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Test Bank-4-5

The document discusses various concepts related to business combinations and consolidation methods, including fair value enterprise method, non-controlling interests, and goodwill. It poses multiple-choice questions aimed at assessing understanding of these topics, such as how to determine fair value, the treatment of goodwill, and the correct journal entries for different scenarios. The content is structured to facilitate learning and comprehension of financial accounting principles related to acquisitions.

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0% found this document useful (0 votes)

14 views148 pages

Test Bank-4-5

Uploaded by

windsorwin18

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Available Formats

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False; For a business combination to occur anentity must acquire control

over the other entity's business. If assets are acquired that do not
constitute a business, then a basket purchase has occurred which is not a
business combination.
58) TRUE
True; Consolidated financial statements are net required when the
acquirer directly purchases the net assets of a business.
59) TRUE
60) FALSE
Goodwill exists if the value of the business (not just assets) acquired is
greater than the fair value of the identifiable net assets. The synergy of
the management, employees and assets working together make the value
of business greater than the sum of its individual parts. If a business is
not acquired, the acquirer would only be paying fair value for the assets
(i.e., no goodwill).

Student name:
1) Which of the following is the best approach to determine the fair value of the non-
controlling interest under the fair value enterprise method?

A) Use the trading price of shares of a comparable company in anactive market.

B) Use the market trading prices of the outstanding subsidiary shares (not owned by the
parent) a few weeks before and after the acquisition.
C) Use a valuation model based on the subsidiary's residual income projections.
D) Use the share price paid by the parent.

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Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Learning Objective : 04-02 Prepare a consolidated balance sheet using the fair value enterprise metho
Topic : 04-03 Fair Value Enterprise (FVE) Method
Topic : 04-04 Example 1 Fair Value of Non-Controlling Interest as Evidenced by Market Trends
Topic : 04-05 Example 2 Fair Value of Non-Controlling Interest Implied by Parent's Consideration Paid
Bloom's : Remember

2) On the date of acquisition, consolidated retained earnings and consolidated common

shares in shareholders' equity are equal to:

A) the sum of the parent and subsidiary's shareholders' equity.

B) the sum of the parent's shareholders' equity plus its pro-rata share of the subsidiary's
shareholders' equity.
C) the parent's shareholders' equity.
D) the subsidiary's shareholders' equity.

3) A Co. has acquired an80% controlling interest in B Co. If using the proportionate
consolidation method, the consolidated balance sheet on the date of acquisition, will contain:

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A) the parent's pro-rata share of the assets and liabilities of the subsidiary at book value.
B) 100% of the assets and liabilities of the subsidiary at fair market value.
C) 100% of the assets and liabilities of the subsidiary at book value.
D) the parent's pro-rata share of the assets and liabilities of the subsidiary at fair market
value.

4) In which of the following situations will there be anacquisition differential?

A) The total consideration given and the carrying amount of the net assets of the acquired
company at the date of acquisition are the same amount.
B) The total consideration given exceeds the carrying amount of net assets of the
acquired company at the date of acquisition.
C) When the parent company establishes a new company as a subsidiary.
D) The carrying amount of the net assets of the acquired company are equal to their fair
value and no goodwill is acquired in the business combination.

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5) Which of the following is the correct journal entry to record the gain of $5,000 resulting
from a bargain purchase (i.e., negative goodwill) if the parent company uses the equity method to
account for its investment in the subsidiary?

Debit Credit

Investment in subsidiary 5,000

Gain on bargain purchase of subsidiary 5,000

Debit Credit

Investment in subsidiary 5,000

Goodwill 5,000

Debit Credit

Goodwill 5,000

Gain on bargain purchase of subsidiary 5,000

D) No entry required.

Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Bloom's : Remember
Learning Objective : 04-04 Explain the concept of negative goodwill and describe how it should be tre
Topic : 04-07 Bargain Purchases

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6) Horne Enterprises Inc. (Horne) purchases 80% of the outstanding voting shares of Belle
Inc. (Belle) on January 1, 2022. Horne is using the fair value enterprise (FVE) consolidation
method. On that date, which of the following statements pertaining to the non-controlling interest
(NCI) is true?

A) Horne's non-controlling interest (NCI) account will include 20% of the carrying
amount of Belle's net assets, 20% of the fair value excess and 20% of the goodwill.
B) Horne's non-controlling interest (NCI) account will include 20% of the carrying
amount of Belle's net assets.
C) Horne's non-controlling interest (NCI) account will include 20% of the acquisition
differential on the date of acquisition.
D) Horne's non-controlling interest (NCI) account will include 20% of the carrying
amount of Belle's net assets and 20% of the fair value excess.

7) Which of the following is a TRUE statement pertaining to a bargain purchase?

A) A bargain purchase occurs when the total consideration is less than the net book value
of the subsidiary's identifiable net assets.
B) A bargain purchase occurs when the total consideration is less than the fair market
value of the subsidiary's identifiable net assets.
C) A bargain purchase occurs when the total consideration is greater than the fair market
value of the subsidiary's identifiable net assets.
D) A bargain purchase occurs when the total consideration is greater than the net book
value of the subsidiary's identifiable net assets.

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8) Which of the following statements pertaining to the non-controlling interest (NCI) when
using the identifiable net assets (INA) method is TRUE?

A) The NCI value is based on the full fair value of the subsidiary including goodwill.
B) The NCI value is based on the book value of the net identifiable assets of the
subsidiary excluding any value pertaining to goodwill.
C) The NCI value is based on the book value of the net identifiable assets of the
subsidiary including goodwill.
D) The NCI value is based on the fair value of the net identifiable assets of the subsidiary
but excludes any value pertaining to goodwill.

Question Details
Accessibility : Keyboard Navigation
Topic : 04-02 Consolidation Methods
Difficulty : Easy
Bloom's : Remember
Learning Objective : 04-03 Prepare a consolidated balance sheet using the identifiable net assets met
Topic : 04-06 Identifiable Net Assets Method

9) One weakness associated with the fair value enterprise method is that:

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A) it is inconsistent with the historical cost principle.

B) non-controlling interest (NCI) is computed using the fair market values of the
subsidiary's net assets.
C) non-controlling interest (NCI) is computed using the book values of the subsidiary's
net assets.
D) the value assigned to the non-controlling interest (NCI) will affect the goodwill
valuation for the subsidiary.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 04-02 Prepare a consolidated balance sheet using the fair value enterprise metho
Topic : 04-03 Fair Value Enterprise (FVE) Method
Topic : 04-04 Example 1 Fair Value of Non-Controlling Interest as Evidenced by Market Trends
Topic : 04-05 Example 2 Fair Value of Non-Controlling Interest Implied by Parent's Consideration Paid
Bloom's : Remember
Learning Objective : 04-03 Prepare a consolidated balance sheet using the identifiable net assets met
Topic : 04-06 Identifiable Net Assets Method
DifficultyMedium

10) Under the parent company method, which of the following statements pertaining to
consolidated financial statements is TRUE?

10)

A) The consolidated balance sheet is prepared by adding the carrying amounts of both the
parent and its subsidiary.
B) The consolidated balance sheet is prepared by adding the carrying amounts of both the
parent and its subsidiary, as well as the parent's share of the fair value excess and goodwill.
C) The consolidated balance sheet is prepared by adding the fair market values of both
the parent and its subsidiary as well as the parent's share of the fair value excess and goodwill.
D) The consolidated balance sheet is prepared by adding together the fair market values
of both the parent and its subsidiary.

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11) Under which of the following consolidation methods is the non-controlling interest
reported as a liability in the consolidated balance sheet?

11)

A) Proportionate consolidation method.

B) Parent company method.
C) Identifiable net assets method.
D) Fair value enterprise method.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 04-01 Define non-controlling interest and explain how its measured on the consol
Difficulty : Easy
Topic : 04-03 Fair Value Enterprise (FVE) Method
Bloom's : Remember

12) Contingent consideration should be valued at:

12)

A) the fair value of the consideration on the date of acquisition.

B) the book value of the consideration at the date of acquisition.
C) the acquirer's pro-rata share of the subsidiary's net assets at book value at the date of
acquisition.
D) the acquirer's pro-rata share of the subsidiary's net assets at fair value at the date of
acquisition.

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Question Details
Accessibility : Keyboard Navigation
Bloom's : Remember
DifficultyMedium
Learning Objective : 04-05 Account for contingent consideration based on its classification as a liab
Topic : 04-10 Contingent Consideration

13) Contingent consideration will be classified as a liability when:

13)

A) it will be paid in the form of a fixed number of shares.

B) it will be paid in the form of cash, another asset, or a variable number of shares to
produce a fixed dollar amount.
C) the amount to be paid is determined at the future date pending the outcome of the
future event.
D) the fair market value of the consideration is determined.

Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Bloom's : Remember
Learning Objective : 04-05 Account for contingent consideration based on its classification as a liab
Topic : 04-10 Contingent Consideration
Topic : 04-11 Contingent Consideration Classified as a Liability

14) Which consolidation method should be used in preparing consolidated financial

statements in accordance with IFRS?

14)

A) Proportionate consolidation method.

B) Parent company method.
C) New-entity method.
D) Either identifiable net assets or fair value enterprise method.

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Question Details
Accessibility : Keyboard Navigation
Learning Objective : 04-01 Define non-controlling interest and explain how its measured on the consol
Difficulty : Easy
Bloom's : Remember
Topic : 04-01 Non-Wholly Owned Subsidiaries

15) A negative acquisition differential:

15)

A) is always equal to negative goodwill.

B) occurs when the total consideration given is less than the carrying value of the
subsidiary's net assets.
C) implies that the parent company may have overpaid for its acquisition.
D) cannot occur under the acquisition method.

16) Any goodwill on the subsidiary company's books on the date of acquisition:

16)

A) must be revalued to fair value on acquisition date.

B) must be eliminated in preparing consolidated financial statements.
C) must be recorded as a loss on acquisition.
D) must be subject to anannual impairment test.

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17) When the non-controlling interest's share of the subsidiary's goodwill cannot be reliably
determined, the method used to prepare consolidated financial statements is:

17)

A) the fair value enterprise method.

B) the proportionate consolidation method.
C) the parent company method.
D) the identifiable net assets method.

Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Bloom's : Remember
Learning Objective : 04-03 Prepare a consolidated balance sheet using the identifiable net assets met
Topic : 04-06 Identifiable Net Assets Method

18) The focus of the consolidated financial statements on the shareholders of the parent
company is characteristic of:

18)

A) the fair value enterprise method.

B) the proportionate consolidation method.
C) the parent company method.
D) both the parent company method and the proportionate consolidation method.

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19) Which method presents the non-controlling interest (NCI) in the shareholders' equity
section of the balance sheet?

19)

A) Identifiable net assets method.

