TEST BANK for Advanced Financial Accounting in Canada. 1st Edition by Johnstone, Dewald & Wilson by ACADEMIAMILL

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 1 Introduction to Advanced Financial Accounting 1.1 Describe the accounting standards used in Canada and how they apply to different reporting entities. 1) A private company in Canada that is closely held, has no debt, and wants to simplify the accounting process is most likely to report under which part of the CPA Canada Handbook? A) Part II — Accounting Standards for Private Enterprises (ASPE) B) Part IV — Accounting Standards for Pensions C) Part I — International Financial Reporting Standards (IFRS) D) Part III — Accounting Standards for Not-for-Profit Organizations Answer: A Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 1.1 Describe the accounting standards used in Canada and how they apply to different reporting entities.

2) In Canada, a private company has the choice to report under International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE). Describe why the CPA Canada Handbook provides the option for private enterprises? Answer: IFRS is meant to create consistency and comparability in international markets. One of the limitations of IFRS is the complexity of reporting for equity investments that are meant to provide information to shareholders for decision-making purposes. Many private companies are held by a small group of shareholders who are often involved in the running of the business or have access to that information. As a result, the cost of applying more complex accounting policies outweighs the benefit of the information provided to this closely held group of shareholders. To address this, the Accounting Standards Board developed the Accounting Standards for Private Enterprises to meet the needs of private enterprises. Private enterprises have the option to adopt IFRS or ASPE depending on the needs of the financial statement users. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.1 Describe the accounting standards used in Canada and how they apply to different reporting entities.

3) What are the four parts of the CPA Canada Handbook — Accounting and which entities are they applicable to? Answer: The four parts are: • Part I — International Financial Reporting Standards (IFRS) — applicable to publicly accountable, private, or not-for-profit entities. • Part II — Accounting Standards for Private Enterprises (ASPE) — applicable to private entities. • Part III — Accounting Standards for Not-for-Profit Organizations — applicable to not-for-profit entities. • Part IV — Accounting Standards for Pension Plans — applicable to pension plans. Diff: 1 Type: ES Taxonomy Category: Remembering Learning Outcome: 1.1 Describe the accounting standards used in Canada and how they apply to different reporting entities.

1.2 Discuss the conceptual framework for financial reporting and the general purpose of financial reporting. 1) In 2011, Canada adopted International Financial Reporting Standards (IFRS) for publicly accountable enterprises. Explain the rationale for adopting IFRS in Canada. Answer: As the global economy expanded, the Accounting Standards Board (AcSB) chose to adopt IFRS in Canada to improve consistency and comparability in the international capital markets. Diff: 1 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.2 Discuss the conceptual framework for financial reporting and the general purpose of financial reporting.

1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities. 1) Laliberte Products Ltd. (LPL), a public company, made several equity investments in the current year. Which of the following investments would most likely be classified as an associate in LPL's financial statements? A) 25,000 of the 30,000 outstanding voting common shares of Glabman Inc. There are significant intercompany transactions between the two companies. B) 13,500 of the 45,000 outstanding voting common shares of CCL Ltd. There are significant intercompany transactions between the two companies. C) 1,000 of the 20,000 outstanding voting common shares of Petruck Inc. There are no transactions between the two corporations and LPL plans to hold these shares for less than a year. D) 3,000 of the 3,500 outstanding non-voting preferred shares of Paradise Ltd. There is a small number of intercompany transactions between the two companies. Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities.

2) What is the definition of control provided in IFRS 10? Answer: IFRS 10 states that an investee has control only when all of the following three criteria are met: The power over the investee, exposure to the variable returns of the investee, and the ability to use that power to affect the earnings of the investee. First, the power to direct the relevant activities over the investee typically arises from a right such as voting rights, the right to choose key personnel or enforcement/veto rights. Power over the relevant activities would include the ability to direct the selling or buying of goods and services, direct research and development, budgeting, and the management of financial assets. Second, variable returns are defined as not fixed and with the potential to vary as a result of the performance of the investee. Finally, there must be a link between the power to control the relevant activities and the return on the investment. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities.

3) List the four different classifications of investments and provide a definition for each type of investment classification. Answer: The four classifications along with a definition are given below: 1. Passive Investment is an equity investment that does not meet the definition of an associate (significant influence under ASPE), joint arrangement, or subsidiary. These investments tend to be more short term and temporary in nature. These can be classified as fair value through other comprehensive income, fair value through profit and loss, and in some rare cases, cost. 2. Associate (Significant Influence under ASPE) is an equity investment where the investor has the ability to influence the activities of the investee but does not have control. 3. Joint Arrangement is a contractual agreement where the parties have joint control over the investment. These can be classified as either joint ventures or joint operations. 4. Subsidiary is an equity investment where the investor has the ability to control the activities of the investee. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities.

4) What is a financial asset, and would a non-strategic equity investment be included in that definition? Answer: A financial asset, as defined in IAS 32, is any of the following: • Cash • An equity investment in another company • A contractual right to receive cash or another asset from another company • A contractual right to exchange another financial instrument under potentially favourable conditions Investments in equities are listed in the definition of a financial asset; therefore, a non-strategic equity investment would meet the definition. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.3 Define and identify strategic and non-strategic intercorporate investments made by reporting entities.

1.4 Determine the classification for accounting purposes of each intercorporate investment. 1) Which of the following is NOT an indicator of significant influence? A) There are significant intercompany transactions between the investor and investee. B) The investor has the ability to shape the policies of the investee. C) The investor and investee are located in the same city and use the same legal firm. D) The ability to choose representation on the investee's board of directors or governing body. Answer: C

Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

2) Kemi Inc., a public company following IFRS, owns 25% of the voting shares of Eunji Ltd. The next largest shareholder owns 15% of the voting shares. Kemi Inc. has some intercompany transactions with Eunji Ltd. and has the ability to elect one of the five members of the board of directors. Which of the following statements best describes how Kemi Inc. should account for its investment in Eunji Ltd.? A) Kemi Inc. should classify Eunji Ltd. as an associate and use proportionate consolidation to account for its investment. B) Kemi Inc. should classify Eunji as a passive investment and account for the investment using the equity method to account for its investment. C) Kemi Inc. controls Eunji Ltd. and should use the consolidation method to account for its investment. D) Kemi Inc. should classify Eunji Ltd. as an associate and use the equity method to account for its investment. Answer: D Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

3) Which of the following investments in equity investments held by MajaCo (MC) would NOT be classified as a subsidiary? A) MC owns 49% of the voting shares of DeltaCo (DC). No other investor owns more than 2% of the remaining voting shares. B) MC owns 50% of the voting shares of Epsilon Ltd. (EL). JakovCo owns the other 50% of the voting shares. The two companies agree that they will participate equally in the running of EL. C) MC owns 75% of the voting shares of TC Inc. D) MC owns 45% of the voting shares of FishelCo. A wholly owned subsidiary of MC owns 25% of the voting shares of FishelCo. The remaining shares are widely held. Answer: B Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

4) Which of the following factors is NOT an indication of an investor having significant influence over an investee? A) Ownership of 19% of the voting shares of ABC Corporation, where the remaining voting shares are owned by a husband and wife B) The ability to elect 2 of a 7-member board of directors C) Significant intercompany transactions between the investor and investee D) The ability to participate in the shaping of the policies of an investee Answer: A Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

5) In the current year, AcqCo Ltd., a private company reporting under ASPE, purchased 42% of the voting shares of Woodward Inc. The remaining 58% of the voting shares are held by the original founder and her immediate family. To date, the family has elected all of the board members, and AcqCo Ltd. has not been able to obtain a seat on the board of directors. AcqCo Ltd. does not have any intercompany transactions with Woodward Inc. nor is there any exchange of management or technology. How should AcqCo Ltd. classify its investment in Woodward Inc.? A) Subsidiary B) Associate C) Passive investment with the option to classify as a fair value through other comprehensive income or fair value through profit and loss. D) Passive investment with the option to classify the investment as a fair value through profit and loss or as a cost investment. Answer: D Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

6) ABC Corporation Inc. (ABC) owns 60% of the voting common shares of Reich Corporation Ltd. (RCL), while TieCo owns 25%, and Platinum Inc. (PI) owns the remaining 15%. ABC has significant intercompany transactions with RCL. TieCo and PI have no intercompany transactions with RCL. ABC appoints eight of RCL's 10 board members; TieCo and PI each appoint one board member. Which of the following statements is true? A) TieCo has significant influence over RCL. B) TieCo and PI have significant influence over RCL. C) TieCo has no influence over RCL and should classify their investment in RCL as a passive investment. D) ABC should classify its investment in RCL as an associate since it does not have control of RCL. Answer: C Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

7) Below is a list of the shareholders holding voting common shares in Karam Co.: Kayman Corporation — 45% Peng Ltd. — 40% Povhe Inc. — 15% Kayman Corporation and Peng Ltd. each have 2 seats on the 5-person board of directors. Peng Ltd. has significant intercompany transactions with Karam Co. All of the companies report under IFRS. Which of the following statements is true? A) Kayman Corporation controls Karam Co and should classify its investment as a subsidiary. B) Peng Ltd. has significant influence and should classify its investment as an associate. C) Peng Ltd. should classify their investment as a passive investment. D) Peng Ltd. controls Karam Co and should classify its investment as a subsidiary. Answer: B Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

8) What factors may indicate that an investor has significant influence over an investee? Answer: IAS 28 defines significant influence as the ability to participate in or influence the operating, investing, and financial policy decisions of the investee. This means that the investor can play a role in the income-earning process. IAS 28, paragraph 6 provides additional guidance in determining the ability to influence the activities of the investee as: • The ability to choose some representation on the investee's board of directors. • The ability to participate in shaping the policies of the investee. • Significant intercompany transactions between the investee and investor. The definition of significant intercompany transactions requires professional judgment. • The loaning of management personnel to the investee. • The investor holds essential technical knowledge, patented technology, or processes needed by the investee. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.4 Determine the classification for accounting purposes of each intercorporate investment.

1.5 Compare the classification requirements of IFRS and ASPE. 1) In Canada, a private profit-oriented corporation may report under International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE). Explain the rationale for having the option, and how the investment classification would differ. Answer: Accounting for equity investments can be more complex than required in ASPE. The reason for offering ASPE to private companies is to remove some of those complexities for closely held organizations and their financial statement users. When a company is closely held, the owners tend to be more involved with the running of the entity and therefore have access to the inner working of the business. The following are differences in the classification of equity investments under IFRS and ASPE: Passive investments: Companies reporting under IFRS have three options to classify a passive investment: FVTPL, FVOCI, and Cost. Companies reporting under ASPE have two options for classifying passive investments: FVTPL and Cost. Other comprehensive income does not exist under ASPE. Strategic investments: A) Investments where the acquirer has significant influence: Companies reporting under IFRS classify these investments as associates, whereas companies reporting under ASPE would classify their investment as a significant influence investment. Similar factors are used to determine the classification of an investment. B) Investments where the acquirer has control: Companies reporting under IFRS and ASPE both classify investments under their control as a subsidiary. Similar factors are used to determine the classification of an investment. Diff: 1 Type: ES Taxonomy Category: Understanding Learning Outcome: 1.5 Compare the classification requirements of IFRS and ASPE.

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 2 Accounting for Non-Controlled Investments 2.1 Account for passive (non-strategic) investments in equity, including journal entries. 1) Non-strategic investments may be classified as a fair value through other comprehensive income (FVOCI), fair value through profit or loss (FVTPL), or as a cost investment. Which of the following statements is true? A) Dividend revenue is reported in the income section of the statement of income for each of the three classifications. B) For a non-strategic investment classified as a FVOCI, dividend revenue is reported in the other comprehensive income section of the statement of income. C) Dividend revenue is only reported as income when the investment is classified as a cost investment. D) Dividend revenue is only reported in the income section the statement of income when the investment is classified as FVTPL or FVOCI. Answer: A Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

2) Ecole Inc., a private company reporting under ASPE, owns 9% of the voting common shares of Plato Corp. Ecole Inc. has classified its investment as a passive investment. On November 15, 2022, Plato Corp. declared a dividend $100,000. The dividend will be paid on January 15, 2023. What journal entry or entries should Ecole Inc. make related to the dividends declared by Plato Corp.? A) November 15, 2022 Dr. Dividend receivable 9,000 Cr. Dividend revenue 9,000 January 15, 2023

B) January 15, 2023

C) January 15, 2023

D) November 15, 2022

January 15, 2023 Answer: A Diff: 2

Type: MC

Dr. Cash Cr. Dividend receivable

9,000

Dr. Cash Cr. Dividend revenue

9,000

Dr. Cash Cr. Investment in Plato Corp.

9,000

Dr. Dividend receivable Cr. Investment in Plato Corp.

9,000

Dr. Cash Cr. Dividend receivable

9,000

Taxonomy Category: Analyzing Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

3) Mido Corporation acquired 10% of the 200,000 outstanding voting shares of Josip Ltd. on January 1, 2022 for $150,000. On September 20, 2022, Josip declared and paid a dividend of $100,000 to its shareholders. On December 31, 2022, Josip's shares were trading at $9.25. The investment in Josip was classified as a FVOCI investment. What amount of income would be included in the profit and loss portion of the statement of income? A) $35,000 B) $10,000 C) $45,000 D) $0 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

4) Taki Corporation, a private company reporting under ASPE, acquired 12% of the 175,000 outstanding voting shares of Hoka Ltd., a publicly traded company, on January 1, 2023 for $150,000. On August 15, 2024, Hoka declared a dividend of $120,000 to its shareholders. On December 31, 2023 and 2024, Hoka's shares were trading at $9.25 and $8.75, respectively. What is the total amount of income that would be included in profit and loss for the year ending December 31, 2024? A) $3,900 B) $33,750 C) $14,400 D) $48,150 Answer: A Diff: 3 Type: MC Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

5) Champei Corporation, a public company, acquired 7% of the 200,000 outstanding voting shares of Okello Ltd. on January 2, 2023, for $75,000 which includes brokerage fees of $1,000. Champei's management does not plan to hold the shares for a long period and therefore has classified Okello as a FVTPL investment. On November 15, 2023 and 2024, Okello declared and paid a dividend of $150,000 and $120,000, respectively, to its shareholders. Okello's shares were trading at $4.75 on December 31, 2023. On December 10, 2024, Champei sold its investment in Okello for $87,500 ($88,500 less $1,000 in brokerage fees). What is the total amount of income that would be included in Champei's statement of income for the year ending December 31, 2024? A) $20,900 B) $31,500 C) $29,400 D) $21,900 Answer: C Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

6) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500. Brayan classified its investment as a FVTPL investment. The following is information related to Alina for the years ending 2023 to 2025. 2023 2024 2025 FMV per share (as of Dec 31) $ 18.00 $ 22.00 $ 23.50 Net income $ 230,000 $ 115,000 $ 275,000 Dividend declared and paid on November 15 each year $ 75,000 $ 125,000 $ 95,000 On December 31, 2025, Brayan sold its investment in Alina for $246,750 and paid a brokerage fee of $2,500. Determine the amount to be included in net income before OCI related to Brayan's investment in Alina for the year ending December 31, 2025. A) $7,125 B) $20,375 C) $72,875 D) $22,875 Answer: B Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

7) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500, and paid a brokerage fee of $1,500. Brayan classified its investment as FVOCI. The following is information related to Alina for the years ending 2023 to 2025.

FMV per share (as of Dec 31) Net income Dividend declared and paid on November 15 each year

2023 $ 18.00 $ 230,000 $ 75,000

2024 $ 22.00 $ 115,000 $ 125,000

2025 $ 23.50 $ 275,000 $ 95,000

On December 31, 2025, Brayan sold its investment in Alina for $246,750 cash and paid a brokerage fee of $2,500. Which set of journal entries to record the sale of the investment is correct? A) Dr. Cash 246,750 Cr. Accounting gain—OCI 15,750 Cr. Investment in Alina Inc. 231,000 Dr. Accumulated OCI—Alina Inc. 68,250 Cr. Retained earnings 68,250 B)

Dr. Cash Cr. Accounting gain—OCI Cr. Investment in Alina Inc. Dr. Retained earnings Cr. Accumulated OCI

244,250

Dr. Cash Cr. Accounting gain Cr. Investment in Alina Inc.

246,750

51,000

13,250 231,000 51,000

15,750 231,000

Dr. Accumulated OCI—Alina Inc. Cr. Retained earnings

10,500

Dr. Cash Cr. Accounting gain—OCI Cr. Investment in Alina Inc. Dr. Accumulated OCI—Alina Inc. Cr. Retained earnings Answer: D

244,250

64,250

10,500

13,250 231,000 64,250

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

8) At the beginning of this year, Bionda Inc purchased 15% of the voting shares of Zoila Ltd. for $195,000. Both companies are private and follow ASPE. It was determined that Bionda does not have significant influence and therefore reports its investment in Zoila using the cost method. Zoila earned net income of $75,000 this year and paid dividends of $50,000. What journal entry should Bionda make to record its share of Ziola's net income? A) Dr. Investment in Zoila Ltd. 11,250 Cr. Investment income 11,250 B)

Dr. Investment in Zoila Ltd. Cr. Investment income

No entry is required

3,750

Dr. Cash Cr. Investment income Answer: C

11,250

3,750

11,250

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

9) At the beginning of this year, Bionda Inc purchased 15% of the voting shares of Zoila Ltd. for $195,000. Both companies are private and follow ASPE. It was determined that Bionda does not have significant influence and therefore reports its investment in Zoila using the cost method. Zoila earned net income of $75,000 this year and paid dividends of $50,000. What journal entry should Bionda make to record its share of the dividends paid by Zoila? A) Dr. Cash 7,500 Cr. Investment in Zoila Ltd. 7,500 B)

Dr. Investment in Zoila Ltd. Cr. Investment income

No entry is required

Dr. Cash Cr. Investment income

3,750

7,500

3,750

7,500

Answer: D

Diff: 1 Type: MC Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

10) Abilo Inc. is a public company with a December 31 year end. On March 15, 2022, Abilo acquired 4,500 shares of Eunji Ltd. at a cost of $35 a share. The company incurred $2,500 in brokerage fees as a result of the share purchase. The following is information related to Eunji:

Dividend per share—declared and paid on November 15 Fair market value of shares at December 31

$ $

2022 1.55 32.00

$ $

2023 2.10 38.00

On February 15, 2024, Abilo sold all of its shares in Eunji for $37.50 a share, incurring brokerage fees of $2,000 on the disposal. Required: Assuming Abilo has classified its investment as a FVTPL, provide the journal entries to account for Abilo's investments in Eunji. Answer: March 15, 2022 Dr. Investment in Eunji Ltd. 157,500 Dr. Brokerage fee expense 2,500 Cr. Cash 160,000 To record the investment in Eunji and the related brokerage fees. November 15, 2022 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji. December 31, 2022 Dr. Fair value adjustment loss Cr. Investment in Eunji Ltd. To record the unrealized decline in the value of Eunji November 15, 2023 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji. December 31, 2023 Dr. Investment in Eunji Ltd. Cr. Fair value adjustment gain To record the unrealized increase in the value of Eunji February 15, 2024 Dr. Cash Dr. Brokerage fee expense Dr. Accounting loss Cr. Investment in Eunji Ltd. To record the sale of the investment in Eunji.

6,975

13,500

9,450

6,975

13,500

9,450

27,000 27,000

166,750 2,000 2,250

171,000

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.

2.2 Compare and discuss the differences in accounting for passive (non-strategic) investments between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE). 1) Abilo Inc. is a public company with a December 31 year end. On March 15, 2022, Abilo acquired 4,500 shares of Eunji Ltd. at a cost of $35 a share. The company incurred $2,500 in brokerage fees as a result of the share purchase. The following is information related to Eunji:

Dividend per share—declared and paid on November 15 Fair market value of shares at December 31

$ $

2022 1.55 32.00

$ $

2023 2.10 38.00

On February 15, 2024, Abilo sold all of its shares in Eunji for $37.50 a share, incurring brokerage fees of $2,000 on the disposal. Required: a) Assuming Abilo has classified its investment as a FVOCI, provide the journal entries to account for Abilo's investments in Eunji. b) Assume Abilo is a private company and correctly uses the cost method to account for its investment in Eunji, prepare the journal entries to account for its investment in Eunji.

Answer:

a) March 15, 2022 Dr. Investment in Eunji Ltd. 160,000 Cr. Cash To record the investment in Eunji Ltd. and the related brokerage fees. November 15, 2022 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji. December 31, 2022 Dr. Fair value adjustment loss—OCI Cr. Investment in Eunji Ltd. To record the unrealized decline in the value of Eunji. November 15, 2023 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji.

6,975

16,000

9,450

160,000

6,975

16,000

9,450

December 31, 2023 Dr. Investment in Eunji Ltd. Cr. Fair value adjustment gain—OCI To record the unrealized increase in the value of Eunji. February 15, 2024 Dr. Cash Dr. Accounting loss—OCI Cr. Investment in Eunji Ltd. Dr. Accumulated OCI—Eunji Ltd. Cr. Retained earnings To record the sale of the investment in Eunji and reclassify the balance in AOCI to retained earnings.

27,000

166,750 4,250 6,750

171,000 6,750

b) March 15, 2022 Dr. Investment in Eunji Ltd. 157,500 Dr. Brokerage fee expense 2,500 Cr. Cash To record the investment in Eunji and the related brokerage fees. November 15, 2022 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji.

6,975

November 15, 2023 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji. February 15, 2024 Dr. Cash Cr. Accounting gain—sale of Eunji Ltd. Cr. Investment in Eunji Ltd. To record the sale of the investment in Eunji

9,450

166,750

160,000

6,975

9,450

9,250 157,500

Diff: 3 Type: ES Taxonomy Category: Analyzing Learning Outcome: 2.2 Compare and discuss the differences in accounting for passive (non-strategic) investments between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE).

2.3 Calculate goodwill for significant influence (associates) investments using two methods. 1) At the beginning of 2023, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result ERI accounts for its investment using the equity method of accounting. On the acquisition date, MCL's shareholders' equity section consisted of $75,000 in common shares and $255,000 in retained earnings. At acquisition, it was determined that the fair values of all the assets were equal to their carrying value with the exception of the following: Carrying value $ 35,000 65,000 125,000

Accounts receivable Inventory Land

Fair value $ 30,000 85,000 150,000

What amount of goodwill resulted from this investment? A) $5,000 B) $278,800 C) $299,600 D) $276,200 Answer: B

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.3 Calculate goodwill for significant influence (associates) investments using two methods.

2) On January 1, 2023, Prince Leather Inc. purchased 27% of the outstanding voting shares of Soul Shoes Ltd. (SSL) for $800,000. Below is the statement of financial position for SSL, along with the fair values of the net assets on January 1, 2023: Soul Shoes Ltd.

Carrying value 103,800 326,000 560,000 1,980,000 $ 2,969,800

Cash Accounts receivable Inventory Property, plant, and equipment (net) Total assets

Current liabilities Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

306,000 340,800 500,000 1,823,000 2,969,800

$ $

Fair value 103,800 300,000 600,000 2,180,000 3,183,800 306,000 355,000

Required: Determine the amount of goodwill resulting from this investment using both the fair value method and carrying value method.

Answer: Goodwill using the fair value method: Purchase price Less the fair value of the net assets Assets Liabilities

$ 3,183,800 661,000 2,522,800

Goodwill Goodwill using the carrying value method: Purchase price Common shares Retained earnings Acquisition differential Allocate to the fair value differentials:

Accounts receivable Inventory Property, plant, and equipment (net) Long-term debt Goodwill

27%

500,000 1,823,000

27% 27%

26,000 (40,000) (200,000) 14,200

27% 27% 27% 27%

800,000

(681,156) 118,844

800,000 (135,000) (492,210) 172,790 7,020 (10,800) (54,000) 3,834 118,844

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 2.3 Calculate goodwill for significant influence (associates) investments using two methods.

2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation. 1) On January 1, 2022, KCG Inc. paid $145,000 to purchase 20% of the 100,000 outstanding voting common shares of EMG Ltd. The remaining shares are owned equally by three unrelated entities. KCG Inc. uses the equity method to account for its investment. The following is information related to EMG Ltd for the years ending December 31: 2022 $65,000 25,000 $ 6.50

Net income Dividends (declared and paid on Dec. 31) Fair market value at Dec. 31 (per share)

2023 $100,000 35,000 8.00

At what value should KCG Ltd. report its investment in EMG Ltd. on its December 31, 2023 statement of financial position? A) $166,000 B) $160,000 C) $145,000 D) $178,000 Answer: A Diff: 1 Type: MC Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

2) Dahlia Ltd. has classified its investment in Rose Inc. as an associate and accounts for it using the equity method. Dahlia received $25,000 in dividends from Rose in the current year. How should Dahlia report these dividends? A) The $25,000 in dividends should be reported as dividend revenue in the profit and loss portion of the statement of income. B) The $25,000 in dividends should be recorded as a decrease to the investment in Rose Inc. in the statement of financial position. C) The $25,000 in dividends should be reported as dividend revenue in other comprehensive income. D) The $25,000 in dividend should be recorded as an increase to the investment in Rose Inc. in the statement of financial position. Answer: B Diff: 1 Type: MC Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

3) On July 1, 2021, Javelin Corp. acquired 22% of the outstanding common shares of Baton Inc. for $210,000 cash. There was no acquisition differential or goodwill. Baton was classified as an associate, and the equity method of accounting was used to account for the investment in Baton. The following information relates to Baton: Amounts Income included before OCI in OCI For the year ending December 31, 2021 $ 196,000 $ 11,000 For the 6-month period of July 1, 2021 to December 31, 2021 98,000 — For the year ending December 31, 2022 (65,000) (2,500) For the year ending December 31, 2023 225,000 — Dividends declared and paid on September 15 of each year: 2021 2022 2023

$ 55,000 — 25,000

Which of the following amounts would represent Javelin's investment in Baton account on the statement of financial position (SFP) as at December 31, 2023? A) $266,210 B) $248,610 C) $38,610 D) $249,160 Answer: B Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

4) Clifford Inc. owns 25% (25,000 shares of the 100,000 shares) of the voting common shares of RedDog Inc. Clifford has been using the equity method of accounting to report its investment in RedDog Inc. At December 31, 2022, the investment in RedDog account had a balance of $357,000. On January 1, 2023, it was determined that Clifford no longer has significant influence over RedDog. As a result, Clifford reclassified the investment as FVTPL. On that date, RedDog's shares were trading at $15.25 per share. How should Clifford account for this change in classification? A) Clifford should revalue its investment to fair value, with any gain or loss being reported in profit and loss. B) Clifford should disclose the change in the classification with no change to the investment account balance. C) Clifford should revalue its investment at the fair value, with the gain or loss being reported in other comprehensive income. D) Clifford should revalue the investment at the fair value, with the gain or loss being reported in a separate shareholder equity account. Answer: A Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

5) On January 1, 2022, I-Core Inc. purchased 45,000 of the 150,000 voting shares of Core Electronics Ltd. (CEL) for $325,000. On that date, CEL's shareholders' equity consisted of common shares of $125,000 and retained earnings of $85,000. At acquisition, all the fair values were equal to the carrying value of the assets with the exception of inventory and land. The inventory was undervalued by $50,000, while the land was overvalued by $20,000. What amount of goodwill would be recorded as a result of this investment? A) $271,000 B) $241,000 C) $253,000 D) $85,000 Answer: C Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

6) On January 1, 2022, HCI Inc. purchased 40,000 of the 160,000 voting shares of SBI Ltd. for $325,000. At acquisition, all the fair values were equal to the carrying value of the assets with the exception of inventory and building. The inventory was undervalued by $40,000, while the land was overvalued by $30,000. The building had a remaining useful like of 10 years. For the year ending December 31, 2022, HCI had net income of $115,000. What amount of equity income would HCI record for the year ending December 31, 2022? A) $19,500 B) $38,000 C) $41,750 D) $28,750 Answer: A Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

7) At the beginning of 2024, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result, ERI accounts for its investment using the equity method of accounting. At acquisition, it was determined that the fair values of all the MCL assets were equal to their carrying value with the exception of the following:

Accounts receivable Inventory Land

Carrying value $ 35,000 65,000 125,000

Fair value $ 30,000 85,000 150,000

For the year ending December 31, 2024, MCL earned net income of $240,000 and paid a dividend or $100,000. Accounts receivables turn over every 45 days and inventory turns over every 90 days. MCL did not sell any land during 2024. What amount of equity income would ERI report for the year ending 2024? A) $52,000 B) $62,400 C) $240,000 D) $58,500 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

8) At the beginning of 2023, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result, ERI accounts for its investment using the equity method of accounting. On the acquisition date, MCL's shareholders' equity section consisted of $75,000 in common shares and $255,000 in retained earnings. At acquisition, it was determined that the fair values of all the MCL assets were equal to their carrying value with the exception of the following:

Accounts receivable Inventory Land

Carrying value $ 35,000 65,000 125,000

Fair value $ 30,000 85,000 150,000

For the year ending December 31, 2023, MCL earned net income of $95,000 and paid a dividend of $50,000. For the year ending December 31, 2024, MCL earned net income of $240,000 and paid a dividend or $100,000. Accounts receivables turn over every 45 days and inventory turns over every 90 days. MCL has not sold any of the land that existed with ERI acquired the shares. What amount would ERI report on the December 31, 2024 statement of financial position for this investment? A) $466,000 B) $419,200 C) $423,100 D) $458,200 Answer: B

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

9) Petar Corporation Ltd. (PCL), a public company reporting under IFRS, acquired a 35% interest in Kailey Design Corporation (KDC) a few years ago. At the time of acquisition, the carrying value of the assets of KDC equaled their book value with the exception of a building, which was undervalued by $75,000. At acquisition, the building had a remaining useful life of 10 years. PCL accounts for its investment using the equity method of accounting. During the year ending December 31, 2025, KDC declared dividends of $125,000 and reported its income for the year as follows: Income from operations Loss on discontinued operations (net of tax) Net income

$275,000 (25,000) $250,000

Assuming PCL has significant influence over KDC, which set of journal entries correctly accounts for the income PCL would report in its December 31, 2025 statement of income? A) Dr. Investment in KDC 84,875 Dr. Loss on discontinued operations 8,750 Cr. Equity income 93,625 B)

Dr. Investment in KDC Dr. Loss on discontinued operations Cr. Equity income

242,500 25,000

Dr. Investment in KDC Cr. Equity income

87,500

Dr. Investment in KDC Dr. Loss on discontinued operations Cr. Equity income Answer: A

267,500

87,500

41,125 8,750 49,875

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

10) At the beginning of 2023, Luis Grocer Inc. (LGI) acquired 30% of the voting common shares of Garcia Producers Ltd. (GPL) for $295,000. It was determined that LGI had significant influence over GPL. LGI accounts for its investment using the equity method of accounting. At acquisition, it was determined that the fair values of all the assets were equal to their carrying value with the exception of the following: Carrying value $ 70,000 125,000

Inventory Building (remaining useful life is 8 years)

Fair value $ 92,000 195,000

For the year ending December 31, 2024, GPL earned net income of $265,000 and paid a dividend of $80,000. Inventory turns over every 90 days. What amount of equity income would LGI report for the year ending 2024? A) $79,500 B) $48,750 C) $76,875 D) $256,250 Answer: C Diff: 1 Type: MC Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

11) On January 1, 2023, Milan Wines Inc., a private company reporting under ASPE, acquired 5,000 of the 20,000 outstanding voting common shares of ELB Winery Ltd. for $95,000 cash. At the time of the investment, ELB's common shares were $50,000, and its retained earnings were $225,000 and all of the assets of ELB were equal to their fair value. Both companies have a December 31 year end. The following is information related to ELB: 2023 $ 75,000 15,000

Net income Dividends—declared and paid on Sept. 15

2024 $ 95,000 25,000

Required: Provide any journal entries that would be required to account for Milan's investment in ELB for the 2023 and 2024 year ends assuming Milan accounts for its investment using: a) The equity method b) The cost method

Answer: a) Equity method: January 1, 2023 Dr. Investment in ELB Cr. Cash To record the investment in ELB

95,000

Dr. Cash Cr. Investment in ELB To record the dividends declared and paid

3,750

Dr. Investment in ELB Cr. Equity income To record Milan's portion of the income earned by ELB

18,750

Dr. Cash Cr. Investment in ELB To record the dividends declared and paid

6,250

Dr. Investment in ELB Cr. Equity income To record Milan's portion of the income earned by ELB

23,750

Dr. Investment in ELB Cr. Cash To record the investment in ELB.

95,000

September 15, 2023

Dr. Cash Cr. Investment in ELB To record the dividends declared and paid

3,750

September 15, 2024

Dr. Cash Cr. Investment in ELB To record the dividends declared and paid

6,250

September 15, 2023

December 31, 2023

September 15, 2024

December 31, 2024

b) Cost method: January 1, 2023

95,000

3,750

18,750

6,250

23,750

95,000

3,750

6,250

Diff: 1 Type: ES Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

12) On January 1, 2023, Lars Corporation purchased 21% of the outstanding common shares of Takibi Tubes Inc. (TTI) for $325,000. At acquisition, all of the fair values of the net assets were equal to the carrying value with the exception of a building and long-term debt. The building was undervalued by $125,000 and had a remaining useful life of 10 years. The long-term debt was undervalued by $25,000 and will mature in 5 years. TTI's net income for 2023 and 2024 was $200,000 and $175,000, respectively. TTI declared and paid dividends of $120,000 in both years on November 15. Required: a) Calculate the equity income that Lars would record for the year ending December 31, 2024. b) Determine the investment in TTI account balance that Lars would report on its statement of financial position at December 31, 2024. Answer: a) Equity income for 2024: TTI's net income $ 175,000 Adjusted for the fair value differences: Building (12,500) Long-term debt 5,000 Adjusted net income $ 167,500 Lars percentage 21% Equity income $ 35,175 b) Investment in TTI on December 31, 2024: Purchase price Net income—2023 Adjusted for the fair value differences: Building Long-term debt Adjusted net income Lars' percentage Dividends—2023 Equity income—2024 from part 1 Dividends—2024 Investment in TTI on December 31, 2024

200,000

325,000

40,425 (25,200) 35,175 (25,200) 350,200

(12,500) 5,000 192,500 21%

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

13) On April 1, 2022, Delightful Donuts Inc. (DDI) purchased 30% of the outstanding voting shares of Neudorf Flours Ltd. (NFL) for $1,350,000 cash. On the acquisition date, NFL's common shares and retained earnings were $1,000,000 and $2,000,000, respectively. The fair value of the net assets was equal to the carrying value with the exception of the following: Carrying Value Fair Value Inventory $ 750,000 $ 875,000 Building (remaining useful life of 8 years) 950,000 900,000 Patent (remaining useful life of 5 years) 250,000 550,000 Both companies have a December 31 year end and earn net income evenly throughout the year. Inventory turns over every 45 days. During the three years following the acquisition, NFL earned the following net income and paid dividends on October 15 each year: 12 month period 2022 2023 2024

Net income (loss) $ 475,000 (525,000) 650,000

Dividends $ 250,000 — 375,000

Required: a) Using the carrying value method, —calculate the goodwill related to the acquisition. b) Determine the investment in NFL balance that would be reported on DDI's statement of financial position at December 31, 2024. Answer: a) Goodwill: Purchase price $ 1,350,000 Common shares 1,000,000 30% (300,000) Retained earnings 2,000,000 30% (600,000) Acquisition differential $ 450,000 Allocated to fair value differences: Inventory (125,000) 30% (37,500) Building 50,000 30% 15,000 Patent (300,000) 30% (90,000) Goodwill $ 337,500

b) Investment in NFL as of December 31, 2024: Purchase price Income is earned evenly throughout the year. The purchase happened on April 1, 2022 therefore DDI should only record 9 months of the adjusted net income for 2022. The exception is the FVD for inventory which should be included 100% for the period as inventory was sold: Equity income—2022 (9 months) Adjusted for the FV amortization Inventory (100%) Building (8 years) (9 months) Patent (5 years)(9 months) Adjusted income (only 9 months) Dividends—2022 Equity loss—2023 Adjusted for the FV amortization Building (8 years) Patent (5 years) Adjusted loss Equity income—2024 Adjusted for the FV amortization Building (8 years) Patent (5 years) Adjusted income Dividends—2024 Investment in NFL as of December 31, 2024

1,350,000

356,250 (125,000) 4,688

(45,000) 190,938 (250,000) (525,000)

$ $

6,250 (60,000) (578,750) 650,000 6,250 (60,000) 596,250 (375,000)

30%

42,961

30%

(75,000)

30%

(173,625)

30% 30%

178,875 (112,500) 1,210,711

Diff: 3 Type: ES Taxonomy Category: Analyzing Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

14) On January 1, 2023, Chocolate Heaven Ltd. (CHL), a private company, acquired 5,000 shares of Cotton Candy Inc. (CCI) for $115,000 cash. CHL paid professional fees of $3,500 in relation to this investment. Both companies have a December 31 year end. This investment represents 18% of the outstanding voting shares of CCI. There was no goodwill or fair value differences at acquisition. The following information relates to CCI: Net income Amounts Dividend Year before OCI included in OCI* amount 2023 $ 315,000 $ 45,000 $ 63,000 2024 115,000 (18,000) 36,000 2025 (45,000) — — * Amounts are not included in the net income before OCI column

Date declared Oct. 15, 2023 Nov. 15, 2024 —

Date paid Jan. 3, 2024 Feb. 2, 2024 —

It has been determined that CHL has significant influence over CCI and as a result, CHL is accounting for the investment using the equity method. On January 2, 2026, CHL sold its shares in CCI for $150,000. Required: a) Calculate the investment in CCI account balance at the end of 2025. b) Prepare the journal entry to record the sale of CCI on January 2, 2026. Answer: a) Calculate the investment in CCI account balance at the end of 2025. Purchase price 2023 Equity income—P&L $ 315,000 18% Equity income—OCI 45,000 18% Dividend declared 63,000 18% 2024 Equity income—P&L 115,000 18% Equity income—OCI 18,000 18% Dividend declared 36,000 18% 2025 Equity loss—P&L (45,000) 18% Investment account balance— December 31, 2025 b) Prepare the journal entry to record the sale of CCI on January 2, 2026. Dr. Cash Dr. Accounting loss Cr. Investment in CCI

150,000 21,340

$ 115,000 56,700 8,100 (11,340) 20,700 3,240 (6,480) (8,100) $ 171,340

171,340

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

15) On January 1, 2023, Chocolate Heaven Ltd.(CHL), a private company, acquired 5,000 shares of Cotton Candy Inc. (CCI) for $115,000 cash. CHL paid professional fees of $3,500 in relation to this investment. Both companies have a December 31 year end. This investment represents 18% of the outstanding voting shares of CCI. There was no goodwill or fair value differences at acquisition. The following information relates to CCI: Net income Amounts Dividend Year before OCI included in OCI* amount Date declared Date paid 2023 $ 315,000 $ 45,000 $ 63,000 Oct. 15, 2023 Jan. 3, 2024 2024 115,000 (18,000) 36,000 Nov. 15, 2024 Feb. 2, 2024 2025 (45,000) — — — — * Amounts are not included in the Net income before OCI column It has been determined that CHL has significant influence over CCI and as a result, CHL is accounting for the investment using the equity method. On January 2, 2026, CHL sold its shares in CCI for $150,000. Required: a) Prepare the equity method journal entries for the years ending 2023 and 2024. b) Assume CHL has decided to account for its investment using the cost method. Calculate the investment income related to CCI for the years ending 2023 and 2024.

Answer:

a) Prepare the equity method journal entries for the years ending 2023 and 2024. 2023

January 1, 2023 Dr. Investment in CCI Dr. Professional fees Cr. Cash To record the investment in CCI

115,000 3,500

October 15, 2023 Dr. Dividend receivable Cr. Investment in CCI To record the dividends declared on October 15

11,340

December 31, 2023 Dr. Investment in CCI 64,800 Cr. Equity income Cr. Equity income - OCI To record its share of the income earned in CCI, along with the OCI.

118,500

11,340

56,700 8,100

2024

January 2, 2024 Dr. Cash 11,340 Cr. Dividend receivable To record the receipt of cash for the dividend receivable from 2023 November 15, 2024 Dr. Dividend receivable Cr. Investment in CCI To record the dividends declared on November 15

6,480

11,340

6,480

December 31, 2024 Dr. Investment in CCI 17,460 Dr. Equity loss—OCI 3,240 Cr. Equity income 20,700 To record its share of the income earned in CCI, along with the equity loss in OCI. b) Cost method income: 2023 Dividend revenue 2024 Dividend revenue

$63,000 $36,000

18% 18%

$11,340 6,480

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.

2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries. 1) Taki Corporation, a private company reporting under ASPE, acquired 12% of the 175,000 outstanding voting shares of Hoka Ltd., a publicly traded company, on January 1, 2023 for $150,000. On August 15, 2024, Hoka declared a dividend of $120,000 to its shareholders. On December 31, 2023 and 2024, Hoka's shares were trading at $9.25 and $8.75, respectively. Both companies pay tax at a rate of 20%. Taki uses the future income taxes method to account for income taxes. What is the total amount of income would be included in profit and loss for the year ending December 31, 2024? A) $3,900 B) $6,000 C) $14,400 D) $27,000 Answer: B Diff: 3 Type: MC Taxonomy Category: Applying Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.

2) Champei Corporation, a public company, acquired 7% of the 200,000 outstanding voting shares of Okello Ltd. on January 2, 2023, for $75,000 which includes brokerage fees of $1,000. Champei's management does not plan to hold the shares for a long period and therefore has classified Okello as a FVTPL investment. On November 15, 2023 and 2024, Okello declared and paid a dividend of $150,000 and $120,000, respectively, to its shareholders. Okello's shares were trading at $4.75 on December 31, 2023. On December 10, 2024, Champei sold its investment in Okello for $87,500 ($88,500 less $1,000 in brokerage fees). Both companies pay tax at a rate of 20%. What is the total amount of income would be included in Champei's statement of income for the year ending December 31, 2024? A) $18,400 B) $27,300 C) $25,200 D) $19,200 Answer: C Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.

3) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500. Brayan classified its investment as a FVTPL investment. The following is information related to Alina for the years ending 2023 to 2025.

FMV per share (as of Dec 31) Net income Dividend declared and paid on November 15 each year

2023 18.00 230,000 75,000

2024 22.00 115,000 125,000

2025 23.50 275,000 95,000

On December 31, 2025, Brayan sold its investment in Alina for $246,750 and paid a brokerage fee of $2,500. Both companies pay tax at a rate of 20%. Determine the amount to be included in net income before OCI related to Brayan's investment in Alina for the year ending December 31, 2025. A) $7,125 B) $17,725 C) $59,725 D) $19,725 Answer: B

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.

4) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500, and paid a brokerage fee of $1,500. Brayan classified its investment as FVOCI. The following is information related to Alina for the years ending 2023 to 2025.

FMV per share (as of Dec 31) Net income Dividend declared and paid on November 15 each year

2023 18.00 230,000 75,000

2024 22.00 115,000 125,000

2025 23.50 275,000 95,000

On December 31, 2025, Brayan sold its investment in Alina for $246,750 cash and paid a brokerage fee of $2,500. Both companies pay tax at a rate of 20%. Which set of journal entries to record the sale of the investment are correct? A) Dr. Cash 246,750 Cr. Accounting gain—OCI Cr. DITA(L) Cr. Investment in Alina Dr. Accumulated OCI—Alina 69,750 Cr. Retained earnings B)

Dr. Cash Cr. Accounting gain—OCI Cr. Investment in Alina Dr. Accumulated OCI—Alina Dr. DITA(L) Cr. Retained earnings Cr. Income tax payable

244,250

Dr. Cash Cr. Accounting gain Cr. Investment in Alina Dr. Accumulated OCI—Alina Cr. Retained earnings

246,750

Dr. Cash Cr. Accounting gain—OCI Cr. DITA(L) Cr. Investment in Alina Dr. Accumulated OCI—Alina Dr. DITA(L) Cr. Retained earnings Cr. Income tax payable

244,250

55,800 13,950

67,250

53,800 13,450

12,600 3,150 231,000 69,750

13,250 231,000

55,800 13,950

15,750 231,000 67,250

10,600 2,650 231,000

53,800 13,450

Answer: D

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.

5) Abilo Inc. is a public company with a December 31 year end. On March 15, 2022, Abilo acquired 4,500 shares of Eunji Ltd. at a cost of $35 a share. The company incurred $2,500 in brokerage fees as a result of the share purchase. The following is information related to Eunji:

Dividend per share—declared and paid on November 15 Fair market value of shares at December 31

$ $

2022 1.55 32.00

$ $

2023 2.10 38.00

Answer:

March 15, 2022

Dr. Investment in Eunji 157,500 Dr. Brokerage fee expense 2,500 Cr. Cash Dr. DITA(L) 500 Cr. DITE(B) To record the investment in Eunji and the related brokerage fees. November 15, 2022

Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji.

6,975

160,000 500

6,975

December 31, 2022

Dr. Fair value adjustment loss 13,500 Cr. Investment in Eunji 13,500 Dr. DITA(L) 2,700 Cr. DITE(B) 2,700 To record the unrealized decline in the value of Eunji and the related deferred income tax November 15, 2023

Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji.

9,450

December 31, 2023

9,450

Dr. Investment in Eunji 27,000 Cr. Fair value adjustment gain 27,000 Dr. DITE(B) 5,400 Cr. DITA(L) 5,400 To record the unrealized increase in the value of Eunji and the related deferred income tax

February 15, 2024

Dr. Cash 166,750 Dr. Brokerage fee expense 2,000 Dr. Accounting loss 2,250 Cr. Investment in Eunji 171,000 Dr. Income tax expense—current 1,350 Cr. Income tax payable 1,350 Dr. DITA(L) 2,200 Cr. DITE(B) 2,200 To record the sale of the investment in Eunji along with the related tax implications.

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.

6) Abilo Inc. is a public company with a December 31 year end. On March 15, 2022, Abilo acquired 4,500 shares of Eunji Ltd. at a cost of $35 a share. The company incurred $2,500 in brokerage fees as a result of the share purchase. The following is information related to Eunji:

Dividend per share—declared and paid on November 15 Fair market value of shares at December 31

$ $

2022 1.55 32.00

$ $

2023 2.10 38.00

Answer: a) March 15, 2022 Dr. Investment in Eunji 160,000 Cr. Cash To record the investment in Eunji and the related brokerage fees. November 15, 2022 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji December 31, 2022 Dr. Fair value adjustment loss—OCI (net of tax) Dr. DITA(L) Cr. Investment in Eunji To record the unrealized decline in the value of Eunji and the related deferred income tax implication

6,975

12,800 3,200

November 15, 2023 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji. December 31, 2023 Dr. Investment in Eunji Cr. Fair value adjustment gain OCI (net of tax) Cr. DITA(L) To record the unrealized increase in the value of Eunji February 15, 2024 Dr. Cash Dr. Accounting loss—OCI(net of tax) Dr. DITA(L) Cr. Investment in Eunji To record the sale of the investment in Eunji

9,450

160,000

6,975

16,000

9,450

27,000 21,600 5,400

166,750 3,400 850

Dr. Accumulated OCI—Eunji Cr. Retained earnings Dr. DITA(L) Cr. DITE(B) To record the related income tax implications related to the sale and reclassify the AOCI balance.

5,400 1,350

171,000

5,400 1,350

b) March 15, 2022 Dr. Investment in Eunji 157,500 Dr. Brokerage fee expense 2,500 Cr. Cash Dr. DITA(L) 500 Cr. DITE(B) To record the investment in Eunji, the related brokerage fees and the deferred income tax implications November 15, 2022 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji. November 15, 2023 Dr. Cash Cr. Dividend revenue To record the dividends declared and paid by Eunji.

160,000 500

6,975 6,975

9,450

February 15, 2024 Dr. Cash 166,750 Cr. Accounting gain - sale of Eunji Cr. Investment in Eunji Dr. Income tax expense 1,350 Cr. Income tax payable Dr. DITE(B) 500 Cr. DITA(L) To record the sale of the investment and the related tax implications.

9,450

9,250 157,500 1,350 500

Diff: 3 Type: ES Taxonomy Category: Analyzing Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.

2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income. 1) On January 1, 2022, HCI Inc. purchased 40,000 of the 160,000 voting shares of SBI Ltd. for $325,000. At acquisition, all the fair values were equal to the carrying value of the assets with the exception of inventory and building. The inventory was undervalued by $40,000, while the land was overvalued by $30,000. The building had a remaining useful like of 10 years. For the year ending December 31, 2022, HCI had net income of $115,000. Both companies pay tax at a rate of 20%. What amount of equity income (loss) would HCI record for the year ending December 31, 2022? A) $21,350 B) $36,150 C) $(850) D) $28,750 Answer: A Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.

2) At the beginning of 2024, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result ERI accounts for its investment using the equity method of accounting. At acquisition, it was determined that the fair values of all the assets were equal to their carrying value with the exception of the following: Carrying value $ 35,000 65,000 125,000

Accounts receivable Inventory Land

Fair value $ 30,000 85,000 150,000

For the year ending December 31, 2024, MCL earned net income of $240,000 and paid a dividend or $100,000. Accounts receivables turn over every 45 days and inventory turns over every 90 days. MCL did not sell any land during 2024. Both companies pay tax at a rate of 20%. What amount of equity income would ERI report for the year ending 2024? A) $65,520 B) $59,280 C) $54,080 D) $228,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.

3) At the beginning of 2023, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result ERI accounts for its investment using the equity method of accounting. On the acquisition date, MCL's shareholders' equity section consisted of $75,000 in common shares and $255,000 in retained earnings. At acquisition, it was determined that the fair values of all the MCL assets were equal to their carrying value with the exception of the following: Carrying value $ 35,000 65,000 125,000

Accounts receivable Inventory Land

Fair value $ 30,000 85,000 150,000

For the year ending December 31, 2023 MCL earned net income of $95,000 and paid a dividend of $50,000. For the year ending December 31, 2024, MCL earned net income of $240,000 and paid a dividend or $100,000. Accounts receivable turns over every 45 days and inventory turns over every 90 days. MCL has not sold any of the land that existed with ERI acquired the shares. Both companies pay tax at a rate of 20%. What amount would ERI report on the December 31, 2024 statement of financial position for this investment? A) $423,100 B) $419,980 C) $465,220 D) $458,980 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.

4) Petar Corporation Ltd. (PCL), a public company reporting under IFRS, acquired a 35% interest in Kailey Design Corporation (KDC) a few years ago. At the time of acquisition, the carrying value of the assets of KDC equaled their book value with the exception of a building, which was undervalued by $75,000. At acquisition, the building had a remaining useful life of 10 years. PCL accounts for its investment using the equity method of accounting. Both companies pay tax at a rate of 20%. During the year ending December 31, 2025, KDC declared dividends of $125,000 and reported its income for the year as follows: Income from operations Loss on discontinued operations (net of tax) Net income

$275,000 (25,000) $250,000

Assuming PCL has significant influence over KDC, which set of journal entries correctly accounts for the income PCL would report in its December 31, 2025 statement of income? A) Dr. Investment in KDC 85,400 Dr. Loss on discontinued operations 8,750 Cr. Equity income 94,150 B) Dr. Investment in KDC Dr. Loss on discontinued operations Cr. Equity income

242,500 25,000

C) Dr. Investment in KDC Cr. Equity income

87,500

D) Dr. Investment in KDC Dr. Loss on discontinued operations Cr. Equity income

41,650 8,750

Answer: A

267,500

87,500

50,400

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.

5) At the beginning of 2023, Luis Grocer Inc. (LGI) acquired 30% of the voting common shares of Garcia Producers Ltd. (GPL) for $295,000. It was determined that LGI had significant influence over GPL. LGI accounts for its investment using the equity method of accounting. At acquisition, it was determined that the fair values of all the GPL assets were equal to their carrying value with the exception of the following: Carrying value $ 70,000 125,000

Inventory Building (remaining useful life is 8 years)

Fair value $ 92,000 195,000

For the year ending December 31, 2024, GPL earned net income of $265,000 and paid a dividend of $80,000. Inventory turns over every 90 days. Both companies pay tax at a rate of 20%. What amount of equity income would LGI report for the year ending 2024? A) $79,500 B) $54,900 C) $77,400 D) $258,000 Answer: C

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.

6) On January 1, 2023, Lars Corporation purchased 21% of the outstanding common shares of Takibi Tubes Inc. (TTI) for $325,000. At acquisition, all of the fair values of the net assets were equal to the carrying value with the exception of a building and long-term debt. The building was undervalued by $125,000 and had a remaining useful life of 10 years. The long-term debt was undervalued by $25,000 and will mature in 5 years. TTI's net income for 2023 and 2024 was $200,000 and $175,000, respectively. TTI declared and paid dividends of $120,000 in both years on November 15. Both companies pay tax at a rate of 20%. Required: a) Calculate the equity income that Lars would record for the year ending December 31, 2024. b) Determine the investment in TTI account balance that Lars would report on its statement of financial position at December 31, 2024. Answer: a) Equity income for 2024: TTI's net income Adjusted for the fair value differences: Building Deferred income tax Long-term debt Deferred income tax Adjusted net income Lars percentage Equity income

$ $

175,000 (12,500) 2,500 5,000 (1,000) 169,000 21% 35,490

b) Investment in TTI on December 31, 2024: Purchase price Net income—2023 Adjusted for the fair value differences: Building Deferred income tax Long-term debt Deferred income tax Adjusted net income Lars percentage Dividends - 2023 Equity income—2024 from part 1 Dividends—2024 Investment in TTI on December 31, 2024

$ $

325,000

200,000

$(120,000)

(12,500) 2,500 5,000 (1,000) 194,000 21% 21%

(120,000)

21%

40,740 (25,200)

35,490 (25,200) 350,830

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.

