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York University
Administrative Studies
ADMS 2510
John Parkinson

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 (it’s 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 Copyright © 2010 McGraw-Hill Ryerson Ltd. 1 To record receipt of a cash dividend (assuming that the Guthrie investment is not recorded on the equity basis). c. Given that the bonds will mature in 2018 and it’s management’s 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 isn’t 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 Loss–Other 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 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)). E 11-7 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 Copyright © 2010 McGraw-Hill Ryerson Ltd. 2 Total liabilities and shareholders' equity $12,000,000 $1,170,000 $13,170,000 $4,200,00 Cost of Shares (100%) 0 Fair value of net identifiable assets 2,400,000 $1,800,00 *Goodwill 0 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 Fletwode’s 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 won’t 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 years in the consolidated income statement. In the year after acquisition there would be a $300,000 depreciation expense. d. The fair value of the inventory of $230,000 would be expensed in the year the inventory is sold, which could be in the year of purchase or in a later year. e. Consolidated net income will not be affected by dividends paid to the parent because this is an intercompany transaction. f. Intercompany transactions are eliminated on consolidation so intercompany revenues, expenses, and profits don’t affect the consolidated statements. g. The 20% of net income that belongs to the shareholders of the subsidiary who aren’t the parent of the subsidiary must be deducted in the calculation of consolidated net income to avoid overstating it. The amount would be shown as non-controlling interest in the income statement. Copyright © 2010 McGraw-Hill Ryerson Ltd. 3 PROBLEMS P11 -1. a. Summarized Balance Sheets As of May 31, 2014 Jolicure Horsefly $168,00 $168,00 Other assets 0 0 Investment in Nictaux 20,000 20,000 $188,00 $188,00 Total assets 0 0 Liabilities $30,000 $30,000 Capital Shares 100,000 100,000 Retained earnings 50,000 58,000 Accumulated other comprehensive income: unrealized holding gains 8,000 $188,00 $188,00 Total liabilities and owners equity 0 0 Summarized Income Statements For the Period Ending May 31, 2014 Jolicure Horsefly $225,00 $225,00 Revenue 0 0 Gain on sale of investment 8,000 Expenses 175,000 175,000 Net income 50,000 58,000 Other comprehensive income - unrealized gain 8,000 Comprehensive income $58,000 $58,000 b. Both companies performed equally well in 2014. However, Horsefly’a net income appears to have performed better because it realized the gains on the value of its shares in Nictaux. c. Horsefly sold and repurchased the shares in Nictaux to increase income by recognizing the gain in the current year. Whether the transaction was wise to enter into or not depends on whether management had an objective that was served by the transaction. However, from the information provided it appears that the transaction had no useful purpose and would have incurred costs to sell and repurchase the shares. Copyright © 2010 McGraw-Hill Ryerson Ltd. 1 P11 -3. a. Pacquet Inc. Balance Sheet As of August 31, 2014 $1,500,00 Current assets 0 Investment in Schwitzer 2,000,000 Capital assets 3,250,000 Total assets 6,750,000 Current liabilities 1,350,000 Non-current liabilities 1,250,000 Capital shares 2,000,000 Retained earnings 2,150,000 $6,750,00 Total liabilities and shareholders' equity 0 b. $2,000,00 Cost: 100% of common shares 0 Fair value of net identifiable assets 1,900,000 Goodwill $100,000 c, d. Schwitzer Schwitzer (Carrying (Fair Consolidate Amounts) Pacquet values) d $1,500,00 Current assets $625,000 0 $875,000 $2,375,000 In
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