B) Proportionate consolidation method.
C) Parent company method.
D) Acquisition method.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 04-01 Define non-controlling interest and explain how its measured on the consol
Topic : 04-02 Consolidation Methods
Bloom's : Understand
Difficulty : Easy
Learning Objective : 04-02 Prepare a consolidated balance sheet using the fair value enterprise metho
Topic : 04-03 Fair Value Enterprise (FVE) Method
Topic : 04-06 Identifiable Net Assets Method

20) When a contingent consideration arising from a business combination is classified as a

liability, how is any difference between the original estimate of the amount to be paid and the
actual amount paid accounted for if the difference arises due to a change in circumstances?

20)

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A) As anadjustment to the consideration paid for the subsidiary.

B) As anadjustment to anestimate included in the determination of net income.
C) As a direct adjustment to consolidated retained earnings.
D) As anadjustment to consolidated contributed surplus.

21) When a contingent consideration arising from a business combination is classified as a

liability, how is any change in its fair value as a result of new information about the facts and
circumstances that existed at the acquisition date accounted for if identified and measured within
one year subsequent to the acquisition date?

21)

A) As anadjustment to the acquisition cost of the subsidiary.

B) As anadjustment to anestimate included in the determination of net income.
C) As a direct adjustment to consolidated retained earnings.
D) As anadjustment to consolidated contributed surplus.

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22) When a contingent consideration arising from a business combination is classified as

equity, how is any change in its fair value accounted for if the difference arises due to a change
in circumstances?

22)

A) As anadjustment to the acquisition cost of the subsidiary.

B) As anadjustment to anestimate included in the determination of net income.
C) After initial recognition there is no remeasurement.
D) As anadjustment to consolidated contributed surplus.

23) Which statement about the differences between consolidation methods permitted under
ASPE and IFRS is true?

23)

A) IFRS and ASPE both require the use of the fair value enterprise method or the
identifiable net assets method.
B) IFRS and ASPE both require the use of the identifiable net assets method.
C) IFRS permits either the fair value enterprise method or identifiable net assets method;
ASPE requires the fair value enterprise method.
D) IFRS permits either the fair value enterprise method or the identifiable net assets
method; ASPE requires the identifiable net assets method.

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Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Bloom's : Remember
Learning Objective : 04-06 Analyze and interpret financial statements involving consolidation of non-
Topic : 04-14 Analysis and Interpretation of Financial Statements

24) IFRS permits several methods to be used to determine the fair value of the non-
controlling interest in a subsidiary at the acquisition date. Which of the following is NOT
anappropriate method to determine the fair value of the non-controlling interest (NCI)?

24)

A) The NCI may be valued at the market value of the subsidiary's shares.
B) The NCI may be valued by determining the fair value of the subsidiary by means of
anindependent business valuation and then deducting the fair value of the controlling interest.
C) The NCI may be valued proportionately to the price paid by the parent for its
controlling interest.
D) The NCI can't be valued objectively, so a nominal value of one dollar is assigned to
the NCI.

Question Details
Accessibility : Keyboard Navigation
Bloom's : Understand
Difficulty : Easy
Learning Objective : 04-02 Prepare a consolidated balance sheet using the fair value enterprise metho
Topic : 04-03 Fair Value Enterprise (FVE) Method
Topic : 04-04 Example 1 Fair Value of Non-Controlling Interest as Evidenced by Market Trends
Topic : 04-05 Example 2 Fair Value of Non-Controlling Interest Implied by Parent's Consideration Paid

25) Which accounts differ on the consolidated balance sheet when using the fair value
enterprise method compared to the identifiable net assets method?

25)

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A) The investment in subsidiary balance and the consolidated retained earnings balance.
B) The goodwill balance and the consolidated retained earnings balance.
C) The goodwill balance and the non-controlling interest balance.
D) The investment in subsidiary balance and the non-controlling interest balance.

Question Details
Accessibility : Keyboard Navigation
Bloom's : Understand
Learning Objective : 04-02 Prepare a consolidated balance sheet using the fair value enterprise metho
Topic : 04-03 Fair Value Enterprise (FVE) Method
Learning Objective : 04-03 Prepare a consolidated balance sheet using the identifiable net assets met
Topic : 04-06 Identifiable Net Assets Method
DifficultyMedium

26) If the non-controlling interest at acquisition is based on the carrying value of the
subsidiary's identifiable net assets, which consolidation method is being applied?

26)

A) Proportionate consolidation method

B) Parent company method
C) Fair value enterprise method
D) Identifiable net assets method.

Question Details
Accessibility : Keyboard Navigation
Topic : 04-02 Consolidation Methods
Difficulty : Easy
Learning Objective : 04-02 Prepare a consolidated balance sheet using the fair value enterprise metho
Bloom's : Remember

27) In the event of a negative acquisition differential, under what circumstances is it still
possible to have positive goodwill?

27)

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A) It is not possible; once there is a negative acquisition differential, the result is negative
goodwill.
B) If the fair values of the subsidiary's net assets are less than their carrying amounts and
if the total consideration is greater than the fair value of the subsidiary's identifiable nets assets,
there will be positive goodwill.
C) If the total consideration exceeds the carrying value of the subsidiary's identifiable
nets assets, there will be positive goodwill.
D) If the carrying values of the subsidiary's net assets are less than their fair values and if
the total consideration is greater than the carrying amount of the subsidiary's identifiable nets
assets, there will be positive goodwill.

Question Details
Accessibility : Keyboard Navigation
Bloom's : Understand
Learning Objective : 04-04 Explain the concept of negative goodwill and describe how it should be tre
Topic : 04-07 Bargain Purchases
Topic : 04-08 Negative Acquisition Differential
DifficultyMedium

28) A business combination involves a contingent consideration. It is considered 80%

probable that a payment of $700,000 will become payable three years after the acquisition date.
Using a 5% discount rate, what liability should be recorded for the contingent consideration on
the acquisition date?

28)

A) $483,749
B) $604,686
C) $560,000
D) $700,000

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Question Details
Accessibility : Keyboard Navigation
DifficultyMedium
Learning Objective : 04-05 Account for contingent consideration based on its classification as a liab
Topic : 04-10 Contingent Consideration
Topic : 04-11 Contingent Consideration Classified as a Liability
Bloom's : Apply

29) A business combination involves a contingent consideration. It is considered 80%

probable that a payment of $700,000 will become payable three years after the acquisition date.
Using a 5% discount rate, how much interest expense should be recorded on the liability for the
first year after acquisition?

29)

A) $19,999
B) $24,187
C) $35,000
D) None; there is no effect on net income.

30) A business combination involves a contingent consideration. As a result, two years after
the acquisition date, the acquirer was required to issue anadditional 40,000 common shares at a
time when the fair value of the common shares was $4 per share. What effect would this
transaction have on the balance in the common shares account in the consolidated financial
statements on the date of acquisition?

30)

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A) It would increase by $160,000.

B) It would not change.
C) It would decrease by $160,000.
D) It is not possible to determine the effect from the information provided.

Question Details
Accessibility : Keyboard Navigation
Bloom's : Understand
DifficultyMedium
Learning Objective : 04-05 Account for contingent consideration based on its classification as a liab
Topic : 04-10 Contingent Consideration
Topic : 04-12 Contingent Consideration Classified as Equity

31) In aninflationary economy, under which consolidation method would total assets in the
consolidated balance sheet at the acquisition date be greatest?

31)

A) Proportionate consolidation method.

B) Parent company method.
C) Fair value enterprise method.
D) Identifiable net assets method.

Question Details
Accessibility : Keyboard Navigation
Bloom's : Understand
DifficultyMedium
Learning Objective : 04-06 Analyze and interpret financial statements involving consolidation of non-
Topic : 04-14 Analysis and Interpretation of Financial Statements

32) What value should be recorded as the fair value of a contingent consideration arising
from a business acquisition when it is classified as a liability?

32)

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A) The undiscounted maximum amount that could be paid.

B) The discounted present value of the maximum amount that could be paid.
C) The undiscounted probabilistic estimate of the amount to be paid.
D) The discounted probabilistic estimate of the amount to be paid.

33) If a business combination occurs and the consideration paid exceeds the fair value of the
identifiable net assets of the subsidiary on the acquisition date and the parent acquires less than
100% of the outstanding common shares of the subsidiary, which consolidation method will
result in the highest value for non-controlling interest on the acquisition date?

33)

A) Proportionate consolidation method.

B) Parent company method.
C) Fair value enterprise method.
D) Identifiable net assets method.

34) Under which consolidation method is the non-controlling interest NOT recognized?

34)

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A) Proportionate consolidation method.

B) Parent company method.
C) Fair value enterprise method.
D) Identifiable net assets method.

35) To determine the full value of the subsidiary under the fair value enterprise method, it is
necessary to combine the fair values of both the controlling interest and non-controlling interest
(NCI). In which of the following situations is it inappropriate to value the NCI by using the price
paid by the parent on a per-share basis for the acquiree's shares.

35)

A) The parent has paid a large premium per share to induce enough shareholders to sell
their shares.
B) The parent has acquired a large controlling interest.
C) The trading prices of the acquiree's shares just before and just after the business
combination are similar to the price paid by the parent.
D) The noncontrolling shareholders are able to exercise their minority rights to demand
the same price per share that was paid to the other shareholders.

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36) PayNet Inc. (PayNet) and Shale Ltd. (Shale) had the following balance sheets on July 31,
2022:
PayNet Inc Shale Ltd. Shale Ltd.

(carrying value) (carrying value) (fair value)

Cash $280,000 $36,000 $36,000

Accounts receivable 100,000 40,000 45,000
Inventory 60,000 24,000 20,000
Plant and equipment (net) 200,000 80,000 75,000
Goodwill - 8,000

Trademark - 12,000 24,000

Total assets $640,000 $200,000

Current liabilities $120,000 $50,000 50,000

Bonds payable 330,000 20,000 30,000
Common shares 90,000 80,000

Retained earnings 100,000 50,000

Total liabilities and equity $640,000 $200,000

Question Details

36.1) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what amount would appear in the non-controlling interest (NCI) account on the
consolidated balance sheet on the date of acquisition if the proportionate consolidation
method was used?

36.1)

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A) Nil
B) $46,380
C) $36,000
D) $102,857

36.2) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, What is the amount of the total assets on PayNet's consolidated balance sheet at
the date of acquisition if the proportionate consolidation method was used?

36.2)

A) $696,000
B) $599,200
C) $651,000
D) $780,000

36.3) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what is the amount of goodwill on PayNet's consolidated balance sheet at the
date of acquisition if the proportionate consolidation method was used?

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36.3)

A) $150,400
B) $136,400
C) $112,000
D) Nil

36.4) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what is the amount of the non-controlling interest (NCI) on PayNet's
consolidated balance sheet at the date of acquisition if the identifiable net assets (INA)
method was used?

36.4)

A) $36,000
B) $27,400
C) $39,000
D) Nil

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 04-03 Prepare a consolidated balance sheet using the identifiable net assets met
Topic : 04-06 Identifiable Net Assets Method
DifficultyMedium
Bloom's : Apply

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36.5) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what is the amount of goodwill on PayNet's consolidated balance sheet at the
date of acquisition if the identifiable net assets (INA) method was used?