7) On April 1, 2022, Delightful Donuts Inc. (DDI) purchased 30% of the outstanding voting shares of Neudorf Flours Ltd. (NFL) for $1,350,000 cash. On the acquisition date, NFL's common shares and retained earnings were $1,000,000 and $2,000,000, respectively. The fair value of the net assets was equal to the carrying value with the exception of the following: Carrying value Fair value Inventory $ 750,000 $ 875,000 Building (remaining useful life of 8 years) 950,000 900,000 Patent (remaining useful life of 5 years) 250,000 550,000 Both companies have a December 31 year end, pay tax at a rate of 20%, and earn net income evenly throughout the year. Inventory turns over every 45 days. During the three years following the acquisition, NFL earned the following net income as well as declared and paid dividends on October 15 each year: 12-month period 2022 2023 2024

Net income (loss) $ 475,000 (525,000) 650,000

Dividends $ 250,000 — 375,000

Required: a) Using the carrying value method, calculate the goodwill related to the acquisition. b) Determine the investment in NFL balance that would be reported on DDI's statement of financial position at December 31, 2024.

Answer: a) Goodwill: Purchase price Common shares Retained earnings Acquisition differential Allocated to fair value differences: Inventory Building Patent Deferred income tax* Goodwill *Calculation of deferred income tax: Inventory @ 30% Building @ 30% Patent @ 30% Tax base Tax rate Deferred income tax

1,000,000 2,000,000

30% 30%

(125,000) 50,000 (300,000)

30% 30% 30%

$ $

37,500 (15,000) 90,000 112,500 20% $ 22,500

1,350,000 (300,000) (600,000) 450,000 (37,500) 15,000 (90,000) 22,500 360,000

Investment in NFL as of December 31, 2024: Purchase price Income is earned evenly throughout the year. The purchase happened on April 1, 2022 therefore DDI should only record 9 months of the adjusted net income for 2022. The exception is the FVD for inventory which should be included 100% for the period as it was all sold in the period:

Equity income—2022 (9 months) Adjusted for the FV amortization: Inventory (100%) Deferred income tax Building (8 years) (9 months) Deferred income tax Patent (5 years) (9 months) Deferred income tax Adjusted income Dividends—2022 Equity loss—2023 Adjusted for the FV amortization: Building (8 years) Deferred income tax Patent (5 years) Deferred income tax Adjusted loss—2023 Equity income—2024 Adjusted for the FV amortization: Building (8 years) Deferred income tax Patent (5 years) Deferred income tax Adjusted income Dividends—2024 Investment in NFL as of December 31, 2024

$1,350,000

356,250

(125,000) 25,000 4,688 (938) (45,000) 9,000 $ 224,000 (250,000) (525,000) 6,250 (1,250) (60,000) 12,000 $ (568,000) $ 650,000 6,250 (1,250) (60,000) 12,000 $ 607,000 (375,000)

30% 30%

67,200 (75,000)

30%

(170,400)

30% 30%

182,100 (112,500) $1,241,400

Diff: 3 Type: ES Taxonomy Category: Analyzing Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.

2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods. 1) On January 1, 2022, I-Core Inc. purchased 45,000 of the 150,000 voting shares of Core Electronics Ltd. (CEL) for $325,000. On that date, CEL's shareholders' equity consisted of common shares of $125,000 and retained earnings of $85,000. At acquisition, all the fair values were equal to the carrying value of the assets with the exception of inventory and land. The inventory was undervalued by $50,000, while the land was overvalued by $20,000. Both companies pay tax at a rate of 20%. What amount of goodwill would be recorded as a result of this investment? A) $245,200 B) $269,200 C) $254,800 D) $91,000 Answer: C Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.

2) At the beginning of 2023, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result, ERI accounts for its investment using the equity method of accounting. Both companies pay tax at a rate of 20%. On the acquisition date, MCL's shareholders' equity section consisted of $75,000 in common shares and $255,000 in retained earnings. At acquisition, it was determined that the fair values of all the assets were equal to their carrying value with the exception of the following: Carrying value $ 35,000 65,000 125,000

Accounts receivable Inventory Land

What amount of goodwill resulted from this investment? A) $ 13,000 B) $280,880 C) $297,520 D) $278,800 Answer: B

Fair value $ 30,000 85,000 150,000

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.

3) On January 1, 2023, Prince Leather Inc. purchased 27% of the outstanding voting shares of Soul Shoes Ltd. (SSL) for $800,000. Below is the statement of financial position for SSL, along with the fair values of the net assets on January 1, 2023: Soul Shoes Ltd. Cash Accounts receivable Inventory Property, plant, and equipment (net) Total assets Current liabilities Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

Carrying value $ 103,800 326,000 560,000 1,980,000 $2,969,800

Fair value $ 103,800 300,000 600,000 2,180,000 $3,183,800

$ 306,000 340,800 500,000 1,823,000 $2,969,800

$ 306,000 355,000

Required: Assuming the tax rate is 20% for both companies, determine the amount of goodwill resulting from this investment using both the fair value method and carrying value method.

Answer: Goodwill using the fair value method: Purchase price Less the fair value of the net assets: Assets Liabilities

$800,000 $3,183,800 661,000 2,522,800

Adjusted for deferred income tax implications* Goodwill *Calculation of deferred income taxes on fair value differences: Accounts receivable Inventory Property, plant, and equipment (net) Long-term debt Tax base Tax rate Deferred income taxes Goodwill using the carrying value method: Purchase price Common shares Retained earnings Acquisition differential Allocate to the fair value differentials: Accounts receivable Inventory Property, plant, and equipment (net) Long-term debt Deferred income tax implications* Goodwill

27%

(681,156) 39,960 $158,804

$(26,000) 40,000 200,000 (14,200) 199,800 20% $39,960

500,000 1,823,000

27% 27%

26,000 (40,000) (200,000) 14,200

27% 27% 27% 27%

$800,000 (135,000) (492,210) 172,790 7,020 (10,800) (54,000) 3,834 39,960 $158,804

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.

2.8 Prepare the journal entries, including the deferred tax implications, for significant influence (associates) investments. 1) On April 1, 2022, Delightful Donuts Inc. (DDI) purchased 30% of the outstanding voting shares of Neudorf Flours Ltd. (NFL) for $1,350,000 cash. On the acquisition date, NFL's common shares and retained earnings were $1,000,000 and $2,000,000, respectively. The fair value of the net assets was equal to the carrying value with the exception of the following: Carrying value Fair value Inventory $ 750,000 $875,000 Building (remaining useful life of 8 years) 950,000 900,000 Patent (remaining useful life of 5 years) 250,000 550,000 Both companies have a December 31 year end, pay tax at a rate of 20%, and earn net income evenly throughout the year. Assume inventory turns over every 45 days. During the three years following the acquisition, NFL earned the following net income as well as declared and paid dividends on October 15 each year: 12-month period 2022 2023 2024

Net income (loss) $ 475,000 (525,000) 650,000

Dividends $ 250,000 2010033 375,000

Required: a) Prepare the equity method journal entries for each year. b) Determine the investment in NFL balance that would be reported on DDI's statement of financial position at December 31, 2024.

Answer: a) Prepare the equity method journal entries for each period. In order to prepare the equity method journal entries, we need to know the equity income for each period. Since the purchase happened on April 1, 2022, all amounts relating to 2022 should only be included for 9 months. The exception is the amortization of the fair value difference for inventory which is included 100% in 2022 as all the inventory would have been sold in the period 2022 (9 months) $ 356,250

NFL's income (loss) Adjusted for fair value differentials: Inventory Building (8 years) Patent (5 years) Deferred income tax asset (liability)* NFL's adjusted net income Percentage belonging to DDI Equity income for each period

*Calculation of deferred income tax asset (liability) Inventory Building (8 years) Patent (5 years) Tax base Tax rate Deferred income tax asset (liability) 2022 April 1

October 15

2023 (525,000)

2024 $ 650,000

(125,000) 4,688 (45,000)

— 6,250 (60,000)

33,063 224,000 30% 67,200

10,750 (568,000) 30% $(170,400)

10,750 607,000 30% $182,100

2022 $ 125,000 (4,688) 45,000 165,313 20% $ 33,063

Dr. Investment in Neudorf Flours Ltd. Cr. Cash To record the initial investment in NFL Dr. Cash Cr. Investment in Neudorf Flours Ltd. To record the dividends declared and received (30% × 250,000)

December 31 Dr. Investment in Neudorf Flours Ltd. Cr. Equity income To record DDI's share of NFL's adjusted net income

2023 — (6,250) 60,000 53,750 20% 10,750

2024 — (6,250) 60,000 53,750 20% $ 10,750

1,350,000 1,350,000

75,000 75,000

67,200

2023 December 31 Dr. Equity loss Cr. Investment in Neudorf Flours Ltd. To record DDI's share of NFL's adjusted net loss 2024 October 15

Dr. Cash Cr. Investment in Neudorf Flours Ltd. To record the dividends declared and received (30% × $375,000)

December 31 Dr. Investment in Neudorf Flours Ltd. Cr. Equity income To record DDI's share of NFL's adjusted net income b) Investment in NFL as of December 31, 2024: Purchase price Dividends—2022 Equity income—2022 Equity loss—2023 Dividends—2024 Equity income—2024 Investment in NFL as of December 31, 2024

170,400 170,400

112,500 112,500

182,100

$ 1,350,000 (75,000) 67,200 (170,400) (112,500) 182,100 $ 1,241,400

Diff: 3 Type: ES Taxonomy Category: Applying Learning Outcome: 2.8 Prepare the journal entries, including the deferred tax implications, for significant influence (associates) investments.

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 3 Introduction to Business Combinations 3.1 Discuss the nature of a business combination and its various forms. 1) Which of the following is least likely to meet the definition of a business combination? A) ABC Corporation purchased 85% of the voting shares of XYZ Corporation. B) ABC Corporation purchased 100% of XYZ Corporation's net assets. C) ABC Corporation purchased 25% of the voting shares of XYZ Corporation. The remaining shares are held by one individual. D) ABC Corporation purchased 45% of the voting shares of XYZ Corporation. As part of the agreement, ABC Corporation can elect 3 of the 5 board members and can veto any large purchases made by XYZ Corporation. Answer: C Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 3.1 Discuss the nature of a business combination and its various forms.

2) Describe what must be established to determine if a business combination has occurred. Answer: IFRS 3 defines a business combination as a transaction or event in which the acquirer obtains control. Two things must be established to conclude a business combination has happened: 1. 2.

That the assets (or net assets) acquired constitutes a business, and Whether control over the business has been acquired.

Diff: 1 Type: ES Taxonomy Category: Remembering Learning Outcome: 3.1 Discuss the nature of a business combination and its various forms.

3.2 Explain when a business combination occurs and identify the acquirer and the acquisition date. 1) Morgan Inc., Prentis Inc., and Reed Ltd. agree to exchange shares to create a combined entity. After the exchange, each company held the following voting shares of the combined company: Morgan held 50%, Prentis held 30%, and Reed held 20%. Which of the following statements is true? A) The company with the largest percentage of ownership is always the acquirer in situations where no party owns controlling interest. B) The company with the net assets with the highest value is considered the acquirer in this situation. C) There is no acquirer in this situation as no one party has control. D) A number of factors must be considered to determine which company is the acquirer. Answer: D Diff: 2 Type: MC Taxonomy Category: Analyzing

Learning Outcome: 3.2 Explain when a business combination occurs and identify the acquirer and the acquisition date.

2) Stove Inc. acquired the net assets of Magdalena Ltd. by issuing voting common shares to Magdalena Ltd. After the acquisition, Magdalena owned 35% of the outstanding voting shares of Stove. Which of the following statements is true? A) Stove will be required to prepare consolidated financial statements. B) Control over the net assets has occurred; Magdalena is now considered a subsidiary of Stove. C) Stove will record the net assets at their fair value, which may also include goodwill. D) Control has not occurred; therefore, Stove should report the investment in Magdalena as an equity investment. Answer: C Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.2 Explain when a business combination occurs and identify the acquirer and the acquisition date.

3) Outline the factors that should be considered in determining the acquirer in a business combination. Answer: There are many factors to consider when determining the acquirer in a business combination. They are given below: The entity that owns more than 50% of the voting shares after the transaction is normally considered the acquirer. In situations that are less straightforward, IFRS 10, Appendix B provides additional factors: a. When the purchase is accomplished through the exchange of cash and other assets, the acquirer is usually the one who gave up the asset. b. Where equity interest is transferred as consideration, the acquirer is usually the one who issues the equity unless it is a reverse takeover. c. The acquirer may be the group with the largest voting interest. d. Which party can elect the majority of the board of directors. e. Largest minority interest may be considered the acquirer. f. Did one party pay a premium of the fair value. g. The largest of the combining entities, which can be measure using assets, revenues, or profits. h. Which entity initiated the transaction.

Diff: 1 Type: ES Taxonomy Category: Understanding Learning Outcome: 3.2 Explain when a business combination occurs and identify the acquirer and the acquisition date.

3.3 Recognize and measure the purchase price paid and the assets and liabilities acquired during a business combination. 1) Perex Co. acquired the net assets of KBJ Co by issuing 100,000 common shares to KBJ. At the time of the acquisition, Perex's shares were trading at $3.50. Perex incurred $5,000 in legal fees and $7,500 in share issuance costs as a result of this transaction. What is the purchase price for this transaction? A) $362,500 B) $350,000 C) $342,500 D) $357,500 Answer: B Diff: 1 Type: MC Taxonomy Category: Applying Learning Outcome: 3.3 Recognize and measure the purchase price paid and the assets and liabilities acquired during a business combination.

2) The purchase price in an acquisition may involve the payment of additional consideration should a specific event occur in the future. Assuming the acquirer issued shares as consideration, describe the accounting for a contingent consideration that requires the acquirer to issue additional shares should the market price of the acquirer's shares drop below a certain value during a specified time frame. Answer: The issuance of additional shares to the seller would not result in any change in the purchase price. If the acquirer is required to issue additional shares to make up for the decrease in value of the shares originally issued, they would adjust their equity accounts to reflect the increase in the number of shares issues. There would be no adjustment to the acquisition price. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 3.3 Recognize and measure the purchase price paid and the assets and liabilities acquired during a business combination.

3) ABC Inc. acquired 100% of the common shares of XYZ Ltd. for $3,000,000. The two parties disagreed on the value of the company but agree that ABC would pay an additional $500,000 if the sales of XYZ Ltd. are greater than $2 million dollars in each of the next two years. Describe how the contingent consideration would be accounted for. Answer: The payment of additional amounts if a specific event occurs requires professional judgment to determine the accounting implications. To determine the effect on the purchase price, we would need to determine the likelihood of the event occurring within the specified time frame. The likelihood of occurrence would help estimate the additional amount of consideration to be added to the purchase price at acquisition. The estimated consideration would be recorded as a contingent consideration liability. At each reporting period within the specified time frame, the acquirer would have to revalue the contingent consideration liability based on current information. Any change in value in the contingent consideration liability would be recorded as a gain or loss on purchase, which is included in the acquirer's profit and loss statement. No adjustment would be made to the investment in XYZ account. If it is later determined that the sales target is not reached, the acquirer would remove the contingent liability and record a gain on purchase. Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 3.3 Recognize and measure the purchase price paid and the assets and liabilities acquired during a business combination.

3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination. 1) Lolapolooza Trinkets Inc. (LTI) purchased 100% of the voting shares of Tiny Toys Ltd. (TTL) for $4,500,000 in cash. The net carrying value of the assets and liabilities equals the fair value, with the exception of long-term debt that was undervalued by $50,000. At acquisition, the shareholders' equity of TTL consisted of $775,000 in common shares and $1,300,000 in retained earnings. On the date of acquisition, which of the following amounts represents the amount of goodwill that LTI would record on its consolidated statement of financial position? A) $2,425,000 B) $2,475,000 C) No goodwill would arise from this acquisition D) $2,375,000 Answer: B Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.

2) Beauty Inc. paid $1,550,000 for all the net assets of Beast Ltd. At acquisition, the carrying value of the net assets of Beast was $1,300,000. The fair values of all the assets and liabilities were equal to the carrying value with the exception of the following:

Accounts receivable Inventory Patent

Carrying value Fair value $ 45,000 $ 40,000 175,000 235,000 200,000 300,000

On the date of acquisition, which of the following amounts represents the amount of goodwill that Beast would record as a result of this acquisition? A) $415,000 B) $ 95,000 C) $250,000 D) $405,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.

3) How is a bargain purchase recorded in the consolidated financial statements? A) A bargain purchase is not recorded in the consolidated financial statements. B) A bargain purchase is recorded as a gain on bargain purchase in other comprehensive income. C) A bargain purchase is recorded in a separate equity account in the equity section of the consolidated statement of financial position. D) A bargain purchase is recorded as a gain on bargain purchase in the profit and loss statement. Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.

4) On January 1, 2023, Avion Blue Inc. acquired 100% of the voting common shares of Plane Corporation Inc. by issuing 10,000 common shares. At acquisition, Avion's shares were trading at $70 per share. Avion incurred $5,000 in share issuance costs and $6,000 in legal fees as part of this acquisition. After the transaction, the share ownership consisted of the following: Group A — (original Avion shareholder) Group B — (the new shareholder group)

90% 10%

At acquisition, Plane's shareholders' equity consisted of $150,000 in common shares and $275,000 in retained earnings. The following is information related to Plane's assets and liabilities at acquisition: Carrying value $ 100,000 250,000 400,000 100,000 300,000

Accounts receivable Inventory Property, plant, and equipment (net) Current liabilities Long-term debt

Fair value $ 90,000 275,000 525,000 100,000 285,000

What amount of goodwill would be recorded in the consolidated statement of financial position as a result of this acquisition? A) $430,000 B) $280,000 C) $120,000 D) $125,000 Answer: C Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.

5) On March 1, 2023, Forrest Inc. issued 50,000 voting common shares in return for all the common shares of Mountain Corporation. At that time, Forrest's shares were trading at $19 per share. After the transaction, the original shareholder group of Forrest retained control. Below is information related to Mountain Corporation: March 1, 2023 Carrying value Cash $ 75,000 Accounts receivable 150,000 Inventory 275,000 Property, plant, and equipment (net) 650,000 Total assets $ 1,150,000 Current liabilities Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

115,000 275,000 150,000 610,000 $ 1,150,000

Fair value $ 75,000 135,000 315,000 550,000 $ 1,075,000 $ 115,000 275,000

What amount of goodwill would be recorded in the consolidated statement of financial position as a result of this acquisition? Answer: Purchase price 50,000 shares × $19 $ 950,000 Less the carrying value: Common shares 150,000 Retained earnings 610,000 Acquisition differential $ 190,000 Adjusted for: Carrying value Fair value Accounts receivable $ 150,000 $ 135,000 $ 15,000 Inventory 275,000 315,000 $ (40,000) Property, plant, and equipment (net) 650,000 550,000 $ 100,000 Goodwill $ 265,000 Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.

3.5 Identify a reverse takeover situation and discuss the implications. 1) Explain what a reverse takeover is, and how it is accounted for. Answer: A reverse takeover is an acquisition where one entity (the legal "parent") issues new shares to the shareholders of another company (the legal "subsidiary") for their shares. After the transaction, the new shareholders group (the shareholders of the legal "subsidiary") control both companies. While the legal "parent" issued the shares to acquire the legal "subsidiary, they do not control the combined entity. For accounting purposes, the legal "subsidiary" is in fact the acquirer. The accounting for a reverse takeover is more complex, as it requires the determination of the purchase price to be based on the fair value of the legal "subsidiary rather than the price paid by the legal "parent." The consolidated statements would reflect the carrying value of the net assets the legal "subsidiary' and the fair value of the net assets of the legal "parent." Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 3.5 Identify a reverse takeover situation and discuss the implications.

3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records. 1) Wooden Reed Inc. (WRI) issued 30,000 voting common shares to acquire all of the assets and liabilities of Creative Instrument Ltd. (CIL). On the acquisition date, WRI's shares were trading at $22 per share. After the transaction, CIL owned 20% of WRI's outstanding shares. The following information relates to CIL on the acquisition date:

Cash Accounts receivable Inventory Property, plant, and equipment (net) Current liabilities Long-term debt Common shares Retained earnings

WRI carrying value $ 75,000 180,000 220,000 880,000 $ 1,355,000 $ 75,000 235,000 100,000 945,000 $ 1,355,000

CIL carrying value $ 35,000 67,500 125,000 350,000 $ 577,500 $ 25,000 125,000 165,000 262,500 $ 577,500

CIL fair value $ 35,000 69,500 147,000 388,000 25,000 125,000

Based on the information provided, which of the amounts below correctly reflect amounts that would appear on WRI's statement of financial position? A) Accounts receivable $ 249,500 Property, plant, and equipment (net) $ 1,268,000 Inventory 367,000 Goodwill 170,500 B) Accounts receivable Inventory

69,500 147,000

Property, plant, and equipment (net) Goodwill

C) Accounts receivable Inventory

$ 247,500 367,000

Property, plant, and equipment (net) Goodwill

$ 1,230,000 174,500

D) Accounts receivable Inventory

$ 249,500 367,000

Property, plant, and equipment (net) Goodwill

$ 1,268,000 174,500

Answer: A

388,000 170,500

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records.

2) Wooden Reed Inc. (WRI) issued 30,000 voting common shares to acquire all of the assets and liabilities of Creative Instrument Ltd. (CIL). On the acquisition date, WRI's shares were trading at $22 per share. WRI incurred share issuance costs of $5,000 and legal fees of $8,000 as a result of this acquisition. After the transaction, CIL owned 20% of WRI's outstanding shares. Below are the statements of financial position of both companies immediately before the transaction, along with the fair values of CIL's assets and liabilities:

Cash Accounts receivable Inventory Property, plant, and equipment (net) Current liabilities Long-term debt Common shares Retained earnings

WRI carrying value $ 75,000 180,000 220,000 880,000 $ 1,355,000 $ 75,000 235,000 100,000 945,000 $ 1,355,000

CIL carrying value $ 35,000 67,500 125,000 350,000 $ 577,500 $ 25,000 125,000 165,000 262,500 $ 577,500

CIL fair value $ 35,000 69,500 147,000 388,000 25,000 125,000

If the consolidated statement of financial position was created immediately after the acquisition, the consolidated common share account will be: A) $773,000 B) $755,000 C) $760,000 D) $100,000 Answer: B

Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records.

3) ABC Corporation incurred legal fees as part of the acquisition of the net assets of XYZ Inc. How should ABC account for the legal fees associated with the acquisition? A) The legal fees should be added to the purchase price when determining goodwill. B) The legal fees should be expensed immediately. C) The legal fees should be deducted from the purchase price when determining goodwill. D) The legal fees should be recorded as a direct reduction of retained earnings. Answer: B Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records.

4) On April 1, 2023, Jack O'Lantern Inc. (JOI) issued 40,000 voting common shares in return for all the assets and liabilities of Pumpkin Seed Corporation (PSC). At that time, JOI's shares were trading at $25 per share. The original shareholders of JOI continued to control both companies after the transaction. Below is information related to PSC: April 1, 2023 Cash Accounts receivable Inventory Property, plant, and equipment (net) Total assets Current liabilities Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

Carrying value $ 25,000 150,000 235,000 650,000 $ 1,060,000 $ 90,000 475,000 150,000 345,000 $ 1,060,000

Fair value $ 25,000 135,000 295,000 850,000 $ 1,305,000 $90,000 475,000

Required a) Determine the goodwill for this acquisition b) Prepare the journal entry that JOI would record in their single-entity records to account for this acquisition

Answer: a) Purchase price Less the carrying value: Common shares Retained earnings Acquisition differential

40,000 sh.

× 25/sh.

$1,000,000 150,000 345,000 $ 505,000

Adjusted for: Accounts receivable Inventory Property, plant, and equipment (net) Goodwill

Carrying value $ 150,000 235,000 650,000

Fair value 135,000 295,000 850,000

15,000 (60,000) (200,000) $ 260,000

b) Dr. Cash Dr. Accounts receivable Dr. Inventory Dr. Property, plant, and equipment (net) Dr. Goodwill Cr. Current liabilities Cr. Long-term debt Cr. Common shares

25,000 135,000 295,000 850,000 260,000

90,000 475,000 1,000,000

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records.

3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records. 1) Marshall Inc. acquired all of the common shares of Runaway Ltd for $950,000 in cash. Marshall incurred legal fees of $8,000 as a result of this acquisition. Below are the statements of financial position of both companies immediately before the transaction, along with the fair values of Runaway's assets and liabilities:

Cash Accounts receivable Inventory Property, plant, and equipment (net) Current liabilities Long-term debt Common shares Retained earnings

Marshall carrying value $ 975,000 180,000 220,000 780,000 $ 2,155,000 $ 75,000 735,000 100,000 1,245,000 $ 2,155,000

Runaway carrying value $ 35,000 67,500 125,000 350,000 $ 577,500 $ 25,000 125,000 165,000 262,500 $ 577,500

Runaway fair value $ 35,000 69,500 147,000 388,000 $

25,000 125,000

Based on the information provided, which of the following amounts would be correctly included in the consolidated statement of financial position immediately after the acquisition? A) Inventory: $345,000 B) Retained earnings: $1,507,000 C) Accounts receivable: $249,500 D) Cash: $1,010,000 Answer: C

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.

2) On July 1, 2023, Sierra Corporation acquired all of the voting common shares of Cole Creations Ltd. (CCL) for $700,000 cash. Sierra paid legal and accounting fees of $15,000 as a result of this acquisition. Below are the statements of financial position of both companies immediately before the transaction, along with the fair values of CCL's assets and liabilities:

Cash Accounts receivable Inventory Property, plant, and equipment (net) Current liabilities Long-term debt Common shares Retained earnings

Sierra CCL carrying value carrying value $ 775,000 $ 35,000 180,000 67,500 220,000 125,000 680,000 350,000 $ 1,855,000 $ 577,500 $ 75,000 $ 25,000 835,000 125,000 100,000 165,000 845,000 262,500 $ 1,855,000 $ 577,500

CCL fair value $ 35,000 69,500 147,000 388,000 25,000 125,000

Based on the information provided, which of the following amounts would be correctly included in Sierra's consolidated statement of financial position? A) Cash: $95,000, Inventory: $367,000 B) Cash: $810,000, Accounts receivable: $247,500 C) Cash: $75,000, Accounts receivable: $249,500 D) Cash: $795,000, Common shares: $265,000 Answer: A

Diff: 1 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.

3) Assuming a company is reporting under ASPE, which of the following statements is true? A) Under ASPE, a parent company must prepare consolidated financial statements when it controls the subsidiary. B) Under ASPE, a parent company has the option to report the subsidiary using either the consolidation process or the equity method. C) Under ASPE, a parent company must use the equity method to account for its subsidiary. D) Under ASPE, a parent company has the option to use one of three methods to report for its subsidiary: cost, equity, or consolidation methods. Answer: D Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.

4) The first step in accounting for a business combination is to: A) determine the acquisition date B) determine the purchase price C) identify the acquirer D) calculate goodwill Answer: C

Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.

5) On April 1, 2023, Safe Corporation issued 40,000 voting common shares in return for all the voting common shares of Risky Corporation. At that time, Safe's shares were trading at $30 per share. Safe paid $5,000 in share issuance costs related to this acquisition. The original shareholders of Safe continued to control both companies after the transaction. Below is information related to Risky: April 1, 2023 Cash Accounts receivable Inventory Property, plant, and equipment (net) Total assets

Current liabilities Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

Carrying value $ 45,000 175,000 365,000 650,000 $ 1,235,000

90,000 475,000 150,000 520,000 $ 1,235,000

Fair value 45,000 148,750 438,000 845,000 $ 1,476,750

$90,000 522,500

Required: a) Determine the goodwill for this acquisition. b) Prepare the journal entry that Safe would record in its single-entity records. c) Prepare the eliminating entry that would be required to prepare the consolidated statement of financial position.

Answer: a) Determine the goodwill for this acquisition. Purchase price Less the carrying value: Common shares Retained earnings Acquisition differential

40,000

$ 1,200,000 150,000 520,000 $ 530,000

Adjusted for: Accounts receivable Inventory Property, plant, and equipment (net) Long-term debt Goodwill

Carrying value $ 175,000 365,000

Fair value $ 148,750 438,000

650,000 475,000

845,000 522,500

26,250 (73,000)

(195,000) 47,500 $ 335,750

b) Prepare the journal entry that Safe would record in its single-entity records. Dr. Investment in Risky Corporation Cr. Common shares Cr. Cash (re: share issuance costs)

1,200,000

1,195,000 5,000

c) Prepare the eliminating entry that would be required to prepare the consolidated statement of financial position. Dr. Common shares Dr. Retained earning Dr. Inventory Dr. Property, plant, and equipment (net) Dr. Goodwill Cr. Accounts receivable Cr. Long-term debt Cr. Investment in Risky Corporation

150,000 520,000 73,000 195,000 335,750

26,250 47,500 1,200,000

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.

3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity. 1) Lolapolooza Trinkets Inc. (LTI) purchased 100% of the voting shares of Tiny Toys Ltd. (TTL) for $4,500,000 in cash. The net carrying value of the assets and liabilities equal the fair value, which the exception of long-term debt which was undervalued by $50,000. At acquisition, the shareholders' equity of TTL consisted of $775,000 in common shares and $1,300,000 in retained earnings. Both companies pay tax at a rate of 20%. On the date of acquisition, which of the following amounts represents the amount of goodwill that LTI would record on its consolidated statement of financial position? A) $2,425,000 B) $2,465,000 C) No goodwill would arise from this acquisition D) $2,385,000 Answer: B Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.

2) Boots Inc. paid $1,550,000 for all the shares of Kimos Ltd. At acquisition, the carrying value of the net assets of Kimos was $1,300,000. Both companies pay tax at a rate of 20%. The fair value of all the Kimos assets and liabilities were equal to the carrying value with the exception of the following: Carrying value $ 55,000 165,000 200,000

Accounts receivable Inventory Patent

Fair value $ 45,000 240,000 250,000

On the date of acquisition, which of the following amounts represents the amount of goodwill that Boots would record as a result of this acquisition? A) $250,000 B) $158,000 C) $142,000 D) $342,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.

3) On January 1, 2023, Avion Blue Inc. acquired 100% of the voting common shares of Plane Corporation Inc. by issuing 10,000 common shares. At acquisition, Avion's shares were trading at $70 per share. Avion incurred $5,000 in share issuance costs and $6,000 in legal fees as part of this acquisition. After the transaction, the share ownership consisted of the following: Group A — (Original Avion shareholder) Group B — (the new shareholder group)

90% 10%

At acquisition, Plane's shareholders' equity consisted of $150,000 in common shares and $275,000 in retained earnings. Both companies pay tax at a rate of 20%. The following is information related to Plane's assets and liabilities at acquisition: Carrying value Fair value Accounts receivable $ 100,000 $ 90,000 Inventory 250,000 275,000 Property, plant, and equipment (net) 400,000 525,000 Current liabilities 100,000 100,000 Long-term debt 300,000 285,000 What amount of goodwill would be recorded in the consolidated statement of financial position as a result of this acquisition? A) $151,000 B) $ 94,000 C) $280,000 D) $ 89,000 Answer: A Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.

4) Mirant Corporation acquired 100% of Zion Corporation on January 1, 2023, for $500,000. At acquisition, Zion's common share and retained earnings had balances of $75,000 and $250,000, respectively. All the fair values of Zion's assets and liabilities were equal to their carrying value with the exception of the following:

Inventory Land Long-term debt

Carrying value $ 150,000 275,000 110,000

Fair value $ 175,000 355,000 125,000

Both companies pay tax at a rate of 20%. Assuming the consolidated statement of financial position is created immediately after the acquisition, what adjustment to the deferred income tax account on the statement of financial position would be required?

A) A debit to the deferred income tax account for $24,000 B) A credit to the deferred income tax account for $18,000 C) A credit to the deferred income tax account for $20,600 D) A debit to the deferred income tax account for $18,000 Answer: B

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.

5) Tara Tiles Inc. (TTI) acquired 100% the common shares of Beaudry Carpets Ltd. (BCL) on January 1, 2023, for $600,000. At acquisition, BCL's common share and retained earnings had balances of $75,000 and $250,000, respectively. All of the fair values of BCL's assets and liabilities were equal to their carrying value with the exception of the following:

Inventory Building Long-term debt

Carrying value $ 165,000 250,000 110,000

Fair value 189,750 300,000 93,500

Both companies pay tax at a rate of 20%. What is the effect of the deferred income tax in accounting for the acquisition? A) Increase in deferred income tax liability and goodwill B) Increase in deferred income tax liability and decrease in goodwill C) Decrease in deferred income tax liability and goodwill D) Decrease in deferred income tax liability and increase in goodwill Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.

6) On April 1, 2023, Safe Corporation issued 40,000 voting common shares in return for all the voting common shares of Risky Corporation. At that time, Safe's shares were trading at $30 per share. Safe paid $5,000 in share issuance costs related to this acquisition. The original shareholders of Safe continued to control both companies after the transaction. Both companies pay tax at a rate of 20%. Below is information related to Risky: April 1, 2023

Cash Accounts receivable Inventory Property, plant, and equipment (net) Total Assets Current liabilities Deferred income tax liability Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

Carrying value $ 45,000 175,000 365,000 650,000 $ 1,235,000 $ 90,000 $ 25,000 475,000 150,000 495,000 $ 1,235,000

Fair value $ 45,000 148,750 438,000 845,000 $ 1,476,750 $ 90,000 25,000 522,500

Required: a) Determine the goodwill for this acquisition. b) Prepare the eliminating entry that would be required to prepare the consolidated statement of financial position.

Answer: a) Purchase price Less the carrying value: Common shares Retained earnings Acquisition differential

40,000

$1,200,000 150,000 495,000 $ 555,000

Carrying value $ 175,000 365,000 650,000 475,000

Adjusted for: Accounts receivable Inventory Property, plant, and equipment (net) Long-term debt Deferred income tax asset (liability)* Goodwill *Calculation of deferred income tax asset (liability): Accounts receivable Inventory Property, plant, and equipment (net) Long-term debt Tax base

Tax rate Deferred income tax asset (liability)

b) Dr. Common shares Dr. Retained earnings Dr. Inventory Dr. Property, plant, and equipment (net) Dr. Goodwill Cr. Accounts receivable Cr. Deferred income tax asset (liability) Cr. Long-term debt Cr. Investment in Risky Corporation

Fair value $ 148,750 438,000 845,000 522,500

(26,250) 73,000 195,000 (47,500) 194,250

20% 38,850

26,250 (73,000) (195,000) 47,500 38,850 $ 399,600

150,000 495,000 73,000 195,000 399,600 26,250 38,850 47,500 1,200,000

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.

7) Brayden Bricks Inc. (BBI) acquired 100% of the common shares of Concrete Plus Ltd. (CPL) on January 1, 2023 for $1,000,000. At acquisition, CPL's common share and retained earnings had balances of $100,000 and $280,000, respectively. All of the fair values of CPL's assets and liabilities were equal to their carrying value with the exception of the following: Carrying value $ 145,000 195,000 200,000

Inventory Patent Land

Fair value 166,750 234,000 170,000

Both companies pay tax at a rate of 20%. Prepare the elimination entry that would be required to create the consolidated statement of financial position immediately after acquisition. Answer: Step 1 Purchase price Common shares Retained earnings Acquisition differential Allocated to: Inventory Patent Land Deferred income tax asset (liability)* Goodwill *Deferred income tax calculation: Inventory Patent Land Tax base Deferred income tax rate Deferred income tax

$ 1,000,000 (100,000) (280,000) 620,000

$ $

Step 2: Elimination entry: Dr. Common shares Dr. Retained earnings Dr. Inventory Dr. Patent Dr. Goodwill Cr. Land Cr. Deferred income tax asset (liability) Cr. Investment in Concrete Plus Ltd.

(21,750) (39,000) 30,000 6,150 595,400 21,750 39,000 (30,000) 30,750 20% 6,150

100,000 280,000 21,750 39,000 595,400

30,000 6,150 1,000,000

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 4 Control Investments: Subsequent Measurements with Wholly Owned Investments 4.1 Explain why amortization of the fair value differentials (FVD) that existed at acquisition is required to adjust the income earned by the subsidiary subsequent to purchase. 1) Inventory was acquired as part of a business combination that occurred at the end of the prior year. The inventory has a fair value greater than the carrying value. The inventory was sold in the current year. Which statement correctly explains the adjust required in the consolidation process. A) The fair value difference is deducted from the cost of sales. The adjustment is required to ensure that the cost of sales reflects the fair value of the inventory when the subsidiary was acquired. B) The fair value difference is added to the inventory balance. The adjustment is required to ensure the fair value of the acquired inventory reflects in the inventory on the statement of financial position for the current year. C) The fair value difference is added to sales. The adjustment is required to record the sale of the inventory in the year. D) The fair value difference is added to the cost of sales. The adjustment is required to reflect the fair value of the inventory in the cost of sales now that the inventory has been sold. Answer: D Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 4.1 Explain why amortization of the fair value differentials (FVD) that existed at acquisition is required to adjust the income earned by the subsidiary subsequent to purchase.

2) On December 31, 2022, Zion Corporation purchased 100% of the outstanding shares of Tella Tulip Inc. for $190,000. At that date, Tella's shareholders' equity consisted of $100,000 in common shares and $40,000 in retained earnings. The carrying value of Tella's assets and liabilities was equal to their fair value with the exception of the inventory. The inventory's fair value was $20,000 less than the carrying value. Inventory turns over every 45 days. Which statement correctly reflects the consolidating adjustment that is required in 2023? A) Cost of sales will decrease by $10,000 to reflect the fair value cost of the inventory in the consolidated statement of income. B) The consolidated inventory balance in the 2023 consolidated statement of financial position will decrease by $10,000. C) Cost of sales will increase by $10,000 to reflect the fair value cost of the inventory in the consolidated statement of income. D) No adjustment is required in the consolidated statement of income in 2023. Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 4.1 Explain why amortization of the fair value differentials (FVD) that existed at acquisition is required to adjust the income earned by the subsidiary subsequent to purchase.

3) On December 31, 2022, Zion Corporation purchased 100% of the outstanding shares of Tella Tulip Inc. for $190,000. At that date, Tella's shareholders' equity consisted of $100,000 in common shares and $40,000 in retained earnings. The carrying value of Tella's assets and liabilities was equal to their fair value with the exception of the building, which had a fair value of $30,000 in excess of the carrying value. The remaining useful life of the building at acquisition is 10 years. Which statement correctly reflects the consolidating adjustment that is required in 2023? A) Depreciation expense will decrease by $3,000 in 2023 to reflect the fair value of the building that existed at acquisition. B) The consolidated balance of the building, net of depreciation, will increase by $30,000 to reflect the remaining fair value at acquisition. C) The consolidated balance of the building, net of depreciation, will decrease by $27,000 to reflect the remaining fair value at acquisition. D) Depreciation expense will increase by $3,000 in 2023 to reflect the fair value of the building that existed at acquisition. Answer: D Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 4.1 Explain why amortization of the fair value differentials (FVD) that existed at acquisition is required to adjust the income earned by the subsidiary subsequent to purchase.

4.2 Adjust the consolidated balances in the statement of financial position (SFP) for the unamortized fair value differentials that existed at acquisition. 1) On January 1, 2023, Rossie Corporation, a public company, acquired 100% of the voting common shares of Mya Inc. At acquisition, all of Mya's assets and liabilities equal their carrying value except for the following assets: Carrying value $ 150,000 250,000 —

Inventory Building Patent

Fair value 250,000 450,000 200,000

Both companies have an inventory turnover of 45 days. At acquisition, the building had a remaining useful life of 10 years. The patent has a remaining useful life of 5 years. The following are selected account balances from the separate-entity statements for the year ending December 31, 2024.

Inventory Building Patent

Rossie 375,000 425,000 275,000

Mya 200,000 202,000 —

What amount represents the value of the inventory that would be reported on the consolidated SFP on December 31, 2024? A) $675,000 B) $300,000

C) $575,000 D) $475,000 Answer: C

Diff: 1 Type: MC Taxonomy Category: Applying Learning Outcome: 4.2 Adjust the consolidated balances in the statement of financial position (SFP) for the unamortized fair value differentials that existed at acquisition.

2) On January 1, 2023, Rossie Corporation, a public company, acquired 100% of the voting common shares of Mya Inc. At acquisition, all of Mya's assets and liabilities equal their carrying value except for the following assets: Carrying value $ 150,000 250,000 -

Inventory Building Patent

Fair value 250,000 450,000 200,000

Inventory Building Patent

Rossie 375,000 425,000 275,000

Mya 200,000 202,000 -

What amount represents the value of the building that would be reported on the consolidated SFP on December 31, 2024? A) $467,000 B) $787,000 C) $807,000 D) $447,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 4.2 Adjust the consolidated balances in the statement of financial position (SFP) for the unamortized fair value differentials that existed at acquisition.

3) On January 1, 2023, Rossie Corporation, a public company, acquired 100% of the voting common shares of Mya Inc. At acquisition, all of Mya's assets and liabilities equal their carrying value except for the following assets:

Inventory Building Patent

Carrying value $ 150,000 250,000 —

Fair value 250,000 450,000 200,000

Both companies have an inventory turnover of 45 days. At acquisition, the building had a remaining useful life of 10 years. The patent has a remaining useful life of 5 years. The following are select account balances from the separate-entity statements for the year ending December 31, 2024.

Inventory Building Patent

Rossie 375,000 425,000 275,000

Mya 200,000 202,000 —

What amount represents the value of the patent that would be reported on the consolidated SFP on December 31, 2024? A) $155,000 B) $435,000 C) $115,000 D) $395,000 Answer: D Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 4.2 Adjust the consolidated balances in the statement of financial position (SFP) for the unamortized fair value differentials that existed at acquisition.

4) How should the fair value differentials related to depreciable assets be accounted for in the consolidation process? A) They should be amortized based on the subsidiary's depreciation policies. B) They should be expensed immediately in the first year of acquisition. C) They should be added to the cost of depreciable asset, until sold outside the consolidated entity. D) They should be deducted from the cost of the depreciable assets, until they are sold outside the consolidated entity. Answer: A Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 4.2 Adjust the consolidated balances in the statement of financial position (SFP) for the unamortized fair value differentials that existed at acquisition.

5) On January 1, 2020, Paulo Corporation acquired 100% of the common shares of Sadeen Ltd. for $1,848,000. On that date, the assets and liabilities had the following carrying and fair values: Sadeen Ltd.

Cash Accounts receivable Inventory Equipment, net Land Accounts payable Bond payable Common shares Retained earnings

Carrying value $ 85,000 240,000 215,000 1,200,000 250,000 1,990,000 $ 235,000 365,000 500,000 890,000 $ 1,990,000

Fair value $ 85,000 225,000 300,000 1,484,000 235,000 $ 235,000 365,000

On the date of acquisition: • The equipment had a remaining useful life of 10 years. • Inventory on hand was sold by December 31, 2020. • Sadeen's accounts receivable turns over every 52 days. The separate-entity financial statements for Paulo and Sadeen for year ending December 31, 2023 are presented below: Statement of Financial Position Paulo Sadeen Cash $ 336,000 $ 40,000 Accounts receivable 528,000 295,000 Inventory 660,000 350,000 Equipment, net 1,312,000 1,250,000 Land 345,000 250,000 Investment in Sadeen (cost method) 1,848,000 Total assets $ 5,029,000 $ 2,185,000 Accounts payable $ 528,000 $ 200,000 Bonds payable 672,000 365,000 Common shares 1,500,000 500,000 Retained earnings 2,329,000 1,120,000 Total liabilities and shareholders' equity $ 5,029,000 $ 2,185,000

Goodwill is tested for impairment each reporting period. In 2021, it was determined that goodwill was impaired by $66,500. In 2023, the goodwill was further impaired by $25,000. Required: Calculated the consolidated balances on the SFP as at December 31, 2023, for the following balances: a) Goodwill b) Equipment, net c) Land

Answer: a) Goodwill Purchase price Less the carrying value: Acquisition differential Allocated to: Accounts receivable Inventory Equipment (net) Land Goodwill at acquisition Less the write-off in: Goodwill balance at end of 2023

Common shares Retained earnings

$500,000 890,000

Carrying value $ 240,000 215,000 1,200,000 250,000

Fair value $ 225,000 300,000 1,484,000 235,000

2021 2023

$ 1,848,000

b) Equipment ($1,312,000 + $1,250,000 + $284,000 − (284,000/10 × 4 years) = $2,732,400 c) Land ($345,000 + $250,000 − $15,000) = $580,000

1,390,000 458,000

15,000 (85,000) (284,000) 15,000 119,000 (66,500) (25,000) 27,500

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 4.2 Adjust the consolidated balances in the statement of financial position (SFP) for the unamortized fair value differentials that existed at acquisition.

6) Presented below are the separate-entity statements of Emerson Inc. and Garstka Ltd., along with the consolidated statement of financial position. Statement of Financial Position December 31, 2024 Emerson Inc. $ 75,000 108,000 95,000 199,000 530,000

Cash and cash equivalent Accounts receivable Inventory Land Property, plant, and equipment (net) Goodwill Investment in Garstka Total assets Accounts payable Current portion of long-term debt Deferred income taxes Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

Garstka Ltd. $ 273,062 123,800 100,000 115,000 166,017

360,000 $ 1,367,000

45,900 37,500 17,500 450,000 200,000 616,100 $ 1,367,000

— 777,879 18,953 15,000 1,950 128,000 75,000 538,976 777,879

Consolidated balances $ 348,062 231,800 195,000 344,000 746,657 14,863 — $ 1,880,382 $

64,853 52,500 19,450 578,000 200,000 965,579 $ 1,880,382

Additional information •

• • •

Emerson purchased 100% of the outstanding shares of Garstka Ltd on January 1, 2021. At that time, Garstka's shareholders' equity consisted of the following: Common shares $ 75,000 Retained earnings 135,737 The acquisition differential was allocated to land and equipment, with the remainder to goodwill. The equipment that existed at acquisition had a remaining useful like of 10 years. There were no intercompany transactions, no goodwill impairment since the acquisition. Garstka has not sold any assets since the acquisition.

Required: Based on the information above, answer the following questions: a) How much was the land fair value difference at acquisition? b) Was the land fair value differential at acquisition greater than or lower than the carrying value held in the subsidiary? c) What was the amount of the fair value differential of the equipment at acquisition? d) What method is Emerson using to record its investment in Garstka in its separate-entity records? e) What was the amount of the fair value differential for the inventory at acquisition?

Answer: a) How much was the land fair value difference at acquisition? Consolidated balance Less the parent's book value Less the subsidiary's book value Difference

344,000 199,000 115,000 30,000

b) Was the land fair value differential at acquisition greater than or lower than the carrying value held in the subsidiary? We are increasing the land to get to the consolidated total, therefore, the fair value at acquisition was greater than the book value at acquisition. c)

What was the amount of the fair value differential of the equipment at acquisition?

First, we need to determine the remaining unamortized balance of the fair value differential: Consolidated balance Less the parent's book value Less the subsidiary's book value Unamortized fair value differential of the equipment. The acquisition happened 4 years ago, leaving 6 years of amortization. Amortization per year would be ($50,640/6 years) Fair value difference at acquisition ($8,440 × 10 years)

746,657 530,000 166,017 50,640

8,440 84,400

d) What method is Emerson using to record its investment in Garstka in its separate-entity records? Since the parent's retained earnings is not equal to the subsidiary's retained earnings, the parent is not using the equity method to account for its investment in Garstka. The parent would be using the cost method. e) What was the amount of the fair value differential for the inventory at acquisition? Purchase price Less the carrying value: Acquisition differential Allocated to: Equipment (net) Land Goodwill at acquisition—without inventory Goodwill on the SFP Inventory FVD at acquisition

Common shares Retained earnings

$75,000 135,737

360,000 210,737 149,263 (84,400) (30,000)

$ $

34,863 14,863 20,000

Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 4.2 Adjust the consolidated balances in the statement of financial position (SFP) for the unamortized fair value differentials that existed at acquisition.

4.3 Adjust the consolidated statement of income (SI) for the amortization of fair value differentials that existed at acquisition. 1) On January 2, 2023, Quepasa Inc. acquired 100% of the voting common shares of Strauss Corporation for $340,000 cash. At that time, the shareholders' equity of Strauss consisted of $120,000 in common shares and $90,000 in retained earnings. The fair values of all assets and liabilities were equal to the carrying value with the exception of inventory and building. The inventory's fair value was $50,000 in excess of the carrying value. The building's fair value was $100,000 less than the carrying value and had a remaining useful life of 8 years. The fair value was considered to be a temporary decline in value. Quepasa uses the cost method to account for its investment in Strauss. In 2024, goodwill was determined to be impaired by $10,000. Both companies have a December 31 year end. The following information relates to the year ending December 31, 2025. Quepasa Strauss Net income $ 650,000 $ 475,000 Dividends declared and paid 290,000 150,000 Which of the following amounts represents consolidated net income for the year ending December 31, 2025? A) $1,127,500 B) $987,500 C) $962,500 D) $927,500 Answer: B

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 4.3 Adjust the consolidated statement of income (SI) for the amortization of fair value differentials that existed at acquisition.

2) Koloa Company purchased 100% of the outstanding voting common shares of Hanapepe Company on December 31, 2023 for $470,000. At that date, Hanapepe had $200,000 of common shares and retained earnings of $130,000. It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $80,000, and the carrying value of the inventory exceeded its fair value by $35,000. The capital assets had a remaining useful life of 5 years as of the acquisition date. Inventory turns over 10 times a year. What adjustment should be made to the consolidated financial statements for the year ended December 31, 2024, with respect to the inventory fair value differential? A) An increase should be made to the opening consolidated retained earnings. B) No adjustment is required in 2024 since the inventory was acquired in 2023. C) An increase to cost of sales for $35,000 should be made in the consolidated income statement. D) A decrease to cost of sales for $35,000 should be made in the consolidated income statement. Answer: D

Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 4.3 Adjust the consolidated statement of income (SI) for the amortization of fair value differentials that existed at acquisition.

3) Koloa Company purchased 100% of the outstanding voting common shares of Hanapepe Company on December 31, 2023 for $270,000. At that date, Hanapepe had $200,000 of common shares and retained

earnings of $130,000. It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $80,000, and the carrying value of the inventory exceeded its fair value by $35,000. The capital assets had a remaining useful life of 5 years as of the acquisition date. Inventory turns over 10 times a year. What adjustment should be made to the consolidated financial statements for the year ended December 31, 2026, with respect to the capital assets fair value differential? A) An increase of $32,000 to retained earnings on January 1, 2026. B) Depreciation expense for the year ending December 31, 2026 will increase by $16,000. C) Depreciation expense for the year ending December 31, 2026 will decrease by $16,000. D) Depreciation expense for the year ending December 31, 2026 will increase by $32,000. Answer: B

Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 4.3 Adjust the consolidated statement of income (SI) for the amortization of fair value differentials that existed at acquisition.

4) Murphy Corporation acquired 100% of the common shares of Brown Inc. on January 1, 2023. The acquisition resulted in a goodwill balance of $125,000. At acquisition, the only fair value differences related to a customer list that was understated by $90,000 and the accounts receivable that was overstated by $15,000. The customer list had a useful life of 20 years. For the year ending December 31, 2023, Murphy reported net income of $310,000, and Brown reported net income of $175,000. Murphy declared and paid dividends of $150,000, and Brown reported dividends of $75,000 on November 30, 2023. What is the consolidated net income for the year ending December 31, 2023? A) $185,500 B) $399,500 C) $420,500 D) $474,500 Answer: C

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 4.3 Adjust the consolidated statement of income (SI) for the amortization of fair value differentials that existed at acquisition.

5) On December 31, 2021, Lenore Corporation issued 275,000 shares to the shareholders of Mido Supplies Ltd. in exchange for 100% of the outstanding common shares. Prior to the transaction, Lenore had 700,000 common shares outstanding. The shares were trading at $40 per share on December 31, 2021. On the date of acquisition, the shareholders' equity of Mido consisted of common shares of $2,100,000 and retained earnings of $7,800,000. All of the assets and liabilities had a fair value equal to carrying value with the exception of the following:

Inventory Land Equipment

Carrying value $ 185,000 495,000 975,000

Fair value 295,000 725,000 850,000

20-year useful life

As part of the negotiations, Lenore and Mido agreed that the fair value of Mido's internally created customer list was $100,000 at acquisition. The customer list had a remaining estimated lifespan of 5 years. For the year ended December 31, 2025, the separate-entity statement of income for Lenore and Mido was as follows: Lenore Mido Sales $ 12,690,000 $ 8,180,000 Cost of goods sold 7,614,000 4,908,000 Gross profit 5,076,000 3,272,000 Other income (loss) 450,000 175,000 Expenses: Depreciation expense 1,035,000 465,200 General and administration expense 1,325,000 945,300 Income before taxes 3,166,000 2,036,500 Income taxes 696,520 448,030 Net income $ 2,469,480 $ 1,588,470 Additional information: • Mido declared dividends of $350,000 on October 1, 2025. • Goodwill was tested for impairment each year. In 2024, it was determined that the fair value of goodwill was $710,000. • Mido still holds the land that existed at acquisition. Required: a) Calculate the entity's consolidated net income for the year ending December 31, 2025. b) Using the direct method, prepare a consolidated statement of income for the year ending December 31, 2025.

