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FFA_3e_Solutions_ch11.doc

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Department
Accounting
Course
ACC 110
Professor
Marla Spergel
Semester
Fall

Description
CHAPTER 11 Investments in Other Companies EXERCISES E11-1. a. a. The investor has control (owning more than 50%) over the investee corporation. Therefore, consolidated financial statements should be prepared. This assumes each share has the same number of votes. b. The investor has control over the investee corporation because it owns more than 50% of the votes (its the votes that provides control, not the actual proportion of the number of shares). Therefore, consolidated financial statements should be prepared. c. If the 25% ownership of shares represents 25% of the votes, this investment would be classified as an equity investment if the investor has significant influence on the decision making of the investee. IFRS suggests that owning between 20% and 50% of the votes of an investee company is an indication of significant influence. However, more information is required to provide a definite conclusion because a 25% interest could be a passive investment if, for example, another shareholder owned the remaining 75% of the shares. d. This is passive investment because with 0.05% of the shares it would not be possible to exert any influence. The investment could be classified as available-for-sale or trading, depending on the intent of management. (Equity investments cannot be classified as held-to-maturity.) Available-for-sale and trading investments are reported on the balance sheet at their fair value. E11-3. a. The non-controlling interest would be 25% of the fair value of the net assets or 25% of $3,600,000 which is $900,000. b. The assets and liabilities would appear at 100% of their fair value. Assets = $6,000,000 Liabilities = $2,400,000 E11-5. a. Dr. Investment in Inwood Corp. 74,000 Cr. Cash 74,000 To record the purchase of 2,000 shares of Inwood Corp. (2,000 shares $37) b. Dr. Cash 10,000 Cr. Dividend income 10,000 To record receipt of a cash dividend (assuming that the Guthrie investment is not recorded on the equity basis). Copyright 2010 McGraw-Hill Ryerson Ltd. 1 c. Given that the bonds will mature in 2018 and its managements intention to hold them to maturity, they should be classified as held-to-maturity. The bonds would only be written down to market if they were permanently impaired. Assuming that this isnt a permanent impairment, no entry required. d. Since the company plans to hold on to these shares, they should be classified and reported as available for sale. In this case the shares would be valued at fair value and a loss of $15,000 would be reported as other comprehensive income. The journal would be as follows: Dr. Unrealized Loss - Other comprehensive income 15,000 Cr. Investment in Kynoch shares 15,000 To record the investment to fair value at the year end 5,000 ($15-12) e. If the shares are classified as available-for-sale, then the shares are written down to fair value and the loss is reported as other comprehensive income. The journal entry would be as follows: Dr. Unrealized LossOther Comprehensive income. 9,000 Cr. Investment in Jobrin Ltd. 9,000 To record the investment to fair value at the year end (3,000 ($19-22)). If this investment was recorded as a trading investment, then the loss would be reported in net income as follows: Dr. Unrealized holding loss (Net income) 9,000 Cr. Investment in Jobrin Ltd. 9,000 To record the investment to fair value at the year end (3,000 ($19-22)). E11-7 Fair Value of Chipman's Balance Sheet Assets and Consolidated of Balmoral Liabilities Balance Sheet Current assets $2,800,000 $2,400,000 $5,200,000 Non-current assets 5,000,000 1,170,000 6,170,000 Investment in Chipman 4,200,000 Goodwill* 1,800,000 1,800,000 Total Assets $12,000,000 $5,370,000 $13,170,000 Current liabilities $5,000,000 $750,000 $5,750,000 Non-current liabilities 2,000,000 420,000 2,420,000 Shareholders' equity 5,000,000 5,000,000 Total liabilities and shareholders' equity $12,000,000 $1,170,000 $13,170,000 Copyright 2010 McGraw-Hill Ryerson Ltd. 2Cost of Shares (100%) $4,200,000 Fair value of net identifiable assets 2,400,000 *Goodwill $1,800,000 E11-9. a. Dr. Investment in Irvine 10,000,000 Cr. Cash 10,000,000 To record the purchase of 2,250,000 common shares of Irvine Ltd. b. The balance sheet value would be the cost of the shares, plus the share of income less the dividends received or $10,000,000 plus $390,000 (share of net income) less $30,000 (30% share of dividends) = $10,360,000. The income statement would report Fletwodes share of the income of Irvine, which is $390,000. E11-11. a. Impairment of goodwill will result in a write-down and reduce net income when it is recognized. b. Since the fair value adjustments on the land wont be depreciated, there will be no effect on net income in any year. c. The fair value of the equipment would be depreciated over five
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