36.5)

A) $76,000
B) $120,000
C) $112,000
D) Nil

36.6) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what is the amount of the shareholders' equity section on PayNet's consolidated
balance sheet at the date of acquisition if the identifiable net assets (INA) method was
used?

36.6)

A) $226,000
B) $190,000
C) $320,000
D) $167,400

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36.7) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what is the amount of the non-controlling interest (NCI) on PayNet's
consolidated balance sheet at the date of acquisition if the fair value enterprise (FVE)
method was used?

36.7)

A) $45,000
B) $84,000
C) $36,000
D) Nil

36.8) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what is the amount of goodwill on PayNet's consolidated balance sheet at the
date of acquisition if the fair value enterprise (FVE) method was used?

36.8)

A) $160,000
B) $88,000
C) $112,000
D) Nil

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36.9) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what is the amount of the shareholders' equity section on PayNet's consolidated
balance sheet at the date of acquisition if the fair value enterprise (FVE) method was used?

36.9)

A) $274,000
B) $185,000
C) $190,000
D) $270,000

36.10) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what is the total amount of the assets section on PayNet's consolidated balance
sheet at the date of acquisition if the fair value enterprise (FVE) method was used?

36.10)

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A) $840,000
B) $1,000,000
C) $804,000
D) $659,000

36.11) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of
$196,000, what is the total amount of the liabilities section on PayNet's consolidated
balance sheet at the date of acquisition if the fair value enterprise (FVE) method was used?

36.11)

A) $530,000
B) $474,000
C) $520,000
D) $499,000

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37) Keen Inc (Keen) and Lax Inc (Lax) had the following balance sheets on October 31,
2022:
Keen Inc Lax Inc Lax Inc

(carrying value) (carrying value) (fair value)

Cash $300,000 $80,000 $80,000

Accounts receivable 60,000 24,000 24,000
Inventory 30,000 54,000 56,000
Plant and equipment (net) 310,000 280,000 300,000
Trademark 12,000 8,000
Total assets $700,000 $450,000

Accounts payable 150,000 $200,000 200,000

Bonds payable 400,000 120,000 100,000
Common shares 100,000 60,000

Retained earnings 50,000 70,000

Total liabilities and equity $700,000 $450,000

Question Details

37.1) Assume Keen purchases 100% of Lax for cash consideration of $150,000 on
November 1, 2022. Keen records its investment using the cost method and prepares its
consolidated financial statements using the fair value enterprise (FVE) method.

Prepare the following:

a) the journal entry that Keen Inc. would make to record the acquisition; and
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition
date.

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37.2) Assume Keen purchases 80% of Lax for cash consideration of $160,000 on
November 1, 2022. Keen records its investment using the cost method and prepares its
consolidated financial statements using the fair value enterprise (FVE) method.

Prepare the following:

a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition
date.

37.3) Assuming that Keen Inc. purchases 100% of Lax Inc. for cash of $150,000 on
November 1, 2022, prepare the consolidated balance sheet on the date of acquisition under
the fair value enterprise method.

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37.4) Assuming that Keen Inc. purchases 80% of Lax Inc. for cash of $160,000 on
November 1, 2022, prepare the consolidated balance sheet on the date of acquisition under
the fair value enterprise (FVE) method.

37.5) On November 1, 2022, Keen acquired 80% of Lax Inc. for cash consideration of
$240,000. Assume that the following draft balance sheet was prepared by a co-worker on
the date of acquisition. Assuming this balance sheet is devoid of technical errors, what can
be concluded about the balance sheet below?
Keen Inc.
Consolidated Balance Sheet, as at November 1, 2022
Cash $124,000
Accounts receivable 79,200
Inventory 70,000

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Plant and equipment (net) 550,000

Trademark 12,800
Goodwill 104,000
Total assets $940,000
Accounts payable $310,000
Bonds payable 480,000
Common hares 100,000
Retained earnings 50,000
Total liabilities and equity $940,000

38) Jean Inc and John Inc had the following balance sheets on August 31, 2022:
Jean Inc. John Inc. John Inc.

(carrying value) (carrying value) (fair value)

Cash $1,200,000 $300,000 $300,000

Accounts receivable 400,000 64,000 64,000
Inventory 240,000 80,000 60,000
Plant and equipment (net) 860,000 256,000 300,000
Trademark ---------- 20,000 36,000
Total assets $2,700,000 $720,000

Accounts payable $1,500,000 300,000 300,000

Bonds payable 600,000 240,000 210,000
Common shares 500,000 60,000

Retained earnings 100,000 120,000

Total liabilities and equity $2,700,000 $720,000

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On August 31, 2022, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for cash
consideration of $378,000.
Assuming the above balance sheets were prepared immediately before the acquisition, prepare
Jean Inc's consolidated balance sheet on the date of acquisition using the proportionate
consolidation method.

39) Jean Inc. and John Inc. had the following balance sheets on August 31, 2022:
Jean Inc. John Inc. John Inc.

(carrying value) (carrying value) (fair value)

Cash $1,200,000 $300,000 $300,000

Accounts receivable 400,000 64,000 64,000
Inventory 240,000 80,000 60,000
Plant and equipment (net) 860,000 256,000 300,000
Trademark ---------- 20,000 36,000
Total assets $2,700,000 $720,000

Accounts payable $1,500,000 300,000 300,000

Bonds payable 600,000 240,000 210,000
Common shares 500,000 60,000

Retained earnings 100,000 120,000

Total liabilities and equity $2,700,000 $720,000

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A) On August 31, 2022, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for
cash consideration of $378,000.
Assuming the above balance sheets were prepared immediately before the acquisition, prepare
Jean Inc's consolidated balance sheet on the date of acquisition using the fair value enterprise
(FVE) method.
B) On August 31, 2022, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for cash
consideration of $420,000.
Assuming the above balance sheets were prepared immediately before the acquisition, calculate
the non-controlling interest (NCI) for the consolidated balance sheet on the date of acquisition
using the identifiable net assets (INA) method.

40) X Company purchased a (100%) controlling interest in Y Company by issuing

$2,000,000 worth of common shares. The business combination agreement has anearnout clause
that states the following: X Company would pay 10% of any earnings in excess of $750,000 to
Y's shareholders in the first year following the acquisition. On acquisition date, X's shares had a
market value of $80 per share.

Required:

a) Assuming that Y's net income in the first year following the acquisition was $950,000, prepare
any journal entries (for X Company) that are necessary to reflect Y's results under IFRS 3
Business Combinations.
b) Assuming that the agreement called for Y's shareholders to be compensated with 1,250 shares
for any decline in X's share price, what journal entries would be required under IFRS 3, if the
market value of X's shares dropped to $64 within the year?

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41) Major Corporation issues 1,000,000 common shares for all of the outstanding common
shares of Minor Corporation on August 1, 2022. The shares issued have a fair market value of
$40.
In addition, the merger agreement provides that if the market price of Major's shares is below
$60 two years from the date of the merger, Major will issue additional shares to the former
shareholders of Minor Corporation in anamount that will compensate them for their loss of
value.
Major predicts that there is a 25% probability that Major's shares will be trading at $59 per share
and a 75% probability that they will be trading at greater than $60 per share two years from the
date of the merger. Assume a discount rate of 7%.

Required:

Prepare the journal entry to record the issuance of the shares.

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42) Various methods have been proposed as solutions to preparing consolidated financial
statements for non-wholly owned subsidiaries. Provide the methods and include your reasoning
to support the method(s) that is/are being adopted under IFRS.

43) Provide the disclosure requirements for the non-controlling interest (NCI).

44) After the introduction of the fair value enterprise (FVE) method in Canada, many
companies opted to use the identifiable net assets (INA) method rather than the FVE method
when preparing consolidated financial statements. What motivation might preparers of
consolidated financial statements have that would cause them to have this preference?

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Question Details
Accessibility : Keyboard Navigation
DifficultyMedium
Learning Objective : 04-06 Analyze and interpret financial statements involving consolidation of non-
Topic : 04-14 Analysis and Interpretation of Financial Statements
Bloom's : Analyze

45) Why might the fair value of the non-controlling interest in a subsidiary on the daklte that
it is acquired in a business combination not be proportionate to the price per share paid by the
parent company to acquire control? How do the IFRS recognize this?

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 04-02 Prepare a consolidated balance sheet using the fair value enterprise metho
Topic : 04-03 Fair Value Enterprise (FVE) Method
Bloom's : Remember
Learning Objective : 04-03 Prepare a consolidated balance sheet using the identifiable net assets met
Topic : 04-06 Identifiable Net Assets Method
DifficultyMedium

46) There is no difference between the consolidation methods if the subsidiary is wholly
owned by the parent.

46)

⊚ true
⊚ false

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Answer Key

Test name: chapter 4

1) B
2) C
The consolidated balance sheet on the date of acquisition reflects only
the parent's share of the assets and liabilities of the subsidiary, based on
their fair values, and the resultant goodwill from the combination.
3) D
4) B
5) A
6) A
7) B
8) D
9) D
10) B
11) B
12) A
13) B
The classification as a liability is based on the form of payment which is
cash, another asset, or a variable number of shares to produce afixed
amount not when fair value is determined or when it is actually paid. A
contingent liability is reported at fair value at the date of acquisition.
14) D
15) B
16) B
17) D
18) D

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19) A
The NCI is not presented under the proportionate consolidation method.
The NCI is presented as a liability under the parent company method.
The NCI is presented as a component of shareholders' equity under both
the identifiable net assets method and the fair value enterprise method.
Note: The acquisition method is used to account for the business
combination.
20) B
21) A
22) C
After the initial recognition, the contingent consideration classified as
equity will not be remeasured; however, changes in the fair value of a
contingent consideration due to gathering of new information about facts
and circumstances that existed at the acquisition date and within one
year subsequent to the acquisition date would be anadjustment to the
acquisition cost of the subsidiary.
23) A
24) D
25) C
26) B
27) B
28) A
[PV when n = 3 and i = 5% Pmt = 0, FV = $700,000] × 80% =
$483,749.
29) B
[PV when n = 3 and i = 5% Pmt = 0, FV = $700,000] × 80% =
$483,749. Interest expense in first year = $483,749 × 5% = $24,187.
30) B

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The contingent consideration will be classified as either a liability or

equity, depending on its nature. If the contingent consideration will be
paid in the form of cash, another asset, or a variable number of shares to
produce a fixed dollar amount, it will be classified as a liability.
31) C
32) D
33) C
34) A
35) A
36) Section Break
36.1) A
The proportionate consolidation method views the consolidated
entity from the standpoint of the shareholders of the parent
company. The consolidated statements do not acknowledge or show
the equity of the noncontrolling shareholders. The consolidated
balance sheet on the date of acquisition reflects only the parent's
share of the assets and liabilities of the subsidiary, based on their
fair values, and the resultant goodwill from the combination.
36.2) A
Under the proportionate consolidation method, the total assets on
the consolidated balance sheet would be:
PayNet Inc Shale Ltd. Consolidation Consolidated