Answer: Step 1 - Confirm who the acquirer is:

Analysis of control Original shareholder group holds New shareholder group (original shareholder of Mido) Number of shares after transaction

Shares 700,000 275,000 975,000

Percentage ownership 71.8% 28.2%

Change of control occurred over Mido's assets since the same shareholder group still controls Lenore. Lenore is the acquirer. To calculate the entity's consolidated net income, –`we need to determine goodwill at acquisition and the amortization schedule. Step 2 - Analyze the purchase price, and calculate goodwill: Goodwill calculation Purchase price Less carrying value: Common shares Retained earnings Acquisition differential Allocated to: Inventory Land Equipment Customer list Goodwill

275,000 ×

$ 40

$11,000,000 2,100,000 7,800,000 1,100,000 (110,000) (230,000) 125,000 (100,000) $ 785,000

Step 3 - Prepare an amortization schedule for the fair value differentials: Fair value Amortization Unamortized Unamortized differentials at for years 2022, balance at Amortization balance at Account acquisition 2023, 2024 end of 2024 2025 end of 2025 Inventory $110,000 $(110,000) $ $ $ Land 230,000 230,000 230,000 Equipment (125,000) 18,750 (106,250) 6,250 (100,000) Customer list 100,000 (60,000) 40,000 (20,000) 20,000 Goodwill 785,000 (75,000) 710,000 710,000 $1,100,000 $ (226,250) $ 873,750 $(13,750) $ 860,000

Step 4—Gather information: Dividends paid by Mido to Lenore

$350,000

a) Calculate the entity's consolidated net income for the year ending December 31, 2025. Lenore's net income Less dividends declared by Mido Lenore's adjusted net income Mido's net income Fair value amortization for the current year Mido's adjusted net income Entity's consolidated net income

$ 1,588,470 (13,750) $ 1,574,720

$ 2,469,480 350,000 $ 2,119,480

100%

1,574,720 $ 3,694,200

b) Using the direct method, prepare a consolidated statement of income for the year ending December 31, 2025. Sales ($12,690,000 + $8,180,000) Cost of goods sold ($7,614,000 + $4,908,000) Gross profit Other income (loss) ($450,000 + $175,000 − $350,000) Expenses: Depreciation expense ($1,035,000 + $465,200 − $6,250 + 20,000) General and administration expense ($1,325,000 + $945,300) Income before taxes Income taxes ($696,520 + $448,030) Net income

$ 20,870,000 12,522,000 8,348,000 275,000 1,513,950 2,270,300 4,838,750 1,144,550 $ 3,694,200

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 4.3 Adjust the consolidated statement of income (SI) for the amortization of fair value differentials that existed at acquisition.

6) On December 31, 2023, Palm Corporation acquired 100% of the voting shares of Oil Company Inc. for $4,300,000 in cash. The following is the statement of financial position of Oil, along with their fair values at acquisition: December 31, 2023

Cash Accounts receivable Inventory Property, plant, and equipment (net) Current liabilities Long-term debt Common shares Retained earnings

Carrying values $ 280,000 200,000 400,000 3,840,000 $4,720,000 $ 200,000 760,000 1,360,000 2,400,000 $4,720,000

Fair values $ 280,000 180,000 510,000 4,100,000 $ 200,000 800,000

Additional information • Palm carries its investments in Oil at cost. • The fair value differential in the property, plant, and equipment arises from a building, which had an estimated useful life of 10 years at acquisition. • Inventory turns over 10 times a year. • At acquisition, the long-term debt matures in 4 years and Oil uses straight line to amortize any premiums or discounts on long-term debt. Below are the separate-entity statements of income for the year ending December 31, 2026:

Sales Cost of goods sold Gross profit Other income (loss) Expenses: Depreciation expense General and administration expense Income before taxes Income taxes Net income Opening retained earnings Dividends Closing retained earnings

Palm $ 7,200,000 3,600,000 3,600,000 581,600

Oil $ 5,200,000 2,800,000 2,400,000 400,000

850,000 1,456,000 1,875,600 375,120 $ 1,500,480

675,000 950,000 1,175,000 235,000 $ 940,000

$ 5,480,000 (500,000) $ 6,480,480

$ 4,880,000 (350,000) $ 5,470,000

Required: a) Calculate consolidated net income for the year ending December 31, 2026. b) Prepare the eliminating entries needed to adjust the consolidated statement of income for the year

ending December 31, 2026. Answer: a) Calculate consolidated net income for the year ending December 31, 2026. Parent's net income Less dividends from the subsidiary Subsidiary's net income Adjust for the current period FVD amortization: Property, plant, and equipment (net) Long-term debt Subsidiary's adjusted net income Parent's percentage Consolidated net income

$ 940,000 (26,000) 10,000 924,000 100%

$ 1,500,480 350,000 1,150,480

924,000 $ 2,074,480

b) Prepare the eliminating entries needed to adjust the consolidated statement of income for the year ending December 31, 2026. Dr. Dividend revenue Cr. Dividends declared (Oil) To eliminate the intercompany dividends declared in the current year.

350,000

Dr. Depreciation expense Cr. Property, plant, and equipment (net) To adjust the depreciation expense for the FVD on the building ($260,000/10 years)

26,000

Dr. Long-term debt Cr. Interest expense To adjust the interest expense for the FVD related to the longterm debt ($40,000/4 years)

10,000

350,000

26,000

10,000

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 4.3 Adjust the consolidated statement of income (SI) for the amortization of fair value differentials that existed at acquisition.

4.4 Consolidate the results of a wholly owned subsidiary subsequent to acquisition. 1) What is the first step in the preparation of the consolidated SFP? A) Adding the parent's carrying values and the subsidiary's fair values together. B) Adding the parent's fair values and the subsidiary's carrying values together. C) Adding the parent's fair values and the subsidiary's fair values together. D) Adding the parent's carrying values and the subsidiary's carrying values together. Answer: D Diff: 1

Type: MC

Taxonomy Category: Understanding Learning Outcome: 4.4 Consolidate the results of a wholly owned subsidiary subsequent to acquisition.

2) In its separate-entity statements, Alfredo Corporation accounts for its 100% owned subsidiary, Perfect Pasta Inc. (PPI) using the cost method. In the current year, PPI declared and paid a $250,000 dividend. What adjustment should be made in the consolidated statements with respect to the dividends? A) Dr. Dividend income for $250,000 and Cr. Cash for $250,000 B) Dr. Cash for $250,000 and Dr. Dividend income for $250,000 C) Dr. Dividends (PPI) for $250,000 and Cr. Dividend income $250,000 D) Dr. Dividend income for $250,000 and Cr. Dividends (PPI) $250,000 Answer: D Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 4.4 Consolidate the results of a wholly owned subsidiary subsequent to acquisition.

3) Cascade Ltd. acquired 100% of the voting shares of Tumble Inc. on December 31, 2023. At that time, Tumble had a client list with a fair value of $140,000 greater than the carrying value. The estimated useful life was 7 years. Which adjustments must be made in the December 31, 2026, consolidated statements in relation to the FVD of the client list? A) Consolidated SI: increase depreciation expense by $20,000 and Consolidated SFP: increase the client list by $80,000 B) Consolidated SI: decrease depreciation expense by $20,000 and Consolidated SFP: increase the client list by $80,000 C) Consolidated SI: decrease depreciation expense by $20,000 and Consolidated SFP: increase the client list by $60,000 D) Consolidated SI: increase depreciation expense by $20,000 and Consolidated SFP: increase the client list by $60,000 Answer: A Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 4.4 Consolidate the results of a wholly owned subsidiary subsequent to acquisition.

4) In its separate-entity statements, Waikoloa Inc. accounts for its wholly owned subsidiary Poipu Ltd. using the equity method of accounting. Which of the following statements is true? A) Consolidated net income will be greater than Waikoloa's net income in its separate-entity statement of income. B) Consolidated net income will be less than Waikoloa's net income in its separate-entity statement of income. C) Consolidated net income will be the same as Waikoloa's net income, only if the subsidiary does not pay dividend, and there are no fair value differentials at acquisition. D) Consolidated net income will be the same as Waikoloa's net income in its separate-entity statement of income. Answer: D Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 4.4 Consolidate the results of a wholly owned subsidiary subsequent to acquisition.

5) On January 1, 2023, Koloa Koncrete Ltd. (KKL) purchased 100% of the outstanding shares of Antle Corporation. The analysis of the purchase price is provided below: Analysis of the acquisition: Purchase price less Common shares Retained earnings Acquisition differential Allocated to: Accounts receivable Inventory Land Equipment Goodwill

$ 4,200,000 1,200,000 2,100,000 900,000 28,000 (120,000) 150,000 (480,000) $ 478,000

Additional information related to the acquisition: • Accounts receivables were collected by the end of 2023. Inventory turns over every 45 days. • One half of the land that existed at acquisition was sold in 2024. • On January 1, 2023, the equipment had a remaining useful life of 10 years. • In 2026, it was determined that the goodwill was valued at $450,000. There have been no other impairments. Below are the separate-entity financial statements of PPI and Antle for December 31, 2026: Statement of Financial Position

KKL 572,500 990,000 875,000 7,650,000 4,200,000 $ 14,287,500 $ 745,000 2,750,000 125,000 7,500,000 3,167,500 $ 14,287,500

Cash Accounts receivable Inventory Property, plant, and equipment (net) Investment in Antle Total assets Current liabilities Long-term debt Deferred income tax liability Common shares Retained earnings Total liabilities and shareholders' equity

Antle 385,000 410,000 375,000 3,850,000 $ 5,020,000 $ 294,000 452,250 54,000 1,200,000 3,019,750 $ 5,020,000 $

Statement of Income Sales Cost of sales Gross profits Other revenues (losses) Expenses: Depreciation expense General and administration Income before tax Income tax expense Net income

KKL 3,120,000 1,482,000 1,638,000 520,000 456,000 925,000 777,000 155,400 621,600

Antle 956,250 382,500 573,750 175,000

208,750 243,000 297,000 59,400 237,600

Statement of Changes in Equity (partial) Opening retained earnings Net income Dividends Closing retained earnings

2,692,150 621,600 (146,250) 3,167,500

2,913,400 237,600 (131,250) 3,019,750

Required: a) Determine the following consolidated balances that would appear on the balance sheet at December 31, 2026. i. Property, plant, and equipment (net) ii. Goodwill iii. Consolidated retained earnings at the end of December 31, 2026 b) Using the direct method, prepare a consolidated statement of income for the year ended December 31, 2026, along with the statement of changes in equity.

Answer: a) Determine the following consolidated balances that would appear on the balance sheet at December 31, 2026. Step 1—We have to determine the FVD amortization amounts:

Account Accounts receivable Inventory Land Equipment Goodwill

Fair value Amortization for Unamortized differentials at 2023, balance at end acquisition 2024, 2025 of 2025 $

(28,000) 120,000 (150,000) 480,000 478,000 900,000

28,000

(120,000) 75,000 (144,000) $ (161,000)

Unamortized Amortization balance at end of 2026 2026

(75,000) 336,000 478,000 739,000

(48,000) (28,000) (76,000)

(75,000) 288,000 450,000 663,000

Step 2—Gather information: Dividends paid from Antle to KKL

$131,250

i. PPE (net): ($7,650,000 + $3,850,000 − $75,000 + $288,000) = $11,713,000 ii. Goodwill: $450,000 iii. Calculate the consolidated retained earnings at December 31, 2026 Parent's single entity retained earnings at December 31, 2026 Subsidiary's retained earnings at December 31, 2026 Subsidiary's retained earnings at acquisition Unadjusted change since acquisition Fair value amortization to December 31, 2026 Adjusted change in retained earnings Equity pickup belonging to the parent Consolidated retained earnings

$3,167,500 $3,019,750 2,100,000 919,750 (237,000) 682,750 100%

682,750 $3,850,250

b) Prepare a consolidated statement of income for the year ending December 31, 2026, along with the statement of retained earnings. Consolidated Statement of Income For the Year Ended December 31, 2026 Sales Cost of sales Gross profits Other revenues (losses) Goodwill impairment Expenses: Depreciation expense General and administration Income before tax Income tax expense Net income

($3,120,000 + $956,250) ($1,482,000 + $382,500)

($520,000 + $175,000 − $131,250)

(456,000 + $208,750 + $48,000) ($925,000 + $243,000) ($155,400 + $59,400))

Consolidated Statement of Changes in Equity (partial) Opening retained earnings (Calculated below) Net income Dividends (146,250 + 131,250 − 131,250) Closing retained earnings

4,076,250 1,864,500 2,211,750 563,750 (28,000) 712,750 1,168,000 866,750 214,800 651,950

3,344,550 651,950 (146,250) 3,850,250

Calculate the consolidated retained earnings at January 1, 2026 for the statement of retained earnings: Parent's single entity retained earnings at January 1, 2026 $ 2,692,150 Subsidiary's retained earnings at January 1, 2026 $ 2,913,400 Subsidiary's retained earnings at acquisition 2,100,000 Unadjusted change since acquisition 813,400

Fair value amortization to January 1, 2026 Adjusted change in retained earnings Equity pickup belonging to the parent Consolidated retained earnings

(161,000) 652,400 100% $

652,400 3,344,550

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 4.4 Consolidate the results of a wholly owned subsidiary subsequent to acquisition.

6) Below are some extracts from the consolidation file prepared by the controller of PPL prior to his resignation. The owner of the company has asked you to help them prepare the eliminating entries that would be required to adjust the consolidated worksheet. PPL uses the cost method to account for its investment in SSL. Analysis of the acquisition price: Purchase price Less the carrying value at acquisition Common shares Retained earnings Acquisition differential Allocated to: Inventory Land Equipment Supply contract Goodwill

590,000 125,000 155,000 310,000

(19,960) 30,000 (57,200) (90,000) 172,840

Amortization schedule

Account Inventory Land Equipment Supply contract Goodwill

Fair value Amortization Unamortized Unamortized differentials at for years balance at end Amortization balance at end acquisition 2022, 2023 of 2023 2024 of 2024 $ 19,960 $ (19,960) (30,000) $ (30,000) $ (30,000) 57,200 (11,440) 45,760 $ (5,720) 40,040 90,000 (45,000) 45,000 (22,500) 22,500 172,840 172,840 (25,000) 147,840 $ 310,000 $ (76,400) $ 233,600 $ (53,220) $ 180,380

Information gathered:

•

Dividends declared/paid by SSL to PPL

•

Calculation of opening consolidated retained earnings as of January 1, 2024.

$37,500

PPL's retained earnings - January 1, 2024 Subsidiary's retained earnings − January 1, 2024 Subsidiary's retained earnings at acquisition Change in subsidiary's retained earnings since acquisition Adjust for FVD amortizations to January 1, 2024 Subsidiary's adjusted change in retained earnings to January 1, 2024 Percentage belonging to the PPL Consolidated retained earnings at January 1, 2024

•

$578,836

564,320 155,000 409,320 (76,400) 332,920 100%

332,920 $ 911,756

Calculation of consolidated net income as of December 31, 2024.

Parent's net income for the year ending December 31, 2024 Less dividends declared by the subsidiary Parent's adjusted net income Subsidiary's net income for the year ending December 31, 2024 Adjust for the fair value differential amortizations for 2024 Subsidiary's adjusted net income (loss) − 2024 Entity's net income

92,906 (53,220) 39,686 $

63,047 37,500 25,547

39,686 65,233

Required: Based on the information provided, prepare the elimination entries required to prepare the consolidated statements for the year ending December 31, 2024. Answer: Dr. Common shares 125,000 Dr. Retained earnings 564,320 Dr. Equipment 45,760 Dr. Supply contract 45,000 Dr. Goodwill 172,840 Cr. Land 30,000 Cr. Equity pickup 332,920 Cr. Investment in SSL 590,000 To adjust the opening consolidated statement of financial position amounts. Dr. Depreciation expense 28,220 Cr. Equipment 5,720 Cr. Supply contract 22,500 To record the current period amortization of the FVD related to equipment and the supply contract ($5,720 + $22,500) Dr. Goodwill impairment Cr. Goodwill To record the goodwill impairment for the current year.

25,000

Dr. Dividend revenue Cr. Dividend declared To eliminate the intercompany dividends in the current year

37,500

Diff: 3

Type: ES

25,000

37,500

Taxonomy Category: Analyzing Learning Outcome: 4.4 Consolidate the results of a wholly owned subsidiary subsequent to acquisition.

4.5 Prepare an independent calculation of consolidated retained earnings and consolidated net income. 1) Worth Corporation acquired all the common shares of Net Inc. on December 31, 2023, when Net's retained earnings was $1,200,000. Two of Net's assets had a fair value different from carrying value: a building, and a patent. At acquisition, the building's fair value was greater than the carrying value by $80,000 and had an estimated useful life of 8 years. The patent's fair value was greater than the carrying value by $140,000 and had an estimated useful life of 7 years. Worth accounts for its investment in Net using the cost method. The following are excerpts from the separate-entity statements as of December 31, 2026: Worth $ 375,000 75,000 1,675,000

Net income Dividends declared and paid on Nov 15, 2026 Opening retained earnings—January 1, 2026

Net $ 495,000 200,000 2,100,000

Which amount represents consolidated net income for the year ending December 31, 2026? A) $900,000 B) $640,000 C) $840,000 D) $670,000 Answer: B

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 4.5 Prepare an independent calculation of consolidated retained earnings and consolidated net income.

2) Worth Corporation acquired all the common shares of Net Inc. on December 31, 2023, when Net's retained earnings was $1,200,000. Two of Net's assets had a fair value different from carrying value: a building, and a patent. At acquisition, the building's fair value was greater than the carrying value by $80,000 and had an estimated useful life of 8 years. The patent's fair value was greater than the carrying value by $140,000 and had an estimated useful life of 7 years. Worth accounts for its investment in Net using the cost method. The following are excerpts from the separate-entity statements as of December 31, 2026: Worth $ 375,000 75,000 1,675,000

Net income Dividends declared and paid on Nov 15, 2026 Opening retained earnings—January 1, 2026

Net $ 495,000 200,000 2,100,000

Which amount represents consolidated retained earnings for the year ending December 31, 2026? A) $3,080,000 B) $2,485,000

C) $3,260,000 D) $4,280,000 Answer: A

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 4.5 Prepare an independent calculation of consolidated retained earnings and consolidated net income.

3) On December 31, 2021, Palani Palates Ltd. (PPL) issued 125,000 common shares to acquire 100% of the common shares of Soomin Sun Jung (SSL). On that date, PPL's shares were trading for $13.25 per share. On that date, the SSL assets and liabilities had the following carrying and fair values: Carrying value $ 65,000

Cash Accounts receivable Inventory Equipment, net Land Total assets Accounts payable Bond payable Common shares Retained earnings Total liabilities and shareholders' equity

105,000 295,000 1,300,000 275,000 2,040,000 220,000 470,000 400,000 950,000 2,040,000

Fair value 65,000 90,000 395,000 1,250,000 450,000

220,000 500,000

On the date of acquisition: • The equipment had a remaining useful life of 8 years. • Inventory on hand was sold by December 31, 2022. • SSL's accounts receivable turns over every 42 days. • The bond payable matures in 5 years. Bond premiums and discounts are amortized using the straight-line method. • Goodwill is tested for impairment each reporting period. In 2022, it was determined that goodwill was impaired by $9,000. In 2025, the goodwill was determined to be further impaired by $3,000. PPL uses the cost method to account for its investment in SSL. Below are excerpts from the December 31, 2025, separate-entity financial statements of PPL and SSL: PPL $ 522,900 75,000 1,965,000

Net income Dividends declared and paid on Nov 15, 2025 Opening retained earnings—January 1, 2025

Required: a) Prepare an analysis of the acquisition differential and calculate goodwill. b) Calculate consolidated net income for the year ending December 31, 2025.

SSL $ 175,000 25,000 1,038,000

Answer: a) Calculate an analysis of the acquisition differential and calculate goodwill. Purchase price (125,000 × $13.25) Less the carrying value Common shares Retained earnings Acquisition differential Allocated to: Carrying value Accounts receivable $ 105,000 Inventory 295,000 Equipment, net 1,300,000 Land 275,000 Bond payable 470,000 Goodwill

$400,000 950,000

Fair value $ 90,000 395,000 1,250,000 450,000 500,000

$1,656,250

1,350,000 306,250

15,000 (100,000) 50,000 (175,000) 30,000 $ 126,250

b) Calculate consolidated net income for the year ending December 31, 2025. PPL's separate-entity net income Less dividends declared by SSL PPL's adjusted net income SSL's separate-entity net income Adjust for the current period FVD amortization Equipment ($50,000/8 years) Bond payable ($30,000/5 years) Goodwill SSL's adjusted net income Percentage belonging to PPL Consolidated net income

$175,000 6,250 6,000 (3,000) 184,250 100%

$ 522,900 25,000 497,900

184,250 $ 682,150

Diff: 3 Type: ES Taxonomy Category: Applying Learning Outcome: 4.5 Prepare an independent calculation of consolidated retained earnings and consolidated net income.

4) On December 31, 2021, Palani Palates Ltd. (PPL) issued 125,000 common shares to acquire 100% of the common shares of Soomin Sun Jung (SSL) On that date, PPL's shares were trading for $13.25 per share. On that date, the assets and liabilities had the following carrying and fair values: SSL

Carrying value $ 65,000 105,000 295,000 1,300,000 275,000 2,040,000 $ 220,000 470,000 400,000 950,000 $ 2,040,000

Cash Accounts receivable Inventory Equipment, net Land Total assets Accounts payable Bond payable Common shares Retained earnings Total liabilities and shareholders' equity

Fair value 65,000 90,000 395,000 1,250,000 450,000 220,000 500,000

On the date of acquisition: • The equipment had a remaining useful life of 8 years. • Inventory on hand was sold by December 31, 2022. • SSL's accounts receivable turns over every 42 days. • The bond payable matures in 5 years. Bond premiums and discounts are amortized using the straight-line method • Goodwill is tested for impairment each reporting period. In 2022, it was determined that goodwill was impaired by $9,000. In 2025, the goodwill was determined to be further impaired by $3,000. PPL uses the cost method to account for its investment in SSL. Below are excerpts from the December 31, 2025, separate-entity financial statements of PPL and SSL: PPL $ 522,900 75,000 1,965,000

Net income Dividends declared and paid on Nov 15, 2025 Opening retained earnings—January 1, 2025

SSL $ 175,000 25,000 1,038,000

Required: Calculate consolidated retained earnings for the year ending December 31, 2025.

Answer: PPL's separate-entity retained earnings at December 31, 2025 PPL's opening retained earnings Add net income Less dividend declared PPL's separate entity retained earnings at December 31, 2025 SSL's retained earnings at December 31, 2025 SSL' s opening retained earnings Add net income Less dividend declared SSL's retained earnings at December 31, 2025

$ 1,965,000 522,900 75,000 $ 2,412,900 $1,038,000 175,000 25,000 1,188,000

SSL's retained earnings at acquisition Unadjusted change since acquisition Fair value amortization to December 31, 2025: Accounts receivable Inventory Equipment (net) Bond payable Goodwill Adjusted change in retained earnings

950,000 238,000 15,000 (100,000) 25,000 24,000 (12,000) 190,000

Equity pickup belonging to the parent Consolidated retained earnings at December 31, 2025

100%

190,000 $2,602,900

Diff: 3 Type: ES Taxonomy Category: Applying Learning Outcome: 4.5 Prepare an independent calculation of consolidated retained earnings and consolidated net income.

4.6 Explain the consolidation process when the parent uses the equity method of accounting for internal purposes instead of the cost method of accounting. 1) On December 31, 2023, Corner Inc. acquired 100% of the common shares of Tristen Inc. for $750,000. The following is the analysis of the purchase price: Purchase price Less the carrying value of net assets Common shares Retained earnings Acquisition differential

Allocated to:

Goodwill

650,000 150,000 250,000 250,000

Accounts receivable Inventory Patent (15-year useful life)

25,000 (110,000) (75,000) $ 90,000

Corner uses the equity method to account for its investment in Tristen. Below are excerpts from the separate-entity statements for the year ending December 31, 2026: Corner $ 675,000 250,000 2,565,000

Net income Dividends declared and paid on Sept. 15, 2026 Opening retained earnings—January 1, 2026

Tristen $ 295,000 125,000 1,450,000

Which amount represents the correct consolidated retained earnings for the year ending December 31, 2026? A) $3,665,000 B) $2,565,000 C) $4,260,000 D) $2,990,000 Answer: D

Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 4.6 Explain the consolidation process when the parent uses the equity method of accounting for internal purposes instead of the cost method of accounting.

2) On December 31, 2023, Corner Inc. acquired 100% of the common shares of Tristen Inc. for $750,000. The following is the analysis of the purchase price: Purchase price Less the carrying value of net assets Common shares Retained earnings Acquisition differential Allocated to: Accounts receivable Inventory Patent (15-year useful life) Goodwill

650,000 150,000 250,000 250,000

25,000 (110,000) (75,000) 90,000

Corner uses the equity method to account for its investment in Tristen. Below are excerpts from the separate-entity statements for the year ending December 31, 2026: Corner Tristen Net income $ 675,000 $ 295,000 Dividends declared and paid on Sept. 15, 2026 250,000 125,000 Opening retained earnings—January 1, 2026 2,565,000 1,450,000 Which amount represents the correct consolidated net income for the year ending December 31, 2026? A) $840,000 B) $675,000 C) $970,000 D) $850,000 Answer: B

4.7 Report the results of a wholly owned subsidiary using the equity method of accounting. 1) On December 31, 2022, Mateg Inc issued 125,000 common shares to acquire 100% of the common shares of Hoka Ltd. On that date, Mateg's shares were trading for $15 per share. On that date, all the assets and liabilities of Hoka were equal to their carrying value with the exception of the following: Carrying value 105,000 295,000 1,300,000

Accounts receivable Inventory Equipment, net (8-year useful life)

Fair value 90,000 395,000 1,250,000

Goodwill is tested for impairment each reporting period. In 2023, it was determined that goodwill was impaired by $9,000. In 2025, the goodwill was determined to be further impaired by 3,000. Below are excerpts from the December 31, 2025, separate-entity financial statements of Mateg and Hoka:

Net income Dividends declared and paid on October 15, 2025 Opening retained earnings—January 1, 2025

Mateg 522,900 75,000 1,965,000

Hoka 175,000 25,000 1,038,000

Assuming Mateg reports under ASPE and uses the equity method of accounting, what amount represents the equity income that Mateg would record in its statement of income for the year ending December 31, 2025? A) $326,750 B) $245,250 C) $178,250 D) $150,000 Answer: C Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 4.7 Report the results of a wholly owned subsidiary using the equity method of accounting.

2) On December 31, 2022, Mateg Inc issued 125,000 common shares to acquire 100% of the common shares of Hoka Ltd. On that date, Mateg's shares were trading for $15 per share and Hoka's retained earnings was $750,000. On that date, all the assets and liabilities of Hoka were equal to their carrying value with the exception of the following: Carrying value 105,000 295,000 1,300,000

Accounts receivable Inventory Equipment, net (8-year useful life)

Fair value 90,000 395,000 1,250,000

Goodwill is tested for impairment each reporting period. In 2022, it was determined that goodwill was impaired by $9,000. In 2025, the goodwill was determined to be further impaired by $3,000. Below are excerpts from the December 31, 2025, separate-entity financial statements of Mateg and Hoka: Mateg $ 522,900 75,000 1,965,000

Net income Dividends declared and paid on October 15, 2025 Opening retained earnings—January 1, 2025

Hoka $ 175,000 25,000 1,038,000

Assuming Mateg reports under ASPE and and uses the equity method of accounting, what amount correctly represents the Investment in Associate that Mateg would present on its statement of financial position at December 31, 2025? A) $2,984,750 B) $2,234,750 C) $1,875,000 D) $2,217,250 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 4.7 Report the results of a wholly owned subsidiary using the equity method of accounting.

3) On January 1, 2021, Jolly Joes Inc. (JJI) acquired all the voting common shares of Rodgers Treats Ltd. (RTL) for $390,000. On the date of acquisition, RTL's shareholders' equity consisted of the following: Common shares Retained earnings

$ 120,000 $ 135,000

The fair value of RTL's identifiable assets and liabilities were equal to carrying value with the exception of: Carrying value $ 35,000 50,000 95,000

Inventory Land Equipment (cost of $119,000)

Fair value $ 55,000 80,000 75,000

Additional information: • • • •

The inventory was sold by December 31, 2021. The equipment that existed at acquisition had an estimated useful life of 8 years. The land that existed at acquisition was sold in the current year (2025). On December 31, 2023, it was determined that goodwill permanently declined in value by $15,000.

Below are the SFP and SI for both companies for the year ending December 31, 2025. Statements of Financial Position (separate entity) Cash and cash equivalents Accounts receivable Inventory Land Building and equipment (net) Investment in Rodgers Treats Ltd. (cost method) Total assets Accounts payable Current portion of long-term debt Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

$ $

JJI 165,000 67,000 102,000 198,000 428,400 390,000 1,350,400 35,900 37,500 435,000 275,000 567,000 1,350,400

$ $

RTL 275,000 125,000 95,000 115,000 165,000 — 775,000 19,600 15,000 81,000 120,000 539,400 775,000

Statements of Income (separate entity) Revenues Cost of sales Gross margin Other revenues Expenses: Depreciation expense General and administration Income before tax Tax expense Net income

JJI 255,000 89,250 165,750 85,000 19,500 45,000 186,250 37,250 149,000

Statements of Changes in Equity (partial) (separate entity) Opening retained earnings $ 493,000 Net income 149,000 Dividends (75,000) Closing retained earnings $ 567,000

RTL 175,000 59,500 115,500 25,000 14,250 19,500 106,750 21,350 85,400

504,000 85,400 (50,000) 539,400

JJI is a private company following ASPE. For 2025, management elected to change its accounting policy to account for its investment in RTL using the equity method. This change is not reflected in the statements above. Required: a) Prepare the statement of financial position and statement of income for JJI for the year ending December 31, 2025 using the equity method for the investment in RTL.. b) Prepare the entries that JJI would record to adjust its 2025 financial statements to the equity method of accounting.

Answer: a) Step 1—Analyze the purchase price, and determine the goodwill amount: While not specifically requested, we must calculate the goodwill at acquisition to complete the requested adjustments. Purchase price Less the carrying value at acquisition: Common shares Retained earnings Acquisition differential

390,000 120,000 135,000 135,000

Allocated to: Inventory Land Equipment Goodwill

(20,000) (30,000) 20,000 105,000

Step 2—Prepare an amortization schedule for the fair value differentials.

Account Inventory Land Equipment Goodwill

Fair value Amortization for Unamortized differentials 2021, 2022, balance at Amortization at acquisition 2023, 2024 end of 2024 2025 $ 20,000 $ (20,000) — — 30,000 — $ 30,000 $ (30,000) (20,000) 10,000 (10,000) 2,500 105,000 (15,000) 90,000 — $ 135,000 $ (25,000) $ 110,000 $ (27,500)

Step 3—Gather information on intercompany transactions: Dividends paid by the subsidiary to the parent $50,000

Unamortized balance at end of 2025

$ $

— — (7,500) 90,000 82,500

Step 4—Calculate the adjustment required to the parent's opening retained earnings. The investment is currently reported using the cost method. Applying the equity method is a change in accounting policy which is applied retrospectively, requiring an adjustment to opening retained earnings for the cumulative effect of the change to the beginning of the year. Parent's retained earnings—Jan.1, 2025

$ 493,000

Subsidiary's retained earnings—Jan. 1, 2025 Less subsidiary's retained earnings at acquisition Change in subsidiary’s retained earnings since acquisition

Adjust for: Fair value amortizations to Jan.1, 2025 Subsidiary’s adjusted change in retained earnings to Jan.1, 2025 Percentage belonging to the parent Equity pickup to the beginning of the year Consolidated retained earnings at Jan. 1, 2025

$ 504,000 135,000 369,000

(25,000) 344,000 100%

344,000 A $ 837,000

Step 5—Calculate equity income for the year ending December 31, 2025 Subsidiary’s net income for the year ending December 31, 2025 Adjust for the fair value amortizations for 2025 Equity income

85,400 (27,500) $ 57,900 B

Statement of Financial Position JJI—under the cost method Cash and cash equivalent $ 165,000 Accounts receivable Inventory Land Building and equipment (net) Investment in Rodgers Treats Ltd. Total assets Accounts payable Current portion of longterm debt Long-term debt Common shares Retained earnings Total liabilities and shareholders’ equity

Adjustments

67,000 102,000 198,000

428,400

390,000 1,250,400 35,900

$ $

JJI—under the equity method $ 165,000

A 344,000

B 57,900

(50,000)

741,900 $1,702,300 $ 35,900

37,500 435,000 275,000 567,000

37,500 435,000 175,000 918,900

1,250,400

$1,702,300

Statement of Income

Revenues Cost of sales Gross margin Other revenues Equity income Expenses Depreciation expense General and administration Income before tax Tax expense Net income

JJI—under the cost method $ 255,000 89,250 165,750 85,000

Adjustments

JJI—under the equity method $ 255,000 89,250 165,750

(50,000)

35,000 B 57,900

19,500

45,000 186,250 37,250 149,000

45,000 194,150 37,250 156,900

Statement of Changes in Equity (partial) Opening retained earnings Net income Dividends Closing retained earnings

493,000 149,000 (75,000) 567,000

A $344,000

837,000 156,900 (75,000) 918,900

b) Prepare the entries that JJI would record to adjust its financial statements to the equity method of accounting. Dr. Investment in Rodgers Treats Ltd. Cr. Retained earnings To adjust the opening retained earnings to reflect the equity method of accounting.

344,000

Dr. Investment in Rodgers Treats Ltd. Cr. Equity income To record the equity income for the current year

57,900

Dr. Dividend revenue Cr. Investment in Rodgers Treats Ltd. To reverse the dividend revenue recorded under the cost method

50,000

344,000

57,900

50,000

Diff: 3 Type: ES Taxonomy Category: Analyzing Learning Outcome: 4.7 Report the results of a wholly owned subsidiary using the equity method of accounting.

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 5 Control Investments: Intercompany Transactions with Wholly Owned Subsidiaries 5.1 Explain why intercompany revenues and expenses must be eliminated in the consolidation process. 1) Under IFRS, when the parent charges rent to the subsidiary in the year, which of the following statements best reflects the adjustment that must be made during the consolidation process? A) No adjustment is required since the revenue and expenses have no affect on the overall profit of the consolidated entity. B) Rental revenue and accounts payable must be decreased by the full amount of the intercompany rent. C) Rental revenue and rental expense need to decrease by the full amount of the intercompany rent even though there is no affect on the overall profit. D) Rent expense and accounts receivable must be decreased by the full amount of the intercompany rent. Answer: C Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 5.1 Explain why intercompany revenues and expenses must be eliminated in the consolidation process.

2) In the current year, a wholly owned subsidiary declares a dividend of $150,000. The dividend is not paid at the end of the year. Which statements correctly reflect the adjustment that must done in the consolidation process? A) Dividend revenue, dividends declared, accounts payable, and receivable would all decrease by $150,000. B) Dividend revenue and accounts receivable would decrease by $150,000. Dividends declared and accounts payable would increase by $150,000. C) Dividend revenue, dividends declared, accounts payable, and receivable would all increase by $150,000. D) Only the dividend revenue and dividends declared would decrease since the accounts receivable and accounts payable offset each other in the consolidated statements. Answer: A Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 5.1 Explain why intercompany revenues and expenses must be eliminated in the consolidation process.

3) When preparing the consolidated statements, which of the following statements is true with respect to intercompany debt and the corresponding interest? A) No eliminating entry is required for intercompany debt and the related interest since profit is not affected. B) The intercompany debt asset and liability as well as the related interest revenue and expense should be eliminated since they have not occurred with parties outside the consolidated entity. C) Only the debt receivable and payable are eliminated since the consolidated entity profit is not affected. D) The intercompany interest expense and revenue, along with the deferred tax implications would need to be eliminated. Answer: B Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 5.1 Explain why intercompany revenues and expenses must be eliminated in the consolidation process.

5.2 Explain why intercompany profits must be adjusted and when the amounts must be adjusted in the consolidation process. 1) Scissor Inc. is a 100% owned subsidiary of Paper Corporation. For the year ending December 31, 2023, Scissors sold $400,000 in inventory to Paper Corporation. Scissors earned a gross profit of 30% on all its sales. At the end of the year, Paper still holds 20% of the inventory. What adjustments must be made in the December 31, 2023 consolidated financial statements? A) Sales would decrease by $400,000, inventory would decrease by $24,000, and cost of sales would decrease by $376,000. B) Sales would decrease by $80,000, inventory would increase by $24,000, and cost of sales would decrease by $104,000. C) Sales would increase by $400,000, inventory would decrease by $24,000, and cost of sales would increase by $376,000. D) Sales would decrease by $400,000, inventory would decrease by $80,000, and cost of sales would decrease by $480,000. Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 5.2 Explain why intercompany profits must be adjusted and when the amounts must be adjusted in the consolidation process.

2) Scissor Inc. is a 100% owned subsidiary of Paper Corporation. For the year ending December 31, 2023, Scissors sold $400,000 in inventory to Paper Corporation. Scissors earned a gross profit of 30% on all its sales. At the end of 2023, Paper still holds 20% of the inventory. Inventory turns over every 60 days. Ignoring the adjustment required to opening balances, what current year adjustments must be made in the December 31, 2024 consolidated financial statements? A) Sales would increase by $400,000. Inventory would increase by $24,000, and cost of sales would increase by $376,000. B) Inventory would increase by $24,000, and cost of sales would decrease by $24,000. C) Inventory would decrease by $24,000, and cost of sales would increase by $24,000. D) Sales would increase by $80,000. Inventory would increase by $24,000, and cost of sales would increase by $104,000. Answer: B Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 5.2 Explain why intercompany profits must be adjusted and when the amounts must be adjusted in the consolidation process.

3) What is unrealized intercompany profit (loss), and how is it accounted for in the consolidation process? Answer: Unrealized intercompany profit (loss) is a result of an intercompany sale of assets, usually, a sale of inventory or capital assets between the parent and the subsidiary, where the asset still exists within the consolidated entity. If the asset still exists within the entity, the profit (loss) that was recorded in the single-entity accounts is unrealized and must be eliminated. The adjustment required depends on 1. The direction of the sale: upstream or downstream. The direction of the sale affects how we eliminate the unrealized intercompany profit. In a downstream sale, the profit is in the parent's separate entity statements; therefore, we eliminate it from the parent's net income in the consolidation process. In an upstream sale, the subsidiary is the seller and the profit (loss) is recorded in the subsidiary's separate entity statements. Therefore, we eliminate the unrealized intercompany profit (loss) from the subsidiary's net income. 2.

The type of asset sold between the parent and the subsidiary: a. Inventory b. Land c. Depreciable asset

For inventory and land, any unrealized profits (losses) may be recognized once the assets are sold to an unrelated party (i.e., outside the consolidated entity). For unrealized intercompany profit (loss) on depreciable assets, the process differs since the asset is used up by the purchaser over time to earn income. As a result, we recognize the unrealized profit (loss) over the useful life of the asset by adjusting the consolidated depreciation expense. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 5.2 Explain why intercompany profits must be adjusted and when the amounts must be adjusted in the consolidation process.

5.3 Prepare the eliminating entries to adjust the intercompany transactions. 1) Dahlia Corporation is a wholly owned subsidiary of Garden Inc. In the current year, Dahlia sold $150,000 in inventory to Garden Corporation. At year end, Garden still held some of the inventory, with unrealized inventory profit of $18,000. What eliminating entry must be in the creation of the consolidated statements? A) Dr. Inventory 18,000 Dr. Sales 150,000 Cr. Cost of sales 168,000 B) Dr. Sales Cr. Inventory Cr. Cost of sales

150,000

C) Dr. Sales Cr. Cost of sales

168,000

D) Dr. Sales Cr. Inventory

18,000

18,000 132,000

168,000

18,000

Answer: B

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 5.3 Prepare the eliminating entries to adjust the intercompany transactions.

2) Hydrangea Inc. has owned 100% of the voting common shares of Angel Corporation for several years. In the current year, Angel sold land to Hydrangea, for $275,000, which Angel had purchased from an unrelated party for $150,000. Ignoring income taxes, what eliminating entry must be made in the consolidated statements for the current year? A) Dr. Sales 275,000 Cr. Other income 275,000 B) Dr. Other income—land gain Cr. Sales

125,000

C) Dr. Land Cr. Other income—land gain

150,000

D) Cr. Other income—land gain Dr. Land

125,000

150,000

125,000

Answer: D

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 5.3 Prepare the eliminating entries to adjust the intercompany transactions.

3) Hydrangea Inc. has owned 100% of the voting common shares of Angel Corporation for several years. Two years ago, Angel sold land to Hydrangea, for $275,000, which Angel had purchased from an unrelated party for $150,000. This year, Hydrangea sold the land to an unrelated entity for $375,000. Ignoring income taxes, and the adjustment required to opening balances, what current year eliminating entry must be made in the preparation of the consolidated statements? A) Dr. Other income—accounting gain Cr. Land

100,000

B) Dr. Land Cr. Other income—land gain

125,000

C) Dr. Land Cr. Other income—land gain

225,000

D) Dr. Other income—land gain Cr. Land

225,000

100,000

125,000

225,000

Answer: B

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 5.3 Prepare the eliminating entries to adjust the intercompany transactions.

4) Bussiere Flooring Inc. acquired 100% of the common shares of Anna Tiles Inc. several years ago. On December 31, 2023, Bussiere sold manufacturing equipment to Anna for $495,000. The carrying value at that time was $650,000. It was determined that the decline in value was not permanent in nature. Ignoring income taxes, what eliminating entry must be made in the consolidated financial statements for the year ending December 31, 2023? A) Dr. Sales Cr. Equipment (net)

650,000

B) Dr. Sales Cr. Equipment (net)

495,000

C) Dr. Equipment (net) Cr. Other income (loss)—equipment

155,000

D) Dr. Other income (loss)—equipment Dr. Equipment (net)

155,000

650,000

495,000

155,000

Answer: C

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 5.3 Prepare the eliminating entries to adjust the intercompany transactions.

5) Bussiere Flooring Inc. acquired 100% of the common shares of Anna Tiles Inc. several years ago. On December 31, 2023, Bussiere sold manufacturing equipment to Anna for $495,000. The carrying value at that time was $650,000 and the equipment had an estimated remaining useful life of 20 years. It was determined that the decline in value was not permanent in nature. Both companies use straight-line method of accounting for depreciable assets. Ignoring income taxes, what current year eliminating entry must be made to adjust the consolidated statement of income for the year ending December 31, 2024? A) Dr. Equipment (net) 7,750 Cr. Depreciation expense 7,750 B) Dr. Depreciation expense Cr. Equipment (net)

7,750

C) Dr. Depreciation expense Cr. Equipment (net)

24,750

D) Dr. Equipment (net) Cr. Depreciation expense

24,750

7,750

Answer: B

24,750

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 5.3 Prepare the eliminating entries to adjust the intercompany transactions.

6) On January 1, 2023, Phantastic Photos Ltd. (PPL) purchased 100% of the outstanding shares of Splendid Supplies Ltd. (SSL). The analysis of the purchase price is provided below: Analysis of the acquisition: Purchase price Less Common shares Retained earnings Purchase price discrepancy Allocated to: Accounts receivable Inventory Building Goodwill

$ 3,500,000 1,000,000 1,900,000 600,000

38,500 (180,000) 120,000 578,500

Information related to the acquisition: • •

Accounts receivables were collected by the end of 2023. Inventory turns over every 45 days. On January 1, 2023, the building had a remaining useful life of 15 years.

Below are extracts from the separate entity statements of PPL and SSL for December 31, 2026:

Common shares Opening retained earnings Net income Dividends Closing retained earnings

$ $

PPL 100,000 7,450,000 556,000 (150,000) 7,856,000

SSL $ 1,000,000 $ 3,050,000 495,000 (100,000) $ 3,445,000

Additional information: • In 2025, it was determined that the goodwill was valued at $550,000. There have been no other impairments. • In 2025, PPL sold $350,000 in inventory to SSL, earning 157,500 in profit. At the end of 2025, SSL still held 15% of the inventory. In 2026, PPL sold $450,000 in inventory to SSL, earning a profit of $202,500. SSL still held 25% of the inventory at the end of 2026. • On January 1, 2024, SSL sold equipment to PPL for a loss of $200,000. It was determined that the loss was not considered to be a permanent impairment. At the time of the sale, the useful life of the equipment was 20 years. • On July 15, 2026, SSL sold land to PPL for a profit of $80,000. PPL still holds the land at the end of 2026. • SSL declared dividends on December 1, 2026. The dividends will be paid on February15,2027. • Both companies pay tax at a rate of 20%. Required: a) Calculate consolidated retained earnings at January 1, 2026. b) Prepare the elimination entries to adjust the opening consolidated balances for the year ending December 31, 2026. Answer:

a) Calculate consolidated retained earnings at January 1, 2026. PPL's separate entity retained earnings at January 1, 2026 Less unrealized inventory profits—downstream ($157,500 × 15%) × (1 − 20%) PPL's adjusted retained earnings SSL's retained earnings at January 1, 2026 Subsidiary's retained earnings at acquisition Unadjusted change since acquisition Fair value amortization to January 1, 2026: Accounts receivable Inventory Building ($120,000/15 * 3 years) Goodwill Add back the intercompany loss after tax—unrealized at Jan 1, 2026 (($200,000 − ($200,000/20 × 2)) × (1 − 20%)) Adjusted change in retained earnings Percentage belonging to the parent Consolidated retained earnings at January 1, 2026

$ 7,450,000

$3,050,000 1,900,000 1,150,000 $

38,500 (180,000) 24,000 (28,500)

(146,000)

144,000 1,148,000 100%

PPL's equity pickup ($1,148,000—18,900)

(18,900) 7,431,100

1,148,000 $ 8,579,100

$ 1,129,100

b) Prepare the eliminating entries to adjust the opening consolidated balances for the year ending December 31, 2026. Dr. Common shares Dr. Retained earnings—Subsidiary at Jan 1, 2023 Dr. Goodwill Dr Equipment—intercompany sale Dr. Deferred income tax asset(liability)—inventory Cr. Deferred income tax asset (liability)—Equipment — intercompany sale Cr. Inventory—opening unrealized Cr. Building Cr. Investment in SSL Cr. Retained earnings—equity pickup

1,000,000 3,050,000 550,000 180,000 4,725 36,000 23,625 96,000 3,500,000 1,129,100

Diff: 3 Type: ES Taxonomy Category: Analyzing Learning Outcome: 5.3 Prepare the eliminating entries to adjust the intercompany transactions.

7) On January 1, 2023, Phantastic Photos Ltd. (PPL) purchased 100% of the outstanding shares of Splendid Supplies Ltd. (SSL). The analysis of the purchase price is provided below: Analysis of the acquisition Purchase price Less Common shares Retained earnings Purchase price discrepancy Allocated to: Accounts receivable Inventory Building Goodwill

$ 3,500,000 1,000,000 1,900,000 600,000

38,500 (180,000) 120,000 578,500

Information related to the acquisition: • Accounts receivables were collected by the end of 2023. Inventory turns over every 45 days. • On January 1, 2023, the building had a remaining useful life of 15 years. Below are extracts from the separate entity statements of PPL and SSL for December 31, 2026:

Common shares Opening retained earnings Net income Dividends Closing retained earnings

$ $

PPL 100,000 7,450,000 556,000 (150,000) 7,856,000

SSL $ 1,000,000 $ 3,050,000 495,000 (100,000) $ 3,445,000

Additional information: • In 2025, it was determined that the goodwill was valued at $550,000. There have been no other impairments. • In 2025, PPL sold $350,000 in inventory to SSL, earning $157,500 in profit. At the end of 2025, SSL still held 15% of the inventory. In 2026, PPL sold $450,000 in inventory to SSL, earning a profit of $202,500. SSL still held 25% of the inventory at the end of 2026. • On January 1, 2024, SSL sold equipment to PPL for a loss of $200,000. It was determined that the loss was not considered to be a permanent impairment. At the time of the sale, the useful life of the equipment was 20 years. • On July 15, 2026, SSL sold land to PPL for a profit of $80,000. PPL still holds the land at the end of 2026. • SSL declared dividends on December 1, 2026. The dividends will be paid on February15, 2027. • Both companies pay tax at a rate of 20%.

• An accounting intern prepared the following opening retained earnings calculation for January 1, 2026. PPL's separate entity retained earnings at January 1, 2026 Less unrealized inventory profits—downstream PPL's adjusted retained earnings SSL's retained earnings at January 1, 2026 Subsidiary's retained earnings at acquisition Unadjusted change since acquisition Fair value amortization to January 1, 2026 Add back the intercompany loss after tax—unrealized at Jan 1, 2026 Adjusted change in retained earnings Percentage belonging to the parent Consolidated retained earnings at January 1, 2026

$3,050,000 1,900,000 1,150,000 (146,000) 144,000 1,148,000 100%

$ 7,450,000 (18,900) 7,431,100

1,148,000 8,579,100

Required: Prepare the current period elimination entries for the year ending December 31, 2026.

Answer: Dr Other income 100,000 Cr. Dividends declared 100,000 Dr. Dividend payable 100,000 Cr. Dividend receivable 100,000 To eliminate the intercompany dividends recorded as income by the subsidiary, along with the intercompany amount owing. Dr. Sales

450,000 Cr. Cost of sales 450,000 To remove the intercompany sales and cost of sales for the total intercompany inventory sales in 2026. Dr. Inventory ($157,500 × 15%) 23,625 Cr. Cost of sales Dr. Deferred income tax expense (benefit) ($23,625 × 20%) 4,725 Cr. Deferred income tax asset (liability) To recognize the opening inventory profit and related tax now sold outside the entity.

23,625 4,725

Dr. Cost of sales 50,625 Cr. Inventory ($202,500 × 25%) 50,625 Dr. Deferred income tax asset (liability) ($50,625 × 20%) 10,125 Cr. Deferred income tax expense (benefit) 10,125 To remove the closing inventory profit and the related tax still held by the parent at the end of the year. Dr. Depreciation expense ($200,000/20 years) 10,000 Cr. Equipment net 10,000 Dr. Deferred income tax asset (liability) 2,000 Cr. Deferred income tax expense (benefit) 2,000 To adjust the depreciation expense for the current year period intercompany equipment loss.

Dr. Other income 80,000 Cr. Land Dr. Deferred income tax asset (liability) 16,000 Cr. Deferred income tax expense (benefit) To remove the profit from the intercompany land sale, land is still held by the parent. Dr. Building (net) ($120,000/15 years) 8,000 Cr. Depreciation expense To recognize the current period amortization of the building fair value difference.

80,000 16,000

8,000

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 5.3 Prepare the eliminating entries to adjust the intercompany transactions.

5.4 Adjust the consolidated balances in the statement of financial position (SFP) for intercompany transactions. 1) On December 31, 2023, Powder Corporation acquired 100% of the common shares of Talc Corporation. There were no fair value differences or goodwill resulting from this transaction. The following information is extracts from the December 31, 2026 for Powder and Talc:

Net income Dividends Property, plant, and equipment (net) Inventory

Powder 1,950,000 250,000 595,000 375,000

Talc $1,100,000 125,000 850,000 265,000

Additional information: • On December 31, 2024, Powder sold a piece of equipment to Talc, recording a profit of $250,000. At that time, the estimated useful life of the equipment of 10 years. • In 2025, Talc sold $250,000 in inventory to Powder. At the end of 2025, Powder still held 22% of the inventory. In 2026, Talc sold $300,000 in inventory to Powder. Powder still held 30% of the inventory at the end of 2026. Talc earns 30% gross profit on all of its inventory sales. • Powder uses the cost method to account for its investment in Talc. Both companies pay tax at a rate of 20%. What is the property, plant, and equipment (net) amount that would be recorded on the December 31, 2026 consolidated statement of financial position? A) $1,220,000 B) $1,270,000 C) $1,645,000 D) $1,245,000 Answer: D Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 5.4 Adjust the consolidated balances in the statement of financial position (SFP) for intercompany transactions.

2) On December 31, 2023, Powder Corporation acquired 100% of the common shares of Talc Corporation. There were no fair value differences or goodwill resulting from this transaction. The following information is extracts from the December 31, 2026 for Powder and Talc:

Net income Dividends Property, plant, and equipment (net) Inventory

Powder 1,950,000 250,000 595,000 375,000

Talc $1,100,000 125,000 850,000 265,000

Additional information: • On December 31, 2024, Powder sold a piece of equipment to Talc, recording a profit of $250,000. At that time, the estimated useful life of the equipment of 10 years. • In 2025, Talc sold $250,000 in inventory to Powder. At the end of 2025, Powder still held 22% of the inventory. In 2026, Talc sold $300,000 in inventory to Powder. Powder still held 30% of the inventory at the end of 2026. Talc earns 30% gross profit on all of its inventory sales. • Powder uses the cost method to account for its investment in Talc. Both companies pay tax at a rate of 20%. What is the inventory amount that would be recorded on the December 31, 2026, consolidated statement of financial position? A) $667,000 B) $613,000 C) $618,400 D) $661,600 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 5.4 Adjust the consolidated balances in the statement of financial position (SFP) for intercompany transactions.