CV FV adjustment B/S

Cash $280,000 $36,000 × 70% = 25,200 ($196,000) cash paid $109,200

A/R $100,000 $45,000 × 70% = 31,500 131,500

Inventory $60,000 $20,000 × 70% = 14,000 74,000

PPE (net) $200,000 $75,000 × 70% = 52,500 252,500

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Trademark $24,000 × 70% = 16,800 16,800

Goodwill 112,000 112,000

Total assets $696,000

Calculation of acquisition differential and goodwill:

Cost of 70% investment in Shale $196,000

Less: Carrying value of net identifiable assets of subsidiary

Assets $200,000

Liabilities (70,000)

Less: Goodwill (8,000)

$122,000

PayNet’s ownership 70% 85,400

Acquisition differential $110,600

Allocation: FV – Carrying Value

Accounts receivable ($45,000 − $40,000) × 70% 3,500

Inventory ($20,000 − $24,000) × 70% (2,800)
Plant and equipment (net) ($75,000 − $80,000) × 70% (3,500)
Trademark ($24,000 − $12,000) × 70% 8,400
Bonds payable ($30,000 − $20,000) × 70% (7,000)
Balance – Goodwill $112,000

36.3) C
Calculation of acquisition differential and goodwill:
Cost of 70% investment in Shale $196,000

Less: Carrying value of net identifiable assets of subsidiary

Assets $200,000

Liabilities (70,000)

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Less: goodwill (8,000)

$122,000

PayNet’s ownership 70% 85,400

Acquisition differential $110,600

Allocation: FV – Carrying Value

Accounts receivable ($45,000 − $40,000) × 70% 3,500

36.4) A
NCI = $120,000 × 30% = $36,000
Implied acquisition cost for 100% ($196,000/0.70) $280,000
less: FV net identifiable assets 120,000

Goodwill $160,000

Under the INA method, NCI is recognized in shareholders' equity

in the consolidated balance sheet, similar to the FVE method. Its
amount is based on the fair values of the identifiable net assets of
the subsidiary; it excludes any value pertaining to the subsidiary's
goodwill.
36.5) C

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Only the parent's share of the subsidiary's goodwill is brought onto

the consolidated statements at the value paid by the parent. Since
the total value of the subsidiary's goodwill is not reasonably
measurable, the NCI's portion of the subsidiary's goodwill is not
measured and not brought onto the consolidated statements.

Calculation and allocation of acquisition differential:

Implied acquisition cost for 100% ($196,000/0.70) $280,000
less: FV net identifiable assets 120,000

Goodwill $160,000

Acquisition cost for 70% of Shale $196,000

Implied acquisition cost for 100% $280,000

Less: Carrying value of net identifiable assets of subsidiary

Common shares $80,000

Retained earnings 50,000

Less: goodwill on Shale’s books (8,000) 122,000

Acquisition differential $158,000

Allocation: (FV-CV)

Accounts receivable $45,000 − $40,000 $5,000

Inventory $20,000 − $24,000 (4,000)
PPE (net) $75,000 − $80,000) (5,000)
Trademark $24,000 − $12,000) 12,000
Bonds payable $30,000 − $20,000 (10,000)
Goodwill $160,000

Goodwill = $160,000 × 70% = $112,000.

36.6) A

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On date of acquisition, the shareholders' equity on the consolidated

balance sheet equals the shareholders equity of the parent + NCI =
$226,000 ($90,000 common shares + $100,000 retained earnings +
NCI $36,000)
NCI = $120,000 (FV of Identifiable net assets) × 30% = $36,000
Under the INA method, NCI is recognized in shareholders' equity in
the consolidated balance sheet, similar to the FVE method. Its
amount is based on the fair values of the identifiable net assets of
the subsidiary; it excludes any value pertaining to the subsidiary's
goodwill.
36.7) B
NCI + implied value for 100% of Shale Inc. × NCI interest =
$280,000 × 30% = $84,000 on date of acquisition under fair value
enterprise (FVE) method
Implied acquisition cost for 100% ($196,000/0.70) $280,000
less: FV net identifiable assets 120,000

Goodwill $160,000

36.8) A
Calculation and allocation of acquisition differential (fair value
enterprise method):
Acquisition cost for 70% of Shale $196,000

Implied acquisition cost for 100% $280,000

Less: Carrying value of net identifiable assets of subsidiary

Common shares $80,000

Retained earnings 50,000

Less: goodwill on Shale’s books (8,000) 122,000

Acquisition differential $158,000

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Allocation: (FV-CV)

Accounts receivable $45,000 − $40,000 $5,000

Inventory $20,000 − $24,000 (4,000)
PPE (net) $75,000 − $80,000) (5,000)
Trademark $24,000 − $12,000) 12,000
Bonds payable $30,000 − $20,000 (10,000)
Goodwill $160,000

36.9) A
On date of acquisition, the shareholders' equity on the consolidated
balance sheet equals the shareholders equity of the parent + NCI =
$274,000 ($90,000 common shares + $100,000 retained earnings +
NCI $84,000)
NCI = Implied value for 100% of Shale Inc. × NCI interest =
$280,000 × 30% = $84,000 on date of acquisition under fair value
enterprise (FVE) method.
36.10) C
Under the Fair Value Enterprise Method, the assets on the
consolidated balance sheet would be:
PayNet Inc Shale Ltd. Consolidation Consolidated

CV CV adjustment B/S

Cash $280,000 $36,000 ($196,000) $120,000

A/R 100,000 40,000 5,000 145,000
Inventory 60,000 24,000 (4,000) 80,000
PPE (net) 200,000 80,000 (5,000) 275,000
Trademark 12,000 12,000 24,000

Goodwill 160,000 160,000

Total assets $804,000

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Calculation and allocation of acquisition differential (fair value

enterprise method):
Acquisition cost for 70% $196,000

Implied acquisition cost for 100% $280,000

Less: Carrying value of net identifiable assets of subsidiary

Common shares $80,000

Retained earnings 50,000

Less: goodwill on subsidiary books (8,000) 122,000

Acquisition differential $158,000

Allocation: (FV-CV)

Accounts receivable $45,000 − $40,000 $5,000

Inventory $20,000 − $24,000 (4,000)
PPE (net) $75,000 − $80,000) (5,000)
Trademark $24,000 − $12,000) 12,000
Bonds payable $30,000 − $20,000 (10,000)
Goodwill $160,000

36.11) A
Under the FVE, the liabilities on the consolidated balance sheet
would be:
PayNet Inc Shale Ltd. Consolidation Consolidated

CV CV adjustment B/S

Current $120,000 $50,000 $170,000

liabilities
Bonds payable 330,000 20,000 10,000 360,000
Total liabilities $530,000

37) Section Break

37.1) a)

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Debit Credit

Investment in Lax Inc 150,000

Cash 150,000

b)
Common shares 60,000

Retained earnings 70,000

Plant and equipment 20,000

Trademark 4,000

Bonds Payable 20,000

Goodwill 18,000

Inventory 2,000

Investment in Lax Inc 150,000

Note: Negative goodwill amount arises from this combination.

Under IFRS, the negative goodwill is treated as a gain on
acquisition and is charged to net income (and then to retained
earnings). The journal entry, if Keen uses the equity method to
account for its investment in Lax, is as follows:
Debit Credit

Goodwill 18,000

Gain on bargain purchase . 18,000

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Calculation and allocation of acquisition differential (fair value

enterprise method):
Acquisition cost for 100% $150,000

Less: carrying value of net identifiable assets of subsidiary

Common shares $60,000

Retained earnings 70,000 130,000

Implied acquisition differential $20,000

Allocation: (FV-CV)

Inventory $56,000 − $54,000 2,000

PPE (net) $300,000 − $280,000) 20,000
Trademark $8,000 − $12,000) (4,000)
Bonds payable $100,000 − $120,000 20,000
Balance - goodwill (negative) ($18,000)

37.2) a)
Debit Credit

Investment in Lax Inc 160,000

Cash 160,000

b)
Common shares 60,000

Retained earnings 70,000

Plant and equipment 20,000

Trademark 4,000

Bonds Payable 20,000

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Goodwill 32,000

Non-controlling interest 40,000

Inventory 2,000

Investment in Lax Inc 160,000

Calculation and allocation of acquisition differential (fair value

enterprise method):
Acquisition cost for 80% $160,000

Implied value of 100% of investment in Lax ($160,000/0.80) $200,000

Less: carrying value of net identifiable assets of Lax

Common shares $60,000

Retained earnings 70,000 130,000

Implied acquisition differential $70,000

Allocation: (FV-CV)

Inventory $56,000 − $54,000 2,000

PPE (net) $300,000 − $280,000) 20,000
Trademark $8,000 − $12,000) (4,000)
Bonds payable $100,000 − $120,000 20,000
Balance - goodwill $32,000

37.3) Keen Inc.

Consolidated Balance Sheet as at November 1, 2022:
Cash $300,000 + $80,000 − $150,000 $230,000
Accounts $60,000 + $24,000 84,000
Receivable
Inventory $30,000 + $54,000 + $2,000 86,000
Plant and $310,000 + $280,000 + 20,000 610,000
equipment (net)
Trademark $0 + $12,000 − $4,000 8,000
Total assets $1,018,000

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Accounts payable $150,000 + $200,000 350,000

Bonds payable $400,000 + $120,000 − $20,000 500,000
Common shares 100,000

Retained earnings $50,000 + $18,000 68,000

Total Liabilities $1,018,000
and Equity

Calculation and allocation of acquisition differential (fair value

enterprise method):
Acquisition cost for 100% $150,000

Less: Carrying value of net identifiable assets of subsidiary

Common shares $60,000

Retained earnings 70,000 130,000

Acquisition differential $20,000

Allocation: (FV-CV)

Inventory $56,000 − $54,000 2,000

PPE (net) $300,000 − $280,000) 20,000
Trademark $8,000 − $12,000) (4,000)
Bonds payable $100,000 − $120,000 20,000
Balance – goodwill (negative) ($18,000)

37.4) Keen Inc.

Consolidated Balance Sheet as at November 1, 2022:
Cash $300,000 + $80,000 − $160,000 $220,000
Accounts Receivable $60,000 + $24,000 84,000
Inventory $30,000 + $54,000 + $2,000 86,000
Plant and equipment $310,000 + $280,000 + 20,000 610,000
(net)
Trademark $0 + $12,000 − $4,000 8,000
Goodwill 32,000

Total assets $1,040,000

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Accounts payable $150,000 + $200,000 350,000

Bonds payable $400,000 + $120,000 − $20,000 500,000
Common shares 100,000

Retained earnings $50,000 50,000

Non-controlling ($200,000 × 20%) 40,000
interest
Total Liabilities and $1,040,000
Equity

Calculation and allocation of acquisition differential (fair value

enterprise method):
Acquisition cost for 80% $160,000

Implied value of 100% of investment in Lax ($160,000/0.80) $200,000

Less: Carrying value of net identifiable assets of subsidiary

Common shares $60,000

Retained earnings 70,000 130,000

Acquisition differential $70,000

Allocation: (FV-CV)

Inventory $56,000 − $54,000 2,000

PPE (net) $300,000 − $280,000 20,000
Trademark $8,000 − $12,000 (4,000)
Bonds payable $100,000 − $120,000 20,000
Balance - goodwill $32,000

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37.5) This balance sheet was prepared using the proportionate

consolidation method. There is no non-controlling interest (NCI)
section on the balance sheet, and Keen's consolidated balance sheet
amounts (with the exception of the shareholders' equity section)
include 100% of Keen's book values and 80% of Lax's fair values
(i.e., 80% of the carrying value of Lax's net assets & 80% of the fair
value excess). For example, inventory = $30,000 + ($54,000 × 80%)
− $3,200 = $70,000.

Calculation of acquisition differential and goodwill:

Cost of 80% investment $240,000

Less: Carrying value of net identifiable assets of

subsidiary
Assets ($450,000) – Liabilities ($320,000) or $130,000
shareholder’s equity [$60,000 (common shares) +
$70,000 (retained earnings)]
Keen’s ownership 80% 104,000
Acquisition differential $136,000

Allocation: FV – Carrying Value

Inventory ($50,000 − $54,000) × (3,200)

80%
Plant and equipment (net) ($300,000 − $280,000) 16,000
× 80%
Trademark ($16,000 − $12,000) × 3,200
80%
Bonds payable ($100,000 − $120,000) 16,000
× 80%
Goodwill $104,000

38) Jean Inc.

Consolidated Balance Sheet as at August 31, 2022
Cash $1,200,000 + ($300,000 × 90%) − $378,000 $1,092,000
Accounts receivable $400,000 + ($64,000 × 90%) 457,600
Inventory $240,000 + ($80,000 × 90%) − $18,000 294,000

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Plant and equipment (net) $860,000 + ($256,000 × 90%) + $39,600 1,130,000

Trademark $0 + ($20,000 × 90%) + $14,400 32,400
Goodwill 153,000

Total assets $3,159,000

Accounts payable $1,500,000 + ($300,000 × 90%) $1,770,000

Bonds payable $600,000 + ($240,000 × 90%) − 27,000 789,000
Common shares 500,000

Retained earnings 100,000

Total liabeilities and equity $3,159,000

Calculation of acquisition differential and goodwill:

Cost of 90% investment $378,000

Less: Carrying value of net identifiable assets of subsidiary

$80,000 (common shares) + $120,000 (retained earnings) $180,000

Keen’s ownership 90% 162,000

Acquisition differential $216,000

Allocation: FV – Carrying Value

Inventory ($60,000 − $80,000) × 90% (18,000)

Plant and equipment (net) ($300,000 − $256,000) × 90% 39,600
Trademark ($36,000 − $20,000) × 90% 14,400
Bonds payable ($210,000 − $240,000) × 90% 27,000
Balance - goodwill $153,000

39) a) Jean Inc.

Consolidated Balance Sheet as at August 31, 2022
Cash $1,200,000 + $300,000 - $378,000 $1,122,000
Accounts receivable $400,000 + $64,000 464,000
Inventory $240,000 + $80,000 − $20,000 300,000
Plant and equipment (net) $860,000 + $256,000 + $44,000 1,160,000
Trademark $0 + $20,000 + $16,000 36,000

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Goodwill 170,000

Total assets $3,252,000

Accounts payable $1,500,000 + $300,000 $1,800,000

Bonds payable $600,000 + $240,000 − $30,000 810,000
Common shares 500,000

Retained earnings 100,000

Non-controlling interest 42,000

Total liabilities and equity $3,252,000

• Calculation of acquisition differential and goodwill:

Cost of 90% investment $378,000

Implied value of 100% of investment in John ($378,000/90%) $420,000

Less: Carrying value of net identifiable assets of subsidiary 180,000

Acquisition differential $240,000

Allocation: FV – Carrying Value

Inventory ($60,000 − $80,000) (20,000)

Plant and equipment (net) ($300,000 − $256,000) 44,000
Trademark ($36,000 − $20,000) 16,000
Bonds payable ($210,000 − $240,000) 30,000
Balance - goodwill $170,000

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Non-controlling interest would be 10% of the implied value: $420,000

× 10% = $42,000 or 10% of the fair value of John's identifiable net
assets & goodwill on the acquisition date $42,000 ($250,000 +
$170,000).
B) Under the INA method, the NCI is = $25,000 ($250,000 × 10%);
under this method, the NCI is not allocated any goodwill. The NCI is
based on its percentage interest of the fair value of the identifiable net
assets [$250,000 × 10%]
40) a)
Loss from Contingent Consideration $20,000

Cash $20,000

$950,000 − $750,000 = $200,000 × 10% = $20,000

b)
Contingent consideration payable in fixed number of common shares $80,000

Common shares 1,250 × $64 $80,000

41)
Journal entry to record the issuance of shares

Investment in Minor 44,439,252

Common shares 40,000,000

Liability for contingent consideration 4,439,252

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Since the shares are currently trading at $40 per share, Major will have
to issue additional shares worth $19,000,000 (1,000,000 × [$59 − 40]).
The probability-adjusted expected payment is $4,750,000 (25% ×
$19,000,000) + (75% × $0). Using a discount rate of 7%, the fair value
of the contingent consideration at August 1, 2024, is $4,439,252
($4,750,000/1.07). The $4,439,252 would be added to the acquisition
cost of the investment.
Note: The contingency is classified as a liability because a fixed dollar
amount must be paid.

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42) There are four methods that have been put forward for the
preparation of financial statements under circumstances where the
subsidiary is non-wholly owned and they are:

a) The proportionate consolidation method

b) The parent company method
c) The identifiable net assets (INA) method
d) The fair value enterprise (FVE) method
The methods that were adopted under IFRS were both the INA method
and the FVE method. Both methods view the consolidated entity as
having two distinct groups of shareholders: the controlling shareholders
and the noncontrolling shareholders.
Under the FVE method, all values are reflected at fair value of the
subsidiary's identifiable net assets with the balance recorded as goodwill
and allocated proportionately to both the parent and NCI. For the INA
method, it values both the parent's share and the NCI's share of
identifiable net assets at fair value; however, only the parent's share of
the subsidiary's goodwill is brought onto the consolidated statements at
the value paid by the parent. This addresses the concern that it is very
difficult to measure goodwill when the parent does not purchase 100%
of the subsidiary with the result that the NCI's portion of the subsidiary's
goodwill is not measured and not brought onto the consolidated
statements.
In addition, both methods represent a departure from the historical cost
basis that has been used by accountants in the past as objective and
verifiable. But the reality is that fair value of each party constitutes their
participation in the entity. And arguably with a transaction has occurred
in the shares of the subsidiary each of the participants should have their
participation re-valued at current market prices or valuations and not
historical cost.

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43) IFRS 3 requires that a reporting entity disclose the following for
each business combination in which the acquirer holds less than 100% of
the equity interests in the acquiree at the acquisition date:

a) The amount of the NCI in the acquiree recognized at the acquisition

date and the measurement basis for that amount.
b) For each NCI in anacquiree measured at fair value, the valuation
techniques and key model inputs are used for determining that value.
44) Using the identifiable net assets (INA) method results in total assets
being lower (because only the parent's share of the goodwill arising from
the business acquisition is recorded). In addition, only the parent's share
of any goodwill impairment would be recorded in future years. As a
result, the net income would be the same or higher when the INA
method is used and the total assets are lower, so the return on assets
would be higher making the results look better than if the fair value
enterprise (FVE) method had been applied.
45) Reasons why the fair value of the non-controlling interest (NCI)
might not be proportionate to the price paid by the parent include:

• there may be synergies to the controlling interest that do not benefit the
non-controlling interest in the subsidiary;
• often a premium is paid to achieve control;
• the acquisition may have taken place at different prices in a series of
purchases, not as a single purchase on the acquisition date.
IFRS recognizes this by permitting both the fair value enterprise (FVE)
method and the identifiable net assets (INA) method of valuing the non-
controlling interest at acquisition. The standards allow the NCI to be
valued based either on its fair value (e.g., using the market trading prices
for the non-controlling interest's shares) or on the basis of the fair value
of the subsidiary's identifiable net assets at acquisition.

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46) TRUE
Each consolidation method differs in the valuation of the NCI and how
much of the subsidiary's value pertains to the NCI. If there is no NCI,
there is no difference in the consolidation methods.

Student name:
1) The acquisition differential related to long-term assets with definite useful lives are
amortized:

A) over their useful lives.

B) over the time periods provided under IAS 36 Impairment of Assets which prescribes
amortization periods for different classes of assets.
C) under the applicable capital cost allowance rates provided by the Canada Revenue
Agency.
D) over two years.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-01 Perform impairment tests on property, plant, equipment, intangible assets,
Bloom's : Remember
Difficulty : Easy
Topic : 05-03 Testing Goodwill and other Assets for Impairment
Topic : 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives

2) Which of the following statements pertaining to the preparation of consolidated financial

statements is FALSE?

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A) The parent's investment in the subsidiary does not appear on the consolidated balance
sheet.
B) The parent's investment income from the subsidiary does not appear on the
consolidated statement of comprehensive income.
C) The depletion of the acquisition differential is reflected on the subsidiary's financial
statements.
D) Consolidated retained earnings reflects only the parent's shareholders' share of the
combined operations.

3) The acquisition differential allocated to land is:

A) ignored.
B) is amortized over 40 years.
C) written down when the land is impaired or sold.
D) carried forward indefinitely.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-01 Perform impairment tests on property, plant, equipment, intangible assets,
Difficulty : Easy
Topic : 05-02 Consolidated Income and Retained Earnings Statements
Bloom's : Apply

4) Which of the following statements pertaining to the accounting treatment of intangible

assets with indefinite lives is correct?

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A) Intangible assets with indefinite lives are only assessed for impairment if internal
factors, such as evidence of poor economic performance, are present.
B) Intangible assets are written down when their carrying value is less than the higher of
fair value less costs of disposal (FVLCD) and value in use (VIU).
C) Impairment losses on intangible assets with indefinite lives are reported in other
comprehensive income.
D) The recoverable amount is determined and compared to the carrying amount. If the
recoverable amount is greater than the carrying amount, there is no impairment, and the
intangible assets with indefinite lives are reported at the carrying amount.

5) Which of the following statements pertaining to the reversal of animpairment loss is

correct?

A) animpairment loss recognized for goodwill can be reversed as long as the recoverable
amount in a subsequent period is greater than the goodwill's carrying value.
B) Assets (with the exception of goodwill) can be written up to the greater of the
recoverable amount and the carrying amount prior to the recognition of any impairment losses.
C) The reversal of animpairment loss is reported in retained earnings.
D) animpairment loss, except for goodwill, can be reversed only if there has been a
change in the estimates used to determine the asset's recoverable amount.

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6) Under the cost method, which of the following statements is TRUE?