3) Mackintosh Corporation owns 100% of the common shares of AppleCore Inc. On December 31, 2023, Mackintosh borrowed $500,000 from AppleCore. Mackintosh is required to pay yearly interest of $17,500. The yearly interest payment is payable on January 15. No principal payments are required. The loan is due on December 31, 2033. Both companies have a December 31 year end. What adjustments are required in the consolidated statement of financial position for the year ending December 31, 2027? A) Dr. Loan receivable, Cr. Loan payable for $500,000 and Dr. Interest payable, Cr. Interest receivable for $17,500 B) Dr. Loan payable, Cr. Loan receivable for $430,000 and Dr. Interest receivable, Cr. Interest payable for $17,500 C) Dr. Loan payable, Cr. Loan receivable for $500,000 and Dr. Interest payable, Cr. Interest receivable for $17,500 D) No adjustment is required since the amounts do not change the total assets and liabilities recorded in the consolidated statement of financial position. Answer: C Diff: 1 Type: MC Taxonomy Category: Understanding

Learning Outcome: 5.4 Adjust the consolidated balances in the statement of financial position (SFP) for intercompany transactions.

4) Pop Corporation acquired 100% of the common shares of Shoppe Inc. on January 1, 2024. There was no goodwill or fair value differentials at acquisition. Both companies have a December 31 year end and pay tax at a rate of 20%. On April 15, 2024, Shoppe sold a parcel of land to Pop for $550,000. The carrying value of the land was $350,000. Pop immediately began building a manufacturing facility on the land. The facility opened on November 1, 2025. Based on this information, what adjustments are required in the December 31, 2025 consolidated statement of financial position? A) Increase land by $200,000 B) Decrease land by $350,000 C) Decrease land by $200,000 D) No adjustment is required on the statement of financial position since the sale occurred in 2024. Answer: C Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 5.4 Adjust the consolidated balances in the statement of financial position (SFP) for intercompany transactions.

5) Below is the consolidated statement of financial position for the year ending December 31, 2026, for PDI and its 100% owned subsidiary MML. It was prepared by an accounting student prior to finishing their advanced accounting course. Consolidated Statement of Financial Position as at December 31, 2026 Cash Accounts receivable Inventories Goodwill Notes receivable Property, plant, and equipment (net) Total assets

Current liabilities Deferred income tax liability Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

1,151,350 2,579,750 6,613,000 178,500 250,000 9,754,250 20,526,850 1,047,500 57,700 4,161,250 1,500,000 13,760,400 20,526,850

The following information was not accounted for in the preparation of the above consolidated statement of financial position: • In 2025, PDI purchased $400,000 in inventory from MML. PDI still held 22% of the inventory at December 31, 2025. In 2026, PDI purchased $325,000 in inventory from MML. PDI still held 30% of the inventory at December 31, 2026. MML earns gross profit of 45% on all inventory sales. • On December 31, 2023, PDI sold equipment to MML for $250,000. On the day of the sale, the

equipment had a net carrying value of $100,000 and a remaining useful life of 8 years. Both companies use the straight-line method to calculate depreciation expense. • PDI still owes MML for the equipment purchased in 2023. PDI pays interest to MML on the loan on December 31 each year. The interest for 2026 was $8,225. • Both companies pay tax at a rate of 20%. PDI uses the cost method to account for its investment in MML in its separate entity statements. Required: Adjust the consolidated statement of financial position for the additional information presented above.

Answer: Adjustments required: Upstream—MML selling to PDI Opening inventory Closing inventory

Before tax

Tax @ 20%

Equipment sale—PDI to MML Dec. 31, 2023 Proceeds $ Carrying value Accounting gain 2024 2025 Unrealized Opening balance 2026—current year Unrealized Closing balance

39,600 43,875

After tax

7,920 8,775

112,500 18,750 93,750

22,500 3,750 18,750

31,680 35,100

250,000 100,000 150,000 18,750 18,750

90,000 15,000 75,000

Cash Accounts receivable Inventories Goodwill Notes receivable Property, plant, and equipment (net) Total assets Current liabilities Deferred income tax liability Long-term debt Common shares Retained earnings Total liabilities and shareholders' equity

Consolidated SFP before adjustments $1,151,350 2,579,750 6,613,000 178,500 250,000

Adjustments

(43,875) (250,000)

9,754,250 $20,526,850 $ 1,047,500 57,700 4,161,250 1,500,000 13,760,400

(112,500) 18,750

(8,775)

(22,500)

(35,100)

(90,000) 15,000

$20,526,850

3,750

Adjusted consolidated SFP $ 1,151,350 2,579,750 6,569,125 178,500 9,660,500 $ 20,139,225 $ 1,047,500 30,175 3,911,250 1,500,000 13,650,300

(250,000)

$ 20,139,225

Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 5.4 Adjust the consolidated balances in the statement of financial position (SFP) for intercompany transactions.

5.5 Adjust the consolidated statement of income (SI) for intercompany transactions. 1) On December 31, 2023, Powder Corporation acquired 100% of the common shares of Talc Corporation. There were no fair value differences or goodwill resulting from this transaction. The following information is extracts from the December 31, 2026 for Powder and Talc:

Net income Dividends Property, plant, and equipment (net) Inventory

Powder $ 1,950,000 250,000 595,000 375,000

Talc $ 1,100,000 125,000 850,000 265,000

Additional information • On December 31, 2024, Powder sold a piece of equipment to Talc, recording a profit of $250,000. At that time, the estimated useful life of the equipment of 10 years. • In 2025, Talc sold $250,000 in inventory to Powder. At the end of 2025, Powder still held 22% of the inventory. In 2026, Talc sold $300,000 in inventory to Powder. Powder still held 30% of the inventory at the end of 2026. Talc earns 30% gross profit on all of its inventory sales. • Powder uses the cost method to account for its investment in Talc. Both companies pay tax at a rate of 20%. What consolidated net income would be reported on the consolidated statement of income for the year ending December 31, 2026? A) $3,104,800 B) $2,936,600 C) $2,993,500 D) $3,091,600 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 5.5 Adjust the consolidated statement of income (SI) for intercompany transactions.

2) Hydrangea Inc. has owned 100% of the voting common shares of Angel Corporation for several years. Hydrangea uses the cost method to account for its investment in Angel. Two years ago, Angel sold land to Hydrangea, for $275,000, which Angel had purchased from an unrelated party for $150,000. In 2026, Hydrangea sold the land to an unrelated entity for $450,000. For the year ending December 31, 2026, Hydrangea and Angel had separate entity net income of $400,000 and $250,000, respectively. Both companies pay tax at a rate of 20%. What amount represents the consolidated net income for the year ending December 31, 2026? A) $550,000 B) $950,000 C) $750,000 D) $525,000 Answer: C

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 5.5 Adjust the consolidated statement of income (SI) for intercompany transactions.

3) Bussiere Flooring Inc. acquired 100% of the common shares of Anna Tiles Inc. several years ago. Bussiere uses the cost method to account for its investment in Anna. On April 1, 2023, Bussiere sold manufacturing equipment to Anna for $800,000. The carrying value at that time was $650,000 and had an estimated useful life of 5 years. Both companies pay tax at a rate of 20% and depreciate assets over the useful life, based on the number of months available in the year. For the year ending December 31, 2023, Bussiere and Anna reported $450,000 and $560,000, respectively, in the separate-entity statement of income. What amount represents the consolidated net income for the year ending December 31, 2023? A) $1,112,000 B) $ 914,000 C) $ 890,000 D) $ 908,000 Answer: D

Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 5.5 Adjust the consolidated statement of income (SI) for intercompany transactions.

4) Below is the consolidated statement of income for the year ending December 31, 2026 for PDI and its 100% owned subsidiary MML. It was prepared by an accounting student prior to finishing their advanced accounting course. Consolidated statement of income for the year ending December 31, 2026 Revenues Cost of sales Gross margin Other revenues Expenses: Depreciation expense General and administration Net income before tax Tax expense (current and deferred) Net income

4,076,250 2,458,315 1,617,935 343,000

412,795 398,144 1,149,996 227,127 922,869

The following information was not accounted for in the preparation of the above consolidated statement of income: • In 2025, MML purchased $500,000 in inventory from PDI. MML still held 15% of the inventory at December 31, 2025. In 2026, MML purchased $375,000 in inventory from PDI. MML still held 35% of the inventory at December 31, 2026. PDI earns gross profit of 40% on all inventory sales. • On December 31, 2024, MML sold equipment to PDI for $398,000. On the day of the sale, the equipment had a net carrying value of $200,000 and a remaining useful life of 12 years. Both companies use the straight-line method to calculate depreciation expense. • MML declared $250,000 in dividends on November 1, 2026. The dividend will be paid on January 15,

2027. • PDI still owes MML for the equipment purchased in 2024. PDI pays interest to MML on the loan on December 31 each year. The interest for 2026 was $19,900. • Both companies pay tax at a rate of 20%. Required: Adjust the consolidated statement of income for the additional information presented above.

Answer: Adjustments required Downstream—PDI selling to MML Opening inventory Closing inventory Equipment sale—MML to PDI December 31, 2024 Proceeds Carrying value Accounting gain 2025 Unrealized Opening balance 2026—current year Unrealized Closing balance

Revenues Cost of sales Gross margin Other revenues Expenses: Depreciation expense General and administration Net income before tax Tax expense (current and deferred) Net income

Before tax $ 30,000 52,500 $

SI before adjustments $ 4,076,250 2,458,315 $ 1,617,935 343,000

$(375,000) (30,000)

412,795

(16,500)

398,144 $ 1,149,996

(19,900)

227,127 922,869

6,000

(250,000)

398,000 200,000 198,000 16,500

Adjustments 52,500 (19,900)

$181,500 16,500 $165,000

Tax @ 20%

After tax

6,000 10,500

$ 24,000 42,000

$36,300 3,300 $33,000

$145,200 13,200 $132,000

Revised consolidated SI $ 3,701,250 (375,000) 2,105,815 $ 1,595,435 73,100 396,295

(10,500)

3,300

378,244 893,996

225,927 668,069

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 5.5 Adjust the consolidated statement of income (SI) for intercompany transactions.

5.6 Include the deferred income tax implications of intercompany transactions in the consolidation process after acquisition. 1) On December 31, 2023, Powder Corporation acquired 100% of the common shares of Talc Corporation. There were no fair value differences or goodwill resulting from this transaction. Powder uses the cost method to account for its investment in Talc. Both companies pay tax at a rate of 20%. On December 31, 2024, Powder sold a piece of equipment to Talc, recording a profit of $250,000. At that time, the estimated useful life of the equipment is 10 years. In 2025, Talc sold $250,000 in inventory to Powder. At the end of 2025, Powder still held 22% of the inventory. In 2026, Talc sold $300,000 in inventory to Powder. Powder still held 30% of the inventory at the end of 2026. Talc earns 30% gross profit on all of its inventory sales. Using the direct method, what adjustments should be made to the deferred income tax assets (liability) balance on the December 31, 2026 consolidated statement of financial position? A) Debit the deferred income tax asset (liability) account for $45,400. B) Credit the deferred income tax asset (liability) account for $45,400. C) Debit the deferred income tax asset (liability) account for $44,600. D) Credit the deferred income tax asset (liability) account for $34,600. Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 5.6 Include the deferred income tax implications of intercompany transactions in the consolidation process after acquisition.

2) Bussiere Flooring Inc. acquired 100% of the common shares of Anna Tiles Inc. several years ago. On December 31, 2023, Bussiere sold manufacturing equipment to Anna for $495,000. The carrying value at that time was $650,000, and the equipment had an estimated remaining useful life of 20 years. It was determined that the decline in value was not permanent in nature. Both companies use straight-line method of accounting for depreciable assets. For the intercompany equipment transaction, what adjustments must be made to the deferred income tax accounts in the consolidated financial statements for the year ending December 31, 2024? A) A net credit deferred income tax asset (liability) for $29,450 and credit deferred income tax expense (benefit) for $1,550. B) A net credit deferred income tax asset (liability) for $29,450. C) A net debit deferred income tax asset (liability) for $29,450 and credit deferred income tax expense (benefit) for $1,550. D) A net credit deferred income tax asset (liability) for $1,550 and debit deferred income tax expense (benefit) for $1,550. Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 5.6 Include the deferred income tax implications of intercompany transactions in the consolidation process after acquisition.

5.7 Prepare a direct calculation of consolidated retained earnings and consolidated net income that includes adjustments for intercompany profits. 1) On January 1, 2023, Petit Four Inc. (PFI) acquired all the voting common shares of Delicious Treats Ltd. (DTL). Below is the analysis of the acquisition: Purchase price Less the carrying value at acquisition Common stock Retained earnings Acquisition differential Allocated to: Inventory (inventory turns over every 25 days) Land Customer list (useful life of 15 years) Goodwill

$825,000 125,000 245,000 455,000 (32,460) (25,000) (187,500) $210,040

Below are extracts from the separate entity financial statements for the year ending December31, 2025.

Opening retained earnings Net income Dividends Closing retained earnings

PFI 650,000 165,000 (75,000) $740,000

DTL 675,000 125,000 (50,000) $750,000

Additional information: • In 2024, DTL sold $75,000 in inventory to PFI, earning a gross profit of 70%. PFI still held 40% of that profit at the end of 2024. • In 2025, DTL sold $45,000 in inventory to PFI, earning a gross profit of 65%. PFI still held 35% of that profit at the end of 2025. • On June 30, 2023, PFI sold a piece of equipment to DTL for $95,000. At the time of the sale, the equipment had a net carrying value of $30,000 and a remaining useful life of 5 years. DTL still uses the equipment in their operations at the end of 2025. • Both companies pay tax at a rate of 20%. Required: Prepare a calculation of opening consolidated retained earnings as of January 1, 2025.

Answer: Step 1 - Gather information: Intercompany Inventory sales—Upstream DTL selling to PFI—2024 Total profit Unrealized profit at end of 2024 DTL selling to PFI—2025 Total profit Unrealized profit at end of 2025 Intercompany equipment sale—Downstream PFI selling to DTL—in 2023 Net carrying value Profit on sale Amortization adjustment—Realized in 2023 (6 months) Amortization adjustment—realized in 2024 Unrealized profit—at December 31, 2024 Amortization adjustment—realized in 2025 Unrealized profit—at December 31, 2025

$ 75,000 70% $ 52,500 40% $ 45,000 65% $ 29,250 35%

$ 95,000 30,000

Before tax

Tax (@ 20%)

After-tax

$ 21,000

4,200

16,800

$ 10,238

2,048

8,190

$ 65,000 6,500 13,000 $ 45,500 13,000 $ 32,500

$ $

$ 13,000

$ 52,000

9,100 2,600 6,500

$ 36,400 10,400 $ 26,000

Step 2 - Prepare a calculation of opening consolidated retained earnings as of January 1, 2025. Parent's retained earnings—January 1, 2025 Less the unrealized equipment profit after tax at January 1, 2025 Adjusted retained earnings Subsidiary's retained earnings—January 1, 2025 Subsidiary's retained earnings at acquisition Change in subsidiary's retained earnings since acquisition Adjust for: Fair value amortizations to January 1, 2025: Inventory Customer list ($187,500/15 years × 2) Less unrealized opening upstream inventory profit Subsidiary's adjusted change in retained earnings to January 1, 2025 Percentage belonging to the parent Consolidated retained earnings at January 1, 2025

675,000 245,000 430,000

(32,460) (25,000) (16,800) 355,740 100%

650,000 (36,400) 613,600

355,740 969,340

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 5.7 Prepare a direct calculation of consolidated retained earnings and consolidated net income that includes adjustments for intercompany profits.

2) On January 1, 2023, Petit Four Inc. (PFI) acquired all the voting common shares of Delicious Treats Ltd. (DTL). Below is the analysis of the acquisition: Purchase price Less the carrying value at acquisition Common stock Retained earnings Acquisition differential Allocated to: Inventory (inventory turns over every 25 days) Land Customer list (useful life of 15 years) Goodwill

$825,000 125,000 245,000 455,000 (32,460) (25,000) (187,500) $210,040

Below are extracts from the separate entity financial statements for the year ending December31, 2025.

Opening retained earnings Net income Dividends Closing retained earnings

PFI 650,000 165,000 (75,000) $740,000

DTL 675,000 125,000 (50,000) $750,000

Additional information: • In 2024, DTL sold $75,000 in inventory to PFI, earning a gross profit of 70%. PFI still held 40% of that profit at the end of 2024. • In 2025, DTL sold $45,000 in inventory to PFI, earning a gross profit of 65%. PFI still held 35% of that profit at the end of 2025. • On June 30, 2023, PFI sold a piece of equipment to DTL for $95,000. At the time of the sale, the equipment had a net carrying value of $30,000 and a remaining useful life of 5 years. DTL still uses the equipment in their operations at the end of 2025. • Both companies pay tax at a rate of 20%. Required: Prepare a calculation of consolidated net income for the year ending December 31, 2025.

Answer:

Step 1 - Gather information: Intercompany inventory sales— Upstream DTL selling to PFI - 2024 Gross profit percentage Total profit Unrealized profit at end of 2024

$ 75,000 70% 52,500 40%

DTL selling to PFI—2025 Gross profit percentage Total profit Unrealized profit at end of 2025

$ 45,000 65% 29,250 35%

Before tax

Tax (@ 20%)

After-tax

$ 21,000

4,200

$ 16,800

$ 10,238

2,048

8,190

Intercompany equipment sale—Downstream PFI selling to DTL—in 2023 Net carrying value Profit on sale Amortization adjustment—Realized in 2023 (6 months) Amortization adjustment—realized in 2024 Unrealized profit—at December 31, 2024 Amortization adjustment - realized in 2025 Unrealized profit—at December 31, 2025

$ 95,000 30,000

$ 65,000 $ 13,000 $ 52,000 6,500 13,000 $ 45,500 $ 9,100 $ 36,400 13,000 2,600 10,400 $ 32,500 $ 6,500 $ 26,000

Step 2 - Prepare a calculation of consolidated net income for the year ending December 31, 2025. Parent's net income for the year ending December 31, 2025 Less dividends declared by the subsidiary Add the current year amortization of the equipment sale after tax Parent's adjusted net income Subsidiary's net income for year ending December 31, 2025 Adjusted for: The fair value amortization of the customer list Now realized intercompany inventory profit (2024) Unrealized intercompany inventory profit (2025) Subsidiary's adjusted net income—2025 Consolidated net income

125,000 (12,500) 16,800 (8,190) 121,110

165,000 (50,000) 10,400 125,400

121,110 246,510

5.8 Explain the consolidation process as it relates to intercompany transactions when the parent uses the equity method of accounting for internal purposes instead of the cost method of accounting. 1) Wyatt Inc. has owned 100% of the voting common shares of Dahlia Corporation for several years. Wyatt uses the equity method to account for its investment in Dahlia in its separate entity records. Two years ago, Dahlia sold land to Wyatt, for $275,000, which Dahlia had purchased from an unrelated party for $150,000. In 2026, Wyatt sold the land to an unrelated entity for $450,000. For the year ending December 31, 2026, Wyatt and Dahlia had separate entity net income of $400,000 and $250,000, respectively. Both companies pay tax at a rate of 20%. What amount represents the consolidated net income for the year ending December 31, 2026? A) $950,000 B) $400,000 C) $750,000 D) $850,000 Answer: B

Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 5.8 Explain the consolidation process as it relates to intercompany transactions when the parent uses the equity method of accounting for internal purposes instead of the cost method of accounting.

2) Cork Flooring Inc. acquired 100% of the common shares of Green Solutions Inc. several years ago. Cork uses the equity method to account for its investment in Green. On June 30, 2024, Green sold manufacturing equipment to Cork for $900,000. The carrying value at that time was $650,000 and had an estimated useful life of 14 years. Both companies pay tax at a rate of 20% and depreciate assets over the useful life, based on the number of months available in the year. For the year ending December 31, 2024, Cork and Green reported $575,000 and $250,000, respectively, in their separate-entity statements of income. What amount represents the consolidated net income for the year ending December 31, 2024? A) $1,017,857 B) $632,143 C) $625,000 D) $575,000 Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 5.8 Explain the consolidation process as it relates to intercompany transactions when the parent uses the equity method of accounting for internal purposes instead of the cost method of accounting.

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 6 Control Investment of Non-Wholly Owned Subsidiaries 6.1 Explain what non-controlling interest (NCI) represents on the consolidated statement of financial position (SFP) and consolidated statement of income (SI). 1) Which statement is true? A) In the years after acquisition, NCI on the consolidated SFP represents the subsidiary's fair value at acquisition allocated to shareholders other than the parent (the controlling interest). B) In the years after acquisition, NCI on the consolidated SFP represents the fair value of the subsidiary's equity that belongs to shareholders other than the parent (the controlling interest) at that point in time. C) When the parent uses the equity method of accounting in its separate entity records, NCI is included in the investment in subsidiary account on the parent's SFP. D) NCI is only represented on the consolidated SFP. Answer: B Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 6.1 Explain what non-controlling interest (NCI) represents on the consolidated statement of financial position (SFP) and consolidated statement of income (SI).

2) How are ownership interests in a subsidiary that do not belong to the parent represented on the consolidated statement of financial position? A) Minority interest, reported in the liability section. B) Minority interest, included in the total consolidated retained earnings. C) Non-controlling interest, reported in the liability section. D) Non-controlling interest, reported as a separate account within shareholders' equity. Answer: D

Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 6.1 Explain what non-controlling interest (NCI) represents on the consolidated statement of financial position (SFP) and consolidated statement of income (SI).

6.2 Discuss the different methods for valuing NCI in the consolidation process. 1) When a subsidiary is not wholly owned, which of the following methods does not include the value of the NCI in the consolidation process? A) Proportionate consolidation B) Identifiable net asset method C) Fair value method D) All three methods value NCI in the consolidation process. Answer: A Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 6.2 Discuss the different methods for valuing NCI in the consolidation process.

2) Which of the methods to value NCI includes the full value of goodwill? A) Identifiable net asset method B) Fair value method C) Proportionate consolidation D) None of the methods above include the full goodwill value. Answer: B

Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 6.2 Discuss the different methods for valuing NCI in the consolidation process.

6.3 Calculate the value of NCI on the date of acquisition. 1) Bacon Ltd. acquired 70% of Egg Inc on January 1, 2023, for $920,000. Assuming the parent uses the proportionate consolidation method to value NCI at acquisition, what amount would represent the value of NCI at acquisition? Amounts are rounded. A) $276,000 B) $644,000 C) $0 D) $394,286 Answer: C Diff: 1 Type: MC Taxonomy Category: Applying Learning Outcome: 6.3 Calculate the value of NCI on the date of acquisition.

2) Borne Inc. purchased 30,000 of the 45,000 shares of Jason Ltd. for $750,000. Immediately after the acquisition, Jason's shares were trading at $23 a share. Jason's common shares and retained earnings were $250,000 and $400,000, respectively. There were no fair value differences at acquisition, so the entire acquisition differential represents goodwill. Assuming the parent uses the fair value method, which amount is the value of NCI at acquisition? Amounts are rounded. A) $374,438 B) $216,450 C) $375,000 D) $345,000 Answer: D Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 6.3 Calculate the value of NCI on the date of acquisition.

3) Ham Inc. purchased 35,000 of the 45,000 shares of Egg Ltd. for $1,225,000. Immediately after the acquisition, Egg's shares were valued at $32. Egg's common shares and retained earnings were $250,000 and $700,000, respectively. There were no fair value differences at acquisition, so the entire acquisition differential represents goodwill. Assuming the parent uses the identifiable net asset method, what value represents the NCI that would be reported on the consolidated SFP immediately after the acquisition? Amounts are rounded. A) $271,950 B) $210,900 C) $349,550 D) $320,000 Answer: B

Diff: 3 Type: MC Taxonomy Category: Applying Learning Outcome: 6.3 Calculate the value of NCI on the date of acquisition.

4) On December 31, 2024, Wine Inc. purchased 85% of the 100,000 common shares of Sommelier Ltd. for $1,338,750. Immediately after the acquisition, Sommelier's shares were trading at $14. The following is information related to Sommelier at acquisition:

Accounts receivable Inventory Customer list Common shares Retained earnings

Carrying value $ 75,000 152,000 — 275,000 550,000

Fair value 72,000 200,000 175,000

Assuming the parent uses the fair value method, what value will goodwill and NCI be reported at on the consolidated SFP immediately after acquisition? A) NCI: $210,000 and Goodwill: $503,750 B) NCI: $236,500 and Goodwill: $530,000 C) NCI: $156,750 and Goodwill: $450,500 D) NCI: $156,750 and Goodwill: $503,750 Answer: A Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 6.3 Calculate the value of NCI on the date of acquisition.

5) On December 31, 2024, Wine Inc. purchased 85% of the 100,000 common shares of Sommelier Ltd. for $1,338,750. The following is information related to Sommelier at acquisition:

Accounts receivable Inventory Land Common shares Retained earnings

Carrying value $ 75,000 152,000 — 275,000 550,000

Fair value 72,000 200,000 195,000

Assuming the parent uses the identifiable net asset method, what value will goodwill and NCI be reported at on the consolidated SFP immediately after acquisition? A) NCI: $236,250 and Goodwill: $510,000 B) NCI: $159,750 and Goodwill: $433,500 C) NCI: $236,250 and Goodwill: $433,500 D) NCI: $159,750 and Goodwill: $510,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 6.3 Calculate the value of NCI on the date of acquisition.

6.4 Calculate how the fair value differentials at acquisition affect NCI on the SFP and SI. 1) On December 31, 2024, Pottery Inc. purchased 85% of the 100,000 common shares of Glass Ltd. for $1,200,000. Immediately after the acquisition, Glass's shares were trading at $14. The following is information related to Glass at acquisition: Carrying value $ 75,000 152,000 — 275,000 550,000

Accounts receivable Inventory Customer list (useful life 10 years) Common shares Retained earnings

Fair value 72,000 200,000 175,000

Below are extracts from the December 31, 2026 separate-entity statements of Pottery and Glass.

Net income Dividends Retained earnings, closing

Pottery 350,000 150,000 975,000

Glass 295,000 75,000 970,000

Pottery uses the cost method to account for its investment in Glass, and there are no intercompany transactions since acquisition. Inventory and accounts receivable turn over every 60 days. Assuming the parent uses the fair value method, at what value will the NCI be in the consolidated SFP at December 31, 2026? A) $285,000 B) $261,000 C) $265,390 D) $274,765 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 6.4 Calculate how the fair value differentials at acquisition affect NCI on the SFP and SI.

2) On December 31, 2024, Pottery Inc. purchased 85% of the 100,000 common shares of Glass Ltd. for $1,200,000. Immediately after the acquisition, Glass's shares were trading at $14. The following is information related to Glass at acquisition: Carrying value $ 75,000 152,000 — 275,000 550,000

Accounts receivable Inventory Customer list (useful life 10 years) Common shares Retained earnings

Fair value 72,000 200,000 175,000

Below are extracts from the December 31, 2026 separate-entity statements of Pottery and Glass.

Net income Dividends Retained earnings, closing

Pottery 350,000 150,000 975,000

Glass 295,000 75,000 970,000

Pottery uses the cost method to account for its investment in Glass, and there are no intercompany transactions since acquisition. Inventory and accounts receivable turn over every 60 days. What value represents consolidated net income attributable to NCI for the year ending December 31, 2026? A) $34,875 B) $84,563 C) $41,625 D) $94,125 Answer: C Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 6.4 Calculate how the fair value differentials at acquisition affect NCI on the SFP and SI.

3) On December 31, 2024, Grape Inc. purchased 80% of the 100,000 common shares of Wrath Ltd. for $1,360,000. Immediately after the acquisition, Wrath's shares were trading at $15. The following is information related to Wrath at acquisition: Carrying value Fair value Accounts receivable $ 65,000 $ 60,000 Inventory 150,000 135,000 Building (useful life 10 years) 450,000 600,000 Common shares 250,000 Retained earnings 672,000 Below are extracts from the December 31, 2026 separate-entity statements of grape and Wrath.

Net income Dividends Retained earnings, closing

Grape 350,000 150,000 975,000

Wrath 295,000 75,000 1,142,000

Grape uses the cost method to account for its investment in Wrath, and there have not been any intercompany transactions since acquisition. Inventory and accounts receivable turn over every 60 days. On December 31, 2026, it was determined that goodwill was impaired by $10,000. Required: a) Calculate goodwill at December 31, 2026, assuming the parent uses the fair value method. b) Calculate the value of NCI on the SFP at December 31, 2026. c) Calculate consolidated net income attributable to NCI for the year ending December 31, 2026.

Answer:

a) Calculate goodwill at acquisition assuming the parent uses the fair value method. % Ownership Number of shares Purchase price Value to NCI Total value

80% 80,000 Parent $1,360,000

20% 20,000 NCI

100,000 Total

$300,000

Less carrying value: Common shares Retained earnings Acquisition differential Accounts receivable Inventory Building (10 years) Goodwill Allocation of goodwill Allocation of impairment ($10,000) Goodwill at December 31, 2026

1,360,000

300,000

(200,000) (537,600) 622,400 4,000 12,000 (120,000) $ 518,400 85.3% $ (8,530) $ 509,870

(50,000) (134,400) 115,600 1,000 3,000 (30,000) $ 89,600 14.7% $ (1,470) $ 88,130

$1,660,000 1,660,000 (250,000) (672,000) 738,000 5,000 15,000 (150,000) $ 608,000 $ $

(10,000) 598,000

b) Calculate the value of NCI on the SFP at December 31, 2026. NCI can be valued two ways (only one is needed): Method 1: The direct method (using fair value amounts) Carrying value of subsidiary at December 31, 2026 Common shares Retained earnings Unamortized FVD at December 31, 2026 Building ($150,000 − ($150,000/10 × 2)) Adjusted fair value before goodwill Percentage belonging to NCI Percentage of goodwill belonging to NCI Goodwill to NCI at acquisition Goodwill impairment belonging to NCI Goodwill belonging to NCI NCI on the SFP at December 31, 2026

250,000 1,142,000 120,000 1,512,000 20.0% 89,600 (1,470)

$ 302,400

88,130 $ 390,530

Method 2: Equity method NCI value at acquisition Wrath's retained earnings at December 31, 2026 Wrath's retained earnings at acquisition Unadjusted change Adjusted for the FVD: Accounts receivable Inventory Building Wrath's adjusted change in retained earnings

$ 300,000

$ 1,142,000 672,000 470,000 5,000 15,000 30,000) 460,000

Percentage belonging to NCI Less goodwill impairment belonging to NCI NCI at December 31, 2026

20.0% 14.7%

$92,000 (1,470)

90,530 $ 390,530

c) Calculate consolidated net income attributable to NCI for the year ending December 31, 2026. Wrath's net income $ 295,000 Adjusted for the FVD amortizations: Building (15,000) Wrath's adjusted net income before the goodwill write-off 280,000 Percentage belonging to NCI 20.0% 56,000 Less the goodwill write-off belonging to NCI (1,470) Consolidated net income attributable to NCI $ 54,530 Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 6.4 Calculate how the fair value differentials at acquisition affect NCI on the SFP and SI.

6.5 Calculate how intercompany transactions affect NCI on the SFP and SI. 1) Brady Inc. acquired 85% of Bunch Ltd. several years ago. In calculating the consolidated net income attributable to NCI, which of the following adjustments would be added to Bunch's net income? A) The current year amortization of the fair value difference related to equipment where the fair value was greater than the carrying value at acquisition. B) An unrealized gain on an upstream intercompany equipment sale that occurred this year. C) An unrealized profit on an upstream intercompany inventory sale that occurred this year. D) Opening profit from an intercompany land sale, realized in the current year. Answer: D Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 6.5 Calculate how intercompany transactions affect NCI on the SFP and SI.

2) On December 31, 2024, Amie Corporation acquired 90% of the common shares of Anahola Inc. The following is the analysis of the acquisition:

Purchase price Less the carrying value represented by: Common shares Retained earnings Acquisition differential Allocated to the fair value differentials: Accounts receivable Building (remaining useful life of 12 years) Customer list (remaining useful life of 10 years) Goodwill

Parent 1,250,000

NCI 138,889

Total $ 1,388,889 350,000 650,000 388,889 15,000 180,000

(25,000) 558,889

At December 31, 2026, Anahola had $1,055,000 in its retained earnings balance. In 2025, Anahola sold $350,000 in inventory to Amie, earning $107,500 in profit. At the end of 2025, Amie still held 18% of the inventory. In 2026, Anahola sold $450,000 in inventory to Amie, earning a profit of $202,500. Amie still held 25% of the inventory at the end of 2026. Ignoring deferred income taxes, at what amount would NCI be reported on the December 31, 2026 consolidated SFP? A) $178,326 B) $175,389 C) $186,952 D) $179,389 Answer: A Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 6.5 Calculate how intercompany transactions affect NCI on the SFP and SI.

3) On December 31, 2023, Powder Corporation acquired 90% of the common shares of Talc Corporation. There were no fair value differences or goodwill resulting from this transaction. Below are extracts from the separate-entity financial statements for the year ending December 31, 2026 for Powder and Talc: Powder $ 1,950,000 250,000 595,000 375,000

Net income Dividends Property, plant, and equipment (net) Inventory

Talc $ 1,100,000 125,000 850,000 265,000

Additional information: • On December 31, 2024, Powder sold a piece of equipment to Talc, recording a profit of $250,000. At that time, the estimated useful life of the equipment of 10 years. • In 2025, Talc sold $250,000 in inventory to Powder. At the end of 2025, Powder still held 22% of the inventory. In 2026, Talc sold $300,000 in inventory to Powder. Powder still held 30% of the inventory at the end of 2026. Talc earns 30% gross profit on all of its inventory sales. • Powder uses the cost method to account for its investment in Talc. Both companies pay tax at a rate of 20%. What amount represents consolidated net income attributable to the NCI for the year ending December 31, 2026? A) $108,950 B) $109,160 C) $113,480 D) $107,840 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 6.5 Calculate how intercompany transactions affect NCI on the SFP and SI.

4) Hydrangea Inc. has owned 80% of the voting common shares of Angel Corporation for several years. Hydrangea uses the cost method to account for its investment in Angel. Two years ago, Angel sold land to Hydrangea, for $275,000, which Angel had purchased from an unrelated party for $150,000. In 2026, Hydrangea sold the land to an unrelated entity for $450,000. For the year ending December 31, 2026, Hydrangea and Angel had separate entity net income of $400,000 and $250,000, respectively. Both companies pay tax at a rate of 20%. What amount represents the consolidated net income attributable to the NCI? A) $78,000 B) $150,000 C) $50,000 D) $70,000 Answer: D

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 6.5 Calculate how intercompany transactions affect NCI on the SFP and SI.

5) Below is the consolidated statement of income for the year ending December 31, 2026, for Paul's Pottery Ltd. (PPL) and its 90% owned subsidiary Mary's Molds Inc. (MMI) It was prepared by an accounting student prior to finishing their advanced accounting course. Consolidated statement of income for the year ending December 31, 2026 Revenues Cost of sales Gross margin Other revenues Expenses: Depreciation expense General and administration Net income before tax Tax expense (current and deferred) Net income Consolidated net income attributable to: The parent's shareholders Non-controlling interest

4,076,250 2,458,315 1,617,935 343,000

412,795 398,144 1,149,996 227,127 922,869

898,644 24,225

The following information was not accounted for in the preparation of the above consolidated statement of income: • In 2025, MMI purchased $500,000 in inventory from PPL. MMI still held 15% of the inventory at December 31, 2025. In 2026, MMI purchased $375,000 in inventory from PPL. MMI still held 35% of the inventory at December 31, 2026. PPL earns gross profit of 40% on all inventory sales. • On December 31, 2024, MMI sold equipment to PPL for $398,000. On the day of the sale, the equipment had a net carrying value of $200,000 and a remaining useful life of 12 years. Both companies use the straight-line method to calculate depreciation expense. • MMI declared $250,000 in dividends on November 1, 2026. The dividend will be paid on January 15, 2027. • PPL still owes MMI for the equipment purchased in 2024. PPL pays interest to MMI on the loan on December 31 each year. The interest for 2026 was $19,900. • Both companies pay tax at a rate of 20%. PPL uses the cost method to account for its investment in MML in its separate entity statements. Required: Adjust the consolidated statement of income for the additional information presented above.

Answer: Adjustments required: Downstream—PPL selling to MMI Opening inventory profit ($500,000 × 15% × 35%) Closing inventory profit ($375,000 × 35% × 40%) Equipment sale—MMI to PPL December 31, 2024 Proceeds Carrying value Accounting gain 2025 Unrealized opening balance 2026—current year Unrealized closing balance Consolidated NI attributable to: As given less the dividends from the subsidiary adjust for downstream inv. transactions adjust for upstream equip. sales–current year portion Revised consolidated NI attributable to:

Revenues Cost of sales Gross margin Other revenues Expenses Depreciation expense General and administration Net income before tax Tax expense (current and deferred) Net income Consolidated net income attributable to: The parent's shareholders Non-controlling interest

SI before adjustments $ 4,076,250 2,458,315 1,617,935 343,000

Before tax

Tax @ 20%

After tax

$ 30,000 52,500

6,000 10,500

$ 24,000 42,000

36,300 3,300 33,000

145,200 13,200 132,000

$ 398,000 200,000 198,000 16,500

opening closing

181,500 16,500 165,000 Parent (90%) $ 898,644 (225,000) 24,000 (42,000)

11,880 667,524

NCI (10%) Total $ 24,225 $ 922,869 $(225,000) $ 24,000 $ (42,000) 1,320 $ 25,545

$ 13,200 $ 693,069

Revised consolidated SI $ 3,701,250 52,500 (375,000) 2,105,815 1,595,435 (19,900) 98,100

Adjustments $375,000) (30,000) (225,000)

412,795 398,144 1,149,996 227,127 $ 922,869

(16,500) (19,900) 6,000

(10,500)

3,300

Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 6.5 Calculate how intercompany transactions affect NCI on the SFP and SI.

396,295 378,244 893,996 225,927 693,069

667,524 25,545

6.6 Include the deferred income tax implications related to intercompany 1) Prentiss Inc. owns 70% of the common shares of UnSub Ltd. There were no fair value differences or goodwill recorded at acquisition. The following is information related to the intercompany transactions between Prentiss and UnSub: UnSub selling to Prentiss Opening inventory Closing inventory

Profit before Tax $ 75,000 115,000

Prentiss selling to UnSub Opening inventory Closing inventory Prentiss selling to UnSub—equipment Opening unrealized profit Current year amortization Closing unrealized profit

55,000 80,000

455,000 35,000 420,000

Both companies pay tax at a rate of 20%. Based on the information above, what affect would deferred income tax have on the consolidated net income attributable to NCI? A) Consolidated net income attributable to NCI would increase by $2,400 due to the deferred income tax adjustments. B) Consolidated net income attributable to NCI would decrease by $600 due to the deferred income tax adjustments. C) Consolidated net income attributable to NCI would increase by $4,500 due to the deferred income tax adjustments. D) Consolidated net income attributable to NCI would decrease by $2,400 due to the deferred income tax adjustments. Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 6.6 Include the deferred income tax implications related to intercompany transactions in the calculation of NCI on the SFP and SI.

2) Prentiss Inc. Owns 70% of the common shares of UnSub Ltd. There were no fair value differences or goodwill recorded at acquisition. The following is information related to the intercompany transactions between Prentiss and UnSub: UnSub selling to Prentiss Opening inventory Closing inventory

Profit before Tax $ 75,000 115,000

Prentiss selling to UnSub Opening inventory Closing inventory Prentiss selling to UnSub - equipment Opening unrealized profit Current year amortization Closing unrealized profit

55,000 80,000

455,000 35,000 420,000

Both companies pay tax at a rate of 20%. Based on the information above, what affect would the deferred income tax have on the NCI closing balance on the statement of financial position? A) The NCI balance on the SFP would decrease by $6,900 due to the deferred income tax. B) The NCI balance on the SFP would decrease by $20,400 due to the deferred income tax. C) The NCI balance on the SFP would increase by $2,400 due to the deferred income tax. D) The NCI balance on the SFP would increase by $6,900 due to the deferred income tax. Answer: D Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 6.6 Include the deferred income tax implications related to intercompany transactions in the calculation of NCI on the SFP and SI.

6.7 Prepare a direct calculation of consolidated retained earnings and consolidated income for a non-wholly owned subsidiary. 1) On January 1, 2024, PFI acquired 70% of the voting common shares of DTL. Below is the analysis of the acquisition: Parent NCI Total 70% 30% 100% Purchase price $ 700,000 $ 300,000 $ 1,000,000 Less the carrying value at acquisition: Common shares 125,000 Retained earnings 250,000 Acquisition differential 625,000 Allocated to: Inventory (inventory turns over every 25 days) 50,000 Land (120,000) Customer list (useful life of 10 years) (75,000) Goodwill $ 480,000 Below are extracts from the separate-entity financial statements for the year ending December31, 2027.

Opening retained earnings Net income Dividends Closing retained earnings

PFI 865,000 325,000 (150,000) $ 1,040,000

DTL 665,000 225,000 (85,000) 805,000

Additional information: • In 2026, DTL sold $75,000 in inventory to PFI, earning a gross profit of 60%. PFI still held 45% of that profit at the end of 2026. • In 2027, DTL sold $45,000 in inventory to PFI, earning a gross profit of 60%. PFI still held 35% of that profit at the end of 2027. • On June 30, 2024, PFI sold a piece of equipment to DTL for $150,000. At the time of the sale, the equipment had a net carrying value of $30,000 and a remaining useful life of 5years. DTL still uses the equipment in their operations at the end of 2027. • Goodwill was determined to be impaired by $15,000 on December 31, 2027. • Both companies pay tax at a rate of 20%. Required: Prepare a direct calculation of opening consolidated retained earnings as of January 1, 2027.

Answer: Step 1 - Prepare an amortization schedule. Fair value Amortization differentials at for 2024, 2025, Account acquisition and 2026 Inventory $ (50,000) $ 50,000 Land 120,000 — Customer list 75,000 (22,500) Goodwill 480,000 — $ 625,000 $ 27,500

Unamortized Unamortized balance at Amortization balance at end of 2026 for 2027 end of 2027 — — — $ 120,000 $ 120,000 52,500 $ (7,500) 45,000 480,000 (15,000) 465,000 $ 652,500 $ (22,500) $ 630,000

Step 2 - Gather information. Intercompany inventory sales—Upstream DTL selling to PFI—2026 Gross profit Total profit Unrealized profit at end of 2026

$ 75,000 60% 45,000 45%

DTL selling to PFI—2027 Gross profit Total profit Unrealized profit at end of 2027

$ 45,000 60% $ 27,000 35%

Intercompany equipment sale— Downstream PFI selling to DTL—in 2024 Net carrying value Profit on sale Realized in 2024 (6 months) Realized in 2025 Realized in 2026 Unrealized profit—at December 31, 2026 Realized in 2027 Unrealized profit—at December 31, 2027

$150,000 30,000

Before Tax Tax (@ 20%)

After-tax

$ 20,250

4,050

$ 16,200

1,890

9,450

$120,000 12,000 24,000 24,000 $ 60,000 24,000 $ 36,000

7,560

$ 24,000

$ 96,000

$ 12,000 4,800 $ 7,200

$ 48,000 19,200 $ 28,800

Step 3 - Prepare a calculation of opening consolidated retained earnings as of January 1, 2027: PFI's retained earnings—January 1, 2027 Less the unrealized equipment profit after-tax at January 1, 2027 Adjusted retained earnings DTL's retained earnings—January 1, 2027 DTL's retained earnings at acquisition Change in DTL's retained earnings since acquisition Adjust for the fair value amortizations to January 1, 2027: Inventory Customer list ($75,000/10 years × 3) Less unrealized opening upstream inventory profit DTL's adjusted change in retained earnings to Jan. 1, 2027 Percentage belonging to the PFI Consolidated retained earnings at January 1, 2027

665,000 250,000 415,000 50,000 (30,000) (16,200) 418,800 70%

865,000 (48,000) 817,000

293,160 $ 1,110,160

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 6.7 Prepare a direct calculation of consolidated retained earnings and consolidated income for a non-wholly owned subsidiary.

2) On January 1, 2024, PFI acquired 70% the voting common shares of DTL. Below is the analysis of the acquisition: Parent 70% $ 700,000

Purchase price Less the carrying value at acquisition: Common shares Retained earnings Acquisition differential Allocated to:

NCI 30% 300,000

Total 100% 1,000,000 125,000 250,000 625,000

Inventory (inventory turns over every 25 days) Land Customer list (useful life of 10 years) Goodwill

50,000 (120,000) (75,000) 480,000

Below are extracts from the separate-entity financial statements for the year ending December31, 2027.

Opening retained earnings Net income Dividends Closing retained earnings

PFI 865,000 325,000 (150,000) 1,040,000

Additional information:

DTL 665,000 225,000 (85,000) 805,000

• In 2026, DTL sold $75,000 in inventory to PFI, earning a gross profit of 60%. PFI still held 45% of that profit at the end of 2026. • In 2027, DTL sold $45,000 in inventory to PFI, earning a gross profit of 60%. PFI still held 35% of that profit at the end of 2027. • On June 30, 2024, PFI sold a piece of equipment to DTL for $150,000. At the time of the sale, the equipment had a net carrying value of $30,000 and a remaining useful life of 5 years. DTL still uses the equipment in their operations at the end of 2027. • Goodwill was determined to be impaired by $15,000 on December 31, 2027. • Both companies pay tax at a rate of 20%. Required: Prepare a calculation of consolidated net income for the year ending December 31, 2027, along with the amounts attributable to the PFI and the NCI.

Answer: Step 1 - Gather information. Intercompany Inventory sales—Upstream DTL selling to PFI—2026 Gross profit Total profit Unrealized profit at end of 2026

Before tax

Tax (@ 20%)

After-tax

$ 75,000 60% 45,000 45%

$20,250

$ 4,050

$16,200

DTL selling to PFI—2027 Gross profit Total profit Unrealized profit at end of 2027

$ 45,000 60% $ 27,000 35%

$ 9,450

$ 1,890

$ 7,560

120,000 12,000

$24,000

$96,000

$12,000 4,800 $ 7,200

$48,000 19,200 $28,800

Intercompany equipment sale—Downstream PFI selling to DTL—in 2024 Net carrying value Profit on sale Realized in 2024 (6 months)

$150,000 30,000

Realized in 2025 Realized in 2026 Unrealized profit–at December 31, 2026 Realized in 2027 Unrealized profit–at December 31, 2027

24,000 24,000 $60,000 24,000 $36,000

Step 2 - Prepare a calculation of consolidated net income for the year ending December 31, 2027, along with the amounts attributable to the parent and NCI.

PFI's net income for the year ending December 31, 2027 Less dividends declared by the DTL (70%) Add the current year amortization of the equipment sale after tax PFI's adjusted net income DTL's net income for the year ending Dec. 31, 2027 Adjusted for: The fair value amort. of the customer list—one year Goodwill impairment in 2027 Realized intercompany inventory profit—after-tax (2026) Unrealized intercompany inventory profit after-tax (2027) DTL's adjusted net income—2027 Entity's net income Attributable to: PFI ($284,700 + $211,140 × 70%) NCI ($211,140 × 30%)

$ 325,000 (59,500) 19,200 284,700 $ 225,000 (7,500) (15,000) 16,200 (7,560) 211,140

211,140 $ 495,840 $ 432,498 $ 63,342

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 6.7 Prepare a direct calculation of consolidated retained earnings and consolidated income for a non-wholly owned subsidiary.

6.8 Calculate the NCI share of income for a given period. 1) Blandin Inc. has owned 80% of the voting common shares of Perrot Corporation for several years. Blandin uses the cost method to account for its investment in Perrot in its separate entity records. Two years ago, Perrot sold land to Blandin, for $375,000, which Perrot had purchased from an unrelated party for $125,000. In 2026, Blandin sold the land to an unrelated entity for $450,000. For the year ending December 31, 2026, Blandin and Perrot had separate entity net income of $600,000 and $350,000, respectively. Both companies pay tax at a rate of 20%. What amount represents consolidated net income attributable to NCI for the year ending December 31, 2026? A) $30,000 B) $110,000 C) $230,000 D) $120,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 6.8 Calculate the NCI share of income for a given period.

2) Paradise Pastry Inc. (PPI) acquired 65% of the common shares of Econo Supplies Inc. (ESI) several years ago. PPI uses the equity method to account for its investment in Green. On June 30, 2025, ESI sold manufacturing equipment to PPI for $800,000. The carrying value at that time was $500,000 and had an estimated useful life of 20 years. Both companies pay tax at a rate of 20% and depreciate assets over the useful life, based on the number of months available in the year. For the year ending December 31, 2025, PPI and ESI reported $650,000 and $400,000, respectively, in their separate-entity statement of income. What amount represents consolidated net income attributable to NCI for the year ending December 31, 2025? A) $58,100 B) $80,000 C) $56,000 D) $219,800 Answer: A Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 6.8 Calculate the NCI share of income for a given period.

3) On December 31, 2024, Davis Chocolates Inc. (DCI) acquired 80% of the common shares of Regal Molds Inc. (RMI) several years ago. DCI uses the cost method to account for its investment in RMI. The following is the analysis of purchase price at acquisition: Parent NCI 75% 25% $975,000 $ 325,000

Purchase price Less the carrying value Common shares Retained earnings Acquisition differential Allocated to the fair value differentials: Inventory Building (useful life of 14 years) Long-term debt (matures in 5 years) Goodwill

Total $1,300,000 150,000 375,000 775,000 (75,000) (525,000) 50,000 $ 225,000

Additional information: • In 2025, DCI purchased $500,000 in inventory from RMI. DCI still held 15% of the inventory at December 31, 2025. In 2026, DCI purchased $375,000 in inventory from RMI. DCI still held 35% of the inventory at December 31, 2026. RMI earns gross profit of 45% on all inventory sales. • On December 31, 2025, DCI sold equipment to RMI for $398,000. On the day of the sale, the equipment had a net carrying value of $200,000 and a remaining useful life of 12 years. Both companies use the straight-line method to calculate depreciation expense. • RMI declared $250,000 in dividends on October 31, 2026. The dividends will be paid on February 1, 2027. • RMI still owes DCI for the equipment sale. For the year ending December 31, 2026, RMI paid interest of $15,000. • For the year ending December 31, 2026, DCI reported $475,000 in its separate-entity net income and RMI reported $350,000. Required: a) Calculate consolidated net income for the year ending December 31, 2026. b) Calculate the consolidated net income attributable to DCI's shareholders and NCI.

Answer: a)

Before tax

RMI selling to DCI—upstream Opening inventory—2025 ($500,000 × 45% × 15%) Closing inventory—2026 ($375,000 × 45% × 35%) DCI selling to RMI—downstream

Tax (@ 20%)

$ 33,750

$ 398,000 200,000

Current year amortization of profit Unrealized intercompany profit at Dec. 31, 2026

After-tax

6,750

27,000

59,063

11,813

47,250

198,000 16,500 $181,500

39,600 3,300 $36,300

158,400 13,200 $145,200

DCI's net income for the year ending December 31, 2026 Less dividends declared by the subsidiary Add the current year amortization of the equipment sale after tax Parent's adjusted net income RMI's net income for the year ending December 31, 2026

Adjusted for: The fair value amortization of the building—one year ($525,000 /14) The fair value amortization of the LTD—one year Now realized intercompany inventory profit—after-tax (2025) Unrealized intercompany inventory profit after-tax (2026) RMI's adjusted net income—2026 Entity's net income b) Consolidated net income attributable to DCI shareholders and NCI: DCI's shareholders ($300,700 + 75% × $302,250) Non-controlling interest ($302,250 × 25%)

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 6.8 Calculate the NCI share of income for a given period.

350,000

(37,500) 10,000 27,000 (47,250) 302,250

$527,388 75,562

475,000 (187,500) 13,200 300,700

302,250 $602,950

6.9 Prepare a consolidated statement of changes in shareholders' equity (SCE). 1) Barker Inc. acquired 70% of Stuart Inc. a few years ago. Below is a partial statement of changes in shareholders' equity for the current year, prepared by an accounting student:

Balance at Jan.1, 2026 Net earnings (loss) Dividends declared to NCI Dividends declared by parent Balance at Dec. 31, 2026

Share capital $ 650,000

Total attributable NonRetained to equity controlling earnings holders interest Total equity $ 1,074,450 $ 1,724,450 $ 383,050 $ 2,107,500 619,980 619,980 63,710 683,690 A: _______ B:

650,000

On November 30, 2026, Barker and Stuart declared dividends of $350,000 and $150,000, respectively. The dividends will be paid on January 20, 2027. What adjustments must be made to the consolidated SCE above for the dividends in the NCI column (shown as A:) and the retained earnings column (shown as B:)? A) No adjustments are required as the dividends were not paid in the year. B) A: dividend declared to NCI would be $150,000, B: dividends declared by parent would be $350,000. C) A: dividend declared to NCI would be $105,000, B: dividends declared by parent would be $245,000. D) A: dividend declared to NCI would be $45,000, B: dividends declared by parent would be $350,000. Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 6.9 Prepare a consolidated statement of changes in shareholders' equity (SCE).