A) The parent's investment in the subsidiary is recorded at cost, and only changed
thereafter if there has been animpairment loss on the investment.
B) The parent's investment in the subsidiary is recorded at cost and adjusted for changes
in the parent's proportionate interest in the subsidiary's other comprehensive income.
C) The parent records its pro rata share of the subsidiary's post-acquisition earnings as
anincrease to the investment account and reduces the investment account with its share of
changes to the acquisition differential.
D) The parent's investment in the subsidiary is recorded at cost and reduced by its pro
rata share of liquidating dividends received from the subsidiary.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-01 Perform impairment tests on property, plant, equipment, intangible assets,
Topic : 05-01 Methods of Accounting for anInvestment in a Subsidiary
Difficulty : Easy
Bloom's : Understand

7) Under the equity method, which of the following statements is TRUE?

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A) The parent's investment in the subsidiary is initially recorded at cost, and only
changed subsequently if there has been a permanent impairment in the value of the investment.
B) The parent's investment in the subsidiary is initially recorded at cost and subsequently
adjusted for the parent's pro rata share of the post -acquisition change in the net assets of the
subsidiary.
C) The parent records its pro rata share of the subsidiary's cumulative earnings as
anincrease to the investment account and reduces the investment account with its share of the
dividends declared by the subsidiary.
D) The parent's investment in the subsidiary is recorded at cost and reduced by
distributions from the subsidiary.

8) Consolidated net income would be:

A) higher if the parent chooses to use equity method rather than the cost method.
B) higher if the parent chooses to use the equity method rather than the cost method,
provided that the subsidiary showed a profit.
C) lower if the parent chooses to use equity method rather than the cost method.
D) the same regardless of whether the parent used the cost method or the equity method
in its internal records.

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9) Consolidated net income is equal to:

A) the parent's net income excluding any income arising from its investment in the
subsidiary, plus the net income of the subsidiary adjusted for changes in the acquisition
differential., excluding goodwill
B) the sum of the net incomes of both the parent and its subsidiaries less any inter-
company dividends.
C) the parent's net income excluding any income arising from its investment in the
subsidiary.
D) the parent's net income excluding any income arising from its investment in the
subsidiary, plus the net income of the subsidiary adjusted for changes in the acquisition
differential, including goodwill.

10) Which of the following statements pertaining to consolidated retained earnings is

FALSE?

10)

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A) Consolidated retained earnings on date of acquisition are the same as the parent's
retained earnings.
B) Consolidated retained earnings reflect only the parent's share of the combined
company's retained earnings.
C) Consolidated retained earnings subsequent to acquisition are equal to the parent's
retained earnings plus the subsidiary's retained earnings.
D) Consolidated retained earnings subsequent to acquisition are equal to the parent's
share of consolidated net income less any dividends declared by the parent and changes to
acquisition differential.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-01 Perform impairment tests on property, plant, equipment, intangible assets,
Bloom's : Understand
Topic : 05-02 Consolidated Income and Retained Earnings Statements
DifficultyMedium
Topic : 05-20 Equity Method of Recording
Learning Objective : 05-06 Analyze and interpret financial statements involving consolidations subseq

11) If the parent company uses the equity method to account for its investment in a non-
wholly owned subsidiary in its internal accounting records, which of the following statements is
FALSE?

11)

A) The parent's net income equals net income of parent and net income of subsidiary,
adjusted for dividends.
B) The parent's retained earnings will be equal to consolidated retained earnings.
C) Only the parent's share of the subsidiary's income, dividends and changes in the
acquisition differential are recorded in the investor's records.
D) The parent's net income equals consolidated net income attributable to the
shareholders of the parent.

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Question Details
Accessibility : Keyboard Navigation
Bloom's : Remember
Difficulty : Easy
Learning Objective : 05-06 Analyze and interpret financial statements involving consolidations subseq
Topic : 05-21 Analysis and Interpretation of Financial Statements

12) Which of the following adjustments (if any) to retained earnings is necessary for the
preparation of the consolidated balance sheet?

12)

A) Under both the cost and equity methods, the parent must record its pro rata share of
the subsidiary's net income.
B) Under both the cost and equity methods, the parent must record its pro rata share of its
subsidiary's income less any dividends received from the subsidiary.
C) No adjustment is required under either the cost or the equity methods.
D) No adjustment is required if the parent has been using the equity method.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-01 Perform impairment tests on property, plant, equipment, intangible assets,
Difficulty : Easy
Bloom's : Understand
Topic : 05-02 Consolidated Income and Retained Earnings Statements

13) Any excess of fair value over book value attributable to inventory on the date of
acquisition is to be:

13)

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A) allocated to other identifiable assets.

B) amortized.
C) charged to consolidated retained earnings when it is sold.
D) reflected on the consolidated income statement as cost of goods sold expense when it
is sold.

14) Which of the following statements pertaining to the consolidated financial statements is
TRUE?

14)

A) The consolidated financial statements do not include any noncontrolling interest if the
parent uses the cost method to account for the investment in the subsidiary.
B) The investment in subsidiary line on the balance sheet and investment income from
subsidiary line on the income statement are eliminated and replaced by the underlying assets,
liabilities, revenues, and expenses of the subsidiary, plus or minus the acquisition differential
when preparing consolidated financial statements.
C) The elimination of the investment in subsidiary line on the balance sheet and
investment income from subsidiary line on the income statement when preparing consolidated
financial statements is only required if the parent uses the equity method to account for the
investment in the subsidiary.
D) The consolidated financial statements are affected by the method used by the parent to
account for the investment in the subsidiary.

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15) If the parent company used the equity method to account for its investment and the
subsidiary company showed a profit for the past year, the consolidation elimination entry
required to remove a subsidiary's income from the parent's books prior to the preparation of
consolidated financial statements would be:

15)

Debit Credit

Equity method income—Parent $$$

Retained earnings—Parent $$$

Debit Credit

Equity method income—Parent $$$

Investment in Subsidiary $$$

Debit Credit

Equity method income—Parent $$$

Acquisition differential $$$

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Debit Credit

Investment Income—Subsidiary $$$

Equity method income—Parent $$$

Question Details
Accessibility : Keyboard Navigation
Bloom's : Understand
Learning Objective : 05-08 (Appendix 5B) Prepare consolidated financial statements subsequent to date
Topic : 05-23 Appendix 5B: Working Paper Approach for Consolidations Subsequent to Acquisition
Difficulty : Hard

16) The consolidation elimination entry required to remove any dividends received from a
subsidiary prior to the preparation of consolidated financial statements (assuming that the parent
uses the cost method to record its investment in the subsidiary) would be:

16)

Debit Credit

Equity method income—Parent $$$

Retained earnings—Parent $$$

Debit Credit

Dividend Income—Subsidiary $$$

Investment in Subsidiary $$$

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Debit Credit

Dividend Income—Parent $$$

Dividends—Subsidiary $$$

Debit Credit

Equity method income—Subsidiary $$$

Equity method income—Parent $$$

17) Pleasant Corporation (Pleasant) acquired 80% of the voting shares of Sad Ltd. (Sad) on
January 1, 2022. On Pleasant's December 31, 2022 year-end, its accounts receivable contained a
receivable of $20,000 from Sad.
Which of the following statements pertaining to the intercompany receivable is correct?

17)

A) The intercompany receivables and payables are both reduced by $16,000

[(80%)($20,000)] in the consolidation process.
B) It is not necessary to eliminate the $20,000 intercompany receivable and payable
during the consolidation process because the overall effect on consolidated net assets is nil.
C) The noncontrolling interest (balance sheet) is reduced by $4,000 [(20%)($20,000)]
D) The entry to eliminate the intercompany receivables and payables on the consolidated
worksheet is a debit to "Accounts payable - Sad" for $20,000 and credit to "Accounts receivable
- Pleasant" for $20,000.

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Question Details
Accessibility : Keyboard Navigation
Bloom's : Remember
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
DifficultyMedium
Topic : 05-18 Intercompany Receivables and Payables

18) Planet Inc. (Planet) purchased 100% of the outstanding voting shares of Sol Company
(Sol) for $420,000 on January 1, 2022. On that date, Sol had common shares and retained
earnings worth $100,000 and $233,000, respectively.
On acquisition date, the plant assets and patent had a remaining useful life of 8 years and 10
years, respectively. Both the plant assets and patent are amortized on a straight-line basis.
The bonds payable mature on December 31, 2030, pay interest annually, and are amortized
using the effective interest rate method. The market rate of interest for similar bonds is 8%.

The balance sheets of both companies, as well as Sol's fair market values on the date of
acquisition are disclosed below:
Planet Inc. Sol Company Sol Company

(carrying value) (carrying value) (fair value)

Cash $150,000 $84,000 $84,000

Accounts receivable 85,000 65,000 65,000
Inventory 55,000 34,000 45,000
Plant assets (net) 850,000 220,000 240,000
Patent ------------ 70,000 84,000
Total assets $1,140,000 $473,000

Current liabilities $220,000 $80,000 80,000

Bonds payable, 10% 400,000 60,000 67,496
Common shares 200,000 100,000

Retained earnings 320,000 233,000

Total liabilities and equity $1,140,000 $473,000

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Otherinformation:

• The net incomes for Planet and Sol for the year ended December 31, 2022, were $180,000 and
$120,000, respectively.
• Sol declared and paid $12,000 in dividends to Planet during the year. There were no other
intercompany transactions during 2022.
• A goodwill impairment test conducted on December 31, 2022, revealed that the goodwill
associated with Planet's acquisition of Sol had a recoverable amount of $40,000.
• Both companies use a FIFO inventory system, and all of Sol 's inventory on the date of
acquisition was sold during the year.
• Planet did not declare any dividends during the 2022.

Question Details

18.1) Which of the following is the correct amount of goodwill arising from this
business combination?

18.1)

A) Nil
B) $124,504
C) $34,504
D) $49,496

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Bloom's : Apply
DifficultyMedium
Learning Objective : 05-02 Prepare schedules to allocate and show changes to the acquisition differen
Topic : 05-09 Consolidation of a 100%-Owned Subsidiary
Topic : 05-10 Consolidated Statements, End of Year 5
Topic : 05-17 Acquisition Differential Assigned to Liabilities

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18.2) Which of the following is the correct amount of goodwill to be reported on Sol's
balance sheet on December 31, 2022?

18.2)

A) Nil
B) $124,504
C) $34,504
D) $49,496

Question Details
Accessibility : Keyboard Navigation
Bloom's : Understand
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
DifficultyMedium
Learning Objective : 05-02 Prepare schedules to allocate and show changes to the acquisition differen
Topic : 05-09 Consolidation of a 100%-Owned Subsidiary
Topic : 05-10 Consolidated Statements, End of Year 5
Topic : 05-17 Acquisition Differential Assigned to Liabilities

18.3) Assuming Planet uses the equity method to account for its investment in Sol,
which of the following is the correct journal entry to record the impairment of the goodwill
on December 31, 2022?

18.3)

A) No entry is required.