2) On January 1, 2024, Crimson Inc. acquired 75% the voting common shares of Scarlet Corporation. Below is the analysis of the acquisition:

Purchase price Less the carrying value at acquisition Common shares Retained earnings Acquisition differential

Parent NCI Total 75% 25% 100% 937,500 $ 312,500 $ 1,250,000 125,000 350,000 775,000

Allocated to: Inventory (inventory turns over every 35 days) Building (useful life of 12 years) Land Goodwill

60,000 (240,000) (125,000) $ 470,000

Below are extracts from the separate-entity financial statements for the year ending December31, 2026.

Common shares Opening retained earnings Net income Dividends Closing retained earnings

Crimson $ 650,000

975,000 475,000 (150,000) $ 1,300,000

Scarlet 125,000 650,000 265,000 (85,000) 830,000

Additional information: • In 2025, Scarlet sold $175,000 in inventory to Crimson, earning a gross profit of 60%. Crimson still held 45% of that profit at the end of 2025. • In 2026, Scarlet sold $95,000 in inventory to Crimson, earning a gross profit of 60%. Crimson still held 35% of that profit at the end of 2026. • On June 30, 2024, Crimson sold a piece of equipment to Scarlet for $350,000. At the time of the sale, the equipment had a net carrying value of $130,000 and a remaining useful life of 10 years. Scarlet still uses the equipment in their operations at the end of 2026. Both companies use straight line to amortize depreciable assets. • Goodwill was determined to be impaired by $12,000 on December 31, 2026. • Scarlet declared dividends on Sept. 15, 2026. The dividends are expected to be paid on January15, 2027. • Both companies pay tax at a rate of 20%. Crimson uses the cost method to account for its investment in Scarlet. Required: a) Prepare a direct calculation of opening consolidated retained earnings as of January 1, 2026. b) Prepare a calculation of consolidated net income for the year ending December 31, 2026, along with the amounts attributable to the parent and NCI. c) Prepare a consolidated statement of changes in shareholders' equity (SCE) for the year ending December 31, 2026.

Answer: Step 1: Prepare an amortization schedule.

Account Inventory Building Land Goodwill

Fair value Amortization Unamortized Unamortized differentials at for 2024 balance at end Amortization balance at end acquisition and 2025 of 2025 for 2026 of 2026 $ (60,000) $ 60,000 — — — 240,000 (40,000) $ 200,000 $ (20,000) $ 180,000 125,000 125,000 125,000 470,000 — 470,000 (12,000) 458,000 $ 775,000 $ 20,000 $ 795,000 $ (32,000) $ 763,000

Step 2: Gather information. Intercompany inventory sales—Upstream Scarlet selling to Crimson—2025 Total profit

Before tax

Tax (@ 20%)

After-tax

$ 175,000 60% 105,000

Unrealized profit at end of 2025

45%

47,250

9,450

Scarlet selling to Crimson—2026

$95,000 60% 57,000 35%

19,950

3,990

Total profit Unrealized profit at end of 2026 Intercompany equipment sale— Downstream Crimson selling to Scarlet—in 2024 Net carrying value Profit on sale Amortization adj.—Realized in 2024 (6 months) Amortization adjustment—realized in 2025 Unrealized profit—at Dec. 31, 2025 Amortization adj.—realized in 2026 Unrealized profit—at December 31, 2026

$ 350,000 130,000

37,800

15,960

$220,000

$ $

11,000 22,000 187,000 22,000 165,000

$ $

37,400 4,400 33,000

$ 149,600 17,600 $ 132,000

a) Prepare a calculation of opening consolidated retained earnings as of January 1, 2026. Parent's retained earnings—January 1, 2026 Less the unrealized equipment profit after-tax at January 1, 2026 Adjusted retained earnings Subsidiary’s retained earnings—January 1, 2026 Subsidiary’s retained earnings at acquisition Change in subsidiary’s retained earnings since acquisition Adjust for the fair value amortizations to January 1, 2026: Inventory Building Less unrealized opening upstream inventory profit Subsidiary’s adjusted change in retained earnings to January 1, 2026 Percentage belonging to the parent Consolidated retained earnings at January 1, 2026

975,000 (149,600) 825,400

650,000 350,000 300,000 60,000 (40,000) (37,800) 282,200 75%

211,650 $ 1,037,000

b) Prepare a calculation of consolidated net income for the year ending December 31, 2026, along with the amounts attributable to the parent and NCI. Parent’s net income for the year ending December 31, 2026 Less dividends declared by the subsidiary (75% × $85,000) Add the current year amortization of the equipment sale after tax Parent’s adjusted net income Subsidiary’s net income for the year ending December 31, 2026 Adjusted for: The fair value amortization of the building—one year Goodwill impairment in 2026 Now realized intercompany inventory profit—after-tax (2025) Unrealized intercompany inventory profit after-tax (2026) Subsidiary’s adjusted net income—2026 Entity’s net income Attributable to: Parent’s shareholders ($428,850 + ($254,840 × 75%)) Non-controlling interest ($254,840 × 25%)

265,000 (20,000) (12,000) 37,800 (15,960) 254,840

$ $

475,000 (63,750) 17,600 428,850

254,840 683,690 619,980 63,710

c) Prepare a consolidated statement of changes in shareholders’ equity (SCE). In order to prepare the SCE, we need to calculate the balance in the NCI account on Jan.1, 2026 NCI at acquisition $ 312,500 Equity pickup (from requirement 1) ($282,200 × 25%) 70,550 NCI at Jan. 1, 2026 $ 383,050 Consolidated Statement of Changes in Shareholders’ Equity For the Year Ending December 31, 2026 Total NonShare Retained attributable to controlling capital earnings equity holders interest Total equity Balance at January 1, 2026 $ 650,000 $ 1,037,000 $ 1,687,000 $ 383,050 $2,070,050 Net earnings (loss) 619,980 619,980 63,710 683,690 Dividends declared by subsidiary to NCI — — (21,250) (21,250) Dividends declared by parent ________ (150,000) (150,000) — (150,000) Balance at December 31, 2026 $ 650,000 $ 1,506,980 $ 2,156,980 $ 425,510 $2,582,490 Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 6.9 Prepare a consolidated statement of changes in shareholders' equity (SCE).

6.10 Calculate the value of NCI on the SFP at a specified date. 1) The value of NCI on the consolidated SFP can be calculated using two methods: the direct method or using the equity pickup at a specific date. Which of the following statements related to the direct method is correct? A) NCI on the SFP = subsidiary's retained earnings plus common shares adjusted for the FVD amortized to date where the FV > CV plus any unrealized upstream intercompany inventory profits. B) NCI on the SFP = the non-controlling interest percentage of: subsidiary's common shares and retained earnings adjusted for the unamortized FVD on that date less any unrealized downstream intercompany inventory profits. C) NCI on the SFP = the non-controlling interest percentage of: subsidiary's common shares and retained earnings adjusted for the FVD at acquisition less any unrealized downstream intercompany inventory profits. D) NCI on the SFP = the non-controlling interest percentage of: subsidiary's common shares and retained earnings adjusted for the unamortized FVD on that date less any unrealized upstream intercompany inventory profits. Answer: D Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 6.10 Calculate the value of NCI on the SFP at a specified date.

2) Which adjustments would be done in the calculation of NCI on the SFP? A) A portion of dividends declared by the parent would reduce the NCI on the SFP. B) The NCI percentage of the subsidiary's dividends declared in the year would reduce the NCI on the SFP. C) The NCI percentage of consolidated net income (profit) would increase the NCI on the SFP. D) Unrealized downstream intercompany inventory profit would decrease NCI on the SFP. Answer: B Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 6.10 Calculate the value of NCI on the SFP at a specified date.

3) On December 31, 2024, Reid Company acquired 65% of the outstanding common shares of Morgan Inc. Below is the analysis of the acquisition: Reid 65% $ 2,200,000

Purchase price Less carrying value: Common shares Retained earnings Acquisition differential Allocated to: Inventory Equipment (10-year useful life) Long-term debt (matures in 7 years)

NCI 35% $ 1,184,615

Total 100% $ 3,384,615 1,250,000 1,475,000 659,615 (125,000) 250,000 (70,000) $ 714,615

Reid uses the cost method to account for its investment in Morgan. Below are extracts from the separate entity statement of Reid and Morgan for the year ending December 31, 2027: Reid Morgan $ 5,650,000 $ 2,950,000 1,250,000 875,000 (375,000) (250,000) $ 6,525,000 $ 3,575,000

Opening retained earnings Net income Dividends Closing retained earnings

Additional information: • On January 1, 2025, Morgan sold a patent to Reid for $2,250,000. The patent had a carrying value of $1,750,000 with a remaining estimated useful life of 10 years. • During 2026, Reid sold $750,000 in inventory to Morgan, earning a profit of $525,000. Morgan still held 25% of this inventory at December 31, 2026. • During 2027, Morgan sold $950,000 in inventory to Reid, earning a profit of $570,000. Reid still held 30% of this inventory at December 31, 2027. • Both companies pay tax at a rate of 20%. Required: Determine the NCI balance on the December 31, 2027, consolidated statement of financial position using the direct method. Answer: Morgan's carrying value Common shares Retained earnings at Dec. 31, 2027 Add: Unamortized FVD at Dec. 31, 2027 Equipment ($250,000 − ($250,000/10 × 3 years)) Long-term debt ($70,000 − ($70,000/7 × 3) years)) Goodwill Less unrealized after-tax profit on intercompany patent: Sell price Carrying value Intercompany profit Amortized (3 years) Unrealized intercompany profit at Dec. 31, 2027 Adjusted for the deferred income tax After-tax unrealized intercompany equipment profit Less unrealized after-tax profit on intercompany inventory ($570,000 × 30%) Tax on profit Unrealized after-tax profit on intercompany inventory Fair value of Morgan at December 31, 2027 Percentage belonging to NCI

$1,250,000 3,575,000

(175,000) 40,000 714,615 $2,250,000 1,750,000 500,000 150,000

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 6.10 Calculate the value of NCI on the SFP at a specified date.

$350,000 (70,000)

$171,000 34,200

35%

(280,000)

(136,800) $4,987,815 $1,745,735

4) On December 31, 2024, Reid Company acquired 65% of the outstanding common shares of Morgan Inc. Below is the analysis of the acquisition: Reid 65% $ 2,200,000

Purchase price Less carrying value: Common shares Retained earnings Acquisition differential Allocated to: Inventory Equipment (10-year useful life) Long-term debt (matures in 7 years)

NCI 35% $ 1,184,615

Total 100% $ 3,384,615 1,250,000 1,475,000 659,615 (125,000) 250,000 (70,000) $ 714,615

Reid uses the cost method to account for its investment in Morgan. Below are extracts from the separateentity statement of changes in retained earnings of Reid and Morgan for the year ending December 31, 2027: Reid Morgan Opening retained earnings $ 5,650,000 $ 2,950,000 Net income 1,250,000 875,000 Dividends (375,000) (250,000) Closing retained earnings $ 6,525,000 $ 3,575,000 Additional information: • On January 1, 2025, Morgan sold a patent to Reid for $2,250,000. The patent had a carrying value of $1,750,000 with a remaining estimated useful life of 10 years. • During 2026, Reid sold $750,000 in inventory to Morgan, earning a profit of $525,000. Morgan still held 25% of this inventory at December 31, 2026. • During 2027, Morgan sold $950,000 in inventory to Reid, earning a profit of $570,000. Reid still held 30% of this inventory at December 31, 2027. • Both companies pay tax at a rate of 20%. Required: Determine the NCI balance on the December 31, 2027, consolidated statement of financial position using the equity pickup method.

Answer: NCI at acquisition Add equity pickup: Morgan's retained earnings at Dec. 31, 2027 Morgan's retained earnings at acquisition Unadjusted change since acquisition Adjusted for the FVD amortization: Inventory

$ 1,184,615 $

3,575,000 1,475,000 2,100,000 (125,000)

Equipment ($250,000/10 × 3 years) Long-term debt ($70,000/7 × 3 years Less unrealized intercompany profit on patent sale: Sell price $ Carrying value Intercompany profit on patent Amortized ($500,000/10 years × 3 years) Unrealized intercompany profit at Dec. 31, 2027 Adjusted for the deferred income tax (20% After tax unrealized intercompany equipment profit Less unrealized after-tax profit on intercompany inventory ($570,000 × 30%) Tax on profit (20%) Unrealized after-tax profit on intercompany inventory Morgan's adjusted retained earnings at Dec 31, 2027 Equity pickup belonging to NCI NCI on SFP at December 31, 2027

75,000 (30,000) 2,250,000 1,750,000 500,000 150,000 350,000 (70,000) (280,000) 171,000 (34,200)

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 6.10 Calculate the value of NCI on the SFP at a specified date.

(136,800) 1,603,200 35%

561,120 $ 1,745,735

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 7 Accounting for Associates (Revisited) and Joint Arrangements 7.1 Explain the equity method of accounting. 1) Which of the following statements is FALSE? A) The equity method of accounting reports the investor's percentage of the fair value of the net assets of a subsidiary, adjusted for intercompany profits in one line on the SFP. B) The equity method of accounting does not adjust for intercompany transactions. C) When a parent uses the equity method of accounting in its separate-entity statements to account for a subsidiary, consolidated retained earnings will be the same as the parent's separate-entity retained earnings. D) When a parent uses the equity method of accounting in its separate-entity statements to account for a subsidiary, the parent's net income will be equal to consolidated net income attributable to the parent. Answer: B Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 7.1 Explain the equity method of accounting.

2) The equity method of accounting is used for an investment in an associate as well as an investment in a joint venture. At acquisition, how is the difference in purchase price and the fair value of the net assets dealt with when using the equity method of accounting? A) For investments in an associate and a joint venture, any excess in the fair value of the net assets over the purchase price will be treated as goodwill. This goodwill is reported separately on the investor's SFP (separate from the investment account). B) Only for investments in an associate will any excess in the fair value of the net assets over the purchase be treated as goodwill. The goodwill is reported separately on the investor's SFP (separate from the investment account). C) For investments in an associate or a joint venture, any excess in fair value over the purchase price is treated as goodwill. The amount of goodwill is included in the investment account balance. D) For investments in either an associate or a joint venture, the excess in fair value of the net assets is taken into income in the year the acquisition occurs. Answer: C Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 7.1 Explain the equity method of accounting.

3) Under the equity method of accounting, how does the accounting for upstream intercompany transactions differ from downstream intercompany transactions? Answer: Both downstream and upstream transactions need to be adjusted in the calculation of equity income. The profits from downstream transactions belong to the investor and are adjusted as follows: • 100% of the unrealized profit (loss) is held-back (eliminated) until sold to an outside party or used up in the income earning process. An intercompany transaction resulting in recognition of profit by the seller will require that the unrealized portion be eliminated (decreasing) from equity income and the investment account balance. • Once sold or used up, the once held-back profit (100%) is recognized in net income. • The deferred income tax adjustments would also be required, thus the after-tax profit is removed and only recognized once the asset is sold or used up in the income earning process. Profits (losses) from upstream transactions belong to both the significant influence shareholders (the "investor") and the other shareholders of the investee. This means that only an investor's percentage of the intercompany profits affects equity income (and the investment account). These profits are adjusted as follows: • The investor's percentage ownership of the unrealized profit (loss) is held-back (eliminated) until sold to an outside party or used up in the income earning process. An intercompany transaction resulting in recognition of profit by the seller will required that the unrealized portion be eliminated (decreasing) from equity income and the investment account balance. • Once sold or used up, the once held-back profit (investor's percentage only) is now recognized in net income. • The deferred income tax adjustments would also be required, thus the after-tax profit is removed and only recognized once the asset is sold or used up in the income earning process. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 7.1 Explain the equity method of accounting.

7.2 Account for intercompany transactions using the equity method, including the deferred income tax implications. 1) On December 31, 2024, Cindy Ltd. acquired 35% of the shares of Crawford Inc. for $125,000. Crawford's shareholders' equity at that time consisted of $175,000 in common shares and $95,000 in retained earnings. The fair value of the assets and liabilities was equal to the carrying value with the exception of the following:

Inventory Building

Carrying value $ 50,000 250,000

Fair value $ 75,000 150,000

Additional information Sold by end of 2023 10-year useful life

On January 1, 2025, Cindy sold inventory to Crawford earning a profit of $85,000. At December 31, 2025, Crawford still held 40% of the inventory. Crawford Inc. earned $225,000 in profit for the year ending December 31, 2025. Cindy earned $300,000 without accounting for its investment in Crawford. Both companies pay tax at a rate of 20%. Determine the equity income from Crawford for the year ending December 31, 2025. A) $63,980 B) $76.020 C) $39,300 D) $46,300 Answer: D

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 7.2 Account for intercompany transactions using the equity method, including the deferred income tax implications.

2) On August 31, 2022, Induk Corp acquired 75% of Scott Inc.'s voting common shares. Both companies have an August 31 year end. On May 31, 2023, Scott sold $140,000 of inventory to Induk and recorded a 40% gross profit on the sale. Half of the goods purchased were still held by Induk on August 31, 2023. Both companies pay tax at a rate of 20%. Which one of the following statements best describes the adjustment to equity income for the year ending December 31, 2023? A) Equity income would decrease by $21,000. B) Equity income would increase by $21,000. C) Equity income would decrease by $22,400. D) Equity income would decrease by $16,800. Answer: D Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 7.2 Account for intercompany transactions using the equity method, including the deferred income tax implications.

3) On August 31, 2022, Induk Corp acquired 75% of Scott Inc.'s voting common shares. Both companies have an August 31 year end. On May 31, 2023, Scott sold $140,000 of inventory to Induk, recording a 40% gross profit on the sale. Half of the inventory purchased was still held by Induk on August 31, 2023 but was sold to an unrelated party in October 2023. On May 31, 2024, Scott sold $225,000 of inventory to Induk, recording a 40% gross profit on the sale. 35% of the inventory purchased was still held by Induk on August 31, 2024. Both companies pay tax at a rate of 20%. Which one of the following statements best describes the total adjustments to equity income for the year ending August 31, 2024? A) Equity income would decrease by $2,100. B) Equity income would increase by $18,900. C) Equity income would decrease by $25,200. D) Equity income would increase by $16,800. Answer: A Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 7.2 Account for intercompany transactions using the equity method, including the deferred income tax implications.

4) On December 31, 2022, Fantini Corp acquired 45% of Bannon Inc.'s voting common shares. Both companies have a December 31 year end. On January 1, 2024, Bannon sold a piece of equipment to Fantini for $440,000. The carrying value of the equipment was $240,000, and it had an estimated remaining useful life of 20 years. Both companies pay tax at a rate of 20%. Which one of the following statements best describes the total adjustments to equity income for the year ending December 31, 2026? A) Equity income would decrease by $8,000. B) Equity income would increase by $3,600. C) Equity income would decrease by $3,600. D) Equity income would increase by $8,000. Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 7.2 Account for intercompany transactions using the equity method, including the deferred income tax implications.

5) On December 31, 2022, Fantini Corp acquired 45% of Bannon Inc.'s voting common shares. Both companies have a December 31 year end. On January 1, 2024, Bannon sold a piece of equipment to Fantini for $440,000. The carrying value of the equipment was $240,000, and it had an estimated remaining useful life of 20 years. Both companies pay tax at a rate of 20%. Fantini has been using the cost method to account for its investment. Assuming Fantini has determined they should have been using the equity method to account for its investment in Bannon, which amount represents the net adjustments to properly adjust the investment account on the SFP for this intercompany transaction at December 31, 2026? A) Investment in Bannon Inc. account would decrease by $136,000. B) Investment in Bannon Inc, account would increase by $136,000. C) Investment in Bannon Inc. account would increase by $61,200. D) Investment in Bannon Inc. account would decrease by $61,200. Answer: D Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 7.2 Account for intercompany transactions using the equity method, including the deferred income tax implications.

6) On January 1, 2023, Peyton Corporation acquired 23% of the common shares of Cadman Industries Inc. for $1,500,000. There were no fair value differentials or goodwill resulting from this acquisition. Both companies pay tax at a rate of 20% and use the straight-line method for amortizing depreciable assets. Inventory turns over every 60 days. The following relates to the year ending December 31, 2023: • Peyton earned income, before accounting for its investment in Cadman, of $450,000. • Cadman earned income of $225,000 and declared dividends of $75,000. • Cadman sold $275,000 in inventory to Peyton, earnings gross profit of 35%. Peyton still held 30% of the inventory at year end. • On December 31, 2023, Peyton sold a piece of equipment to Cadman for a profit of $200,000. The remaining useful life is 10 years. The following relates to the year ending December 31, 2024: • Peyton earned income, before accounting for its investment in Cadman, of $200,000. • Cadman earned income of $325,000 and declared dividends of $175,000. • Cadman sold $175,000 in inventory to Peyton, earnings gross profit of 35%. Peyton still held 40% of the inventory at year end. Required: a) Calculate the equity income (loss) Peyton would report in 2023 and 2024. b) Calculate the Investment in Cadman Industries Inc. account balance as of December 31, 2024. Answer: a) Equity income (loss)—2023 Cadman's net income Less the unrealized inventory profit—upstream Before tax: ($275,000 × 35% × 30%) Deferred income tax on profit (20%) Cadman's adjusted net income Percentage belonging to Peyton Adjusted for downstream equipment sale: Profit on sale Deferred income tax on profit (20%) Unrealized after-tax profit Equity income (loss)—2023

23%

225,000

(28,875) 5,775 201,900

46,437

(160,000) (113,563)

$(200,000) 40,000

Equity income (loss)—2024

Cadman's net income Add opening inventory profit—now realized—upstream Before tax: ($275,000 × 35% × 30%) Deferred income tax on profit (20%) Less the unrealized inventory profit—upstream Before tax: ($175,000 × 35% × 40%) Deferred income tax on profit (20%) Cadman's adjusted net income Percentage belonging to Peyton Adjusted for downstream equipment sale Recognize one year of the gain Deferred income tax on profit (20%) Unrealized after-tax profit Equity income (loss)—2024

325,000 28,875 (5,775)

23% $

(24,500) 4,900 328,500

75,555

16,000 91,555

20,000 (4,000)

b) Investment in Cadman Industries Inc. account balance at Dec. 31, 2024: Initial investment 2023—Equity income (loss) 2023—declared dividend ($75,000 × 23%)

$ 1,500,000 (113,563) (17,250)

2024—Equity income 2024—declared dividend ($175,000 × 23%) Investment in Cadman Industries Inc. account balance at Dec. 31, 2024

91,555 (40,250) $ 1,420,492

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 7.2 Account for intercompany transactions using the equity method, including the deferred income tax implications.

7) On January 1, 2023, Peyton Corporation acquired 23% of the common shares of Cadman Industries for $1,500,000. There were no fair value differentials or goodwill resulting from this acquisition. Both companies pay tax at a rate of 20% and use the straight-line method for amortizing depreciable assets. Inventory turns over every 60 days. The following relates to the year ending December 31, 2023: • Peyton earned income, before accounting for its investment in Cadman, of $450,000. • Cadman earned income of $225,000 and declared dividends of $75,000. • Cadman sold $275,000 in inventory to Peyton, earnings gross profit of 35%. Peyton still held 30% of the inventory at year end. • On December 31, 2023, Peyton sold a piece of equipment to Cadman for a profit of $200,000. The remaining useful life is 10 years.

The following relates to the year ending December 31, 2024: • Peyton earned income, before accounting for its investment in Cadman, of $200,000. • Cadman earned income of $325,000 and declared dividends of $175,000. • Cadman sold $175,000 in inventory to Peyton, earnings gross profit of 35%. Peyton still held 40% of the inventory at year end. Required: Prepare the equity method journal entries for each year.

Answer: 2023

2024

Dr. Investment in Cadman Industries Inc. Cr. Cash To record the initial investment in Cadman.

1,500,000

Dr. Equity loss Cr. Investment in Cadman Industries Inc. To record Peyton's share of the equity loss in 2023. (see supporting calculation)

113,563

Dr. Cash Cr. Investment in Cadman Industries Inc. To record the dividends declared by Cadman (75,000 × 23%)

17,250

Dr. Investment in Cadman Industries Inc. Cr. Equity income To record Peyton's share of the equity income in 2024. (see supporting calculation)

91,555

Dr. Cash Cr. Investment in Cadman Industries Inc. To record the dividends declared Cadman. (175,000 × 23%)

40,250

1,500,000

113,563

17,250

91,555

40,250

Supporting Calculations Equity income (loss)—2023 Cadman's net income Less the unrealized inventory profit—upstream Before tax: ($275,000 × 35% × 30%) Deferred income tax on profit (20%) Cadman's adjusted net income Percentage belonging to Peyton Adjusted for downstream equipment sale: Profit on sale Deferred income tax on profit (20%) Unrealized after-tax profit Equity income (loss)—2023

23% $

225,000

$ $

(28,875) 5,775 201,900 46,437

(160,000) (113,563)

325,000

(200,000) 40,000

Equity income (loss)—2024: Cadman's net income Add opening inventory profit—now realized— upstream Before tax: ($275,000 × 35% × 30%) Deferred income tax on profit (20%) Less the unrealized inventory profit—upstream Before tax: ($175,000 × 35% × 40%) Deferred income tax on profit (20%) Cadman's adjusted net income

28,875 (5,775)

Percentage belonging to Peyton Adjusted for downstream equipment sale: Recognize one year of the gain Deferred income tax on profit (20%) Unrealized after-tax profit Equity income (loss)—2024

23% $

(24,500) 4,900 328,500

75,555

16,000 91,555

20,000 (4,000)

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 7.2 Account for intercompany transactions using the equity method, including the deferred income tax implications.

7.3 Calculate equity income for a strategic investment with significant influence or control. 1) Pat Corporation, a private company reporting under ASPE, owns 65% of the common shares of Sat Inc. Pat has chosen to account for its subsidiary using the equity method of accounting. Additional information: • In 2024, Pat sold inventory to Sat, earning a profit of $60,000. At the end of 2024, Sat still held 50% of the inventory purchased from Pat. • In 2025, Pat sold inventory to Sat, earning a profit of $75,000. At the end of 2025, Sat still held 30% of the inventory purchased from Pat. • In 2025, Sat sold a piece of land to Pat, earning a profit of $150,000. Pat plans to use this land to build a warehouse in the next few years. • In 2025, Pat earned income of $450,000 (before accounting for its investment in Sat), and Sat earned $375,000. Both companies pay tax at a rate of 20%. • In 2025, Sat declared dividends of $50,000, which will be paid on January 15, 2026. What amount represents the equity income Pat would report for the year ending December 31, 2025? A) $171,750 B) $169,650 C) $261,000 D) $121,550 Answer: A Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 7.3 Calculate equity income for a strategic investment with significant influence or control.

2) Garcia Corporation owns 35% of the common shares of Rosalee Inc. Garcia accounts for its investment in Rosalee using the equity method of accounting. Additional information: • In 2024, Rosalee sold inventory to Garcia, earning a profit of $80,000. At the end of 2024, Garcia still held 40% of the inventory purchased from Rosalee. • In 2025, Rosalee sold inventory to Garcia, earning a profit of $100,000. At the end of 2025, Garcia still held 50% of the inventory purchased from Rosalee. • In 2024, Garcia sold a piece of equipment to Rosalee, earning a profit of $525,000. Rosalee is using the equipment in its manufacturing process. At the time of the sale, the equipment had an estimated remaining useful life of 15 years. • In 2025, Rosalee earned $295,000. Both companies pay tax at a rate of 20%. • In 2025, Rosalee declared dividends of $50,000, which will be paid January 15, 2026. What amount represents the equity income Garcia would report for the year ending December 31, 2025? A) $108,010 B) $117,250 C) $126,210 D) $291,100 Answer: C Diff: 2

Type: MC

Taxonomy Category: Applying Learning Outcome: 7.3 Calculate equity income for a strategic investment with significant influence or control.

3) On January 1, 2025, Pelican Inc. acquired 55% of Cormorant Ltd. for $1,300,000. Both companies have a December 31 year end. The following are the fair value differentials that existed on that date:

Inventory Building Patent

Carrying value $ 75,000 500,000 —

Fair value 100,000 400,000 250,000

Remaining useful life 8 10

Additional information: • On April 30, 2025, Pelican sold land to Cormorant for a profit of $150,000. Cormorant still holds the property. • On June 30, 2025, Cormorant sold a piece of equipment to Pelican for profit of $250,000. Pelican continues to use the equipment in their manufacturing process. The estimated useful like of 10 years. • For the year ending December 31, 2025, Cormorant earned income of $265,000 and paid a dividend of $125,000. • Both companies pay tax at a rate of 20%. What amount equity income (loss) would Pelican report for the year ending December 31, 2025? A) $ 70,125 B) $(99,375) C) $(39,875) D) $(76,625) Answer: B

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 7.3 Calculate equity income for a strategic investment with significant influence or control.

4) On January 1, 2022, HCI Inc. purchased 40,000 of the 160,000 voting shares of SBI Ltd. for $325,000. At acquisition, all the fair values were equal to the carrying value of the assets except for inventory and building. The inventory was undervalued by $40,000, while the building was overvalued by $30,000. The building had a remaining useful life of 10 years. For the year ending December 31, 2024, SBI had net income of $235,000. Both companies pay tax at a rate of 20%. In 2023, SBI sold inventory to HCI, earning a profit of $70,000. At the end of 2023, HCI still held 40% of the inventory purchased from SBI. In 2024, SBI sold inventory to HCI, earning a profit of $90,000. At the end of 2024, HCI still held 50% of the inventory purchased from SBI. What amount of equity income would HCI record for the year ending December 31, 2024? A) $46,100 B) $45,900 C) $54,600 D) $56,100 Answer: D Diff: 2

Type: MC

Taxonomy Category: Applying Learning Outcome: 7.3 Calculate equity income for a strategic investment with significant influence or control.

5) On January 1, 2023, Over Inc. owns 15,000 of the 20,000 outstanding voting shares of Under Ltd. As a private company, Over is using the equity method of accounting to report its investment in Under. The acquisition resulted in goodwill of $95,000. At acquisition, the fair value of the net assets was equal to the carrying value except for the patent, which was undervalued by $80,000. On that date, the patent had a remaining useful life of 5 years. Both companies pay tax at a rate of 20%. Additional information: • In 2023, Over sold inventory to Under for a profit of $80,000. Under still holds 40% of that inventory at the end of 2023. • In 2024, Under sold inventory to Over for a profit of $100,000. Over still holds 50% of that inventory at the end of 2024. • On June 30, 2023, Under sold a piece of land to Over for a profit of $250,000. In early 2024, Over determined that the land could not be rezoned and sold the land to an unrelated third party, earning a profit of $25,000. • Under earned income of $350,000 for the year ending December 31, 2024, and paid $50,000 in dividends. Required: Calculate the equity income Over would report for the year ending December 31, 2024. Answer: Under's net income $ 350,000 Amortization of the FVD—Patent (80,000 / 5) (16,000) Less unrealized ending inventory profit after tax—upstream Profit before tax ($100,000 × 50%) (50,000) Deferred income tax ($100,000 × 50%) × 20% 10,000 Add the now-realized profit on land sale: Profit before tax 250,000 Deferred income tax ($250,000 × 20%) (50,000) Under's adjusted net income $494,000 Percentage belonging to Over 75% $ 370,500 Adjusted for the downstream sales—opening: Profit before tax ($80,000 × 40%) 32,000 Deferred income tax ($80,000 × 40%) × 20% (6,400) Equity income $ 396,100 Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 7.3 Calculate equity income for a strategic investment with significant influence or control.

6) On December 31, 2024, Tulip Corporation acquired 70% of the common shares of Lily Inc. The acquisition resulted in a goodwill $955,700, the fair values of the net assets were equal to their carrying value except for the building and customer list. The building was overvalued by $100,000 (useful life of 10 years), and the customer list was undervalued by $75,000 (useful life of 20 years). Below are extracts from the December 31, 2026, draft separate-entity statements of Tulip and Lily: Tulip Lily Net income $ 350,000 $ 295,000 Dividends 150,000 75,000 Retained earnings, closing 975,000 470,000 Tulip has not recorded any income from Lily in 2026. Both companies pay tax at a rate of 20% and have a December 31 year end. Additional information: • In 2025, Lily sold $350,000 in inventory to Tulip, earning $105,000 in profit. At the end of 2025, Tulip still held 25% of the inventory. In 2026, Tulip sold $450,000 in inventory to Lily, earning a profit of $185,000. Lily still held 30% of the inventory at the end of 2026. • On December 31, 2025, Tulip sold a piece of equipment to Lily, recording a profit of $562,500. At that time, the estimated useful life of the equipment is 15 years. • On November 15, 2026, Lily sold a piece of land to Tulip and recorded a loss of $125,000. The loss was considered to be permanent in nature. Required: Assume Tulip is a private company following ASPE and wants to use the equity method of accounting for its investment in Lily. Calculate the equity income that would be reported for the year ending December 31, 2026.

Answer: Lily's net income Adjusted for the current period FVD: Building ($100,000/10 years)—overvalued (FV < CV) Customer list ($75,000/20)—undervalued (FV > CV) Opening inventory profit after tax (upstream) Deferred income tax on opening profit (at 20%)

Percentage belonging to Tulip Adjusted for downstream transactions: Closing inventory profit before tax Deferred income tax on profit (at 20%) Closing after-tax profit on inventory sale Equipment profit—recognized one year—before tax Deferred income tax on profit (at 20%) After-tax amortization of the equipment profit Equity income for 2026

10,000 (3,750)

$ 26,250 (5,250)

Opening inventory profit after tax (upstream)—now realized Upstream land loss (Note 1) Lily's adjusted net income 70%

21,000 — 322,250

225,575

(55,500) 11,100

(44,400)

37,500 (7,500)

295,000

30,000 211,175

Note 1: The land loss incurred by Lily on the sale to Tulip is considered to be permanent in nature; this means we should recognize the loss immediately even though it is an intercompany transaction. Since the loss is already recorded by Lily, there is no adjustment required in the calculation of equity income. Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 7.3 Calculate equity income for a strategic investment with significant influence or control.

7.4 Compare and discuss the differences in the equity method of accounting between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE). 1) Which statement below best represents how equity income differs under ASPE as compared to IFRS? A) Under ASPE, intercompany transactions are adjusted at 100% regardless of whether they are upstream or downstream. B) Under ASPE, intercompany transactions are not adjusted. C) The calculation of equity income is the same under ASPE and IFRS. D) Under ASPE, to calculate equity income, the investor only takes in its percentage of the investee's income, adjusted for intercompany transactions. Under IFRS, to calculate equity income, the investor takes in 100% of the investee's income in the investee's income, adjusted for intercompany transactions. Answer: C Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 7.4 Compare and discuss the differences in the equity method of accounting between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE).

7.5 Account for joint arrangements, including joint ventures and joint operations. 1) Which of the following statements is FALSE when accounting for joint arrangements? A) A joint arrangement that is not set up as a separate legal entity may be classified as either a joint venture or a joint operation, depending on additional factors. B) A joint arrangement that is set up as a separate legal entity may be classified as either a joint venture or a joint operation. The classification depends on additional factors. C) A joint arrangement that is not set up as a separate legal structure is classified as a joint operation. D) Joint operations are accounted for using proportionate consolidation. Answer: A Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 7.5 Account for joint arrangements, including joint ventures and joint operations.

2) Mining Inc and Gitzel Corporation enter into a joint arrangement to survey several areas in Northern Saskatchewan and Manitoba for cobalt, the main ingredient in lithium batteries. Both companies will provide different areas of expertise and equipment but will retain ownership of their individual assets. Any debt incurred by the joint arrangement will be the responsibility of each of the venturers, based on their relative rights under the agreement. The agreement states that Mining Inc. owns 40% of the joint arrangement, and Gitzel Corporation will own the other 60%. Assuming Mining Inc. reports under IFRS, what method of accounting is appropriate?

A) Equity method B) Cost method C) Consolidation D) Proportionate consolidation Answer: D

Diff: 1 Type: MC Taxonomy Category: Evaluating Learning Outcome: 7.5 Account for joint arrangements, including joint ventures and joint operations.

3) Assuming a corporation reports under IFRS, which of the following statements is true? A) The equity method of accounting is used for an associate, while proportionate consolidation is used to account for a joint venture. B) The equity method of accounting is used to account for both an associate and a joint venture. C) The equity method of accounting is used to account for both an associate and a joint operation. D) Proportionate consolidation is used to account for both an associate and a joint venture. Answer: B Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 7.5 Account for joint arrangements, including joint ventures and joint operations.

4) Which of the following conditions is NOT required for an investment to be considered a joint arrangement? A) Equal equity ownership for each of the parties involved B) Involvement in the decision-making process C) Unanimous consent between all parties that control the arrangement, regardless of equity ownership D) All of the above are required to be considered a joint arrangement. Answer: A Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 7.5 Account for joint arrangements, including joint ventures and joint operations.

5) On January 1, 2026, Zack Corporation (Zack) and Hodge Incorporated (Hodge) decided to create a new company called ZHI Ltd. Zack and Hodge agreed they would have joint control over the operating and financing decisions of ZHI Ltd. Based on their initial investments, Zack will hold 60% of the equity ownership, and Hodge will hold 40%. The draft financial statements for Zack (before accounting for ZHI this year) and ZHI for the year ending December 31, 2026 are:

Cash Accounts receivable Inventory Property, plant, and equipment (net) Investment in ZHI Ltd. Total assets Current liabilities Long-term liabilities Common shares Retained earnings Total liabilities and shareholders' equity Sales Cost of sales

$ $

Operating expenses Income tax expense Net income

Zack 25,000 $ 175,000 450,000 625,000 165,000 1,440,000 $ 165,000 $ 475,000 250,000 550,000 1,440,000 $ 845,000 $ 380,250 464,750 295,750 33,800 135,200 $

ZHI 15,000 95,000 225,000 125,000 460,000 125,000 25,000 100,000 210,000 460,000 175,000 70,000 105,000 61,250 8,750 35,000

Required: Assume Zack reports under IFRS. a) Assuming its investment in ZHI is classified as a joint venture, prepare Zack's statement of financial position and statement of income for the year ending December 31, 2026. b) Assuming its investment in ZHI is classified as a joint operation, prepare Zack's statement of financial position and statement of income for the year ending December 31, 2026. Answer: a) Assuming its investment in ZHI is classified as a joint venture, prepare Zack's statement of financial position and statement of income for the year ending December 31, 2026. Zack Inc. Statement of Financial Position December 31, 2026

Cash Accounts receivable Inventory Property, plant, and equipment (net) Investment in ZHI ($165,000 + $21,000) Total assets

Current liabilities Long-term liabilities Common shares Retained earnings ($550,000 + $21,000) Total liabilities and shareholders' equity

25,000 175,000 450,000 625,000 186,000 1,461,000 165,000 475,000 250,000 571,000 1,461,000

Zack Inc. Statement of Income For the Year Ending December 31, 2026 Sales Cost of sales

Equity income ($35,000 × 60%) Operating expenses Income tax expense Net income

845,000 380,250 464,750 21,000 295,750 33,800 156,200

b) Assuming its investment in ZHI is classified as a joint operation, prepare Zack's statement of financial position and statement of income for the year ending December 31, 2026. Zack Inc. Statement of Financial Position December 31, 2026 Cash ($25,000 + $15,000 × 60%) Accounts receivable ($175,000 + 95,000 × 60%) Inventory ($450,000 + $225,000 × 60%) Property, plant, and equipment (net) ($625,000 + $125,000 × 60%) Total assets Current liabilities ($165,000 + $125,000 × 60%) Long-term liabilities ($475,000 + $25,000 × 60%) Common shares Retained earnings ($550,000 + $35,000 × 60%) Total liabilities and shareholders' equity

$ $

Zack Inc. Statement of Income For the Year Ending December 31, 2026 Sales ($845,000 + 175,000 × 60%) Cost of sales ($380,250 + $70,000 × 60%)

Operating expenses ($295,750 + $61,250 × 60%) Income tax expense ($33,800 + $8,750 × 60%) Net income

34,000 232,000 585,000 700,000 1,551,000 240,000 490,000 250,000 571,000 1,551,000

950,000 422,250 527,750 332,500 39,050 156,200

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 7.5 Account for joint arrangements, including joint ventures and joint operations.

6) Palm Corporation and Oil Incorporated have decided to form a joint venture. On January 1, 2024, POI Corporation was formed. Palm will contribute land, building, and equipment worth $3,500,000 in exchange for 70% interest in POI. Oil will contribute cash of $1,500,000 for its 30% interest. Both companies agree to have joint control over POI. Below is information related to the assets contributed by Palm:

Carrying value $ 750,000 1,250,000 850,000 $ 2,850,000

Land Building (net) Equipment (net) Total

Fair value 750,000 1,750,000 1,000,000 $ 3,500,000

Remaining useful life n/a 20 10

Required: a) Prepare the journal entries for Palm for the year ending December 31, 2024, assuming the transaction has commercial substance. b) Prepare the journal entries for Palm for the year ending December 31, 2024, assuming the transaction does not have commercial substance. Answer: a) Prepare the 2024 journal entries for Palm assuming the transaction has commercial substance. Accounting gain on transfer

Land Building (net) Equipment (net)

Proceeds Carrying value $ 750,000 $ 750,000 1,750,000 1,250,000 1,000,000 850,000

Accounting gain $ — 500,000 150,000

Portion considered sold to Oil (30%) $ — 150,000 45,000

Unrealized gain 350,000 105,000

January 1, 2024 Dr. Investment in Joint Venture 3,500,000 Cr. Building 1,250,000 Cr. Land 750,000 Cr. Equipment 850,000 Cr. Gain on contribution—immediately 195,000 Cr. Unrealized gain—equipment (contra account) 105,000 Cr. Unrealized gain—building (contra account) 350,000 The unrealized gains on the equipment and building will be recognized over the useful life of the depreciable assets. December 31, 2024 Dr. Unrealized gain—equipment 10,500 Cr. Gain on contribution 10,500 To record the portion of unrealized equipment, gain in the current year. The unrealized gain is realized over the remaining useful life. $105,000/10 years = $10,500 a year. Dr. Unrealized gain—building Cr. Gain on contribution

17,500

Record the portion of unrealized building gain in the current year. The unrealized gain is realized over the remaining useful life. $350,000/20 years = $17,500 a year. b) Assuming that the transaction does not have commercial substance, prepare the 2024 journal entries for Palm. January 1, 2024 Dr. Investment in Joint Venture 3,500,000 Cr. Building 1,250,000 Cr. Land 750,000 Cr. Equipment 850,000 Cr. Unrealized gain—equipment (contra account) 150,000 Cr. Unrealized gain—building (contra account) 500,000 Record the investment in the joint venture. The assets are removed from the books. Since there is no commercial substance, none of the gain can be realized immediately. The accounting gain on the equipment and building will be realized over the useful life of the asset. December 31, 2024 Dr. Unrealized gain—equipment 15,000 Cr. Gain on contribution 15,000 To record the portion of unrealized equipment, gain in the current year. The unrealized gain is realized over the remaining useful life. $150,000/10 years = $15,000 a year. Dr. Unrealized gain—building 25,000 Cr. Gain on contribution 25,000 Record the portion of unrealized building gain in the current year. The unrealized gain is realized over the remaining useful life. $500,000/20 years = $25,000 a year. Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 7.5 Account for joint arrangements, including joint ventures and joint operations.

7) On January 1, 2025, Data Corporation contributed some equipment in return for $200,000 in cash and a 55% interest in SpotCat Inc., a newly formed joint venture. The equipment had a fair value of $1,025,000, a net carrying value of $400,000, and a remaining useful life of 10 years. Tiger Corporation contributed $675,000 in return for 45% interest in the joint venture. SpotCat earned $195,000 in net income for the year ending December 31, 2025. No dividends were declared in the year, and there were no intercompany transactions. Required: a) Prepare the journal entries for Data for the year ending December 31, 2025, assuming the transaction has commercial substance. b) Prepare the journal entries for Data for the year ending December 31, 2025, assuming the transaction does not have commercial substance. Answer: a) Prepare the journal entries for Data for the year ending December 31, 2025, assuming the transaction has commercial substance. Fair value of asset contributed Carrying value of the equipment Total accounting gain Portion realized—considered sold to other venturers (45%) Unrealized portion—belonging to Data

$1,025,000 400,000 625,000 281,250 $ 343,750

January 1, 2025 Dr. Investment in SpotCat Inc. 825,000 Dr. Cash 200,000 Cr. Equipment 400,000 Cr. Accounting gain on transfer 281,250 Cr. Unrealized accounting gain (contra account) 343,750 To recognize the transfer of the asset to SpotCat Inc. The unrealized accounting gain will be recognized over the useful life of the asset. December 31, 2025 Dr. Unrealized gain—equipment 34,375 Cr. Gain on contribution 34,375 To record the portion of unrealized equipment gain in the current year. The unrealized gain is realized over the remaining useful life. $343,750/10 years = $34,375 a year Dr. Investment in SpotCat Inc. Cr. Equity income To record Data's share of SpotCat's net income ($195,000 × 55%)

107,250

b) Prepare the journal entries for Data for the year ending December 31, 2025, assuming the transaction does not have commercial substance. Fair value of asset contributed Percentage that relates to cash ($200,000/$1,025,000)

Gain on exchange

$1,025,000 19.5122%

Fair value Carrying value

$1,025,000 400,000

Gain to be recognized immediately ($625,000 × 19.5122%) Balance of gain to be unrealized Alternate calculation Cash received from other venturers Carrying amount sold:

Cash Total fair value Carrying value Carrying amount related to the cash portion of the sale Immediate gain to be recognized on transfer Total gain on transfer ($1,025,000 − $400,000) Unrealized gain

$200,000 $1,025,000

625,000

121,951 503,049

200,000

78,049 121,951 625,000 503,049

$ 400,000

January 1, 2025 Dr. Investment in SpotCat Inc. 825,000 Dr. Cash 200,000 Cr. Equipment 400,000 Cr. Accounting gain on transfer 121,951 Cr. Unrealized accounting gain (contra account) 503,049 Since there is no commercial substance, the immediate gain is based on the other assets (in this case cash) received. The remaining gain will be recognized over the useful life of the equipment. December 31, 2025 Dr. Unrealized gain − equipment 50,305 Cr. Gain on contribution 50,305 To record the portion of unrealized equipment gain in the current year. The unrealized gain is realized over the remaining useful life. $503,049/10 years = $50,305 a year. Dr. Investment in SpotCat Cr. Equity income To record Data's share of SpotCat's net income ($195,000 × 55%)

107,250

Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 7.5 Account for joint arrangements, including joint ventures and joint operations.

7.6 Compare and discuss the differences in accounting between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) for joint arrangements. 1) Which of the following statements is true? A) There are no differences in accounting between IFRS and ASPE for joint arrangements. B) IFRS has two classifications for joint arrangements: joint operations and joint ventures. ASPE also has two classifications for joint arrangements: jointly controlled assets and joint ventures. C) ASPE has three classifications for joint arrangements: jointly controlled operations, jointly controlled assets, and jointly controlled enterprises. Jointly controlled operations do not require a separate vehicle (legal entity) while the other two require separate vehicles. D) ASPE outlines three classifications for joint arrangements. Jointly controlled operations and jointly controlled assets are reported through proportionate consolidation, while the third classification, jointly controlled enterprises have the option of using the equity method of account or the cost method. Answer: D Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 7.6 Compare and discuss the differences in accounting between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) for joint arrangements.

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 8 Control Investments—Other Reporting Issues 8.1 Explain the impact of consolidation on the consolidated cash flow statement and determine how to prepare a consolidated cash flow statement. 1) Consolidated cash flow statements are one of the statements required in the consolidation process. Which of the following statements are true? A) The allocation of consolidated net income to the non-controlling interest is presented in the financing activities of the consolidated cash flow statement. B) The dividends declared by the subsidiary are presented in the financing section of the consolidated cash flow statement. C) In the indirect method of accounting for operating cash flows, the amortization of the FVD are added back to net income since they are a non-cash item. D) Intercompany sales of depreciable or non-depreciable assets must be presented in the investing activities of the consolidated cash flow statement. Answer: C

Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 8.1 Explain the impact of consolidation on the consolidated cash flow statement, and determine how to prepare a consolidated cash flow statement.

2) IAS 7 requires that the acquirer prepare a note disclosure for an acquisition. Which statement represents items that must be included in the note disclosure? A) Total consideration paid, including the portion related to cash and/or cash equivalent, the carrying value of the net assets acquired from the subsidiary along with a list of the non-controlling interest parties. B) Total consideration paid, including the cash and/or cash equivalent, the fair value of the net assets acquired, summarized by major category. C) Total consideration paid, a list of non-controlling interest parties, along with a list of assets acquired from the subsidiary. D) Total consideration paid, a list of intercompany transactions in the year of acquisition, along with the fair value of the assets acquired. Answer: B

Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 8.1 Explain the impact of consolidation on the consolidated cash flow statement, and determine how to prepare a consolidated cash flow statement.

3) Marnie Corporation owns 75% of the outstanding voting shares of Wilson Inc. For the year ending December 31, 2025, Wilson paid dividends of $150,000. Which statement best represents the adjustment required in the financing section of the consolidated cash flow statement for December 31, 2025? A) A decrease in cash of $150,000 B) An increase in cash of $112,500 C) A decrease in cash of $112,500 D) A decrease in cash of $37,500 Answer: D

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 8.1 Explain the impact of consolidation on the consolidated cash flow statement, and determine how to prepare a consolidated cash flow statement.

4) On January 1, 2026, Walsy Corporation purchased 75% of the common shares of Gill Corporation for $1,125,000 cash. At the time of acquisition, the carrying value of the net assets was equal to the fair value, with the exception of the inventory, which was undervalued by $50,000 and a building, which was undervalued by $250,000. The building had a remaining useful life of 15 years. Gill's statement of financial position at acquisition is presented below: Cash Inventory Property, plant, and equipment (net) Total assets Current liabilities Long-term liabilities Common shares Retained earnings Total liabilities and shareholders' equity

$ $

75,000 200,000 787,500 1,062,500 37,500 275,000 300,000 450,000 1,062,500

Additional information: • •

Both companies have a December 31 year end. Gill paid a dividend of $100,000 on September 15, 2026.

Required: a) What is the impact of this acquisition for the December 31, 2026 consolidated cash flow statement? b) Prepare the note disclosure for the acquisition of Gill Corporation. Answer: a) What is the impact of this acquisition for the December 31, 2026 consolidated cash flow statement? • The investing activities section of the consolidated cash flow statement would show a cash outflow of $1,050,000 ($1,125,000 − $75,000). • The financing activities section of the consolidated cash flow statement would show a cash outflow of $25,000 for the dividends paid to the non-controlling interest. b) Prepare the note disclosure for the acquisition of Gill Corporation. On January 1, 2026, Walsy Corporation acquired 75% of Gill Corporation for a total consideration of $1,125,000.

Net assets acquired Inventory Property, plant, and equipment (net) Goodwill (Note 1) Current liabilities Long-term liabilities Non-controlling interest

Consideration given Less cash acquired

$ $

Note 1 Purchase Price (75%) Implied value of 100% Less the book value of the common shares Common shares Retained earnings Acquisition differential Allocated to the fair value differences: Inventory Building Goodwill

300,000 450,000

250,000 1,037,500 450,000 (37,500) (275,000) (375,000) 1,050,000 1,125,000 (75,000) 1,050,000 1,125,000 1,500,000

750,000 750,000

(50,000) (250,000) 450,000

Diff: 2 Type: ES Taxonomy Category: Creating Learning Outcome: 8.1 Explain the impact of consolidation on the consolidated cash flow statement, and determine how to prepare a consolidated cash flow statement.

8.2 Discuss the issues and requirements related to interim reporting. 1) Which of the following statements is true for interim financial statements for public companies? A) Interim statements must be comparable to the prior year financial statements and formatted in a manner consistent with the year-end statements. B) Interim statements must be audited. C) Interim statements provide the same level of detail as the annual statements but do not have to comply with IFRS. D) All of the above statements are true. Answer: A Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 8.2 Discuss the issues and requirements related to interim reporting.

8.3 Discuss the IFRS requirements for segmented reporting, and determine the segments that must be disclosed. 1) Which of the following is NOT a threshold in determining a reportable segment? A) Any segment with 10% or more of the total revenues. B) Any segment with 10% or more of the total net profits (including losses). C) Any segment with 10% or more of the total combined assets. D) Any segment with 10% or more of the combined reported profits (excluding losses). Answer: B

Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 8.3 Discuss the IFRS requirements for segmented reporting, and determine the segments that must be disclosed.

2) The following information relates to different segments of Danny Corporation for the year ending December 31, 2026: Segment Potash Uranium Phosphate Oil Retail Total

Profit 12,500 (850) 1,975 500 (5,700) 8,425

Revenues 14,500 4,215 1,900 750 9,500 $ 30,865 $

Assets 22,500 4,500 1,500 1,200 19,500 49,200

Using the profit test only, which segments must be reported separately? A) All segments must all be reported separately. B) Potash, Phosphate, and Retail must be reported separately. C) Potash and Phosphate must be reported separately. D) Potash, Phosphate, and Oil must be reported separately. Answer: B

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 8.3 Discuss the IFRS requirements for segmented reporting, and determine the segments that must be disclosed.