Debit Credit

Equity method income 9,496

Investment in Sol 9,496

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Debit Credit

Investment in Sol 9.496

Equity method income 9,496

Debit Credit

Goodwill impairment loss 9,496

Goodwill 9,496

18.4) Assuming Planet uses the equity method to account for its investment in Sol,
which of the following is the correct journal entry to record the dividends received by
Planet from Sol in 2022?

18.4)

Debit Credit

Cash 12,000

Investment in Sol 12,000

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Debit Credit

Cash 12,000

Equity method income 12,000

Debit Credit

Cash 12,000

Acquisition differential 12,000

Debit Credit

Cash 12,000

Goodwill 12,000

18.5) Assuming Planet uses the cost method to account for its investment in Sol, which
of the following is the correct journal entry to record the dividends received by Planet from
Sol in 2022?

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18.5)

Debit Credit

Cash 12,000

Investment in Sol 12,000

Debit Credit

Cash 12,000

Equity method income 12,000

Debit Credit

Cash 12,000

Acquisition differential 12,000

Debit Credit

Cash 12,000

Dividend income 12,000

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18.6) Assuming Planet uses the equity method to account for its investment in Sol,
which of the following is the correct journal entry to record the changes to the acquisition
differential for 2022?

18.6)

Debit Credit

Equity method income 23,796

Investment in Sol 23,796

Debit Credit

Equity method income 23,563

Investment in Sol 23,563

Debit Credit

Investment in Sol 23,796

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Equity method income 23,796

Debit Credit

Investment in Sol 23,563

Equity method income 23,563

18.7) Assuming Planet uses the equity method to account for its investment in Sol,
which of the following is the correct journal entry to record Sol's net income for 2022?

18.7)

Debit Credit

Investment in Sol 108,000

Equity method income 108,000

Debit Credit

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Equity method income 120,000

Investment in Sol 120,000

Debit Credit

Investment in Sol 120,000

Equity method income 120,000

D) No entry is required.

18.8) Assuming Planet uses the cost method to account for its investment in Sol, which
of the following is the correct consolidated net income attributable to the shareholders of
Planet for the year ended December 31, 2022?

18.8)

A) $264,204
B) $180,000
C) $276,204
D) $300,000

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18.9) Assuming Planet uses the cost method to account for its investment in Sol, which
of the following is the correct amount of retained earnings that would appear on the
consolidated balance sheet as at January 1, 2022?

18.9)

A) $553,000
B) $320,000
C) $420,000
D) $473,000

Question Details
Accessibility : Keyboard Navigation
Bloom's : Remember
Difficulty : Easy
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Learning Objective : 05-02 Prepare schedules to allocate and show changes to the acquisition differen
Topic : 05-09 Consolidation of a 100%-Owned Subsidiary
Topic : 05-10 Consolidated Statements, End of Year 5
Topic : 05-17 Acquisition Differential Assigned to Liabilities
Learning Objective : 05-05 Prepare journal entries and calculate balance in the investment account un
Topic : 05-20 Equity Method of Recording

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18.10) Assuming Planet uses the equity method to account for its investment in Sol and
had net income of $160,000 from its own operations (before making any entries to reflect
its investment in Sol), what amount of consolidated retained earnings would appear on
Planet's consolidated balance sheet as at December 31, 2022?

18.10)

A) $600,000
B) $564,204
C) $480,000
D) $576,204

19) Great Inc. (Great) owns 100% of Max Ltd. (Max). During the year, Max earned a net
income of $40,000 and declared and paid dividends of $10,000.

Question Details

19.1) Assuming that Great uses the equity method, what effect would the above
information have on Great's Investment in Max account?

19.1)

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A) anincrease of $10,000.
B) anincrease of $30,000.
C) anincrease of $40,000.
D) No effect.

Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Bloom's : Apply
Learning Objective : 05-05 Prepare journal entries and calculate balance in the investment account un
Topic : 05-20 Equity Method of Recording

19.2) Assuming that Great uses the cost method, what effect would the above
information have on Great's Investment in Max account?

19.2)

A) anincrease of $10,000
B) anincrease of $30,000
C) anincrease of $40,000
D) No effect.

Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Bloom's : Apply
Learning Objective : 05-02 Prepare schedules to allocate and show changes to the acquisition differen
Topic : 05-09 Consolidation of a 100%-Owned Subsidiary

19.3) What is the difference in comprehensive income if Great uses the equity method
instead of the cost method to account for its investment in Max?

19.3)

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A) anincrease of $30,000
B) anincrease of $10,000
C) A decrease of $10,000
D) anincrease of $40,000

Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Bloom's : Understand
Learning Objective : 05-02 Prepare schedules to allocate and show changes to the acquisition differen
Topic : 05-09 Consolidation of a 100%-Owned Subsidiary
Learning Objective : 05-05 Prepare journal entries and calculate balance in the investment account un
Topic : 05-20 Equity Method of Recording

20) Great Inc. (Great) owns 70 % of Max Ltd. (Max). During the year, Max earned a net
income of $40,000 and declared and paid dividends of $10,000.

Question Details

20.1) Assuming that Great uses the equity method, what effect would the above
information have on Great's Investment in Max account?

20.1)

A) anincrease of $21,000.
B) anincrease of $28,000.
C) anincrease of $30,000.
D) No effect.

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20.2) Assuming that Great uses the cost method, what effect would the above
information have on Great's Investment in Max account?

20.2)

A) anincrease of $21,000
B) anincrease of $28,000
C) anincrease of $30,000
D) No effect

21) Big Guy Inc. (Big Guy) purchased 80% of the outstanding voting shares of Humble Corp.
(Humble) for $360,000 on July 1, 2020. On that date, Humble had common shares and retained
earnings worth $180,000 and $90,000, respectively.
The equipment had a remaining useful life of 5 years from the date of acquisition. Humble's
bonds mature on July 1, 2030. Both companies use straight line amortization, and no salvage
value is assumed for assets. The trademark is assumed to have anindefinite useful life.

Goodwill is tested annually for impairment. The balance sheets of both companies, as well as
Humble's fair market values on the date of acquisition are disclosed below:
Big Guy Humble Humble

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(carrying value) (carrying value) (fair value)

Cash $800,000 $245,000 $245,000

Accounts receivable 240,000 40,000 40,000
Inventory 60,000 45,000 50,000
Equipment (net) 900,000 80,000 72,000
Trademark -------- 90,000 193,000
Total assets $2,000,000 $500,000

Current liabilities $200,000 $160,000 $160,000

Bonds payable 260,000 70,000 40,000
Common shares 900,000 180,000

Retained earnings 640,000 90,000

Total liabilities and equity $2,000,000 $500,000

The following are the financial statements for both companies for the fiscal year ended June 30,
2023:

Income Statements:
Big Guy Humble

Sales $640,000 $240,000

Investment revenue 8,480

Less: expenses:

Cost of goods sold 300,000 160,000

Depreciation 81,000 34,000
Interest expense 34,000 26,000
Other expenses 5,000 8,000
Net income $228,480 $12,000

Retained Earnings Statements

Big Guy Humble

Balance, July 1, 2022 $960,560 $48,000

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Net income 228,480 12,000

Dividends 20,000 2,000
Balance, June 30, 2023 $1,169,040 $58,000

Balance Sheets
Big Guy Humble

Cash $1,200,000 $365,000

Accounts receivable 270,000 55,000
Investment in Humble 319,040

Inventory 70,000 70,000

Equipment (net) 820,000 65,000
Trademark 85,000

Total assets $2,679,040 $640,000

Current liabilities $350,000 $332,000
Bonds payable 260,000 70,000
Common shares 900,000 180,000
Retained earnings 1,169,040 58,000
Total liabilities and equity $2,679,040 $640,000

animpairment test conducted in September 2021 on Big Guy's goodwill resulted in

animpairment loss of $10,000 being recorded.
Both companies use a FIFO system, and Humble's entire inventory on the date of acquisition
was sold during the following year.
During 2023, Humble borrowed $20,000 in cash from Big Guy interest free to finance its
operations. As of June 30, 2023, the amount remained unpaid.
Big Guy uses the equity method to account for its investment in Humble. Assume that the fair
value enterprise (FVE) method applies.

Question Details

21.1) Which of the following is the correct amount of goodwill arising from this
business combination?

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21.1)

A) ($-40,000)
B) $110,000
C) $50,000
D) $44,000

Question Details
Accessibility : Keyboard Navigation
Bloom's : Apply
DifficultyMedium
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach

21.2) Which of the following is the correct amount of non-controlling interest on Big
Guy's consolidated balance sheet on July 1, 2020?

21.2)

A) $0
B) $72,000
C) $90,000
D) $80,000

21.3) Which of the following is the correct amount of depreciation expense appearing
on Big Guy's June 30, 2023 consolidated income statement?

21.3)

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A) $113,400
B) $113,720
C) $115,000
D) $116,280

21.4) Which of the following is the correct amount of interest expense appearing on Big
Guy's June 30, 2023 consolidated income statement?

21.4)

A) $36,000
B) $57,600
C) $62,400
D) $63,000

21.5) Which of the following is the correct amount of other expenses appearing on Big
Guy's June 30, 2023 consolidated income statement?

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21.5)

A) $11,600
B) $12,000
C) $13,000
D) $13,400

21.6) Which of the following is the correct amount of consolidated net income
attributable to the shareholders of Big Guy appearing on Big Guy's consolidated income
statement on June 30, 2023?

21.6)

A) $216,080
B) $218,480
C) $228,480
D) $279,600

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21.7) Which of the following is the correct amount of dividends that would appear on
Big Guy's consolidated statement of retained earnings as at June 30, 2023?

21.7)

A) $2,000
B) $20,000
C) $21,600
D) $22,000

21.8) Which of the following is the correct amount of non-controlling interest that
would appear on Big Guy's June 30, 2023 consolidated income statement?

21.8)

A) Nil
B) $2,000
C) $2,120
D) $3,600

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21.9) Which of the following is the correct amount of Big Guy's consolidated retained
earnings as at June 30, 2023?

21.9)

A) $1,169,040
B) $1,486,400
C) $1,500,000
D) $1,508,000

21.10) Which of the following is the correct amount of non-controlling interest that
would appear on Big Guy's consolidated balance sheet as at June 30, 2023?

21.10)

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A) $79,760
B) $83,600
C) $90,000
D) $226,400

21.11) Which of the following is the correct amount that would appear as Big Guy's
investment in Humble Corp. on its June 30, 2023 consolidated balance sheet?

21.11)

A) $9,600
B) $12,000
C) $360,000
D) The Investment in Humble account would not appear on the consolidated balance
sheet.

Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Bloom's : Understand
Learning Objective : 05-06 Analyze and interpret financial statements involving consolidations subseq
Topic : 05-21 Analysis and Interpretation of Financial Statements
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach

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21.12) Which of the following is the correct amount of goodwill that would appear on
Big Guy's consolidated balance sheet as at June 30, 2023?

21.12)

A) Nil
B) $30,000
C) $40,000
D) $50,000

21.13) Which of the following is the correct amount that would appear on Big Guy's
consolidated balance sheet for equipment as at June 30, 2023?