3) The following information relates to different segments of Danny Corporation for the year ending December 31, 2026: Segment Potash Uranium Phosphate Oil Retail Total

Profit 12,500 (850) 1,975 500 (5,700) 8,425

Revenues $ 14,500 4,215 1,900 750 9,500 $ 30,865

Assets 22,500 4,500 1,500 1,200 19,500 49,200

Using the revenue test only, which segments must be reported separately? A) All segments must all be reported separately. B) Potash, Phosphate, and Retail must be reported separately. C) Potash and Phosphate must be reported separately. D) Potash, Uranium, and Retail must be reported separately. Answer: D

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 8.3 Discuss the IFRS requirements for segmented reporting, and determine the segments that must be disclosed.

4) The following information relates to different segments of Danny Corporation for the year ending December 31, 2026: Segment Potash Uranium Phosphate Oil Retail Total

Profit 12,500 (850) 1,975 500 (5,700) 8,425

Revenues 14,500 4,215 1,900 750 9,500 $ 30,865 $

Assets 22,500 4,500 1,500 1,200 19,500 49,200

Using the asset test only, which segments must be reported separately? A) All segments must all be reported separately. B) Potash, Phosphate, and Retail must be reported separately. C) Potash and Retail must be reported separately. D) Potash, Uranium, and Retail must be reported separately. Answer: C

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 8.3 Discuss the IFRS requirements for segmented reporting, and determine the segments that must be disclosed.

5) Harwick Corporation has provided the following information for its segments:

Revenues Operating profit

Division A 7,800 297

Division B 1,450 40

Division C 13,500 7

Total 22,750 344

Which operating segments must be reported separately? A) Only Division A B) Only Divisions A and C C) Only Divisions A and B D) All three divisions must be reported separately. Answer: D

Diff: 1 Type: MC Taxonomy Category: Applying Learning Outcome: 8.3 Discuss the IFRS requirements for segmented reporting, and determine the segments that must be disclosed.

8.4 Discuss the impact of indirect shareholdings on consolidated net income and consolidated retained earnings. 1) On January 1, 2025, Freeman Corporation acquired 65% of the common shares of Shackle Company. At acquisition, the acquisition differential was $250,000 and was fully allocated to a building, resulting in no goodwill. The building has a remaining useful life of 10 years. On January 1, 2026, Shackle Company acquired 75% of the common shares of Metal Corporation. The acquisition of Metal resulted in $250,000 of goodwill and a customer list with a fair value that was $75,000 greater than carrying value. The customer list had a remaining useful life of 3 years. Below are extracts from the separate-entity financial statements for the year ending December 31, 2026: Freeman Shackle Metal Retained earnings at acquisition $ 250,000 $ 125,000 Net income

Dividends Retained earnings at December 31, 2026

375,000

255,000

195,000

75,000

85,000

50,000

1,250,000

795,000

270,000

There are no intercompany transactions. Freeman and Shackle both use the cost method of accounting for their subsidiaries in their single-entity statements. Which of these amounts represents consolidated net income attributable to the shareholders of Freeman? A) $682,250 B) $652,000 C) $646,875 D) $527,750 Answer: D Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 8.4 Discuss the impact of indirect shareholdings on consolidated net income and consolidated retained earnings.

2) On January 1, 2025, Freeman Corporation acquired 65% of the common shares of Shackle Company. At acquisition, the acquisition differential was $250,000 and was fully allocated to a building, resulting in no goodwill. The building has a remaining useful life of 10 years. On January 1, 2026, Shackle Company acquired 75% of the common shares of Metal Corporation. The acquisition of Metal resulted in $250,000 of goodwill and a customer list with a fair value that was $75,000 greater than carrying value. The customer list had a remaining useful life of 3 years. Below are extracts from the separate-entity financial statements for the year ending December 31, 2026:

Retained earnings at acquisition Net income Dividends Retained earnings at December 31, 2026

Freeman $

375,000 75,000 1,250,000

Shackle 250,000 $ 255,000 85,000 795,000

Metal 125,000 195,000 50,000 270,000

There are no intercompany transactions. Freeman and Shackle both use the cost method of accounting for their subsidiaries in their single-entity statements. Which of these amounts represents consolidated retained earnings for the year ending December 31, 2026? A) $1,630,250 B) $1,662,750 C) $1,865,000 D) $1,719,625 Answer: A

Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 8.4 Discuss the impact of indirect shareholdings on consolidated net income and consolidated retained earnings.

3) Jelly Corporation owns 70% of the common shares of Bean Company. Bean Company owns 55% of the common shares of Bag Company. There were no fair value differentials or goodwill as a result of either purchase. The following are extracts from the financial statements for the year ending December 31, 2026 for all three companies:

Net income Closing retained earnings

Jelly 375,000 1,250,000

Bean 265,000 985,000

Bag 295,000 695,000

Additional information: • No dividends were declared in 2026. • All three companies pay tax at a rate of 20%. • There were no intercompany transactions in prior years. • In 2026, Jelly sold inventory to Bag, earning a profit of $100,000. Bag still held 50% of the inventory at the end of 2026. • In 2026, Bean sold inventory to Jelly, earning a profit of $50,000. Jelly still held 30% of the inventory at the end of 2026. Which of these amounts represents consolidated net income attributable to the shareholders of Jelly? A) $674,075 B) $718,600 C) $625,675 D) $830,250 Answer: C

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 8.4 Discuss the impact of indirect shareholdings on consolidated net income and consolidated retained earnings.

4) Jelly Corporation owns 70% of the common shares of Bean Company. Bean Company owns 55% of the common shares of Bag Company. There were no fair value differentials or goodwill as a result of either purchase. The following are extracts from the financial statements for the year ending December 31, 2026 for all three companies:

Net income Closing retained earnings

Jelly 375,000 1,250,000

Bean 265,000 985,000

Bag 295,000 695,000

Which of these amounts represents consolidated net income attributable to the non-controlling interest for the year ending December 31, 2026? A) $125,850 B) $257,325 C) $264,900 D) $321,150 Answer: B

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 8.4 Discuss the impact of indirect shareholdings on consolidated net income and consolidated retained earnings.

5) Jelly Corporation owns 70% of the common shares of Bean Company. Bean Company owns 55% of the common shares of Bag Company. There were no fair value differentials or goodwill as a result of either purchase. The following are extracts from the financial statements for the year ending December 31, 2026 for all three companies: Jelly Bean Bag Net income $ 375,000 $ 265,000 $ 295,000 Closing retained earnings 1,250,000 985,000 695,000 Retained earnings at acquisition 385,000 395,000 Additional information: • No dividends were declared in 2026. • All three companies pay tax at a rate of 20%. • There were no intercompany transactions in prior years. • In 2026, Jelly sold inventory to Bag, earning a profit of $100,000. Bag still held 50% of the inventory at the end of 2026. • In 2026, Bean sold inventory to Jelly, earning a profit of $50,000. Jelly still held 30% of the inventory at the end of 2026. Which of these amounts represents consolidated retained earnings for the year ending December 31, 2026? A) $1,833,900 B) $1,737,100 C) $1,785,500 D) $1,831,600 Answer: B

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 8.4 Discuss the impact of indirect shareholdings on consolidated net income and consolidated retained earnings.

6) The following organization chart outlines the shareholdings of Muddy Corporation, Sunny Corporation, and Dry Corporation. The percentages shown represent the percentage of ownership of each company.

Required: Assuming Muddy reports under IFRS, briefly describe how Muddy Corporation should classify and account for its investments in Sunny Corporation and Dry Corporation. Answer: Muddy has direct control over Sunny and would classify Sunny as a subsidiary. Muddy would account for Sunny using the consolidation method. Sunny's results would be consolidated with Muddy's financial statements, adjusted for any goodwill from the acquisition, fair value differentials, and intercompany transactions. The ownership of Dry is a bit more complex since Muddy has direct ownership in Dry as well as indirect ownership. In order to determine if Muddy has control, we need to look at the Sunny's ownership in Dry. Muddy controls Sunny and, therefore, controls all the assets of Sunny, including the shares Sunny owns in Dry. This means that Muddy controls a total of 60% of the voting shares of Dry. As a result, Muddy controls Dry and should classify Dry as a subsidiary. Muddy will have to consolidate the results of Dry, adjusting for any goodwill, fair value amortization, and intercompany transactions. Diff: 2 Type: ES Taxonomy Category: Evaluating Learning Outcome: 8.4 Discuss the impact of indirect shareholdings on consolidated net income and consolidated retained earnings.

7) RMT Inc. owns 80% of the outstanding common shares of Thyme Inc. Thyme Inc. owns 60% of the outstanding shares of MRJ. There were no acquisition differentials, fair value differentials, or goodwill resulting from either transaction. It was determined that each acquisition gave the acquirer control. The companies have the following intercompany transactions: • In 2025, Thyme purchased $450,000 of inventory from MRJ, of which 35% was still held at the end of 2025. In 2026, Thyme purchased $300,000 of inventory from MRJ, of which 25% was still held at the end of 2026. MRJ earns a gross profit of 55% on all its inventory sales. • In 2025, Thyme sold $300,000 in inventory to RMT, of which 30% was still held at the end of 2025. In 2026, Thyme sold $250,000 of inventory to RMT, of which 50% was still held at the end of 2026. Thyme earns profit of 65% on all its inventory sales. • On January 1, 2025, RMT sold a piece of equipment to MRJ for a profit of $300,000. The equipment had an estimated remaining useful life of 12 years. MRJ is still using the equipment at the end of 2026. All three companies pay income tax at a rate of 20%. RMT and Thyme use the cost method to account for their investment in their separate-entity statements. The separate-entity income and dividends for the year ending December 31, 2026 are:

Net income Dividends

RMT 765,000 150,000

Thyme 850,000 250,000

MRJ 653,000 75,000

Required: Calculate consolidated net income for 2026 attributable to: a) RMT's shareholders. b) Non-controlling interest. Answer: Step 1: Gather information on inventory transactions.

Before tax

Tax @ 20%

After tax

86,625

$ 17,325

69,300

16,875

3,375

13,500

58,500

$ 11,700

46,800

81,250

$ 16,250

65,000

Sold Jan 1, 2025—profit Recognized in 2025

$ 300,000 25,000

$ 60,000 5,000

240,000 20,000

Recognized in 2026 Unrealized equipment profit

25,000 $ 250,000

5,000 $ 50,000

Upstream—MRJ sell to Thyme—2025- inv. sale—now earned ($450,000 × 35% × 55% GP) Upstream—MRJ sell to Thyme—2025—inv. sale—unearned ($300,000 × 25% × 55% GP) Upstream—Thyme selling to RMT—2025—inventory sale— now earned ($300,000 × 30% × 65%GP) Upstream—Thyme selling to RMT—2026—inventory sale— unearned ($250,000 × 50% × 65%GP) Downstream equipment sale RMT to MRJ

20,000 200,000

a) Calculate consolidated net income for 2026 attributable to the RMT's shareholders: RMT's net income Less dividends declared by Thyme ($250,000 × 80%) Add current period equipment profit after tax RMT's adjusted net income Thyme's net income Less dividends declared by MRJ ($75,000 × 60%) Add opening inventory profit after tax Less ending inventory profit after tax MRJ's net income Add opening inventory profit after tax Less ending inventory profit after tax MRJ's adjusted net income Percentage of MRJ's net income belonging to Thyme Thyme's adjusted net income including MRJ Percentage belonging to RMT Consolidated net income attributable to the parent, RMT

$653,000 69,300 (13,500) 708,800 60%

b) Calculate consolidated net income for 2026 attributable to NCI: NCI's percentage of MRJ's adjusted net income $ 708,800 NCI's percentage of Thyme's adjusted net income 1,212,080 Consolidated net income attributable to NCI

765,000 200,000 20,000 985,000

$ 850,000 (45,000) 46,800 (65,000)

425,280 1,212,080 80% $

× 40% × 20%

$ $

969,664 1,954,664

283,520 242,416 525,936

Diff: 2 Type: ES Taxonomy Category: Evaluating Learning Outcome: 8.4 Discuss the impact of indirect shareholdings on consolidated net income and consolidated retained earnings.

8.5 Explain the accounting impact of a change in ownership interest. 1) Temperance Inc. owns 65% of the common shares of Hodge Ltd. It was determined that Temperance had control of Hodge and has been preparing consolidated financial statements as a result. On December 31, 2026, Temperance purchased an additional 15% of the common shares of Hodge Ltd. How should Temperance account for the purchase of the additional 15% of the common shares? A) A revaluation of the net assets will be required. An analysis of the new purchase price will be required. This may result in a new goodwill and new fair value differentials. B) An accounting gain or loss will be recognized based on the price paid and the revaluation of the net assets. C) A new goodwill will be calculated based on the purchase price of the additional 15%. The additional goodwill and fair value differentials will be added to those recorded in the first purchase. D) Change of control has not changed; this is a reallocation of the ownership interest. Temperance will need to determine the amount of equity that is being transferred from NCI to Temperance. No gain or loss will be recognized on this new purchase. Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 8.5 Explain the accounting impact of a change in ownership interest.

2) Which of the following statements on step acquisitions is FALSE? A) Whenever ownership percentage changes, we must analyse whether the level of influence or control has changed as a result. B) When a significant influence is achieved because of a step acquisition, we must update the carrying value of the investment. An analysis of the purchase price is performed, fair value differentials are determined, and goodwill is calculated. C) If a second purchase of shares increases ownership but the investor still maintains significant influence, no adjustment is made to the goodwill or fair value difference. It is accounted for by reallocating the equity between owners. D) When the acquisition of additional shares results in a change from significant influence to control, the investment account balance must first be updated to the purchase date. Answer: C Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 8.5 Explain the accounting impact of a change in ownership interest.

3) Dillon Corporation acquired 65% of Angela Corporation three years ago, giving it control over Angela. In the current year, Dillon acquired an additional 15% of the common shares of Angela. How should the acquisition of the additional shares be treated? A) An analysis of the new purchase should be performed, increasing the fair value differentials and goodwill. B) The new purchase did not result in a change of control; no new acquisition analysis is performed. The new acquisition would result in a reallocation of equity between the NCI and Dillon. C) Dillon's investment in Angela account should be updated to the date of the new purchase, a new goodwill calculated based on an 80% acquisition, recognizing the fair value differentials and goodwill. The previously recorded acquisition of Angela would be eliminated. D) An analysis of the new purchase will be performed; the resulting fair value differences and goodwill will be added to those calculated when the 65% was acquired. Answer: B

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 8.5 Explain the accounting impact of a change in ownership interest.

4) Bone Corporation acquired 60% of the 10,000 common shares of Chip Inc. on December 31, 2022. On January 1, 2027, Bone acquired another 20% of the 10,000 common shares of Chip for $275,000. On January 1, 2027, Chip's common shares and retained earnings were $150,000 and $365,000, respectively. On January 1, 2027, the fair value of the net assets equals their carrying value, expect for the patent, which was undervalued by $240,000. Below are extracts from the consolidated statements for December 31, 2026: NCI Opening consolidated retained earnings Consolidated net income attributable to Bone's shareholders Dividends declared Closing consolidated retained earnings

$ $

479,000 1,275,000 657,000 (250,000) 1,682,000

With respect to the January 1, 2027, share purchase, which statement is correct for the change required in the consolidated statement of financial position? A) NCI will decrease by $239,500. B) NCI will decrease by $95,800. C) Goodwill will increase by $620,000. D) Goodwill will increase by $124,000. Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 8.5 Explain the accounting impact of a change in ownership interest.

5) On January 1, 2022, Pop Limited purchased 60% of the 200,000 outstanding shares of Shoppe Inc. for $1,200,000. On January 1, 2025, Pop purchased another 50,000 shares of Shoppe for $550,000. The following information was extracted from the separate-entity financial records of Shoppe. January1, 2022 $ 250,000 650,000 10 years $ 450,000 750,000

Carrying value of the patent Fair value of the patent Remaining useful life of the patent Common shares Retained earnings

January 1, 2025 $ 175,000 575,000 7 years $ 450,000 1,975,000

For both acquisitions, the carrying value of the net assets was equal to their fair value with the exception of the patent above. There were no intercompany transactions between Pop and Shoppe. Required: a) Determine the balance of the goodwill immediately after the second purchase. b) Calculate the NCI balance on the consolidated SFP immediately after the second purchase.

Answer: a) Determine the balance of the goodwill immediately after the second purchase. Goodwill would not change as a result of the second purchase. It would be based on the acquisition at January 1, 2022: Purchase price Implied value ($1,200,000/60%) Less the carrying value: Common shares Retained earnings Acquisition differential Allocated to the patent FVD Goodwill

1,200,000

2,000,000

450,000 750,000 800,000 (400,000) 400,000

b) Calculate the NCI balance on the consolidated SFP immediately after the second purchase. First, we need to determine the NCI balance at December 31, 2024. NCI at January 1, 2022 Equity pickup would be: Retained earnings at Jan. 1, 2025 Retained earnings at acquisition Unadjusted change in retained earnings Less the FVD amortization to date Patent ($400,000/10 years × 3) Adjusted change in retained earnings Percentage to NCI NCI balance immediately before the second purchase Less the additional shares transferred from Shoppe to Pop* ($1,242,000 × 50,000/80,000) NCI immediately after the second share purchase

800,000

$ 1,975,000 750,000 1,225,000 (120,000) 1,105,000 40%

442,000 1,242,000 (776,250) $ 465,750

*After the first purchase, NCI held 80,000 shares (40% of 200,000). The second purchase transferred 50,000 shares to Pop. After the second acquisition, NCI holds 30,000 shares, which represents 15% of Shoppe.

Alternate calculation of NCI Carrying value of Shoppe at Jan. 1, 2025 Common shares Retained earnings Adjusted for the unamortized FVD on the patent ($400,000 − ($400,000/10 × 3 years) Goodwill Fair value of Shoppe NCI's portion (30,000/120,000 shares)

450,000 1,975,000

280,000 400,000 $ 3,105,000 $ 465,750

15%

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 8.5 Explain the accounting impact of a change in ownership interest.

6) On January 1, 2023, Glass Ltd. acquired 30% of Ceiling Inc. for $475,000. This investment was correctly classified as an associate. At that time, the shareholders' equity of Ceiling consisted of $250,000 in common shares and $200,000 in retained earnings. The entire acquisition differential was allocated to a patent with a useful life of 8 years. On January 1, 2026, Glass Ltd. acquired an additional 10% of Ceiling Inc. for $185,000. At that time, the shareholders' equity of Ceiling consisted of $ 250,000 in common shares and $500,000 in retained earnings. The entire acquisition differential was allocated to a patent which had a remaining useful life of 5 years. For the year ending December 31, 2026, Ceiling reported net income of $350,000 and declared and paid dividends of $90,000. Required: Calculate the balance in the investment in Ceiling account at December 31, 2026. Answer: First acquisition Purchase price (30%) Less carrying value of net assets: Common shares Retained earnings

$ $

% purchased by Glass Acquisition differential Fair value difference: Patent Goodwill

250,000 200,000 450,000 30%

135,000 340,000

475,000

340,000 0

Investment in Ceiling account immediately before the second purchase: Initial investments Add the equity pickup: Retained earnings at Jan 1, 2026 Retained earnings at acquisition Unadjusted change since acquisition Less the amortization to date on the patent FVD (340,000/8 years × 3 years) Adjusted change in retained earnings Percentage belonging to Glass Investment balance at January 1, 2026

475,000

51,750 526,750

$ 500,000 200,000 300,000 (127,500) 172,500 30%

Second acquisition Investment balance at January 1, 2026 Purchase of additional 10% at January 1, 2026 Add Glass's share of net income ($350,000 × 40%) Less Glass's share of dividends ($90,000 × 40%) Amortization of the patent FVD: Patent—1st purchase ($340,000/8 years) Patent—2nd purchase (Note 1: $110,000/5 years) Investment balance at December 31, 2026 Note 1: Second purchase price (10%) Less carrying value of net assets: Common shares Retained earnings

% purchased by Glass Acquisition differential Fair value difference: Patent Goodwill

526,750 185,000 140,000 (36,000)

(42,500) (22,000) 751,250

185,000

250,000 500,000 750,000 10%

75,000 110,000

110,000 0

Diff: 3 Type: ES Taxonomy Category: Analyzing Learning Outcome: 8.5 Explain the accounting impact of a change in ownership interest.

8.6 Analyze the purchase price and calculate goodwill for subsidiaries with outstanding preferred shares. 1) When calculating consolidated net income attributable to the NCI, which of the following statements is correct for a subsidiary with preferred shares owned by the NCI? A) If the preferred shares are non-cumulative, net income is adjusted by the dividends allocated to the preferred shares, regardless of whether or not dividends are declared. B) If the preferred shares are cumulative, net income is adjusted only in years where dividends are declared in the year. C) No adjustment is made to net income for dividends related to preferred shares. D) If the preferred shares are cumulative, net income is adjusted whether or not the dividends are declared. Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 8.6 Analyze the purchase price and calculate goodwill for subsidiaries with outstanding preferred shares.

2) On January 1, 2025, EMO Ltd. purchased 80% of the common shares of SOK Inc. for $1,550,000. On the acquisition date, SOK's shareholders' equity was as follows: Common shares (100,000 shares) Preferred shares (20,000 shares) non-voting, cumulative, $1.50 dividends, redemption value of $7.00 Retained earnings

$ 500,000 125,000 960,000

There were no fair value differentials at acquisition. SOK's net income for 2025 was $190,000. SOK paid dividends of $90,000 on November 15, 2025 for 2025, 2024 and 2023 dividends What amount represents the goodwill resulting from this acquisition? A) $492,500 B) $90,000 C) $477,500 D) $105,000 Answer: A

Diff: 2 Type: MC Taxonomy Category: Applying Learning Outcome: 8.6 Analyze the purchase price and calculate goodwill for subsidiaries with outstanding preferred shares.

3) On January 1, 2026, Heel Inc. purchased 65% of the common shares of Knuckle Ltd. for $275,000. At acquisition, Knuckle's shareholders' equity consisted of: Common shares (10,000 shares) Preferred shares (5,000 shares) Retained earnings

125,000 25,000 165,000

The preferred shares are $1.00, non-cumulative with a liquidation value of $1.04. Dividends have not been declared for the past two years. The carrying value of the net assets was equal to the fair value with the exception of the accounts receivable, which was overvalued by $20,000 and inventory, which was undervalued by $40,000. Knuckle's net income for the year ending December 31, 2026 was $300,000, and Knuckle declared and paid dividends of $25,000. Heel earned income of $550,000 and paid dividends of $25,000 for the year ending December 31, 2026. Required: a) Prepare an analysis of the purchase price, and calculate goodwill. b) Calculated consolidated net income attributable to Heel and the NCI for the year ending December 31, 2026. c) Calculate NCI that would appear on the consolidated SFP for the year ending December 31, 2026. Answer: a) Prepare an analysis of the purchase price, and calculate goodwill. Purchase price (65%) Implied value (100%) Less carrying value of net assets: Common shares (Note 1) Retained earnings

$ 275,000 $ 423,077 $ 124,000 165,000

Acquisition differential Fair value differential: Accounts receivable Inventory Goodwill Note 1: Common share value Redemption value of preferred shares (($25,000 × 1.04) — $25,000) Claim of preferred shareholders

289,000 134,077

20,000 (40,000) 114,077

125,000

1,000 124,000

1,000

b) Calculated consolidated net income attributable to Heel and the NCI for the year ending December 31, 2026. Consolidated Net Income Heel's net income Less: dividends (Note 2) Knuckle's net income Less: Amortization of fair value differentials Accounts receivable Inventory Knuckle's adjusted net income Consolidated net income

$ 300,000 20,000 (40,000)

Attributable to Heel ($537,000 + ($280,000 − $5,000) × 65%)) Attributable to NCI (35% × ($280,000 − $5,000) + 5,000) Note 2: Dividends Dividends declared and paid Preferred dividends ($1 × 5,000 shares) Dividends to common shareholders '% owned by parent Dividends paid to Patrick

$ 550,000 (13,000) 537,000

280,000 $ 817,000 $ 715,750 $ 101,250

$ $ $

25,000 5,000 20,000 65% 13,000

c) Calculate the NCI that would appear on the consolidated SFP for the year ending December 31, 2026. NCI at the date of acquisition Common shares ($125,000 × 35%) Preferred shares (100% × ($25,000 × 1.04)

Add: Net income attributable to NCI Less: Dividends attributable to NCI ($5,000 preferred shares + $20,000 × 35% common shares) NCI at the end of the year (on the SFP)

43,750 26,000 69,750 101,250 (12,000) $ 159,000

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 8.6 Analyze the purchase price and calculate goodwill for subsidiaries with outstanding preferred shares.

8.7 Compare and discuss the differences in accounting between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) for other reporting issues. 1) How does ASPE treat dividends declared by the subsidiary in preparing the consolidated cash flow statement? A) All dividends declared by the subsidiary, whether to the NCI or the parent, are treated as a reduction financing cash outflows. B) The dividends declared by the subsidiary belonging to the NCI are treated as a reduction in financing cash outflow. C) Dividends declared by the subsidiary are eliminated and, therefore, do not need to be adjusted in the consolidated cash flow statement. D) The dividends declared by the subsidiary belonging to the NCI are treated as a reduction in operating cash outflow. Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 8.7 Compare and discuss the differences in accounting between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) for other reporting issues.

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 9 Foreign Currency Transactions 9.1 Account for foreign currency transactions and balances for both monetary and nonmonetary items. 1) How are the effects of exchange rate fluctuations on accounts payable accounted for under IFRS? A) A loss is recognized immediately; gains are deferred until payment of the accounts payable is received. B) Gains and losses are deferred until payment of the accounts payable is received. C) Gains and losses are calculated at each reporting period and recognized immediately. D) Gains and losses are calculated at each reporting period, recognized in other comprehensive income (OCI) until payment is received. When payment is received, the amount in accumulated OCI is transferred to retained earnings. Answer: C Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 9.1 Account for foreign currency transactions and balances for both monetary and nonmonetary items.

2) Which of the following meets the definition of a non-monetary item? A) Prepaid expense B) Long-term debt C) Dividends payable D) Cash Answer: A

Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 9.1 Account for foreign currency transactions and balances for both monetary and nonmonetary items.

3) On January 1, 2024, Cindy Inc. issued €1,000,000 (Euros) of bonds. The bonds are due on December 31, 2026. Over the life of the bond payable, the exchange rates were as follows: January 1, 2024 December 31, 2024 December 31, 2025 December 31, 2026

€1 = €1 = €1 = €1 =

Cdn. $ 1.45 Cdn. $ 1.40 Cdn. $ 1.50 Cdn. $ 1.55

What is the exchange rate gain (loss), in Cdn. dollars, Cindy Inc. will recognize in income for the year ending December 31, 2026? A) $50,000 B) $(50,000) C) $(100,000) D) $100,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 9.1 Account for foreign currency transactions and balances for both monetary and non-

monetary items.

4) Booth Ltd., a Canadian company, sold inventory to a company in London, England for £1,000,000, which translated to $1,670,000 Cdn. Three months later, Booth received full payment on the account receivable, which at the time was valued at $1,770,000 Cdn. How should the resulting difference of $100,000 Cdn. between the date of sale and the date payment is received be treated? A) As an increase in sales B) As a decrease in sales C) As a decrease in cost of sales D) As a realized gain in net income Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 9.1 Account for foreign currency transactions and balances for both monetary and nonmonetary items.

5) On December 2, 2024, Pickerel Inc. purchased a piece of equipment for 200,000 Swiss Francs (CHF) with payment required on April 30, 2025. Pickerel has a December 31 year end. Below are the relevant exchange rates: December 2, 2024 December 31, 2024 April 30, 2025

$1 = $1 = $1 =

CHF 0.74 CHF 0.79 CHF 0.82

Which of these amounts would be reported as the exchange gain (loss), in Cdn. dollars, in Pickerel Inc.'s December 31, 2025 year end? Amounts are rounded. A) An exchange gain of $6,000 B) An exchange loss of $6,000 C) An exchange gain of $9,262 D) An exchange loss of $9,262 Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 9.1 Account for foreign currency transactions and balances for both monetary and nonmonetary items.

6) On December 1, 2025, Page Ltd. entered into an agreement to sell inventory to an Australian company for 200,000 Australian dollars (AUD). The inventory was delivered on December 15, 2025, with the amount due on February 1, 2026. Both companies have a December 31 year end. The relevant exchange rates are below: December 1, 2025 December 15, 2025 December 31, 2025 February 1, 2026

AUD 1 = AUD 1 = AUD 1 = AUD 1 =

$0.94 $0.96 $0.97 $0.90

Required: Prepare the journal entries (in Cdn. dollars) for this transaction for each of the dates listed above. Answer: December 1, 2025 No entry required as the transaction has not occurred. A contract has been entered into but nothing has been delivered. December 15, 2025 Dr. Accounts receivable Cr. Sales To record the sale of inventory (AUD 200,000 × 0.96)

192,000

December 31, 2025 Dr. Accounts receivable 2,000 Cr. Foreign exchange gain 2,000 To record the increase in value for the accounts receivable (192,000 − (AUD 200,000 × 0.97)) February 1, 2026 Dr. Cash 180,000 Dr. Foreign exchange loss 14,000 Cr. Accounts receivable 194,000 To record the cash received in Cdn. dollars (AUD 200,000 × 0.90) and remove the accounts receivable (AUD 200,000 × 0.97) Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 9.1 Account for foreign currency transactions and balances for both monetary and nonmonetary items.

7) On November 15, 2024, Melville Winery Ltd (MWL) ordered a large volume of wine from a California winery for USD$950,000. The wine was delivered on December 10, 2024. The accounts payable was due on January 31, 2025. The relevant exchange rates are: November 15, 2024 December 10, 2025 December 31, 2025 February 1, 2026

$1 = $1 = $1 = $1 =

USD $0.74 USD $0.76 USD $0.78 USD $0.75

Required: Prepare the journal entries (in Cdn. dollars) for this transaction for each of the dates listed above. Answer: November 15, 2024 No entry required as the inventory is not received until December 10, 2024. December 10, 2025 Dr. Inventory 1,250,000 Cr. Accounts payable 1,250,000 To record the receipt of the inventory and set up the accounts payable (USD950,000/0.76) December 31, 2025 Dr. Accounts payable 32,051 Cr. Foreign exchange gain 32,051 To record the revaluation of the accounts payable (1,250,000 − (USD950,000/0.78)) February 1, 2026 Dr. Accounts payable 1,217,949 Dr. Foreign exchange loss 48,718 Cr. Cash 1,266,667 To record the payment of the accounts payable ( Cash USD 950,000/0.75, A/P USD 950,000/0.78)

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 9.1 Account for foreign currency transactions and balances for both monetary and nonmonetary items.

8) On November 15, 2024, Melville Winery Ltd (MWL) sold a large volume of wine to a California winery for US$950,000. The wine was delivered on December 10, 2024. The wine had a cost of sales of $695,000 Cdn. The accounts payable was due on January 31, 2025. The cash payment was received on January 31, 2025, as expected. The relevant exchange rates are: November 15, 2024 December 10, 2025 December 31, 2025 February 1, 2026

USD $1 = USD $1 = USD $1 = USD $1 =

1.32 1.29 1.28 1.34

Required: Prepare the journal entries for this transaction for each of the dates listed above. Answer: November 15, 2024 No entry required as the inventory has not been delivered yet. December 10, 2025 Dr. Accounts receivable 1,225,500 Cr. Sales 1,225,500 Dr. Cost of sales 695,000 Cr. Inventory 695,000 To record the delivery of the inventory. Set up the accounts receivable (USD950,000 × 1.29) December 31, 2025 Dr. Foreign exchange loss 9,500 Cr. Accounts receivable 9,500 To record the revaluation of the accounts receivable (1,225,500 − (USD950,000 × 1.28)) February 1, 2026 Dr. Cash 1,273,000 Cr. Foreign exchange gain 57,000 Cr. Accounts receivable 1,216,000 To record the receipt of the account receivable (Cash USD 950,000 × 1.28, A/R USD 950,000 × 1.28)

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 9.1 Account for foreign currency transactions and balances for both monetary and nonmonetary items.

9.2 Explain hedging, the objectives of hedging strategies, and hedge accounting. 1) Billy Corporation does a lot of business in the United States. Billy has a number of accounts receivable and accounts payable that are settled in US dollars. What type of hedge does this create? A) Cash flow hedge B) Natural hedge C) Fair value hedge D) Billy does not have a hedge related to these accounts held in USD dollars. Answer: B Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 9.2 Explain hedging, the objectives of hedging strategies, and hedge accounting.

2) Which of the following statements about hedge accounting is true? A) Hedge accounting is mandatory when a company reports under IFRS. B) Hedge accounting is mandatory when a company reports under ASPE or IFRS. C) Hedge account is mandatory, only when a receivable is being hedged. D) Hedge accounting is optional for both ASPE and IFRS. Answer: D

Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 9.2 Explain hedging, the objectives of hedging strategies, and hedge accounting.

3) Which of the following is NOT a qualified hedged item? A) Accounts receivable B) A forecasted transaction with a low probability. C) Unrecognized firm commitment D) A highly probable forecasted transaction Answer: B

Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 9.2 Explain hedging, the objectives of hedging strategies, and hedge accounting.

4) Assuming a company applies hedge accounting and reports under IFRS, which of the following statements about hedging a foreign currency risk on a contracted future credit sale is true? A) The hedge must be accounted for using a cash flow hedge. B) The hedge is not eligible for hedge accounting until the sale actually occurs. C) The hedge must be accounted for using a fair value hedge. D) The company can account for the hedge using either a cash flow hedge or a fair value hedge. Answer: D Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 9.2 Explain hedging, the objectives of hedging strategies, and hedge accounting.

9.3 Account for foreign currency forward contracts using both the gross and net methods. 1) Which of the following statements is true? A) The gross method of accounting for forward contracts will result in a different net exchange gain (loss) when compared to the net method. B) Both the gross and net methods of accounting for forward contracts require an entry when the forward contract is entered into. C) The foreign exchange gain (loss) will be the same regardless of whether the gross or net method is used to account for a forward contract. D) When using the net method to account for forward contracts, there will be a forward contract receivable and forward contract payable reported separately on the statement of financial position (SFP). Answer: C Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 9.3 Account for foreign currency forward contracts using both the gross and net methods.

2) PPR Ltd. is a Canadian retailer specializing in importing high-quality fashions from Milan, Italy. On November 15, 2024, PPR ordered merchandise from a Milan fashion house for €2,000,000 (Euros). The merchandise was received on January 15, 2025, payable within 60 days of receipt. PPR paid for this merchandise on March 14, 2025. On November 15, 2024, in order to reduce the foreign exchange risk associated with the order, PPR entered into a forward exchange contract to receive €2,000,000 on March 14, 2025. PPR has chosen not to apply hedge accounting. PPR has a December 31 year end. The relevant exchange spot rates and forward rates for contracts settling on March 14, 2025 are:

November 15, 2024 December 31, 2024 January 15, 2025 March 14, 2025 * For contracts expiring on March 14, 2025

Spot rate €1 = 1.375 €1 = 1.385 €1 = 1.365 €1 = 1.395

Forward rates* 1.412 1.430 1.405 n/a

Required: a) Prepare the journal entries (in Cdn. dollars) for the forward contract and the order using the gross method. b) Prepare a proof of the overall gain (loss), in Cdn. Dollars, on the forward contract.

Answer: a) Prepare the journal entries for the forward contract and the order using the gross method. November 15, 2024 Dr. Due from broker (Euros) 2,824,000 Cr. Due to broker (Cdn.) To record the forward contract to received 2,000,000 Euros on March 14, 2025

2,824,000

December 31, 2024 Dr. Due from broker (Euros) 36,000 Cr. Exchange gain on forward contract 36,000 To increase the value of the Euros based on the forward contract rates (€2,000,000 × 1.430) − 2,824,000) January 15, 2025 Dr. Inventory 2,730,000 Cr. Accounts payable (€2,000,000) 2,730,000 To record the inventory at the spot rate on the day the inventory is received (€2,000,000 × 1.365) Note that there is no requirement to update the forward contract when we receive the inventory since the forward contract would be updated on March 14 (which is within the first interim statement dates). March 14, 2025 Dr. Due to broker Cr. Cash (Cdn.) To settle the due to broker account.

2,824,000 2,824,000

Dr. Cash (Euros) 2,790,000 Dr. Exchange loss on forward contract 70,000 Cr. Due from broker (Euros) 2,860,000 To update the forward contract on the settlement date ((€2,000,000 × 1.43) − (€2,000,000 × 1.395)) and settle the contract to received €2,000,000 (valued at 2,790,000 Cdn.). Dr. Accounts payable 2,730,000 Dr. Foreign exchange loss on translation 60,000 Cr. Cash (Euros) To pay the accounts payable and record the loss on the foreign exchange

2,790,000

b) Prepare a proof of the overall gain (loss) on the forward contract. Value agreed to pay for €2,000,000 Value of €2,000,000 received on March 14 Net loss on forward contract

Gain recorded on December 31, 2024 Loss recorded on March 14, 2025 Net loss on forward contract

2,824,000 2,790,000 (34,000) 36,000 (70,000) (34,000)

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 9.3 Account for foreign currency forward contracts using both the gross and net methods.

3) Alderage Ltd. is a Canadian manufacturer located in Winnipeg specializing in manufacturing highquality fashions. On January 15, 2024, Alderage received an order for merchandise from an Australian retailer for A$2,000,000 (Australian dollars (A$)). The merchandise was delivered to the Australian retailer on March 1, 2024 with a requirement to pay within 30 days. Alderage received payment on March 31, 2024. The merchandise delivered had a cost of $850,000 Cdn. On January 15, 2024, in order to reduce the foreign exchange risk associated with the sale, Alderage enters into a forward exchange contract to deliver A$2,000,000 on March 31, 2024. Alderage has chosen not to apply hedge accounting. Alderage has a February 28 year end. The relevant exchange spot rates and forward rates for contracts settling on March 31, 2024, are:

January 15, 2024 February 28/ March 1, 2024 March 31, 2024 * For contracts expiring on March 31, 2024

Spot rate A$1 = 0.967 A$1 = 0.945 A$1 = 0.936

Forward rates* 0.955 0.962 n/a

Required: a) Prepare the journal entries (in Cdn. dollars) for the forward contract and the order using the net method. b) Prepare a proof of the overall gain (loss), in Cdn. dollars, on the forward contract. Answer: a) Prepare the journal entries for the forward contract and the order using the net method. January 15, 2024 No entry required under the net method. February 28, 2024 Dr. Exchange loss on forward contract 14,000 Cr. Forward contract 14,000 To revalue the forward contract at year end ((A2,000,000 × 0.955) − (A2,000,000 × 0.962)) March 1, 2024 Dr. Accounts receivable Cr. Sales Dr. Cost of sales Cr. Inventory

1,890,000 850,000

March 31, 2024 Dr. Cash (A$) 1,872,000 Dr. Exchange loss 18,000 Cr. Accounts receivable To record the receipt of the payment on the merchandise. (A2,000,000 × 0.936)

1,890,000 850,000

1,890,000

Dr. Forward contract Dr. Cash (Cdn.) Cr. Cash (A$) Cr. Exchange gain on forward contract To record the settling of the forward contract

14,000 1,910,000 1,872,000 52,000

b) Prepare a proof of the overall gain (loss) on the forward contract. Value agreed to receive for A$2,000,000 (fwd contract) Value of A$2,000,000 received on March 31 (from customer) Net gain on forward contract Loss recorded on Feb. 28, 2024 Gain recorded on March 31, 2024 Net gain on forward contract

$ $ $ $

1,910,000 1,872,000 38,000 (14,000) 52,000 38,000

Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 9.3 Account for foreign currency forward contracts using both the gross and net methods.

9.4 Account for a cash flow hedge for a forecasted transaction. 1) On March 1, 2024, Brennan Ltd. ordered a piece of equipment from a company in the United States for USD$750,000. On the same day, Brennan entered into a forward contract to receive USD$750,000 on August 30, 2024. The equipment was delivered on July 31, 2024, and final payment was made on August 30, 2024. Brennan has a June 30 year end. The relevant exchange rates are: Forward Spot rate rates* March 1, 2024 USD $1 = 1.270 1.325 June 30, 2024 USD $1 = 1.290 1.310 July 31, 2024 USD $1 = 1.300 1.285 August 30, 2024 USD $1 = 1.280 n/a * For contracts expiring on August 30, 2024 Brennan has designated the forward contract as a cash flow hedge. What amount of gain (loss) (in Cdn. dollars) should be recognized as other comprehensive income on June 30, 2024? A) $ 11,250 B) $(11,250) C) $(26,250) D) $15,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 9.4 Account for a cash flow hedge for a forecasted transaction.

2) On March 1, 2024, Brennan Ltd. ordered a piece of equipment from a company in the United States for USD$750,000. On the same day, Brennan entered into a forward contract to receive USD$750,000 on August 30, 2024. The equipment was delivered on July 31, 2024, and final payment was made on August 30, 2024. Brennan has a June 30 year end. The relevant exchange rates are:

March 1, 2024 USD $1 = June 30, 2024 USD $1 = July 31, 2024 USD $1 = August 30, 2024 USD $1 = * For contracts expiring on August 30, 2024

Spot rate 1.270 1.290 1.300 1.280

Forward rates* 1.325 1.310 1.285 n/a

Brennan has designated the forward contract as a cash flow hedge. What is the carrying value (in Cdn. dollars) of the equipment as of August 30, 2024? A) $1,005,000 B) $945,000 C) $993,750 D) $1,008,750 Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 9.4 Account for a cash flow hedge for a forecasted transaction.

3) On March 1, 2024, Brennan Ltd. ordered a piece of equipment from a company in the United States for USD$750,000. On the same day, Brennan entered into a forward contract to receive USD$750,000 on August 30, 2024. The equipment was delivered on July 31, 2024, and final payment was made on August 30, 2024. Brennan has a June 30 year end. The relevant exchange rates are:

March 1, 2024 USD $1 = June 30, 2024 USD $1 = July 31, 2024 USD $1 = August 30, 2024 USD $1 = * For contracts expiring on August 30, 2024

Spot rate 1.270 1.290 1.300 1.280

Forward rates* 1.325 1.310 1.285 n/a

Brennan has designated the forward contract as a cash flow hedge. What is the net exchange gain (loss), in Cdn. Dollars, that Brennan would record for the period of July 1, 2024 to August 30, 2024? A) A foreign exchange gain of $22,500 B) No gain or loss since any change in the value of the forward contract would adjust the equipment value. C) A foreign exchange loss of $3,750 D) A foreign exchange loss of $22,500

Answer: C

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 9.4 Account for a cash flow hedge for a forecasted transaction.

4) On November 15, 2024, Sweets Ltd. accepted a sales order from a company in the United States for USD$250,000. On the same day, Sweets entered into a forward contract to deliver USD$250,000 on February 15, 2025. Sweets has a December 31 year end. The inventory was delivered on January 15, 2025, and the U.S. company paid the account on February 15, 2025. The relevant exchange rates are: Forward Spot rate rates* November 15, 2024 USD $1 = 1.270 1.325 December 31, 2024 USD $1 = 1.290 1.310 January 15, 2025 USD $1 = 1.300 1.285 February 15, 2025 USD $1 = 1.280 n/a * For forward contracts expiring on February 15, 2025. Sweets has designated the forward contract as a cash flow hedge. What amount (in Cdn. dollars) should be recognized as other comprehensive income on December 31, 2024? A) $(3,750) B) $(10,000) C) $3,750 D) $10,000 Answer: C Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 9.4 Account for a cash flow hedge for a forecasted transaction.

5) On November 15, 2024, Sweets Ltd. accepted an order from a company in the United States for USD$250,000. On the same day, Sweets entered into a forward contract to deliver USD$250,000 on February 15, 2025. Sweets has a December 31 year end. The inventory was delivered on January 15, 2025, and the company paid the account on February 15, 2025. The relevant exchange rates are: Forward Spot rate rates* November 15, 2024 USD $1 = 1.270 1.325 December 31, 2024 USD $1 = 1.290 1.310 January 15, 2025 USD $1 = 1.300 1.285 February 15, 2025 USD $1 = 1.280 n/a * For forward contracts expiring on February 15, 2025. Sweets has designated the forward contract as a cash flow hedge. What amount (in Cdn. dollars) reflects the value of the sales that would be recorded as a result of the transactions above? A) $325,000 B) $335,000 C) $315,000

D) $328,750 Answer: B

Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 9.4 Account for a cash flow hedge for a forecasted transaction.

6) On March 1, 2024, Brennan Ltd. ordered a piece of equipment from a company in the United States for USD$750,000. On the same day, Brennan entered into a forward contract to receive USD$750,000 on August 30, 2024. The equipment was delivered on August 30, 2024, and final payment was made on the same day. Brennan has a June 30 year end. The relevant exchange rates are:

Spot rate March 1, 2024 USD $1 = 1.270 June 30, 2024 USD $1 = 1.290 August 30, 2024 USD $1 = 1.280 * For contracts expiring on August 30, 2024

Forward rates* 1.325 1.310 n/a

Brennan has designated the forward contract as a cash flow hedge. Required: Prepare the journal entries (in Cdn. dollars) for the transactions above. Assume Brennan uses the gross method to account for forward contracts. Answer: March 1, 2024 Dr. Due from broker (USD) 993,750 Cr. Due to broker (Cdn) To record the forward contract to receive USD750,000 (USD750,000 × 1.325)

993,750

June 30, 2024 Dr. Exchange loss on forward contract—OCI 11,250 Cr. Due from broker (USD) 11,250 To revalue the forward contract at the year-end forward contract rate (993,750 − (USD750,000 × 1.310)) Dr. Cash flow hedge reserve (equity) 11,250 Cr. Exchange loss on forward contract—OCI 11,250 To close the foreign exchange loss to the cash flow hedge reserve at the end of the year. August 30, 2024 Dr. Exchange loss on forward contract—OCI 22,500 Cr. Due from broker (USD) 22,500 To revalue the forward contract at the year-end forward contract rate (USD750,000 × (1.310 − 1.280)) Dr. Equipment 960,000 Cr. Accounts payable 960,000 To record the receipt of the equipment and set up the accounts payable (USD 750,000 × 1.280) Dr. Equipment Cr. Cash flow hedge reserve To reclassify losses on the forward contract to the equipment

33,750

Dr. Due to broker Cr. Cash (Cdn) To settle the amount owing to the broker

993,750

Dr. Cash (USD) Cr. Due from broker (USD) To settle the amount receivable from the broker

960,000

Dr. Accounts payable 975,000 Cr. Cash (USD) To pay the accounts payable with the USD received from the broker.

993,750

960,000

Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 9.4 Account for a cash flow hedge for a forecasted transaction.

9.5 Account for a fair value hedge for a firm commitment. 1) On September 30, 2024, Kilt. Inc., a Canadian company based in Ontario, ordered merchandise for USD$650,000. The merchandise was delivered on November 30, 2024 with full payment required at that time. Kilt has an October 31 year end. To reduce the risk associated with the foreign exchange fluctuation, Kilt entered into a forward contract on September 30, 2024, to purchase USD$650,000 on November 30, 2024. The forward contract was classified as a fair value hedge. The relevant exchange rates are:

Spot rate September 30, 2024 USD $1 = 1.355 October 31, 2024 USD $1 = 1.320 November 30, 2024 USD $1 = 1.340 * For contracts expiring on November 30, 2024

Forward rates* 1.375 1.335 n/a

At what value would the merchandise be recorded on November 30, 2024? A) $871,000 B) $861,250 C) $893,750 D) $880,750 Answer: B Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 9.5 Account for a fair value hedge for a firm commitment.

2) On September 30, 2024, Kilt. Inc., a Canadian company based in Ontario, ordered merchandise for USD$650,000. The merchandise was delivered on November 30, 2024 with full payment required at that time. Kilt has an October 31 year end. To reduce the risk associated with the foreign exchange fluctuation, Kilt entered into a forward contract on September 30, 2024, to purchase USD$650,000 on November 30, 2024. The forward contract was classified as a fair value hedge. The relevant exchange rates are:

September 30, 2024 USD $1 = October 31, 2024 USD $1 = November 30, 2024 USD $1 = * For contracts expiring on November 30, 2024

Spot rate 1.355 1.320 1.340

Forward rates* 1.375 1.335 n/a

What is the value of the net commitment asset/liability on October 31, 2024? A) A debit balance of $22,750 B) A credit balance of $22,750 C) No commitment liability is recorded until the merchandise is received. D) A credit balance of $26,000 Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 9.5 Account for a fair value hedge for a firm commitment.

3) On September 30, 2024, Skirt. Inc., a Canadian company based in Regina, Saskatchewan, ordered merchandise from a British supplier for £500,000 (British pounds). The merchandise was delivered on November 30, 2024 with full payment required at that time. Skirt has an October 31 year end. To reduce the risk associated with the foreign exchange fluctuation, Skirt entered into a forward contract on September 30, 2024, to purchase £500,000 on November 30, 2024. The forward contract was classified as a fair value hedge. The relevant exchange rates are:

Spot rate September 30, 2024 £1= 1.455 October 31, 2024 £1= 1.420 November 30, 2024 £1= 1.440 * For contracts expiring on November 30, 2024

Forward rates* 1.435 1.415 n/a

Required: Assuming the gross method is used for the forward contract, prepare all of the journal entries (in Cdn. dollars) for these events. Answer: September 30, 2024 Dr. Due from broker (£) Cr. Due to broker (Cdn.) To record the forward contract using the gross method October 31, 2024 (year end) Dr. Exchange loss on forward contract Cr. Due from broker (£) To update the forward contract at year end.

717,500

10,000

717,500

10,000

Dr. Firm commitment to purchase merchandise 17,500 Cr. Exchange gain on foreign currency 17,500 To update the firm commitment at the year-end spot rate (£500,000 × (1.455 − 1.420))

November 30, 2024 Dr. Due from broker (£) 12,500 Cr. Exchange gain on foreign currency 12,500 To update the forward contract at the spot rate on settlement date (500,000 × (1.445 − 1.415) Dr. Exchange loss on foreign currency Cr. Firm commitment to purchase merchandise To update the commitment liability to the spot rate

10,000

Now we settle the forward contract so we have British pounds to pay for the inventory. Dr. Due to broker (Cdn) 717,500 Cr. Cash (Cdn) 717,500 Dr. Cash (£) 720,000 Cr. Due from broker (£) 720,000 To record the settling of the forward contract. Now we can pay for the inventory with the British pounds (£). We need the balance in the firm commitment to record the merchandise— it is a debit balance of 7,500 (17,500 − 10,000). Dr. Inventory 727,500 Cr. Firm commitment Cr. Cash (£) To record the receipt of the inventory and the payment in British pounds (£).

7,500 720,000

Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 9.5 Account for a fair value hedge for a firm commitment.

9.6 Compare and discuss the differences in accounting for foreign currency transactions and hedges between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE). 1) Which of the following statements is FALSE? A) ASPE does not have other comprehensive income; therefore, all foreign exchange gains are reported in net income. B) Hedge accounting is optional under ASPE but once used, it cannot be discontinued electively. C) Under ASPE, forward contracts are the only eligible hedging instrument. D) ASPE does not have other comprehensive income; therefore, all foreign exchange gains (losses) are recorded directly to a shareholders' equity account and never flow through income. Answer: D Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 9.6 Compare and discuss the differences in accounting for foreign currency transactions and hedges between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE).

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 10 Translation and Consolidation of Foreign Operations 10.1 Determine the functional currency for a foreign operation and the appropriate translation method required to convert a foreign operation's financial statements to the presentation currency. 1) Which of the following factors is a primary indicator under IFRS in determining the functional currency of a subsidiary? A) High level of intercompany sales with the parent company B) The parent financing the subsidiary's operations C) The subsidiary retaining any surplus in Canadian dollars D) The currency that influences the selling price of inventory Answer: D

Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 10.1 Determine the functional currency for a foreign operation and the appropriate translation method required to convert a foreign operation's financial statements to the presentation currency.

2) Which of the following would be an indication that the functional currency of the subsidiary is the same as the parent's (i.e., the Canadian dollar)? A) The parent has controlling interest in the subsidiary. B) Sales price of the subsidiary's merchandise is set by the local markets. C) The parent provides all the financing to the subsidiary; the subsidiary pays interest in Canadian dollars. D) Wages and salaries are paid in local currency and determined by the local union. Answer: C

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 10.1 Determine the functional currency for a foreign operation and the appropriate translation method required to convert a foreign operation's financial statements to the presentation currency.

3) NKC Ltd. has a foreign subsidiary, CKN Inc. located in Brazil. In the past, CKN focused on its local market, setting sales prices in Brazil Real (R$), purchasing inputs locally, and financing its operations with operating income and through local borrowings. Last year, CKN struggled with supplier issues and acquiring local financing, and lost two key managers. This resulted in some changes in the overall operation of the company. In the current year, in order to stabilize supplier issues and to take advantage of the strong Canadian dollar, NKC provided all the financing to CKN, with interest to be paid to NKC in Canadian dollars. To stabilize the supplier issues, CKN began using all of NKC's suppliers, which are located in Canada and require payment in Canadian dollars. As well, NKC's management will take over the decision-making process rather than hire managers to replace those that have left. This will be the first year that CKN will sell its products in Canada. Which of the following statements reflects the correct approach to account for CKN's results in the current year? A) The functional currency of CKN is the Canadian dollar in the current year. This change in functional currency should be accounted for prospectively. B) The functional currency of CKN is the Brazil Real in both the past and current year. There is no change in functional currency. C) The functional currency of CKN is the Canadian dollar in the current year. This change in functional currency should be accounted for retrospectively. D) The functional currency of CKN is the Brazil Real in the current year. This change in functional currency should be accounted for prospectively. Answer: A Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 10.1 Determine the functional currency for a foreign operation and the appropriate translation method required to convert a foreign operation's financial statements to the presentation currency.

4) Describe how the functional currency of a foreign subsidiary is determined. Answer: The first step in determining functional currency is to apply the primary indicators to the facts in the foreign subsidiary. There are three primary indicators to review: • Competitive forces that determine the sales price • Currency that influences the sales price • Currency that influences the cost of providing the goods (i.e., labour, materials, etc.) If the facts in the situation clearly indicate the functional currency of the subsidiary, a conclusion on functional currency can be made based on the primary indicators; steps 2 and 3 do not need to be completed. If the facts in the situation do not clearly indicate the functional currency; then, we need to move on to step 2–applying the secondary indicators. The secondary indicators are: • The currency that finances the operations of the subsidiary, • The currency in which the operating activities are usually retained in, • Are the activities an extension of the parent, • The level of intercompany transactions, • Do the cash flows of the subsidiary directly affect the parent, and • Financing of the operations of the subsidiary. Only if a conclusion on functional currency cannot be made using the secondary indicators will step 3 be considered. Step 3 requires professional judgment based on the underlying transactions and conditions. Diff: 2 Type: ES Taxonomy Category: Understanding Learning Outcome: 10.1 Determine the functional currency for a foreign operation and the appropriate translation method required to convert a foreign operation's financial statements to the presentation currency.

10.2 Translate a foreign subsidiary's financial statements when its functional currency is the Canadian dollar. 1) Assuming the subsidiary's functional currency is the Canadian dollar (the same as the parent), which of the following items would be translated at a historical rate? A) Inventory, reported at net realizable value B) Intercompany note payable C) Prepaid rent D) Preferred shares classified as debt Answer: C Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 10.2 Translate a foreign subsidiary's financial statements when its functional currency is the Canadian dollar.

2) Assuming the subsidiary's functional currency is the Canadian dollar (the same as the parent), which of the following items would be translated at the current rate at the SFP date? A) Preferred shares classified as equity B) Prepaid rent expense C) Deferred revenue D) Bond payable, maturing in 20 years Answer: D Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 10.2 Translate a foreign subsidiary's financial statements when its functional currency is the Canadian dollar.

3) Beadwork Corp, an Australian corporation, is a wholly owned subsidiary of MetFlower Inc. Beadwork sells only merchandise purchased from MetFlower. All transactions with MetFlower are denominated in Canadian dollars. While Beadwork does have access to a small local line of credit, its main source of financing is a loan from MetFlower. In the current year, the translation of the Beadwork's statements created a large foreign currency gain. Based on the information presented, what is the correct method of accounting for the translation gain? A) The translation gain should be reported in the statement of income. B) The translation gain should be reported to comprehensive income. C) The translation gain should be credited directly to the shareholders' equity account called the cumulative translation adjustment. D) The translation gain should be reported as a deferred gain on the SFP. Answer: A Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 10.2 Translate a foreign subsidiary's financial statements when its functional currency is the Canadian dollar.

4) Assuming the functional currency is the Canadian dollar, FC=PC, which of the following statements is true? A) A foreign translation gain (loss) is determined based on the change in net asset position in the year under the FC=PC method. B) Only monetary items on the statement of financial position create a foreign translation gain (loss) under the FC=PC method. C) The gain on sale of equipment will create a foreign translation gain (loss) under the FC=PC method. D) Cost of goods sold will create a foreign translation gain (loss) under the FC=PC method. Answer: B Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 10.2 Translate a foreign subsidiary's financial statements when its functional currency is the Canadian dollar.

5) Forrest Inc. is a wholly owned subsidiary of Cedar Ltd., a Canadian company. Cedar reports under IFRS with consolidated financial statements. Below are extracts from Forrest's December31, 2025, SFP, denominated in Swiss Francs (SF). SF 950,000 1,250,000 3,750,000 15,000,000 1,100,000 4,750,000 5,000,000

Cash Accounts receivable Inventory Property, plant, and equipment (net) Accounts payable Due to Cedar Ltd. Common shares Additional information:

• Cedar acquired Forrest several years ago. The exchange rate at acquisition was SF 1 = $1.15 Cdn. • Inventories were acquired when SF 1 = $1.32 Cdn. All of the inventory was written down to net realizable at the end of the year. • Property, plant, and equipment is broken down as follows: SF Building and equipment-existed at acquisition 7,500,000 Land-existed at acquisition 2,500,000 Purchased on March 15, 2024: Land 1,500,000 Building and equipment 3,500,000 15,000,000 • On March 15, 2024, the exchange rate was SF 1 = $1.29 Cdn. • When the acquisition of Forrest occurred, Cedar loaned Forrest enough funds to repay all of its current debt. The loan to Forrest only requires interest payments. • The exchange rate on December 31, 2025 is SF 1 = $1.38 Cdn. Required: Assuming Forrest's functional currency is the same as the parent, the Canadian dollar, translate the year-end balances into Canadian dollars.

Answer:

Cash Accounts receivable Inventory (Note 1) Property, plant, and equipment (net) Building and equipment—existed at acquisition Land—existed at acquisition Land—new Building and equipment—new Total property, plant, and equipment Accounts payable Due to Cedar Ltd. Common shares

Amount in SF

Exchange rate

Canadian value

950,000 1,250,000 3,750,000

1.38 1.38 1.38

$ 1,311,000 1,725,000 5,175,000

7,500,000 2,500,000 1,500,000 3,500,000 15,000,000 1,100,000 4,750,000 5,000,000

1.15 1.15 1.29 1.29

8,625,000 2,875,000 1,935,000 4,515,000 $ 17,950,000 1,518,000 6,555,000 5,750,000

1.38 1.38 1.15

Note 1—Inventory was revalued at year end; therefore, the historical rate is no longer relevant. The yearend exchange rate should be used to revalue the inventory. Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 10.2 Translate a foreign subsidiary's financial statements when its functional currency is the Canadian dollar.

6) Beach Bean Company (BBC) is a subsidiary of Common Grounds Inc. (CGI), a Canadian company that reports in Canadian dollars. BBC is located on the Island of Kauai in the United States. On December 31, 2020, CGI purchased 85% of the common shares of BBC for USD $1,250,000. The exchange rate at acquisition was USD 1 = $1.265 Cdn. The following appears on the BBC financial statements for the year ending December 31, 2025: Beach Bean Company Statement of Income For the Year Ending December 31, 2025 Sales Cost of sales Gross margin Gain on sale of equipment Expenses: Depreciation expense Other expense Net income

(in USD) 3,650,000 1,642,000 2,008,000 50,000

365,000 950,000 743,000

Beach Bean Company Statement of Financial Position As at December 31, 2025 (in USD) 2025 Cash $ 1,055,000 Accounts receivable 1,290,000 Inventory 895,000 Intangible assets 365,000 Property, plant, and equipment (net) 1,865,000 Total assets $ 5,470,000 Accounts payable 395,000 Deferred revenue 212,000 Loan payable 1,650,000 Common shares 10,000 Other shareholders' equity 3,203,000 Total liabilities and shareholders' equity $ 5,470,000

(in USD) 2024 675,000 1,035,000 850,000 365,000 2,455,000 5,380,000 600,000 195,000 1,950,000 10,000 2,625,000 5,380,000

The relevant exchange rates for USD 1 to the Canadian dollar: July 1, 2015 December 31, 2020 Average rate—month of December—2024 Average rate—last quarter of 2024 December 31, 2024 August 14, 2025 Average rate—yearly—2025 November 30, 2025 December 31, 2025 Average rate—month of December Average rate—last quarter of 2025

$1.095 1.240 1.235 1.245 1.260 1.270 1.273 1.275 1.285 1.280 1.265

Required: Assuming that BBC's functional currency is the Canadian dollar, determine the foreign exchange gain (loss) on translation for the year ending December 31, 2025.

Answer: In USD

Exchange rate

Cdn. value

Opening monetary position: Cash

675,000

Accounts receivable

1,035,000

Accounts payable Loan payable Net monetary liability position Changes to monetary position: Sales Purchases

(600,000) (1,950,000) (840,000)

1.260

3,650,000 (1,687,000)

1.273 1.273

4,646,450 (2,147,551)

Other expenses

(950,000)

1.273

(1,209,350)

Proceeds from sale of equipment

275,000

1.270

349,250

Increase in deferred revenue

17,000

1.280

21,760

(165,000)

1.275

(210,375)

Dividends declared Expected closing net monetary position

300,000

1,055,000

(1,058,400)

391,784

Actual closing net monetary position: Cash Accounts receivable

1,290,000

Accounts payable

(395,000)

Loan payable

(1,650,000)

Actual closing net monetary position

300,000

Foreign exchange loss

1.285

385,500 $

(6,284)

Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 10.2 Translate a foreign subsidiary's financial statements when its functional currency is the Canadian dollar.

7) Beach Bean Company (BBC) is a subsidiary of Common Grounds Inc (CGI), a Canadian company that reports in Canadian dollars. BBC is located on the Island of Kauai in the United States. On December 31, 2020, CGI purchased 85% of the common shares of BBC for USD $1,250,000. The exchange rate at acquisition was USD 1 = $1.265 Cdn. The following appears on the BBC financial statements for the year ending December 31, 2025: Beach Bean Company Statement of Income For the Year Ending December 31, 2025 Sales Cost of sales Gross margin Gain on sale of equipment Expenses: Depreciation expense Other expense Net income

(in USD) 3,650,000 1,642,000 2,008,000 50,000

365,000 950,000 743,000

(in USD) 2024 675,000 1,035,000 850,000 365,000 2,455,000 5,380,000 600,000 195,000 1,950,000 10,000 2,625,000 5,380,000

$1.095 1.240 1.235 1.245 1.260 1.270 1.273 1.275 1.285 1.280 1.265

Required: Assuming that BBC's functional currency is the Canadian dollar, determine the balance in Canadian dollars for the following accounts: i. Cost of sales ii. Accounting gain on sale of equipment iii. Deferred revenues iv. Sales

Answer: In USD i. Cost of sales Opening inventory Purchases

Closing inventory Cost of sales ii. Accounting gain on sale of equipment Proceeds of disposition Net carrying value Accounting gain

Cdn. value

850,000 1,687,000

1.245 $ 1.273

1,058,250 2,147,551

(895,000) 1,642,000

1.265

( 1,132,175) 2,073,626

275,000

1.270 $

349,250

225,000 50,000

1.240

279,000 70,250

212,000

1.280

271,360

1.235 $ 1.273

240,825 4,398,215 4,639,040

iii. Deferred revenues iv. Sales

Exchange rate

Prior year deferred revenue—now recognized Remaining sales Total sales

195,000 3,455,000 $ 3,650,000

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 10.2 Translate a foreign subsidiary's financial statements when its functional currency is the Canadian dollar.

8) Beach Bean Company (BBC) is a subsidiary of Common Grounds Inc (CGI), a Canadian company that reports in Canadian dollars. BBC is located on the Island of Kauai in the United States. On December 31, 2020, CGI purchased 85% of the common shares of BBC for USD $1,250,000. The exchange rate at acquisition was USD 1 = $1.265 Cdn. The following appears on the BBC financial statements for the year ending December 31, 2025: Beach Bean Company Statement of Income For the Year Ending December 31, 2025 Sales Cost of sales Gross margin Gain on sale of equipment Expenses: Depreciation expense Other expense Net income

(in USD) 3,650,000 1,642,000 2,008,000 50,000

365,000 950,000 743,000

Beach Bean Company Statement of Financial Position As at December 31, 2025 (in USD) 2025 Cash $ 1,055,000 Accounts receivable 1,290,000 Inventory 895,000 Intangible assets 365,000 Property, plant, and equipment (net) 1,865,000 Total assets $ 5,470,000 Accounts payable $ 395,000 Deferred revenue 212,000 Loan payable 1,650,000 Common shares 10,000 Other shareholders' equity 3,203,000 Total liabilities and shareholders' equity $ 5,470,000

$ $

(in USD) 2024 675,000 1,035,000 850,000 365,000 2,455,000 5,380,000 600,000 195,000 1,950,000 10,000 2,625,000 5,380,000

The relevant exchange rates for USD 1 to the Canadian dollar: July 1, 2015 December 31, 2020 Average rate—month of December - 2024 Average rate—last quarter of 2024 December 31, 2024 August 14, 2025 Average rate—yearly - 2025 November 30, 2025 December 31, 2025 Average rate—month of December Average rate—last quarter of 2025

$1.095 1.240 1.235 1.245 1.260 1.270 1.273 1.275 1.285 1.280 1.265

Required: Assuming that BBC's functional currency is the Canadian dollar, translate the SI and SFP into Canadian dollars for the year ending December 31, 2025.

Answer:

Sales Cost of sales Gross margin Gain on sale of equipment Expenses: Depreciation expense Other expense

Foreign exchange loss Net income

Beach Bean Company Statement of Income For the Year Ending December 31, 2025

In USD $ 3,650,000 1,642,000 2,008,000 50,000

Exchange rate Note 1 Note 2 Note 3

Cdn. value $ 4,639,040 2,073,626 2,565,414 70,250

365,000 950,000 $743,000

1.240 1.273

452,600 1,209,350 973,714

— $ 743,000

Note 4

(6,284) 967,430

Beach Bean Company Statement of Financial Position As at December 31, 2025 Exchange rate 1.285 1.285 1.265 1.240 1.240

Cash Accounts receivable Inventory Intangible assets Property, plant, and equipment (net) Total assets Accounts payable Deferred revenue Loan payable

In USD $ 1,055,000 1,290,000 895,000 365,000 1,865,000 $ 5,470,000 $ 395,000 212,000 1,650,000

Common shares Other shareholders' equity Total liabilities and shareholders' equity

10,000 3,203,000 $ 5,470,000

Note 1 Sales—other than deferred revenues Deferred revenues Total sales

In USD $ 3,455,000 195,000 $ 3,650,000

Note 2 Opening inventory Purchases Closing inventory Cost of sales

$ 850,000 1,687,000 (895,000) $ 1,642,000

1.245 1.273 1.265

$ 1,058,250 2,147,551 (1,132,175) $ 2,073,626

1.270 1.240

Note 3 Accounting gain on sale of equipment Proceeds of disposition Net carrying value Accounting gain

275,000 225,000 50,000

1.285 1.280 1.285 1.240 plug

Exchange rate 1.273 1.235

Cdn. value $ 1,355,675 1,657,650 1,132,175 452,600 2,312,600 $ 6,910,700 $ 507,575 271,360 2,120,250 12,400 3,999,115 $ 6,910,700

Cdn. value $ 4,398,215 240,825 $ 4,639,040

349,250 279,000 70,250

Exchange rate

Cdn value

(600,000) (1,950,000) $ (840,000)

1.260

$ (1,058,400)

$ 3,650,000

1.273

4,646,450

(1,687,000)

1.273

(2,147,551)

Other expenses

(950,000)

1.273

(1,209,350)

Proceeds from sale of equipment

275,000

1.270

349,250

Increase in deferred revenue Dividends declared Expected closing net monetary position

1.280 1.275

17,000 (165,000) 300,000

21,760 (210,375) 391,784

Actual closing net monetary position Cash

$ 1,055,000

$ $

385,500 (6,284)

Note 4 Opening monetary position Cash

In USD $

Accounts receivable

675,000 1,035,000

Accounts payable Loan payable Net monetary liability position Changes to monetary position Sales Purchases

Accounts receivable

1,290,000

Accounts payable Loan payable Actual closing net monetary position Foreign exchange loss

(395,000) (1,650,000) $ 300,000

1.285

Diff: 1 Type: ES Taxonomy Category: Applying Learning Outcome: 10.2 Translate a foreign subsidiary's financial statements when its functional currency is the Canadian dollar.

10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar. 1) Assuming the subsidiary's functional currency is not the Canadian dollar (different from parent), which of the following items would be translated at the historical rate? A) Inventory, carried at cost B) Preferred shares, classified as debt C) Wages payable D) Common shares Answer: D

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar.

2) Below is the SFP, in Euros (€), for Seely Corporation, a subsidiary of Berman Inc. Berman is a Canadian company that reports in Canadian dollars. Seely is located in Pisa, Italy. Seely Corporation Statement of Financial Position As at December 31, 2024

(in €)

Cash

67,800

Accounts receivable

836,200

Inventory

339,000

Intangible assets Property, plant, and equipment (net) Total assets

395,500 2,599,000 4,237,500

Accounts payable Loan payable

847,500 1,695,000

Common shares Other shareholders' equity Total liabilities and shareholders' equity

100,000 1,595,000 4,237,500

Additional information: • Berman purchased Seely on December 31, 2019, when the exchange rate was $1 Cdn. = €0.682. • The inventory on hand at year end was purchased when the exchange rate was $1 Cdn. = €0.726. • Intangible assets were purchased in 2020 when the exchange rate was $1 Cdn. = €0.744. • Property, plant, and equipment was purchased on July 1, 2012, when the exchange rate was $1 Cdn. = €0.643. • The exchange rate on December 31, 2024 was $1 Cdn. = €0.733. Assuming Seely's functional currency is the Euro (€), what is the balance of total assets in Canadian dollars (rounded)? A) $6,273,807 B) $5,781,037 C) $3,106,088 D) $2,874,155 Answer: B

Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar.

3) Below are the financial statements, in Euros (€), for Seely Corporation, a subsidiary of Berman Inc. Berman is a Canadian company that reports in Canadian dollars. Seely is located in Pisa, Italy. Seely Corporation Statement of Financial Position As at December 31

(in €) 2024 67,800 836,200 339,000 395,500 2,599,000 4,237,500 847,500 1,695,000 100,000 1,595,000 4,237,500

Cash Accounts receivable Inventory Intangible assets (net) Property, plant, and equipment (net) Total assets Accounts payable Loan payable Common shares Other shareholders' equity Total liabilities and shareholders' equity

Seely Corporation Statement of Income and Shareholders' Equity (partial) For the Year Ending December 31, 2024 Sales Cost of sales Gross margin Depreciation expense Other expenses Net income Opening retained earnings Dividends Closing retained earnings

(in €) 2023 35,000 625,000 295,000 440,500 2,849,000 4,244,500 759,500 1,995,000 100,000 1,390,000 4,244,500

(in €) 3,250,000 1,950,000 1,300,000 295,000 600,000 405,000 1,390,000 (200,000) 1,595,000

Additional information: • Berman purchased Seely on December 31, 2019, when the exchange rate was $1 Cdn. = €0.682. • The inventory on hand at year end was purchased when the exchange rate was $1 Cdn. = €0.726. • Intangible assets were purchases when the exchange rate was $1 Cdn. = €0.744. • Property, plant, and equipment was purchased on July 1, 2012, when the exchange rate was $1 Cdn. = €0.643. • The exchange rate on December 31, 2023 was $1 Cdn. = €0.707. • The exchange rate on December 31, 2024 was $1 Cdn. = €0.733. • Dividends were declared on November 15, 2024, when the exchange rate was $1 Cdn. = €0.756 and payable on January 15, 2025, when the exchange rate was $1 Cdn. = €0.734.

Assuming Seely's functional currency is the Euro (€), what is the exchange gain (loss) resulting from the translation of the December 31, 2024 financial statements? A) A foreign exchange loss of $93,031 would be reported in other comprehensive income. B) A foreign exchange gain of $93,031 would be reported in other comprehensive income. C) A foreign exchange loss of $48,605 would be reported in other comprehensive income. D) A foreign exchange gain of $48,605 would be reported in other comprehensive income. Answer: A

Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar.

4) Tooth Inc. is a foreign subsidiary of Sweets Corporation, a Canadian company that reports in Canadian dollars. Tooth is located in London, England. It has been determined that Tooth's functional currency is the British pound (£). At what exchange rate should the depreciation expense be translated? A) At the historical rate when the assets were purchased B) At the historical rate when Sweets purchased its controlling ownership of Tooth C) At the current closing rate D) At the average rate for the year Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar.

5) For a private company following ASPE, how are the foreign exchange gains (loss) on the translation of a foreign subsidiary accounted for when the functional currency is different from the parent's (FC ≠ PC)? A) Exchange gains (losses) are reported as other comprehensive income. B) Exchange gains (losses) are reported as a separate line item in net income. C) The FC ≠ PC method is not allowed under ASPE. D) Exchange gains (losses) are a direct adjustment to a separate component in shareholders' equity. Answer: D

Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar.

6) Forrest Inc. is a wholly owned subsidiary of Cedar Ltd., a Canadian company. Cedar reports under IFRS with consolidated financial statements in Canadian dollars. Below are extracts from Forrest's December31, 2025 SFP, denominated in Swiss Francs (SF). SF Cash 950,000 Accounts receivable 1,250,000 Inventory 3,750,000 Property, plant, and equipment (net) 15,000,000 Accounts payable 1,100,000 Due to Cedar Ltd. 4,750,000 Common shares 5,000,000 Additional information: • Cedar acquired Forrest several years ago. The exchange rate at acquisition was SF 1 = $1.15 Cdn. • Inventories were acquired when SF 1 = $ 1.32 Cdn. All of the inventory was written down to net realizable at the end of the year. • Property, plant, and equipment is broken down as follows: SF Building and equipment—existed at acquisition 7,500,000 Land—existed at acquisition 2,500,000 Purchased on March 15, 2024: Land 1,500,000 Building and equipment 3,500,000 15,000,000 • On March 15, 2024, the exchange rate was SF 1 = $1.29 Cdn. • When the acquisition of Forrest occurred, Cedar loaned Forrest enough funds to pay off all of its current debt. The loan to Forrest only requires interest payments. • The exchange rate on December 31, 2025 is SF 1 = $1.38 Cdn. Required: Assuming Forrest's functional currency is Swiss Francs, translate the year-end balances given above into Canadian dollars.

Answer:

Cash Accounts receivable Inventory Property, plant, and equipment (net) Accounts payable Due to Cedar Common shares

Amount in SF 950,000 1,250,000 3,750,000 15,000,000 1,100,000 4,750,000 5,000,000

Exchange rate Canadian value 1.38 $ 1,311,000 1.38 1,725,000 1.38 5,175,000 1.38 20,700,000 1.38 1,518,000 1.38 6,555,000 1.15 5,750,000

Diff: 1 Type: ES Taxonomy Category: Applying Learning Outcome: 10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar.

(in USD) 3,650,000 1,642,000 2,008,000 50,000 365,000 950,000 743,000

(in USD) 2024 675,000 1,035,000 850,000 365,000 2,455,000 5,380,000 600,000 195,000 1,950,000 10,000 2,625,000 5,380,000

Additional information: • Inventory on hand at the end of the year was purchased evenly throughout the last quarter of the year. • On August 14, 2025, BBC sold equipment with a net carrying value of US$225,000. • All of BBC's property, plant, and equipment was purchased on July 1, 2015 as were the intangible assets. • Deferred revenue is for deposits received evenly in the month of December. • Dividends were declared on November 30, 2025 and were paid on December 31, 2025. The relevant exchange rates for USD 1 to the Canadian dollar: July 1, 2015 December 31, 2020 Average rate—month of December—2024 Average rate—last quarter of 2024 December 31, 2024 August 14, 2025 Average rate—yearly—2025 November 30, 2025 December 31, 2025 Average rate—month of December Average rate—last quarter of 2025

$1.095 1.240 1.235 1.245 1.260 1.270 1.273 1.275 1.285 1.280 1.265

Required: Assuming that BBC's functional currency is the American dollar, determine the foreign exchange gain (loss) on translation for the year ending December 31, 2025.

Answer: In USD Opening net asset position: Opening retained earnings

10,000 2,635,000 693,000 50,000

Dividends (Note 1) Expected net asset position

(165,000) 3,213,000

Actual closing net asset position: Opening retained earnings

3,203,000

10,000 3,213,000

Note 1 Closing retained earnings Less net income Opening retained earnings Dividends declared

Cdn. value

2,625,000

Common shares Opening net asset position Net income—without gain Accounting gain

Common shares Actual closing net asset position Foreign translation gain

Exchange rate

1.260 1.273 1.270

1.275

1.285

3,320,100 882,189 63,500 (210,375) 4,055,414

4,128,705 73,291

3,203,000 (743,000) 2,625,000) (165,000)

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar.

(in USD) 3,650,000 1,642,000 2,008,000 50,000

365,000

Other expense Net income

950,000 743,000

$ Beach Bean Company Statement of Financial Position As at December 31, 2025

(in USD) 2025 $ 1,055,000 1,290,000 895,000 365,000 1,865,000 $ 5,470,000 395,000 212,000 1,650,000 10,000 3,203,000 $ 5,470,000

Cash Accounts receivable Inventory Intangible assets Property, plant, and equipment (net) Total assets Accounts payable Deferred revenue Loan payable Common shares Other shareholders' equity Total liabilities and shareholders' equity

(in USD) 2024 $ 675,000 1,035,000 850,000 365,000 2,455,000 $ 5,380,000 600,000 195,000 1,950,000 10,000 2,625,000 $ 5,380,000

Additional information: • Inventory on hand at the end of the year was purchased evenly throughout the last quarter of the year. • On August 14, 2025, BBC sold equipment with a net carrying value of US$225,000. • All of BBC's property, plant, and equipment was purchased on July 1, 2015 as were the intangible assets. • Deferred revenue is for deposits received in the last month of the year, received evenly in the month of December. • Dividends were declared on November 30, 2025 and were paid on December 31, 2025. The relevant exchange rates for USD 1 to the Canadian dollar: July 1, 2015 December 31, 2020 Average rate—month of December—2024 Average rate—last quarter of 2024 December 31, 2024 August 14, 2025 Average rate—yearly—2025 November 30, 2025 December 31, 2025 Average rate—month of December Average rate—last quarter of 2025

$1.095 1.240 1.235 1.245 1.260 1.270 1.273 1.275 1.285 1.280 1.265

Required: Assuming that BBC's functional currency is the American dollar, determine the balance in Canadian dollars for the following accounts: i. Cost of sales ii. Accounting gain on sale of equipment iii. Deferred revenues iv. Sales Answer:

i. Cost of sales

In USD 1,642,000

Exchange rate 1.273

50,000

1.270

63,500

212,000 3,650,000

1.285 1.273

272,420 4,646,450

ii. Accounting gain on sale of equipment iii. Deferred revenues iv. Sales

Cdn. value 2,090,266

Diff: 1 Type: ES Taxonomy Category: Applying Learning Outcome: 10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar.

9) Beach Bean Company (BBC) is a subsidiary of Common Grounds Inc (CGI), a Canadian company that reports in Canadian dollars. BBC is located on the Island of Kauai in the United States. On December 31, 2020, CGI purchased 85% of the common shares of BBC for USD $1,250,000. The exchange rate at acquisition was USD 1 = $1.265 Cdn. The following appears on the BBC financial statements for the year ending December 31, 2025: Beach Bean Company Statement of Income For the Year Ending December 31, 2025 Sales Cost of sales

(in USD) 3,650,000 1,642,000

Gross margin

2,008,000

Gain on sale of equipment Expenses:

50,000

Depreciation expense

365,000

Other expense Net income

950,000 743,000

$ Beach Bean Company Statement of Financial Position As at December 31, 2025

(in USD) 2025 $ 1,055,000 1,290,000 895,000 365,000 1,865,000 $ 5,470,000 395,000 212,000 1,650,000 10,000 3,203,000 $ 5,470,000

(in USD) 2024 $ 675,000 1,035,000 850,000 365,000 2,455,000 $ 5,380,000 600,000 195,000 1,950,000 10,000 2,625,000 $ 5,380,000

Additional information: • Inventory on hand at the end of the year was purchased evenly throughout the last quarter of the year. • On August 14, 2025, BBC sold equipment with a net carrying value of US$225,000. • All of BBC's property, plant, and equipment was purchased on July 1, 2015 as were the intangible assets. • Deferred revenue is for deposits received in the last month of the year, received evenly in the month of December. • Dividends were declared on November 30, 2025 and were paid on December 31, 2025. The relevant exchange rates for USD 1 to the Canadian dollar: July 1, 2015 December 31, 2020 Average rate—month of December—2024 Average rate—last quarter of 2024 December 31, 2024 August 14, 2025 Average rate—yearly—2025 November 30, 2025 December 31, 2025 Average rate—month of December Average rate—last quarter of 2025

$1.095 1.240 1.235 1.245 1.260 1.270 1.273 1.275 1.285 1.280 1.265

Required: Assuming that BBC's functional currency is the American dollar, translate the SI (without the foreign translation gain (loss)) and SFP into Canadian dollars for the year ending December 31, 2025. Assume the other shareholders' equity is the balancing figure.

Answer:

Beach Bean Company Statement of Income For the Year Ending December 31, 2025

Sales Cost of sales Gross margin Gain on sale of equipment Expenses: Depreciation expense

Other expense Net income

(in USD) Exchange rate 3,650,000 1.273 1,642,000 1.273 2,008,000 50,000 1.270 365,000

1.273

950,000 743,000

1.273

Cdn. value 4,646,450 2,090,266 2,556,184 63,500 464,645

1,209,350 945,689

Beach Bean Company Statement of Financial Position As at December 31, 2025

Cash Accounts receivable Inventory Intangible assets

Property, plant, and equipment (net) Total assets Accounts payable Deferred revenue Loan payable Common shares Other shareholders' equity Total liabilities and shareholders' equity

(in USD) Exchange rate 1,055,000 1.285 1,290,000 1.285 895,000 1.285 365,000 1.285 1,865,000 5,470,000 395,000 212,000 1,650,000 10,000

1.285

3,203,000 5,470,000

plug

1.285 1.285 1.285 1.240

Cdn. value 1,355,675 1,657,650 1,150,075 469,025 2,396,525 7,028,950 507,575 272,420 2,120,250 12,400 4,116,305 7,028,950

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 10.3 Translate a foreign subsidiary's financial statements when its functional currency is not the Canadian dollar.

10.4 Explain accounting exposure and economic exposure as they relate to foreign operations. 1) Which of the following is the risk related to the translation of financial statements from one currency to another? A) Foreign currency exchange exposure B) Restatement exposure C) Accounting exposure D) Economic exposure Answer: C Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 10.4 Explain accounting exposure and economic exposure as they relate to foreign operations.

2) What is the risk that a subsidiary's equity value will decrease as a result of a change in the foreign exchange rate? A) Foreign currency exchange exposure B) Restatement exposure C) Accounting exposure D) Economic exposure Answer: D

Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 10.4 Explain accounting exposure and economic exposure as they relate to foreign operations.

10.5 Prepare consolidated financial statements when the parent controls a foreign subsidiary. 1) Which of the following statements regarding the preparation of consolidated financial statements is correct when the subsidiary prepares single entity statements in a currency different from that used by the parent? A) Consolidating adjustments must be restated to the functional currency. B) All eliminating entries are restated to the presentation currency at the rate on the date the transaction occurred. C) When the subsidiary's functional currency is the same as the parent, the fair value differentials are translated at the current exchange rate. D) When the subsidiary's functional currency is the same as the parent, the fair value differentials are translated at the exchange rate on the date the parent acquired the subsidiary. Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 10.5 Prepare consolidated financial statements when the parent controls a foreign subsidiary.

2) When a subsidiary's functional currency is different from the presentation currency, the goodwill acquired in the purchase is translated at which of the following rates? A) The average rate is used to translate goodwill. B) The historical rate is used to translate goodwill. C) The closing current rate is used to translate goodwill. D) The goodwill is recalculated using the current rate for the purchase price and carrying values and monetary items. The historical rate is used for non-monetary items. Answer: C

Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 10.5 Prepare consolidated financial statements when the parent controls a foreign subsidiary.

3) On January 1, 2025, Gullman Inc., a Canadian company, acquires 75% the voting common shares of Seaside Ltd. for US$300,000. On the date of acquisition, Seaside's shareholders' equity consisted of: USD $75,000 125,000

Common shares Retained earnings

The fair value of Seaside's identifiable assets and liabilities were equal to carrying value with the exception of: Carrying value Fair value (USD) (USD) Accounts receivable $ 50,000 $ 35,000 Inventory 95,000 135,000 Land 75,000 150,000 Equipment 575,000 500,000 The decrease in equipment value is not considered to be permanent in nature. The relevant exchange rates are: January 1, 2025 December 31, 2025 Average rate 2025

$1 Cdn. = $1 Cdn. = $1 Cdn. =

0.752 USD 0.815 USD 0.784 USD

Assuming Seaside's functional currency is the same as the presentation currency, what amount represents the goodwill in Canadian dollars that would be reported on the December 31, 2025, consolidated SFP? A) $176,400 B) $232,713 C) $214,721 D) $299,202 Answer: B Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 10.5 Prepare consolidated financial statements when the parent controls a foreign subsidiary.

4) On January 1, 2025, Gullman Inc., a Canadian company, acquires 75% the voting common shares of Seaside Ltd. for US$300,000. On the date of acquisition, Seaside's shareholders' equity consisted of: USD $75,000 125,000

Common shares Retained earnings

$1 Cdn. = $1 Cdn. = $1 Cdn. =

0.752 USD 0.815 USD 0.784 USD

Assuming Seaside's functional currency is different from the presentation currency, what amount represents the goodwill in Canadian dollars that would be reported on the December 31, 2025 consolidated SFP? A) $131,600 B) $232,713 C) $142,625 D) $214,724 Answer: D

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 10.5 Prepare consolidated financial statements when the parent controls a foreign subsidiary.

5) On January 1, 2025, Gullman Inc., a Canadian company, acquires 75% the voting common shares of Seaside Ltd. for US$300,000. On the date of acquisition, Seaside's shareholders' equity consisted of: USD $75,000 125,000

Common shares Retained earnings

The fair value of Seaside's identifiable assets and liabilities were equal to carrying value with the exception of: Carrying value Fair value (USD) (USD) Accounts receivable $ 50,000 $ 35,000 Inventory 95,000 135,000 Land 75,000 150,000 Equipment (10 years remaining) 575,000 500,000 The decrease in equipment value is not considered to be permanent in nature. The relevant exchange rates are: January 1, 2025 December 31, 2025 Average rate 2025

$1 Cdn. = $1 Cdn. = $1 Cdn. =

0.752 USD 0.815 USD 0.784 USD

Additional information: • In 2025, Gullman sold USD $250,000 of inventory to Seaside, evenly throughout the year, earning a profit of USD$80,000. Of that inventory, 50% remains unsold by Gullman at the end of the year. • Both companies pay tax at a rate of 20%. Required: Assuming Seaside's functional currency is the Canadian dollar, prepare the following: a) A calculation of goodwill b) The elimination entry for the acquisition to adjust the opening SFP accounts c) The consolidation elimination entries for the current year

Answer: a) A calculation of goodwill

In USD 300,000

Purchase price (75%) Implied value Less the carrying value:

In USD 400,000

Common shares Retained earnings Acquisition differential Allocated to: Accounts receivable Inventory Land Equipment Goodwill

Exchange rate 0.752 0.752

Cdn. NCI value value $398,936 531,915 132,979

75,000 125,000 200,000

0.752 0.752

99,734 166,223 265,958

15,000 (40,000) (75,000)

0.752 0.752 0.752

19,947 (53,191) (99,734)

75,000 175,000

0.752

99,734 $ 232,714

b) The elimination entry for the acquisition to adjust the SFP accounts Dr. Common shares Dr. Retained earnings Dr. Inventory Dr. Land Dr. Goodwill Cr. Accounts receivable Cr. Equipment (net) Cr. Non-controlling interest Cr. Investment in Seaside Inc.

99,734 166,223 53,191 99,734 232,714

19,947 99,734 132,979 398,936

c) The consolidation elimination entries for the current year To adjust for the fair value differential amortization: Dr. Cost of sales Cr. Inventory

53,191

Dr. Accounts receivable Cr. Bad debt expense

19,947

Dr. Equipment (net) Cr. Depreciation expense ($99,734/10 years)

9,973

53,191

19,947

9,973

To adjust for the unrealized intercompany profit—upstream: Dr. Cost of sales 51,020 Cr. Inventory 51,020 Dr. Deferred income tax asset (liability) 10,204 Cr. Deferred income tax expense (benefit) 10,204 Intercompany profit is $51,020 (USD$80,000/0.784 × 50%), and the DITA is $51,020 × 20%. To adjust for the intercompany sales in the year: Dr. Sales Cr. Cost of sales Sales translated at the average rate (USD$250,000/0.784)

318,878 318,878

Diff: 3 Type: ES Taxonomy Category: Applying Learning Outcome: 10.5 Prepare consolidated financial statements when the parent controls a foreign subsidiary.

Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 11 Accounting for Not-For-Profit Organizations 11.1 Explain the significant characteristics of not-for-profit organizations and how they differ from profit-oriented organizations. 1) Which of the following statements related to NFPOs is FALSE? A) An NFPO may sell goods, for profit, in the same manner as a profit-oriented business. B) An NFPO may have shareholders when specific criteria are met. C) The NFPO may or may not meet the definition of a registered charity. D) Contributors to an NFPO do not receive a financial return in return for their contribution. Answer: B

Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 11.1 Explain the significant characteristics of not-for-profit organizations and how they differ from profit-oriented organizations.

2) A contribution to a not-for-profit organization whose value must be retained is known as: A) a contribution in kind B) a non-reciprocal transfer C) an endowment D) an investment Answer: C

Diff: 1 Type: MC Taxonomy Category: Remembering Learning Outcome: 11.1 Explain the significant characteristics of not-for-profit organizations and how they differ from profit-oriented organizations.

11.2 Explain what fund accounting is and the reasons to use it. 1) Which of the following statements related to NFPOs is FALSE? A) Fund accounting presents the net assets and net income in terms of funds. B) An NFPO is not required to apply fund accounting. C) An NFPO, choosing fund accounting, may establish funds based on programs, type of activities, or another method that will provide the users of the statements useful information. D) If an NFPO has more than one activity or program, it must use fund accounting. Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 11.2 Explain what fund accounting is and the reasons to use it.

11.3 Account for contributions using both the deferral method and the restricted fund method. 1) The Dewald family contributed $500,000 to a local university to establish a scholarship fund in the name of their father. From this contribution, $400,000 will be invested, and the investment income must be used to provide scholarships to indigenous students enrolled in nursing or medical school. The remaining $100,000 may be used to provide immediate scholarships to indigenous students enrolled in nursing or medical school. The university uses the restricted fund method, with general, scholarship, capital asset, and endowment funds. How should the $500,000 contribution be accounted for? A) The $500,000 should reported as deferred revenue in the endowment fund. The investment income should be reported as revenue in the general fund as received. B) $400,000 of the contribution should be reported as revenue in the endowment fund. The remaining $100,000 should be reported as revenue in the scholarship fund. Any investment income on the $500,000 should be reported in the scholarship fund when it is earned. C) $400,000 of the contribution should be reported as deferred revenue in the endowment fund. The remaining $100,000 should be reported as revenue in the scholarship fund. Any investment income on the $500,000 should be reported in the general fund when it is earned. D) The $500,000 should reported as revenue in the endowment fund. The investment income should be reported as deferred revenue until the scholarships are paid out. Answer: B

Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 11.3 Account for contributions using both the deferral method and the restricted fund method.

2) Mental Health Inc. is a not-for-profit organization that provides mental health services to low-income individuals in Northern Manitoba. The not-for-profit organization uses the deferral method. How would Mental Health Inc. account for unrestricted contributions? A) Unrestricted contributions are deferred and recognized when expenses are incurred. B) Unrestricted contributions are deferred. C) Unrestricted contributions are a direct increase to the net assets. D) Unrestricted contributions are recognized as revenue immediately. Answer: D

Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 11.3 Account for contributions using both the deferral method and the restricted fund method.

3) Sports for Kids is a not-for-profit organization that provides access to several sports to low-income families in Alberta. The organization uses the restricted fund method to provide information on its different sporting activities. The restricted funds include a general, baseball, soccer, hockey, and figure skating funds. In 2024, Sports for Kids received a $150,000 contribution to meet the general operating expenses for 2025 and 2026. How should the contribution be reported? A) As revenue in the 2024 general fund B) As revenue in 2024, allocated among the baseball, soccer, hockey, and figure skating funds C) As deferred revenue in the 2024 SFP and recognized into income as the general operating expenses are incurred in 2025 and 2026 D) As a direct increase in the net assets in the general fund Answer: C Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 11.3 Account for contributions using both the deferral method and the restricted fund method.

4) Jordan contributed $500,000 to MusicForAll (MFA), a not-for-profit organization. Jordan stipulated that the contribution be invested and cannot be spent. The investment income can be used to provide music lessons, instruments, etc. to indigenous children living in Northern Canada. MFA uses the deferral method and reports using fund accounting but does not have an endowment fund. How should MFA account for the $500,000 contribution? A) The $500,000 contribution would be recorded as a direct increase to net assets in the general fund. B) MFA must create an endowment fund and recognize the $500,000 contribution as revenue within that newly created endowment fund. C) The $500,000 contribution would be recorded as deferred revenue in the general fund. D) MFA must create an endowment fund and recognize the $500,000 contribution as deferred revenue within that newly created endowment fund. Answer: A Diff: 2 Type: MC Taxonomy Category: Analyzing Learning Outcome: 11.3 Account for contributions using both the deferral method and the restricted fund method.

5) On November 1, 2025, Angel contributed $1,000,000 to the local homeless shelter, stipulating that the contribution be used to purchase a building to provide additional beds for the homeless. The building was purchased at a cost of $1,200,000 on March 31, 2026, with $200,000 coming from surpluses in the general fund. The building has an estimated useful life of 15 years, with no residual value. The shelter capitalizes its capital assets and uses the straight line method to amortize its capital assets, pro-rating for the number of months owned in the years of acquisition and disposal. The shelter has a December 31 year end and uses the deferral method. What journal entry correctly accounts for the building and contribution revenue in the financial statements for the year ending December 31, 2026? A) Dr. Deferred revenue 50,000 Dr. Amortization expense 50,000 Cr. Capital asset 100,000 B) Dr. Deferred contribution liability Cr. Contribution revenue Dr. Amortization expense Cr. Capital asset—accumulated amortization

50,000 60,000

C) Dr. Deferred contribution liability Cr. Contribution revenue Dr. Amortization expense Cr. Capital asset—accumulated amortization

60,000 60,000

D) Dr. Deferred contribution liability Dr. Amortization expense Cr. Contribution revenue

50,000 60,000

60,000 60,000

110,000

Answer: B

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 11.3 Account for contributions using both the deferral method and the restricted fund method.

6) Laval Home Services is a non-for-profit organization providing home services to low-income seniors in Laval, Quebec. Laval Home Services uses the deferral method of accounting for contribution revenues and has a December 31 year end. On November 20, 2024, it received a contribution restricted for use in paying for the salaries of the staff for the current and future periods. How should the contribution be reported in the current year? A) Recognize the full amount as revenue in the current year. B) Defer the full amount, showing a deferred contribution liability on the SFP. C) Recognize the full amount as a direct increase in net assets. D) Recognize revenue to the extent of the salary expense in the current year, and defer the remaining balance as deferred contribution liability on the SFP. Answer: D Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 11.3 Account for contributions using both the deferral method and the restricted fund method.

7) For the 2025 fiscal year, Home Sweet Home (HSH), a not-for-profit organization, received $200,000 in unrestricted donations and $450,000 in donations designated specifically to pay for housing for Ukrainian refugees. In 2025, $100,000 of the unrestricted donations and $150,000 of the restricted donations were expended for current operations and rent, respectively. While HSH does use fund accounting, it did not set up a separate fund for the restricted donation. Under the deferral method, how much of the donations should be reported as revenue in the statement of operations for the 2025 fiscal year? A) $350,000 B) $250,000 C) $200,000 D) $650,000 Answer: A Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 11.3 Account for contributions using both the deferral method and the restricted fund method.

8) Water For All (WFA) is a large not-for-profit organization whose main objective is to deliver reliable fresh drinking water to all communities in Canada. WFA uses the restricted fund method and has the following funds: general, capital, and endowment. WFA has a December 31 year end. The CEO has come to you with a few questions related to transactions that occurred in the year. a) WFA received a large endowment of $5 million on March 1, 2024. It was immediately invested in AAA bonds, as required. Interest of $275,000 was earned in 2024, paid on December 31. The interest income may be used to fund operating expenses. b) During the year, 3,500 volunteer hours were provided. The CEO estimates that WFA would have to pay $19/hour to replace the volunteers and indicated that WFA would have to hire employees to perform the work. c) On January 1, 2024, two large delivery trucks were donated to WFA. These trucks will be used to deliver drinking water to northern communities until they have a reliable water source. The trucks are estimated to have a total market value of $350,000 and an estimated useful life of 10 years. Required: Determine the correct accounting treatment for each of these situations, along with any journal entry (if required).

Answer: a) Donation of $5,000,000 Endowment fund Dr. Cash Cr. Contribution revenue Dr. Investment in bonds Cr. Cash

5,000,000 5,000,000

General fund Dr. Cash Cr. Interest income

275,000 275,000

b) Volunteer hours—general fund Volunteer hours may be recognized but only if they meet the three criteria: fair value may be estimated, the services would be used in the normal course of operations, and the services would otherwise be purchased. WFA may still choose not to recognize these services. The purpose of the financial statements is to show the cost of providing the services to communities that do not have reliable water. Since WFA would otherwise hire employees without the volunteers, showing the value of the donated time would provide valuable information to the financial statement users. The entries to record services received would be: Dr. Service expense—donated Cr. Contribution revenue—donated services (3,500 hours × $19)

66,500

c) Donated Trucks—capital asset fund Dr. Trucks (net) Cr. Contribution revenue—donated trucks Dr. Amortization expense Cr. Trucks (net)

350,000 35,000

Diff: 2 Type: ES Taxonomy Category: Evaluating Learning Outcome: 11.3 Account for contributions using both the deferral method and the restricted fund method.

11.4 Prepare financial statements for not-for-profit organizations. 1) With respect to endowment funds, which of the following statements is true? A) Endowment contributions are reported as a direct increase to net assets under the deferral method and as revenue in the endowment fund under the restricted fund method. B) Endowment contributions are reported as revenue under the deferral method and as revenue in a restricted fund under the restricted fund method. C) Endowment contributions are treated the same way under both the deferral method and the restricted fund method: they are reported as revenue in the general fund. D) Endowment contributions are reported as revenue under the deferral method and as a direct increase to net assets under the restricted fund method. Answer: A Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 11.4 Prepare financial statements for not-for-profit organizations.

2) When an NFPO uses fund accounting, it may be necessary to loan funds from one fund to another when there is a cash short fall. How should these interfund loans be reflected in the statements? A) The loan should be reported as a receivable/payable in the statement of financial position in each individual fund, and the transfer reflected in the statement of changes in net assets. B) The loan should be reported as a receivable/payable in the statement of financial position in each individual fund with the transfer shown as revenue/expense for each fund on the statement of operations. C) No amount is reflected in the statements but a note disclosure explaining the transfer must be provided. D) The loan is reflected as a transfer in the statement of changes in net assets. Answer: A Diff: 2 Type: MC Taxonomy Category: Understanding Learning Outcome: 11.4 Prepare financial statements for not-for-profit organizations.

3) Manny's Dog Rescue (MDR) is a not-for-profit organization that operates an animal rescue and adoption service. MDR began on March 1, 2024, and has a December 31 year end. On March 2, 2024, the organization received $450,000 to purchase land and $300,000 to build a facility to house the rescue dogs until foster families could be found. The land was purchased immediately, and the building was completed on July 31, 2024. The facility is expected to have a useful life of 25 years. The total cost of the land and facility was $450,000 and $950,000, respectively. The balance was financed with $350,000 in private donations received through a fundraising drive for the building and $300,000 of government grants that had no restrictions placed on them. The facility will be amortized on a straight-line basis, using the number of months in the year. On June 15, 2024, MDR received a $600,000 government grant to fund two veterinarians for the next 24 months, with $300,000 of the grant received on June 15, 2024. The remaining balance will be paid to MDR at the beginning of 2026, providing MDR has two veterinarians employed by September 15, 2024. Two veterinarians were hired on July 1, 2024, at an annual salary of $150,000 each, paid at the end of month. The organization is expected to generate $950,000 in annual revenues. During 2024, MDR received unrestricted donations of $450,000 and paid out operating expenses of $295,000 in addition to the veterinarian salaries. MDR has chosen not to use fund accounting. Required: Prepare a statement of operations and a statement of financial position for the year ending December 31, 2024. Answer: Statement of Financial Position Cash ($300,000 + $450,000 − $150,000 − $295,000) $ 305,000 Grant receivable 300,000 Land 450,000 Building (net) ($950,000 − (950,000/25 years × 5/12) 934,167 Total assets $ 1,989,167 Deferred contribution—Facility ($650,000 − ($650,000/25 × 5/12)) Deferred contribution − Veterinarians ($600,000 − ($150,000 × 2 × 6/12) Fund balance Net assets—land Unrestricted

639,167 450,000 450,000 450,000 1,989,167

Statement of Operations Contribution revenue Contribution revenue—veterinarian salaries Contribution revenue—facility

Salaries Amortization expense Other expenses Excess revenue over expenses

Diff: 2 Type: ES Taxonomy Category: Evaluating Learning Outcome: 11.4 Prepare financial statements for not-for-profit organizations.

750,000 150,000 10,833 910,833 150,000 15,833 295,000 450,000

4) Manny's Dog Rescue (MDR) is a not-for-profit that operates an animal rescue and adoption service. MDR began on March 1, 2024 and has a December 31 year end. On March 2, 2024, the organization received $450,000 to purchase land and $300,000 to build a facility to house the rescue dogs until foster families could be found. The land was purchased immediately and the building was completed on July 31, 2024. The facility is expected to have a useful life of 25 years. The total cost of the land and facility was $450,000 and 950,000, respectively. The balance was financed with $350,000 in private donations received through a fundraising drive for the building and $300,000 of government grants that had no restrictions placed on them. The facility will be amortized on a straight-line basis, using the number of months in the year. On June 15, 2024, MDR was granted $600,000 from the government to fund two veterinarians for the next 24 months, with $300,000 of the grant received on June 15, 2024. The remaining balance will be paid to MDR at the beginning of 2025, providing MDR has two veterinarians employed by September 15, 2024. Two veterinarians were hired on July 1, 2024 at an annual salary of $150,000 each, paid at the end of month. The organization is expected to generate $950,000 in annual revenues. During 2024, MDR received unrestricted donations of $450,000 and paid out operating expenses of $295,000 in addition to the veterinarian salaries. MDR has chosen not to use fund accounting. Required: Prepare the journal entries for the year ending December 31, 2024.

Answer: Prepare the journal entries for the year ending December 31, 2024. Dr. Cash Cr. Net assets—Land Cr. Deferred contributions—facility To record the funds donated for the facilities

750,000 450,000 300,000

Dr. Cash 650,000 Cr. Deferred contributions—facility Cr. Contribution revenue To record the government grant and donations for the remaining building costs Dr. Land Dr. Building (net) Cr. Cash To record the purchase of the land and facility

450,000 950,000

Dr. Cash Dr. Government grant receivable Cr. Deferred contributions—veterinarian To record the government grant.

300,000 300,000

Dr. Cash Cr. Contribution revenue To record the unrestricted contributions.

450,000

Dr. Operating expenses Cr. Cash To record operating expenses for the year.

295,000

350,000 300,000

1,400,000

600,000

450,000

295,000

Dr. Salary expense 150,000 Dr. Deferred contributions—Veterinarian 150,000 Cr. Cash 150,000 Cr. Contribution revenue—salaries 150,000 To record the salary expense ($150,000 × 2 × 6/12) and the contribution revenue related to the salary. Dr. Amortization expense 15,833 Dr. Deferred contribution—facility 10,833 Cr. Building (net) 15,833 Cr. Contribution revenue—facility 10,833 To record the amortization expense ($950,000/25 × 5/12) and the related deferred revenue ($650,000/25 × 5/12) Diff: 2 Type: ES Taxonomy Category: Evaluating Learning Outcome: 11.4 Prepare financial statements for not-for-profit organizations.

5) Saskatoon Home for Vets (SHV) has provided its records for the current year. Its volunteer controller resigned at the beginning of the year, and no replacement has been found. As a result, no entries have been made in the current year. SHV has hired you, CPA, to help with the preparation of its December 31, 2026 year-end statements. Additional information: i. SHV's main objective is to provide homes for veterans that are homeless. It also provides various services to the veterans to help get them back on their feet. To increase the availability of homes, SHV has purchased a large piece of land on which to build a tiny home community. These homes are rented to veterans, based on their income level. If a veteran has no income, no rent is charged. SHV also subsidizes the rent for veterans who are in rental properties not owned by SHV. ii. SHV uses the restricted fund method and has the following funds: operating, endowment, and capital asset. The operating fund is used to pay for mental health services, utilities, rent, etc. iii. Opening balances at January 1, 2026 were:

Cash

General fund $ 25,000

Endowment $ -

Capital asset $ 10,000 $

Total 35,000

Land Furniture (net)*

950,000 60,000

Buildings (net)* Investments Total

25,000

145,000 $ 1,165,000

145,000 150,000 $ 1,340,000

150,000 150,000

Current liabilities $ 10,000 $ $ 2,500 $ 12,500 Fund balance 15,000 150,000 1,162,500 1,327,500 Total $ 25,000 $ 150,000 $ 1,165,000 $ 1,340,000 *The remaining useful life of the furniture and building is 5 and 30 years, respectively. Original cost of the furniture and building was $75,000 and $150,000, respectively. iv. On April 1, 2026, a wealthy donor provided $1,500,000 in contributions, with $750,000 to be retained and invested in perpetuity, and the interest to be used as the organization sees fit. The remaining $750,000 is to be used to build tiny homes for veterans. Immediately, $750,000 was invested in a government bond that pays interest annually on December 31 at a rate of 5%. v. On June 30, 2026, a local contractor volunteered his crew to build three tiny homes in the new community. The cost of the crew to the contractor was $65,000. The CEO of SHV was happy to receive the free labour as it saved SHV from having to pay for the contractors to build the homes. vi. Total cost of materials and labour for the three homes built in 2026 was $250,000 and $115,000, respectively. These homes were inhabited on September 1, 2026 and are expected to have a remaining useful life of 30 years.

vii. Salary expense for 2026 was $75,000, with $6,500 still owing at year end. The current liabilities in the general fund represented salaries owed at the end of 2025. viii. Total unrestricted contributions of $650,000 were received in the year. Rent of $250,000 and utilities of $10,000 were paid in the year. There are utilities owing of $1,500 at the end of 2026. ix. SHV amortizes its capital assets on a straight-line basis, assuming no residual value, based on the number of months available in the year. x. The $2,500 current liability owing at the end of 2025 in the capital asset fund was paid. On October 1 of this year, additional appliances and furnishings at a discounted cost of $25,000 were purchased. The value of the appliances and furnishings was $40,000, and they have an estimated useful life of 8 years. Required: Prepare the journal entries for the year ending December 31, 2026. Answer: Items i, ii, and iii do not require journal entries. Item iv. Endowment fund Dr. Cash Cr. Contribution revenue To record the endowment.

750,000

Dr. Investment in government bond Cr. Cash To record the investment.

750,000

750,000 750,000

Operating fund Dr. Cash 28,125 Cr. Interest income To record the interest on the new bond ($750,000 × 5% × 9/12). Capital Asset fund Dr. Cash Cr. Contribution revenue To record the contribution to the capital asset fund.

750,000

Item v. Capital Asset fund Dr. Building Cr. Contribution revenue—donated labour Item vi. Capital Asset fund Dr. Building Cr. Cash To record the costs associated with the building.

65,000

365,000

28,125

750,000

65,000

365,000

Item vii. Operating fund Dr. Salary expense Dr. Current liabilities Cr. Current liabilities Cr. Cash To record salary expense.

75,000 10,000

Item viii. Operating fund Dr. Cash Cr. Contribution revenue To record the unrestricted contributions.

650,000

Dr. Rent expense Dr. Utilities expense Cr. Current liabilities Cr. Cash To record the current year rent and utility expenses.

250,000 10,000

6,500 78,500

650,000

1,500 258,500

Item ix. Capital Asset fund Dr. Amortization expense 20,000 Cr. Building (net) 5,000 Cr. Furniture (net) 15,000 To record amortization expense on the assets that existed at the beginning of the year: Building $150,000/30 years and Furniture $75,000/ 5 years. Dr. Amortization expense Cr. Building (net) To record the amortization expense on the new building. (($365,000 + $65,000)/30 years × 4/12) Item x. Capital Asset fund Dr. Current liabilities Cr. Cash To record the payment of the current liability.

4,778

2,500

Dr. Furniture (net) 40,000 Cr. Contribution revenue Cr. Cash To record the purchase of the furniture at fair market value. Dr. Amortization expense Cr. Furniture (net) To record the amortization expense on the furniture. $40,000/year 8 × 3 months/12months.

1,250

Diff: 3 Type: ES Taxonomy Category: Evaluating Learning Outcome: 11.4 Prepare financial statements for not-for-profit organizations.

4,778

2,500

15,000 25,000

1,250

6) Saskatoon Home for Vets (SHV) has provided its records for the current year. Its volunteer controller resigned at the beginning of the year, and no replacement has been found. As a result, no entries have been made in the current year. SHV has hired you, CPA, to help with the preparation of its December 31, 2026 year-end statements. Additional information: i. SHV's main objective is to provide homes for veterans that are homeless. It also provides various services to the veterans to help get them back on their feet. To increase the availability of homes, SHV has purchased a large piece of land on which to build a tiny home community. These homes are rented to veterans, based on their income level. If a veteran has no income, no rent is charged. SHV also subsidizes the rent for veterans who are in rental properties not owned by SHV. ii. SHV uses the restricted fund method and has the following funds: operating, endowment, and capital asset. The operating fund is used to pay for mental health services, utilities, rent, etc. Opening balances at January 1, 2025: General fund

Endowment

Capital asset

Cash

25,000

10,000

Total $

35,000

Land Furniture (net)*

950,000 60,000

Buildings (net)*

145,000

Investments

150,000 $ 1,340,000

150,000

Total

25,000

150,000

1,165,000

Current liabilities

10,000

2,500

Fund balance

15,000

150,000

1,162,500

12,500 1,327,500

Total $ 25,000 $ 150,000 $ 1,165,000 $ 1,340,000 *The remaining useful life of the furniture and building is 5 and 30 years, respectively. Original cost of the furniture and building was $75,000 and $150,000, respectively. iii. On April 1, 2026, a wealthy donor provided $1,500,000 in contributions, with$750,000 to be retained and invested in perpetuity, and the interest to be used as the organization sees fit. The remaining $750,000 is to be used to build tiny homes for veterans. Immediately, $750,000 was invested in a government bond that pays interest annually on December 31 at a rate of 5%. iv. On June 30, 2026, a local contractor volunteered his crew to build three tiny homes in the new community. The cost of the crew to the contractor was $65,000. The CEO of SHV was happy to receive the free labour, as it saved SHV from having to pay for the contractors to build the homes. v. Total cost of materials and labour for the three homes built in 2026 was $250,000 and $115,000, respectively. These homes were inhabited on September 1, 2026 and are expected to have a remaining useful life of 30 years. vi. Salary expense for 2026 was $75,000, with $6,500 still owing at year end. The current liabilities in the general fund represented salaries owed at the end of 2025. vii. Total unrestricted contributions of $650,000 were received in the year. Rent of $250,000 and utilities of $10,000 were paid in the year. There are utilities owing of $1,500 at the end of 2026.

viii. SHV amortizes its capital assets on a straight-line basis, assuming no residual value, based on the number of months available in the year. ix. The $2,500 current liability owing at the end of 2025 in the capital asset fund was paid. On October 1 of this year, additional appliances and furnishings at a discounted cost $25,000 were purchased. The value of the appliances and furnishings was $40,000 and had an estimated useful life of 8 years. Required: Prepare the statement of operations and statement of financial position for the year ending December 31, 2026.

Answer:

Cash (Note 1)

Statement of Financial Position General fund Endowment Capital asset $ 366,125 $ - $ 367,500 $

Total 733,625

Land

950,000

Furniture (net) (Note 2)

83,750

Buildings (net) (Note 3)

565,222

$ 1,966,472

900,000 3,232,597

8,000

Investments (Note 4) Total

366,125

900,000 900,000

Current liabilities

8,000

Fund balance Total

358,125 366,125

900,000 900,000

1,966,472 $ 1,966,472

3,224,597 3,232,597

Contribution revenue (Note 5)

Statement of Operations General fund Endowment Capital asset $ 650,000 $ 750,000 $ 830,000

Total 2,230,000

Investment income Expenses:

28,125

Amortization expense (Note 6)

28,125

26,028

Salary expense

75,000

Rent expense Utility expense Excess income over expenses

250,000 10,000 343,125

250,000 10,000 1,897,097

750,000

803,972

Notes 1 Cash—GF: $25,000 − $78,500 + $650,000 − $258,500 + $28,125 = $366,125 Cash—CF: $10,000 + $750,000 − $365,000 − $2,500 − $25,000 = $367,500 2 Furniture—CF: $60,000 + $40,000 − $15,000 − $1,250 = $83,750 3 Building—CF: $145,000 + $65,000 + $365,000 − $5,000 − $4,778 = $565,222 4 Investments—EF: $150,000 + $750,000 = $900,000 5 Contribution revenue—CF: $750,000 + $65,000 + $15,000 = $830,000 6 Amortization expense—CF: $20,000 + $4,778 + $1,250 = $26,028

Diff: 3 Type: ES Taxonomy Category: Creating Learning Outcome: 11.4 Prepare financial statements for not-for-profit organizations.

11.5 Explain and apply accounting standards required for not-for-profit organizations. 1) Which of the not-for-profit organizations would be required to capitalize and amortize its capital

assets? A) Martens Dog Rescue has annual revenues of $250,000 and assets of $75,000. B) Halifax Soccer Club had revenues of $350,000 and $550,000 in 2022 and 2023, respectively. C) StreetCat Rescue has less than five full-time employees. D) LunchBox for Kids had revenues of $550,000 and $650,000 in 2022 and 2023, respectively. Answer: D

Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 11.5 Explain and apply accounting standards required for not-for-profit organizations.

2) PrettyPaws, a local dog rescue not-for-profit organization, relies on volunteers to provide its rescue services. Without these volunteers, the dog rescue could not pay for these services. How should PrettyPaws account for the donated volunteer services? A) The volunteer services must be recorded as revenue, even if the value is difficult to determine. B) Given the services would not be provided without the volunteers, no amount of revenue should be recognized. C) The value of the volunteer services must be estimated. The value must be recognized as revenue with an offsetting expense. D) The value of the volunteer services must be estimated. The value must be recognized as revenue. Answer: B Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 11.5 Explain and apply accounting standards required for not-for-profit organizations.

3) A not-for-profit organization receives a capital asset from a donor. At what value should the not-forprofit organization report the asset? A) The net carrying value of the donor B) The replacement cost of the asset C) The net realizable value of the asset D) The fair market value of the asset Answer: D Diff: 1 Type: MC Taxonomy Category: Understanding Learning Outcome: 11.5 Explain and apply accounting standards required for not-for-profit organizations.

4) Nanaimo Food Bank, a not-for-profit organization, held its yearly fund-raising event on the last weekend in November. As a result of this event, it received contributions of $250,000, along with pledges of $85,000. This event has been held for the past 15 years and has been very successful. On average, Nanaimo Food Bank has collected 95% of the total pledges made in this yearly event. Nanaimo Food Bank has a December 31 year end. At the end of the current year, 15% of the pledges remained uncollected. Which of the journal entries correctly accounts for the pledges in the current year? A) Dr. Cash 72,250 Dr. Contribution receivable 12,750 Cr. Contribution revenue 85,000 B) Dr. Cash Dr. Contribution receivable Cr. Contribution revenue

72,250 8,500

C) Dr. Cash Cr. Contribution revenue

80,750

D) Dr. Cash Cr. Contribution revenue

72,250

80,750

72,250

Answer: B

Diff: 3 Type: MC Taxonomy Category: Evaluating Learning Outcome: 11.5 Explain and apply accounting standards required for not-for-profit organizations.

5) Harm Reduction Centre Inc. (HRC), a not-for-profit organization, provides safe injection sites and drug recovery services in major cities across Canada. While each site always has a paid registered nurse, the balance of the services is run by volunteers. HRC estimates that the volunteer services have a fair value of $15 an hour. If these services were not contributed on a volunteer basis, HRC would not pay for them. How should HRC account for these contributed services? A) Recognize the fair value of the volunteer services as contribution revenue and record salary expense for the same amount. B) It depends on whether HRCs average revenues for the past two years exceed $500,000 or not. C) Do not recognize the value of the donated services. D) Recognize the value of the volunteer services as a direct increase in net assets, along with a salary expense. Answer: C Diff: 2 Type: MC Taxonomy Category: Evaluating Learning Outcome: 11.5 Explain and apply accounting standards required for not-for-profit organizations.

6) Hockey R Us (HRU) is a not-for-profit organization that runs hockey tournaments and clinics for all ages. It also buys equipment needed at the tournaments. It receives government funding as well as tournament and clinic fees that are paid by participants. Generally, annual revenues have been $500,000. This year, HRU received a special grant of $950,000 to pay for needed renovations on the hockey rink ($450,000) and purchase new hockey equipment. Renovations to the rink amounted to $450,000 in the current year. The renovations extended the remaining useful life on the hockey rink to 20 years. Equipment in the amount of $150,000 was purchased. The equipment is expected to last five years. HRU has always capitalized its capital assets and depreciated them on a straight-line basis, taking a full year of amortization in the first year. Required: Prepare the journal entries for HRU for the transactions above for the current year. Answer: Dr. Cash 950,000 Cr. Deferred contribution—rink 450,000 Cr. Deferred contribution—equipment 500,000 To record the contributions received. Dr. Building (net) Cr. Cash To record the cost of the renovations.

450,000

Dr. Amortization expense 22,500 Dr. Deferred contribution—rink 22,500 Cr. Building (net) 22,500 Cr. Contribution revenue—rink 22,500 To record the current year deprecation ($450,000/20 years) and the related contribution revenue. Dr. Equipment Cr. Cash To record the purchase of the equipment.

150,000

Dr. Amortization expense 30,000 Dr. Deferred contribution—equipment 30,000 Cr. Equipment (net) 30,000 Cr. Contribution revenue—equipment 30,000 To record the current year deprecation ($150,000/5 years) and the related contribution revenue.

Diff: 2 Type: ES Taxonomy Category: Applying Learning Outcome: 11.5 Explain and apply accounting standards required for not-for-profit organizations.

Advanced Accounting in Canada, 1Ce (Johnstone) Appendix – Deferred Income Taxes (DIT) and the Consolidation Process Subsequent to Acquisition Appendix – Chapter 4 1) When amortizing fair value differences, which of the following is true for the deferred income tax balance relating to the fair value differences? A) The deferred income tax account on the statement of financial position is eliminated only when the fair value difference is fully amortized. B) The deferred income tax account on the statement of income is recorded only when the fair value differences are fully amortized. C) The deferred income tax account on the statement of financial position does not change with the amortization of the fair value differences. D) The deferred income tax account on the statement of financial position is reversed on the same basis as the fair values are amortized. Answer: D Diff: 2 Type: MC Taxonomy Category: Understanding

2) Inventory was acquired as part of a business combination that occurred at the end of the prior year. The inventory has a fair value $10,000 greater than the carrying value. The inventory was sold in the current year. The company pays tax at a rate of 20%. Which statement correctly explains the adjustment required in the consolidation process? A) Cost of sales would increase by $10,000 and deferred income tax expense would decrease by $2,000. B) Cost of sales would decrease by $10,000 and deferred income tax expense would increase by $2,000. C) Cost of sales would increase by $8,000. D) Cost of sales would decrease by $8,000 Answer: A Diff: 2 Type: MC Taxonomy Category: Evaluating

3) On December 31, 2022, Zion Corporation purchased 100% of the outstanding shares of Tella Tulip Inc. for $190,000. At that date, Tella's shareholders' equity consisted of $100,000 in common shares and $40,000 in retained earnings. The carrying value of Tella's assets and liabilities were equal to their fair value with the exception of the building, which had a fair value of $30,000 in excess of the carrying value. The remaining useful life of the building at acquisition is 10 years. Both Tella and Zion pay tax at a rate of 20%. Which statement correctly reflects the consolidating adjustment that is required in 2023? A) Depreciation expense will decrease by $3,000 in 2023 to reflect the fair value of the building that existed at acquisition. Deferred income tax expense will increase by $600 to reflect the change in temporary difference related to the building. B) The consolidated balance of the building, net of depreciation, will increase by $24,000 to reflect the remaining fair value at acquisition, net of tax C) The consolidated balance of the building, net of depreciation, will decrease by $21,600 to reflect the remaining fair value at acquisition, net of tax D) Depreciation expense will increase by $3,000 in 2023 to reflect the fair value of the building that existed at acquisition. Deferred income tax expense will decrease by $600 to reflect the change in temporary difference related to the building. Answer: D Diff: 3 Type: MC Taxonomy Category: Evaluating

4) On January 1, 2023, Rossie Corporation, a public company, acquired 100% of the voting common shares of Mya Inc. At acquisition, all of Mya's assets and liabilities equal their carrying value except for the following assets: Carrying value Fair value Inventory $ 150,000 $ 250,000 Building 250,000 450,000 Patent

200,000

Both companies have an inventory turnover of 45 days. At acquisition, the building had a remaining useful life of 10 years. The patent has a remaining useful life of 5 years. Both companies pay tax at a rate of 20%. What amount represents the deferred income tax asset or deferred income tax liability related to the acquisition differentials at December 31, 2023? A) Deferred income tax asset of $68,000 B) Deferred income tax liability of $68,000 C) Deferred income tax asset of $80,000 D) Deferred income tax liability of $80,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Analyzing

5) How should the deferred income tax related to the fair value differentials be accounted for in the consolidation process? A) The deferred income tax should be expensed in the first year. B) The deferred income tax implications should be netted against the fair value differences on the statement of financial position. C) As we adjust the temporary differences in the consolidation process, through the amortization of the fair value differences, we adjust the deferred income tax asset (liability) balance to reflect the change in the temporary difference. D) The deferred income tax asset (liability) should only be adjusted when the depreciable or nondepreciable asset is sold outside the entity. Answer: C Diff: 1 Type: MC Taxonomy Category: Understanding

6) On January 2, 2023, Quepasa Inc. acquired 100% of the voting common shares of Strauss Corporation for $340,000 cash. At that time, the shareholders' equity of Strauss consisted of $120,000 in common shares and $90,000 in retained earnings. The fair values of the all the assets and liabilities were equal to the carrying value with the exception of the inventory and building. The inventory's fair value was $50,000 in excess of the carrying value. The building's fair value was $100,000 less than the carrying value, and it had a remaining useful life of 8 years. The fair value was considered to be a temporary decline in value. Both companies pay tax at a rate of 20%. Quepasa uses the cost method to account for its investment in Strauss. In 2024, goodwill was determined to be impaired by $10,000. Both companies have a December 31 year-end. The following information relates to the year ending December 31, 2025: Quepasa $ 650,000 290,000

Net income Dividends declared and paid

Strauss $ 475,000 150,000

Which of the following amounts represents consolidated net income for the year ending December 31, 2025? A) $1,122,000 B) $985,000 C) $965,000 D) $935,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying

7) Murphy Corporation acquired 100% of the common shares of Brown Inc. on January 1, 2023. The acquisition resulted in a goodwill balance of $125,000. At acquisition, the only fair value differences related to a customer list, which was understated by $90,000, and the accounts receivable, which was overstated by $15,000. The customer list had a useful life of 20 years. For the year ending December 31, 2023, Murphy reported net income of $310,000 and Brown reported net income of $175,000. Murphy declared and paid dividends of $150,000, and Brown declared and paid dividends of $75,000 on November 30, 2023. Both companies pay tax at a rate of 20%. What is the consolidated net income for the year ending December 31, 2023? A) $183,400 B) $401,600 C) $418,400 D) $476,600 Answer: C Diff: 2 Type: MC Taxonomy Category: Applying

8) Worth Corporation acquired all the common shares of Net Inc. on December 31, 2023, when Net's retained earnings was $1,200,000. Two of Net's assets had a fair value different from carrying value: a building and a patent. At acquisition, the building's fair value was greater than the carrying value by $80,000, and the building had an estimated useful life of 8 years. The patent's fair value was greater than the carrying value by $140,000, and the patent had an estimated useful life of 7 years. Worth accounts for its investment in Net using the cost method. Both companies pay tax at a rate of 20%. The following are excerpts from the separate-entity statements as of December 31, 2026: Worth $ 375,000 75,000 1,675,000

Net income Dividends declared and paid on Nov. 15, 2026 Opening retained earnings, January 1, 2026

Net $ 495,000 200,000 2,100,000

Which amount represents consolidated net income for the year ending December 31, 2026? A) $894,000 B) $646,000 C) $846,000 D) $670,000 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying

9) Worth Corporation acquired all the common shares of Net Inc. on December 31, 2023, when Net's retained earnings was $1,200,000. Two of Net's assets had a fair value different from carrying value: a building and a patent. At acquisition, the building's fair value was greater than the carrying value by $80,000, and the building had an estimated useful life of 8 years. The patent's fair value was greater than the carrying value by $140,000, and the patent had an estimated useful life of 7 years. Worth accounts for its investment in Net using the cost method. The following are excerpts from the separate-entity statements as of December 31, 2026: Worth $ 375,000 75,000 1,675,000

Net income Dividends declared and paid on Nov. 15, 2026 Opening retained earnings, January 1, 2026

Net $ 495,000 200,000 2,100,000

Which amount represents consolidated retained earnings for the year ending December 31, 2026? A) $3,098,000 B) $2,503,000 C) $3,242,000 D) $4,298,000 Answer: A Diff: 2 Type: MC Taxonomy Category: Applying

10) On January 1, 2020, Paulo Corporation acquired 100% of the common shares of Sadeen Ltd. for $1,848,000. On that date, the assets and liabilities had the following carrying and fair values: Sadeen Ltd. Cash Accounts receivable Inventory Equipment, net Land Total assets Accounts payable Bond payable Common shares Retained earnings Total liabilities and shareholders' equity

Carrying Value $ 85,000 240,000 215,000 1,200,000 250,000 1,990,000 $ 235,000 365,000 500,000 890,000 $ 1,990,000

Fair Value 85,000 225,000 300,000 1,484,000 235,000 235,000 365,000

On the date of acquisition: • The equipment had a remaining useful life of 10 years. • Inventory on hand was sold by December 31, 2020. • Sadeen's accounts receivable turns over every 52 days. The separate-entity financial statements for Paulo and Sadeen for the year ending December 31, 2023 are: Statement of Financial Position Cash Accounts receivable Inventory Equipment, net Land Investment in Sadeen (cost method) Total assets Accounts payable Deferred income tax liability Bonds payable Common shares Retained earnings Total liabilities and shareholders' equity

$ $

Paulo 361,000 528,000 660,000 1,312,000 345,000 1,848,000 5,054,000 528,000

25,000 672,000 1,500,000 2,329,000 5,054,000

$ $

Sadeen 47,500 295,000 350,000 1,250,000 250,000 2,192,500 200,000

7,500 365,000 500,000 1,120,000 2,192,500

Additional information: • Both companies pay tax at a rate of 20%. • Goodwill is tested for impairment each reporting period. In 2021, it was determined that goodwill was impaired by $66,500. In 2023, the goodwill was further impaired by $25,000.

Required: Calculate the consolidated balances on the SFP as at December 31, 2023 for the following balances: i. Goodwill ii. Equipment(net) iii. Land iv. Deferred income tax asset (liability)

Answer: i. Goodwill Purchase Price Less the carrying value: Acquisition differential Allocated to: Accounts receivable Inventory Equipment (net) Land Deferred income tax liability* Goodwill at acquisition Less the write off in: Goodwill balance at end of 2023

$ Common shares Retained earnings

$500,000 890,000

Carrying value $ 240,000 215,000

1,848,000 1,390,000 458,000

Fair value 225,000 300,000

15,000 (85,000)

1,200,000

1,484,000

(284,000)

250,000

235,000

15,000 67,800 186,800 (66,500) (25,000) 95,300

2021 2023

*Deferred income tax: Accounts receivable Inventory Equipment (net) Land Tax basis Tax at 20% Deferred income tax

(15,000) 85,000 284,000 (15,000) 339,000 20% 67,800

ii. Equipment(net): $1,312,000 + $1,250,000 + $284,000 − $113,600 = $2,732,400 iii. Land: $345,000 + $250,000 − $15,000 = $580,000 iv. Deferred income tax asset (liability): $(25,000) − $7,500 − $67,800 + $22,720 − $3,000 + $17,000 = $(63,580) Alternative calculation for deferred income tax asset (liability) balance is: Parent's DITA(L) Sub's DITA(L) Remaining DIT balance

(7,500)

Unamortized FVD

Land Equipment DITA(L) balance

15,000 (170,400)

Diff: 2 Type: ES Taxonomy Category: Analyzing

(25,000)

3,000 (34,080) (63,580)

11) On December 31, 2021, Lenore Corporation issued 275,000 shares to the shareholders of Mido Supplies Ltd. in exchange for 100% of the outstanding common shares. Prior to the transaction, Lenore had 700,000 common shares outstanding. The shares were trading at $40 per share on December 31, 2021. On the date of acquisition, the shareholders' equity of Mido consisted of common shares of $2,100,000 and retained earnings of $7,800,000. All of the assets and liabilities had a fair value equal to carrying value with the exception of:

Inventory Land Equipment

Carrying value $ 185,000 495,000 975,000

Fair value 295,000 725,000 850,000 20-year useful life

As part of the negotiations, Lenore and Mido agreed that the fair value of Mido's internally created customer list was $100,000 at acquisition. The customer list had a remaining estimated lifespan of 5 years. Both companies pay tax at a rate of 20%. For the year ended December 31, 2025, the separate-entity statements of income for Lenore and Mido were as follows: Lenore Mido Sales $ 12,690,000 $ 8,180,000 Cost of goods sold 7,614,000 4,908,000 Gross profit 5,076,000 3,272,000 Other income (loss) 450,000 175,000 Expenses: Depreciation expense 1,035,000 465,200 General and administration expense 1,325,000 945,300 Income before taxes 3,166,000 2,036,500 Income taxes (current and deferred) 696,520 448,030 Net income $ 2,469,480 $ 1,588,470 Additional information: • Mido declared dividends of $350,000 on October 1, 2025. • Goodwill was tested for impairment each year. In 2024, it was determined that the fair value of goodwill was $710,000. • Mido still holds the land that existed at acquisition. Required: a) Calculate the entity's consolidated net income for the year ended December 31, 2025. b) Using the direct method, prepare a consolidated income statement for the year ended December 31, 2025.

Answer: Step 1: Confirm who the acquirer is:

Analysis of control Original shareholder group holds New shareholder group (original shareholders of Mido) Number of shares after transaction

Shares 700,000 275,000 975,000

Percentage ownership 71.8% 28.2%

Change of control occurred over Mido's assets since the same shareholder group still controls Lenore. Lenore is the acquirer. To calculate the entity's consolidated net income, we need to determine goodwill at acquisition and the amortization schedule. Step 2 - Analyze the purchase price, and calculate goodwill: Purchase price Less carrying value: Common shares Retained earnings Acquisition differential Allocated to: Inventory Land Equipment Customer list Deferred income tax liability* Goodwill *Deferred income tax liability Inventory Land Equipment Customer list Tax base Tax at 20% Total deferred income tax liability

275,000 ×

40.00

$ 11,000,000 2,100,000 7,800,000 1,100,000 (110,000) (230,000) 125,000 (100,000) 63,000 $ 848,000

$ 110,000 230,000 (125,000) 100,000 315,000 20% $ 63,000

Step 3: Prepare an amortization schedule for the fair value differentials. Fair value Amortization Unamortized Unamortized differentials for years 2022, balance at end Amortization balance at end Account at acquisition 2023, 2024 of 2024 2025 of 2025 Inventory $ 110,000 $ (110,000) $ $ $ Land 230,000 230,000 230,000 Equipment (125,000) 18,750 (106,250) 6,250 (100,000) Customer list 100,000 (60,000) 40,000 (20,000) 20,000 DITA(L) (63,000) 30,250 (32,750) 2,750 (30,000) Goodwill 848,000 (138,000) 710,000 710,000 $1,100,000 $ (259,000) $ 841,000 $ (11,000) $ 830,000 Step 4: Gather information. Dividends paid by Mido to Lenore

350,000

a) Calculate the entity's consolidated net income for the year ended December 31, 2025. Lenore's net income

$ 2,469,480

Less dividends declared by Mido

350,000

Lenore's adjusted net income Mido's net income Fair value amortization for the current year

2,119,480

$ 1,588,470 (11,000)

Mido's adjusted net income Entity's consolidated net income

1,577,470

100%

1,577,470 $ 3,696,950

b) Using the direct method, prepare a consolidated statement of income for the year ending December 31, 2025. Consolidated Lenore Mido Adjustments total Sales $ 12,690,000 $ 8,180,000 $ 20,870,000 Cost of goods sold 7,614,000 4,908,000 12,522,000 Gross profit 5,076,000 3,272,000 8,348,000 Other income (loss) Expenses:

450,000

175,000

(350,000)

Depreciation expense General and administration expense

1,035,000

465,200

(6,250)

1,325,000

945,300

2,270,300

Income before taxes

3,166,000

2,036,500

4,838,750

696,520 $ 2,469,480

448,030 $ 1,588,470

Income taxes Net income

(2,750)

Diff: 2 Type: ES Taxonomy Category: Applying

275,000

20,000

1,513,950

1,141,800 $ 3,696,950

12) Below are some extracts from the consolidation file prepared by the controller of PPL prior to his resignation. The owner of the company has asked you to help them prepare the elimination entries that would be required to adjust the consolidated worksheet. PPL uses the cost method to account for its investment in SSL. Analysis of the acquisition price: Purchase price Less the carrying value at acquisition: Common shares Retained earnings Acquisition differential Allocated to: Inventory Land Equipment Supply contract Deferred income tax liability* Goodwill

590,000 125,000 155,000 310,000

(19,960) 30,000 (57,200) (90,000) 27,432 200,272

*Deferred income tax liability: Inventory Land Equipment Supply contract Tax base Tax at 20% Total deferred income tax liability

19,960 (30,000) 57,200 90,000 137,160 20% $ 27,432

Amortization schedule

Account

Fair value Amortization Unamortized Unamortized differentials at for years balance at end Amortization balance at end acquisition 2022, 2023 of 2023 2024 of 2024

Inventory

19,960

$ (19,960)

Land Equipment Supply contract DITA(L) Goodwill

(30,000) 57,200 90,000 (27,432) 200,272 $ 310,000

(11,440) (45,000) 15,280 $ (61,120)

(30,000) 45,760 45,000 (12,152) 200,272 $ 248,880

(5,720) (22,500) 5,644 (25,000) (47,576)

(30,000) 40,040 22,500 (6,508) 175,272 201,304

Additional information: • Dividends declared/paid by SSL to PPL

$37,500

Calculation of opening consolidated retained earnings as of January 1, 2024: PPL's retained earnings, January 1, 2024 Subsidiary's retained earnings, January 1, 2024 $ 564,320 Subsidiary's retained earnings at acquisition 155,000 Change in subsidiary's retained earnings since acquisition 409,320 Adjust for FVD amortizations to January 1, 2024 (61,120) Subsidiary's adjusted change in retained earnings to January 1, 2024 348,200 Percentage belonging to the PPL 100% Consolidated retained earnings at January 1, 2024 Calculation of consolidated net income as of December 31, 2024: Parent's net income for the year ending December 31, 2024 Less dividends declared by the subsidiary Parent's adjusted net income Subsidiary's net income for the year ending December 31, 2024 Adjust for the fair value differential amortizations for 2024 Subsidiary's adjusted net income (loss) - 2024 Entity's net income

92,906 (47,576) 45,330

$578,836

348,200 $927,036

$63,047 37,500 25,547

45,330 $ 70,877

Required: Based on the information provided, prepare the elimination entries required to prepare the consolidated statements for the year ending December 31, 2024.

Answer: Dr. Common shares 125,000 Dr. Retained earnings 564,320 Dr. Equipment 45,760 Dr. Supply contract 45,000 Dr. Goodwill 200,272 Cr. DITA(L) Cr. Land Cr. Equity pickup Cr. Investment in SSL To adjust the opening consolidated statement of financial position amounts.

12,152 30,000 348,200 590,000

Dr. Depreciation expense 28,220 Cr. Equipment 5,720 Cr. Supply contract 22,500 To record the current period amortization of the FVD related to equipment and the supply contract ($5,720 + $22,500) Dr. DITA(L) Cr. DITE(B) To record the current period amortization of the DITA(L).

5,644

Dr. Goodwill impairment Cr. Goodwill To record the goodwill impairment for the current year.

25,000

Dr. Dividend revenue Cr. Dividend declared To eliminate the intercompany dividends in the current year.

37,500

Diff: 3 Type: ES Taxonomy Category: Analyzing

5,644

25,000

37,500

Appendix – Chapter 5 1) On December 31, 2023, Powder Corporation acquired 100% of the common shares of Talc Corporation. There were no fair value differences or goodwill resulting from this transaction. The following information is extracts from the financial statements for the year ending December 31, 2026 for Powder and Talc: Powder $ 1,950,000 250,000 595,000 375,000

Net income Dividends Property, plant, and equipment (net) Inventory

Talc $ 1,100,000 125,000 850,000 265,000

Additional information: • On December 31, 2024, Powder sold a piece of equipment to Talc, recording a profit of $250,000. At that time, the estimated useful life of the equipment was 10 years. • In 2025, Talc sold $250,000 in inventory to Powder. At the end of 2025, Powder still held 22% of the inventory. In 2026, Talc sold $300,000 in inventory to Powder. Powder still held 30% of the inventory at the end of 2026. Talc earns 30% gross profit on all of its inventory sales. • Powder uses the cost method to account for its investment in Talc. Both companies pay tax at a rate of 20%. In the consolidation process, what is the net adjustment to the deferred income tax balance on the SFP for the year ending December 31, 2026? A) Increase the deferred income tax asset by $45,400 B) Decrease the deferred income tax asset by $45,400 C) Increase the deferred income tax asset by $34,600 D) Decrease the deferred income tax asset by $34,600 Answer: A Diff: 2 Type: MC Taxonomy Category: Applying

2) On January 1, 2023, Petit Four Inc.(PFI) acquired all the voting common shares of Delicious Treats Ltd. (DTL). Below is the analysis of the acquisition: Purchase price Less the carrying value at acquisition: Common shares Retained earnings Acquisition differential Allocated to: Inventory (inventory turns over every 25 days) Land Customer list (useful life of 15 years) DITA(L)* Goodwill

825,000 125,000 245,000 455,000

*Deferred income tax liability: Inventory Land Customer list

Tax at 20% Total deferred income tax liability

(32,460) (25,000) (187,500) 48,992 259,032

32,460 25,000 187,500 244,960 20% 48,992

Below are extracts from the separate-entity financial statements for the year ending December 31, 2025.

Opening retained earnings Net income Dividends Closing retained earnings

PFI 650,000 165,000 (75,000) 740,000

DTL 675,000 125,000 (50,000) 750,000

Additional information: • In 2024, DTL sold $75,000 in inventory to PFI, earning a gross profit of 70%. PFI still held 40% of that inventory at the end of 2024. • In 2025, DTL sold $45,000 in inventory to PFI, earning a gross profit of 65%. PFI still held 35% of that inventory at the end of 2025. • On June 30, 2023, PFI sold a piece of equipment to DTL for $95,000. At the time of the sale, the equipment had a net carrying value of $30,000 and a remaining useful life of 5 years. DTL still uses the equipment in its operations at the end of 2025. • Both companies pay tax at a rate of 20%. Required: Prepare a calculation of opening consolidated retained earnings as of January 1, 2025.

Answer: Step 1: Gather information Intercompany Inventory sales— Upstream DTL selling to PFI—2024

$ 75,000 70% $ 52,500 40% $ 45,000 65% $ 29,250 35%

Total profit Unrealized profit at end of 2024 DTL selling to PFI—2025 Total profit Unrealized profit at end of 2025 Intercompany equipment sale— Downstream PFI selling to DTL—in 2023 Net carrying value Profit on sale Amortization adjustment—Realized in 2023 (6 months) Amortization adjustment—realized in 2024 Unrealized profit—at December 31, 2024 Amortization adjustment—realized in 2025 Unrealized profit—at December 31, 2025

$ 95,000 30,000

Before tax Tax (@ 20%)

After-tax

$ 21,000

4,200

16,800

$ 10,238

2,048

8,190

$ 65,000

$ 13,000

$ 52,000

9,100

$ 36,400

2,600

10,400

6,500

$ 26,000

6,500 13,000 $ 45,500

13,000 $ 32,500

Step 2: Prepare a calculation of opening consolidated retained earnings as of January 1, 2025. Parent's retained earnings, January 1, 2025 Less the unrealized equipment profit after-tax at January 1, 2025 Adjusted retained earnings Subsidiary's retained earnings, January 1, 2025 Subsidiary's retained earnings at acquisition Change in subsidiary's retained earnings since acquisition Adjust for: Fair value amortizations to January 1, 2025: Inventory DIT Customer list ($187,500/15 years × 2) DIT Less unrealized opening upstream inventory profit Subsidiary's adjusted change in retained earnings to January 1, 2025 Percentage belonging to the parent Consolidated retained earnings at January 1, 2025

650,000 (36,400)

Diff: 2 Type: ES Taxonomy Category: Applying

613,600

675,000 245,000 430,000

(32,460) 6,492 (25,000) 5,000 (16,800) 367,232 100%

367,232 980,832

Appendix – Chapter 6 1) On December 31, 2024, Pottery Inc. purchased 85% of the 100,000 common shares of Glass Ltd. for $1,200,000. Immediately after the acquisition, Glass's shares were trading at $14. The following is information related to Glass at acquisition: Carrying value $ 75,000 152,000 275,000 550,000

Accounts receivable Inventory Customer list (useful life 10 years) Common shares Retained earnings

Fair value $ 72,000 200,000 175,000

Below are extracts from the December 31, 2026, separate-entity financial statements of Pottery and Glass.

Net income Dividends Retained earnings, closing

Pottery 350,000 150,000 975,000

Glass 295,000 75,000 970,000

Pottery uses the cost method to account for its investment in Glass and there are no intercompany transactions since acquisition. Inventory and accounts receivable turn over every 60 days. Assuming the parent uses the fair value method, at what value will the NCI be shown in the consolidated SFP at December 31, 2026? A) $282,600 B) $263,400 C) $267,265 D) $274,765 Answer: B Diff: 2 Type: MC Taxonomy Category: Applying

Accounts receivable Inventory Customer list (useful life 10 years) Common shares Retained earnings

Fair value 72,000 200,000 175,000

Below are extracts from the December 31, 2026, separate-entity financial statements of Pottery and Glass.

Net income Dividends Retained earnings, closing

Pottery 350,000 150,000 975,000

Glass 295,000 75,000 970,000

Pottery uses the cost method to account for its investment in Glass and there are no intercompany transactions since acquisition. Inventory and accounts receivable turn over every 60 days. Both companies pay tax at a rate of 20%. What value represents consolidated net income attributable to NCI for the year ending December 31, 2026? A) $36,750 B) $85,088 C) $42,150 D) $94,650 Answer: C Diff: 2 Type: MC Taxonomy Category: Applying

Net income Dividends Retained earnings, closing

Grape 350,000 150,000 975,000

Wrath 295,000 75,000 1,142,000

Grape uses the cost method to account for its investment in Wrath and there have been no intercompany transactions since acquisition. Inventory and accounts receivable turn over every 60 days. Both companies pay tax at a rate of 20%. On December 31, 2026, goodwill was determined to be impaired by $10,000. Required: a) Calculate goodwill at December 31, 2026, assuming the parent uses the fair value method. b) Calculate the value of NCI on the SFP at December 31, 2026. c) Calculate consolidated net income attributable to NCI for the year ending December 31, 2026.

Answer: a) Calculate goodwill at acquisition assuming the parent uses the fair value method. % ownership

80.0%

20.0%

80,000

20,000

Parent $1,360,000

Purchase price Value to NCI Total value

Less carrying value: Common shares Retained earnings Acquisition differential Accounts receivable Inventory Building (10 years) Deferred income tax liability* Goodwill Allocation of goodwill Allocation of impairment ($10,000) Goodwill at December 31, 2026

100,000

NCI $ 300,000

Total

1,360,000

300,000

$1,660,000 1,660,000

(200,000) (537,600) 622,400

(50,000) (134,400) 115,600

(250,000) (672,000) 738,000

4,000 12,000 (120,000) 20,800 539,200 85.05% (8,505) $ 530,695

1,000 3,000 (30,000) 5,200 94,800 14.95% (1,495) $ 93,305

5,000 15,000 (150,000) 26,000 634,000

*Deferred income tax liability: Accounts receivable Inventory Building (10 years)

(10,000) $ 624,000

(5,000) (15,000) 150,000 $ 130,000 20% $ 26,000

Tax at 20% Total deferred income tax liability

b) Calculate the value of NCI on the SFP at December 31, 2026. NCI can be calculated two ways (only one is needed): Method 1: The direct method (using fair value amounts) Carrying value of subsidiary at December 31, 2026 Common shares Retained earnings Unamortized FVD at December 31, 2026 Building ($150,000 − ($150,000/10 × 2)) DIT on building Adjusted fair value before goodwill Percentage belonging to NCI Percentage of goodwill belonging to NCI Goodwill to NCI at acquisition Goodwill impairment belonging to NCI Goodwill belonging to NCI NCI on the SFP at December 31, 2026 Method 2: Equity method NCI value at acquisition Wrath's retained earnings at December 31, 2026 Wrath's retained earnings at acquisition Unadjusted change Adjusted for the FVD: Accounts receivable DIT Inventory DIT Building DIT Wrath's adjusted change in retained earnings Percentage belonging to NCI Less Goodwill impairment belonging to NCI NCI at December 31, 2026

$ 250,000 1,142,000 120,000 (24,000) 1,488,000 20.0%

$ 297,600

94,800 (1,495)

93,305 $ 390,905

$300,000

$1,142,000 672,000 470,000 5,000 (1,000) 15,000 (3,000) (30,000) 6,000 462,000 20.0% 14.95%

92,400 (1,495)

90,905 $390,905

c) Calculate consolidated net income attributable to NCI for the year ending December 31, 2026. Wrath's net income Adjusted for the FVD amortizations: Building DIT Wrath's adjusted net income before the goodwill write-off Percentage belonging to NCI Less the goodwill write-off belonging to NCI Consolidated net income attributable to NCI

20.0%

Diff: 3 Type: ES Taxonomy Category: Evaluating

295,000

$ $

(15,000) 3,000 283,000 56,600 (1,495) 55,105

4) On January 1, 2024, PFI acquired 70% of the voting common shares of DTL. Below is the analysis of the acquisition: Parent NCI Total 70% 30% 100% Purchase price $700,000 $ 300,000 $ 1,000,000 Less the carrying value at acquisition: Common shares 125,000 Retained earnings 250,000 Acquisition differential 625,000 Allocated to: Inventory (inventory turns over every 25 days) 50,000 Land (120,000) Customer list (useful life of 10 years) (75,000) Deferred income tax liability* 29,000 Goodwill $ 509,000 *Deferred income tax liability: Inventory (inventory turns over every 25 days) Land Customer list (useful life of 10 years)

Tax at 20% Total deferred income tax liability

(50,000) 120,000 75,000 145,000 20% 29,000

Below are extracts from the separate-entity financial statements for the year ending December 31, 2027.

Opening retained earnings Net income Dividends Closing retained earnings

PFI 865,000 325,000 (150,000) $ 1,040,000

DTL 665,000 225,000 (85,000) 805,000

Additional information • In 2026, DTL sold $75,000 in inventory to PFI, earning a gross profit of 60%. PFI still held 45% of that inventory at the end of 2026. • In 2027, DTL sold $45,000 in inventory to PFI, earning a gross profit of 60%. PFI still held 35% of that inventory at the end of 2027. • On June 30, 2024, PFI sold a piece of equipment to DTL for $150,000. At the time of the sale, the equipment had a net carrying value of $30,000 and a remaining useful life of 5 years. DTL still uses the equipment in its operations at the end of 2027. • Goodwill was determined to be impaired by $15,000 on December 31, 2027. • Both companies pay tax at a rate of 20%. Required: Prepare a direct calculation of opening consolidated retained earnings as of January 1, 2027.

Answer: Step 1: Prepare an amortization schedule

Account Inventory Land Customer list DITA(L) Goodwill

Fair value Amortization for Unamortized differentials at 2024, 2025 and balance at end acquisition 2026 of 2026 $

(50,000) 120,000 75,000 (29,000) 509,000 625,000

50,000 (22,500) (5,500) 22,000

Unamortized balance at end of 2027

Amortization for 2027

120,000 52,500 (34,500) 509,000 647,000

(7,500) 1,500 (15,000) (21,000)

120,000 45,000 (33,000) 494,000 626,000

Step 2: Gather information Intercompany inventory sales - Upstream DTL selling to PFI - 2026 Gross profit Total profit Unrealized profit at end of 2026 DTL selling to PFI - 2027 Gross profit Total profit Unrealized profit at end of 2027

Intercompany equipment saleDownstream PFI selling to DTL in 2024 Net carrying value Profit on sale Amortization adjustment-Realized in 2024 (6 months) Amortization adjustment-realized in 2025 Amortization adjustment-realized in 2026 Unrealized profit-at December 31, 2026 Amortization adjustment-realized in 2027 Unrealized profit-at December 31, 2027

Before tax

Tax (@ 20%)

20,250

4,050 $

16,200

9,450

1,890 $

7,560

75,000 60% 45,000 45% 45,000 60% 27,000 35%

$ 150,000 30,000

$ 120,000

After-tax

$ 24,000

$ 96,000

60,000

$ 12,000

$ 48,000

24,000

4,800

19,200

7,200

$ 28,800

$ 12,000 24,000 24,000

$ 36,000

Step 3: Prepare a direct calculation of opening consolidated retained earnings as of January 1, 2027. PFI's retained earnings, January 1, 2027 Less the unrealized equipment profit after-tax at January 1, 2027 Adjusted retained earnings DTL's retained earnings, January 1, 2027 DTL's retained earnings at acquisition Change in DTL's retained earnings since acquisition Adjust for the fair value amortizations to January 1, 2027:

865,000 (48,000)

665,000 250,000 415,000

Inventory

50,000

Deferred income tax

(10,000)

Customer list ($75,000/10 years x 3)

(30,000)

Deferred income tax Less unrealized opening upstream inventory profit DTL's adjusted change in retained earnings to Jan.1, 2027 Percentage belonging to PFI Consolidated retained earnings at January 1, 2027

6,000 (16,200) 414,800 70%

Diff: 2 Type: ES Taxonomy Category: Analyzing

817,000

290,360 $ 1,107,360

5) On December 31, 2024, Davis Chocolates Inc. (DCI) acquired 80% of the common shares of Regal Molds Inc. (RMI). DCI uses the cost method to account for its investment in RMI. The following is the analysis of the purchase price at acquisition: Parent 75% $ 975,000

Purchase price Less the carrying value: Common shares Retained earnings Acquisition differential Allocated to the fair value differentials: Inventory Building (useful life of 14 years) Long-term debt (matures in 5 years) Deferred income tax liability* Goodwill

NCI 25% $ 325,000

Total $1,300,000 150,000 375,000 775,000 (75,000) (525,000) 50,000 110,000 $ 335,000

*Deferred income tax liability: Inventory Building (useful life of 14 years) Long-term debt (matures in 5 years)

75,000 525,000 (50,000) $ 550,000 20% $ 110,000

Tax at 20% Total deferred income tax liability

Answer: Step 1

Before tax

RMI selling to DCI-upstream Opening inventory-2025 ($500,000 × 45% × 15%) Closing inventory-2026 ($375,000 × 45% × 35%) DCI selling to RMI-downstream

$ 398,000 200,000

Current year amortization of profit Unrealized intercompany profit at Dec 31, 2026

Tax (@ 20%)

33,750 $

6,750

59,063

11,813

After-tax

27,000 47,250

$ 198,000 16,500

39,600 3,300

158,400 13,200

$ 181,500

36,300

145,200

475,000 (187,500) 13,200

Step 2 a) DCI's net income for the year ending December 31, 2026 Less dividends declared by the subsidiary Add the current year amortization of the equipment sale after tax Parent's adjusted net income Subsidiary's net income for the year ending December 31, 2026 Adjusted for: The fair value amortization of the building, one year ($525,000 /14)

300,700 $ 350,000

(37,500)

Deferred income tax on building

7,500

The fair value amortization of the LTD, one year Deferred income tax on LTD

10,000 (2,000)

Now-realized intercompany inventory profit after tax (2025) Unrealized intercompany inventory profit after tax (2026) Subsidiary's adjusted net income, 2026 Entity's net income b) Attributable to: DCI's shareholders ($300,700 + 75% × $307,750) Non-controlling interest ($307,750 × 25%) Diff: 2 Type: ES Taxonomy Category: Analyzing

27,000 (47,250) 307,750 $

307,750 608,450

$ $

531,513 76,937

6) On December 31, 2024, Reid Company acquired 65% of the outstanding common shares of Morgan Inc. Below is the analysis of the acquisition: Reid NCI Total 65% 35% 100% Purchase price $ 2,200,000 $ 1,184,615 $ 3,384,615 Less carrying value: Common shares 1,250,000 Retained earnings 1,475,000 Acquisition differential 659,615 Allocated to: Inventory (125,000) Equipment (10-year useful life) 250,000 Long-term debt (matures in 7 years) (70,000) Deferred income tax asset* (11,000) $ 703,615 *Deferred income tax asset: Inventory Equipment (10-year useful life) Long-term debt (matures in 7 years) Tax base Tax at 20% Total deferred income tax asset

$ 125,000 (250,000) 70,000 (55,000) 20% $ (11,000)

Reid uses the cost method to account for its investment in Morgan. Below are extracts from the separateentity financial statements of Reid and Morgan for the year ending December 31, 2027:

Opening retained earnings Net income Dividends Closing retained earnings

Reid 5,650,000 1,250,000 (375,000) 6,525,000

Morgan 2,950,000 875,000 (250,000) 3,575,000

Answer: Morgan's carrying value Common shares Retained earnings at Dec 31, 2027 Add: Unamortized FVD at Dec. 31, 2027 Equipment ($250,000 − ($250,000/10 × 3 years))

1,250,000 3,575,000

(175,000)

DIT–Equipment Long-term debt ($70,000 − ($70,000/7 × 3 years))

35,000

DIT–LTD

(8,000)

40,000

Goodwill Less unrealized after-tax profit on intercompany patent: Sell price Carrying value Intercompany profit Amortized (3 years)

703,615

$ 2,250,000 1,750,000 500,000 150,000

Unrealized intercompany profit at Dec. 31, 2027 Adjusted for the deferred income tax After tax unrealized intercompany equipment profit Less unrealized after-tax profit on intercompany inventory ($570,000 × 30%) Tax on profit Unrealized after-tax profit on intercompany inventory Fair value of Morgan at December 31, 2027 Percentage belonging to NCI

$350,000 (70,000) (280,000)

171,000 34,200

35%

Diff: 2 Type: ES Taxonomy Category: Applying

$ $

(136,800) 5,003,815 1,751,335

7) On December 31, 2024, Reid Company acquired 65% of the outstanding common shares of Morgan Inc. Below is the analysis of the acquisition: Reid NCI Total 65% 35% 100% Purchase price $ 2,200,000 $ 1,184,615 $ 3,384,615 Less carrying value: Common shares 1,250,000 Retained earnings 1,475,000 Acquisition differential 659,615 Allocated to: Inventory (125,000) Equipment (10-year useful life) 250,000 Long-term debt (matures in 7 yrs) (70,000) Deferred income tax asset* (11,000) $ 703,615 *Deferred income tax asset : Inventory Equipment (10-year useful life) Long-term debt (matures in 7 years) Tax base Tax at 20% Total deferred income tax asset

$ 125,000 (250,000) 70,000 (55,000) 20% $ (11,000)

Reid uses the cost method to account for its investment in Morgan. Below are extracts from the separateentity financial statements of Reid and Morgan for the year ending December 31, 2027:

Opening retained earnings Net income Dividends Closing retained earnings Additional information:

Reid 5,650,000 1,250,000 (375,000) 6,525,000

Morgan 2,950,000 875,000 (250,000) 3,575,000

• On January 1, 2025, Morgan sold a patent to Reid for $2,250,000. The patent had a carrying value of $1,750,000 with a remaining estimated useful life of 10 years. • During 2026, Reid sold $750,000 in inventory to Morgan, earning a profit of $525,000. Morgan still held 25% of this inventory at December 31, 2026. • During 2027, Morgan sold $950,000 in inventory to Reid, earning a profit of $570,000. Reid still held 30% of this inventory at December 31, 2027. • Both companies pay tax at a rate of 20%. Required: Determine the NCI balance on the December 31, 2027 consolidated statement of financial position using the equity pickup method.

Answer: NCI at acquisition Add equity pickup: Morgan's retained earnings at Dec 31, 2027 Morgan's retained earnings at acquisition Unadjusted change since acquisition Adjusted for the FVD amortization:

1,184,615

3,575,000 1,475,000 2,100,000

Inventory

(125,000)

DIT–inventory

25,000

Equipment

75,000

DIT–equipment

(15,000)

Long-term debt

(30,000)

DIT–LTD Less unrealized intercompany profit on patent sale: Sell price Carrying value Intercompany profit Amortized (3 years) Unrealized intercompany profit at Dec. 31, 2027 Adjusted for the deferred income tax After-tax unrealized intercompany equipment profit Less unrealized after-tax profit on intercompany inventory ($570,000 × 30%) Tax on profit Unrealized after-tax profit on intercompany inventory

Morgan's adjusted retained earnings at Dec. 31, 2027 Equity pickup belonging to NCI NCI on SFP at December 31, 2027

6,000

$ 2,250,000 1,750,000 500,000 150,000 350,000 (70,000) (280,000)

171,000 (34,200) (136,800)

1,619,200 35%

Diff: 2 Type: ES Taxonomy Category: Applying

566,720 $1,751,335

TEST BANK for Advanced Financial Accounting in Canada. 1st Edition by Johnstone, Dewald & Wilson

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Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 2 Accounting for Non-Controlled Investments