21.13)

A) $872,000
B) $878,600
C) $881,800
D) $885,000

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21.14) Which of the following is the correct amount of current liabilities that would
appear on Big Guy's consolidated balance sheet as at June 30, 2023?

21.14)

A) $350,000
B) $630,000
C) $662,000
D) $682,000

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Bloom's : Apply
DifficultyMedium
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5
Topic : 05-14 Consolidated Statements, End of Year 6
Topic : 05-18 Intercompany Receivables and Payables

21.15) Which of the following is the correct amount of accounts receivable that would
appear on Big Guy's consolidated balance sheet as at June 30, 2023?

21.15)

A) $270,000
B) $305,000
C) $314,000
D) $325,000

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Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Bloom's : Apply
DifficultyMedium
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5
Topic : 05-14 Consolidated Statements, End of Year 6
Topic : 05-18 Intercompany Receivables and Payables

21.16) Assume the non-controlling interest is measured using the identifiable net assets
(INA) method, which of the following is the correct amount of non-controlling interest that
would appear on Big Guy's consolidated balance sheet as at June 30, 2023?

21.16)

A) Insufficient information to determine.

B) $83,600
C) $71,760
D) $79,760

Question Details
Accessibility : Keyboard Navigation
Difficulty : Easy
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Topic : 05-16 Identifiable Net Assets Method
Bloom's : Apply
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5
Topic : 05-14 Consolidated Statements, End of Year 6

21.17) Which of the following is the correct amount of common shares that would
appear on Big Guy's consolidated balance sheet on June 30, 2023?

21.17)

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A) $900,000
B) $1,044,000
C) $1,080,000
D) $1,800,000

21.18) Which of the following is the correct amount of bonds payable that would appear
on Big Guy's consolidated balance sheet on June 30, 2023?

21.18)

A) $309,000
B) $317,800
C) $318,000
D) $330,000

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22) Brand X Inc. (Brand X) purchased a controlling interest in Brand Y Inc. (Brand Y) on
January 1, 2023. On that date, Brand Y Inc. had common shares and retained earnings worth
$180,000 and $20,000, respectively. Goodwill is tested annually for impairment. At the date of
acquisition, Brand Y's assets and liabilities were assessed for fair value as follows:
Inventory $5,000 less than book value
Equipment $30,000 less than book value
Patent $24,000 greater than book value
Bonds payable $5,000 less than book value

The balance sheets of both companies, as at December 31, 2023 are disclosed below:
Brand X Brand Y

Cash $200,000 $45,000

Accounts receivable 100,000 40,000
Inventory 80,000 55,000
Equipment (net) 220,000 100,000
Patent --------- 60,000
Investment in Brand Y 348,000 ---------
Total assets $948,000 $300,000
Current liabilities $480,000 $53,000
Bonds payable 270,000 50,000
Common shares 100,000 180,000
Retained earnings 98,000 19,000
Total liabilities and equity $948,000 $300,000

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OtherInformation:

• The net incomes for Brand X and Brand Y for the year ended December 31, 2023, were
$1,000 and $50,000, respectively. Brand X did not declare any dividends during the year.
However, Brand Y declared and paid $51,000 in dividends to make up for several years in which
the company had never declared any dividends.
• animpairment test conducted on December 31, 2023 revealed that the goodwill should actually
have a value $2,000 lower than the amount calculated on the date of acquisition.
• Both companies use a FIFO system, and Brand Y's inventory on the date of acquisition was
sold during the year.
• Brand Y's equipment and patent have useful lives of 10 years and 6 years, respectively from
the date of acquisition.
• All bonds payable mature on January 1, 2028. The discount on the bonds payable is amortized
using the straight-line method.

Question Details

22.1) Prepare Brand X's consolidated balance sheet as at December 31, 2023, assuming
that Brand X purchased 100% of Brand Y for $350,000 and accounts for its investment
using the equity method.

Question Details
Accessibility : Keyboard Navigation
Bloom's : Apply
DifficultyMedium
Learning Objective : 05-02 Prepare schedules to allocate and show changes to the acquisition differen
Topic : 05-09 Consolidation of a 100%-Owned Subsidiary
Topic : 05-10 Consolidated Statements, End of Year 5
Learning Objective : 05-06 Analyze and interpret financial statements involving consolidations subseq
Topic : 05-21 Analysis and Interpretation of Financial Statements
Topic : 05-11 Consolidated Statements, End of Year 6

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22.2) Prepare Brand X's consolidated balance sheet as at December 31, 2023, assuming
that Brand X purchased 80% of Brand Y for $350,000 and accounts for its investment
using the equity method. The non-controlling interest is calculated using the fair value
enterprise (FVE) method.

Question Details
Accessibility : Keyboard Navigation
Bloom's : Apply
DifficultyMedium
Learning Objective : 05-06 Analyze and interpret financial statements involving consolidations subseq
Topic : 05-21 Analysis and Interpretation of Financial Statements
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5
Topic : 05-14 Consolidated Statements, End of Year 6

23) Par Inc. (Par) purchased 70% of the outstanding voting shares of Sub Inc. (Sub) for
$700,000 on January 1, 2023. On that date, Sub had common shares and retained earnings worth
$410,000 and $170,000, respectively.
The equipment had a remaining useful life of 5 years from the date of acquisition. Sub's bonds
mature on December 31, 2028. The inventory was sold in the year following the acquisition.
Both companies use straight line amortization for the equipment, and no salvage value is
assumed for assets. The effective interest rate method is used to amortize the bond discount. Par
and Sub declared and paid $10,000 and $5,000 in dividends, respectively during the year.
Par uses the fair value enterprise (FVE) method to value the non-controlling interest in Sub on
the acquisition date.

The balance sheets of both companies, as well as Sub's fair values immediately following the
acquisition are shown below:
Par Inc. Sub Inc. Sub Inc.

(carrying value) (carrying value) (fair value)

Cash $600,000 $515,000 $515,000

Accounts receivable 140,000 85,000 85,000
Inventory 60,000 45,000 60,000

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Investment in Sub Inc. 700,000

Equipment (net) 50,000 180,000 185,000

Land ------------ 115,000 200,000
Total assets $1,550,000 $940,000

Current liabilities $100,000 $280,000 280,000

Bonds payable, 3% 160,000 80,000 71,879
Common shares 800,000 410,000

Retained earnings 490,000 170,000

Total liabilities and equity $1,550,000 $940,000

The following are the financial statements for both companies for the fiscal year ended
December 31, 2024:

Income Statements
Sales $800,000 $300,000
Investment revenue 33,422

Less: expenses:

Cost of goods sold 240,000 180,000

Depreciation 10,000 20,000
Interest expense 12,000 40,000
Other expenses 8,000 10,000
Net income $563,422 $50,000

Retained Earnings Statements

Balance, January 1, 2024 $477,964 $170,000
Net income 563,422 50,000
Dividends (10,000) (5,000)
Balance, December 31, 2024 $1,031,386 $215,000

Balance Sheets

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Par Inc. Sub Inc.

Cash $647,500 $665,000

Accounts receivable 250,000 35,000
Investment in Sub 717,886

Inventory 90,000 45,000

Equipment (net) 750,000 170,000
Land ---------- 115,000
Total assets $2,455,386 $1,030,000
Current liabilities $464,000 $325,000
Bonds payable 160,000 80,000
Common shares 800,000 410,000
Retained earnings 1,031,386 215,000
Total liabilities and equity $2,455,386 $1,030,000

Other information:

• During 2024, Sub borrowed $10,000 in cash from Par, interest free, to finance its operations.
The amount remains unpaid as December 31, 2024.
• Par uses the equity method to account for its investment in Sub.
• The bonds pay interest on December 31 each year at a stated rate of 3%. The market rate of
interest on January 1, 2023 was 5%.

Question Details

23.1) Prepare Par's consolidated balance sheet as at the date of acquisition.

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23.2) Prepare Par's consolidated income statement for the year ended December 31,
2024. Show the allocation of consolidated net income between the controlling and
noncontrolling interests.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Bloom's : Apply
DifficultyMedium
Topic : 05-17 Acquisition Differential Assigned to Liabilities
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5
Topic : 05-14 Consolidated Statements, End of Year 6

23.3) Prepare Par's statement of consolidated retained earnings for the year ended
December 31, 2024.

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Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Bloom's : Apply
DifficultyMedium
Topic : 05-17 Acquisition Differential Assigned to Liabilities
Learning Objective : 05-06 Analyze and interpret financial statements involving consolidations subseq
Topic : 05-21 Analysis and Interpretation of Financial Statements
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5
Topic : 05-14 Consolidated Statements, End of Year 6

23.4) Prepare a consolidated balance sheet for Par Inc. as at December 31, 2024.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Bloom's : Apply
DifficultyMedium
Topic : 05-17 Acquisition Differential Assigned to Liabilities
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5
Topic : 05-14 Consolidated Statements, End of Year 6
Topic : 05-18 Intercompany Receivables and Payables

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24) Remburn Inc. (Remburn) purchased 90% of the outstanding voting shares of Stanton Inc.
(Stanton) for $90,000 on January 1, 2022. On that date, Stanton had common shares and retained
earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of
10 years from the date of acquisition. Stanton's trademark is estimated to have a remaining life of
5 years from the date of acquisition. Stanton's bonds mature on January 1, 2042. The inventory
was sold in the year following the acquisition. Both companies use straight line amortization, and
no salvage value is assumed for assets. Remburn and Stanton declared and paid $12,000 and
$4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton's fair values on the date of acquisition
are shown below:
Remburn Inc. Stanton Inc. Stanton Inc.

(carrying value) (carrying value) (fair value)

Cash $400,000 $5,000 $5,000

Accounts receivable 240,000 30,000 30,000
Inventory 60,000 30,000 50,000
Investment in Stanton Inc. 90,000

Equipment (net) 160,000 25,000 20,000

Land -------- 20,000 30,000
Trademark --------- 10,000 15,000
Total assets $950,000 $120,000

Current liabilities $500,000 $50,000 50,000

Bonds payable 120,000 20,000 30,000
Common shares 200,000 30,000

Retained earnings 130,000 20,000

Total liabilities and equity $950,000 $120,000

The following are the financial statements for both companies for the fiscal year ended
December 31, 2022:

Income Statements
Remburn Inc. Stanton Inc.

Sales $295,750 $125,000

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Dividend income 3,600

Less: expenses:

Cost of goods sold 200,000 19,000

Depreciation 10,000 25,000
Interest expense 16,000 36,000
Other expenses 5,000 28,000
Gain on sale of land - (8,000)
Net income $68,350 $25,000

Retained Earnings Statements

Remburn Inc. Stanton Inc.

Balance, January 1, 2022 $130,000 $20,000

Net income 68,350 25,000
Dividends (12,000) (4,000)
Balance, December 31, 2022 $186,350 $41,000

Balance Sheets
Remburn Inc. Stanton Inc.

Cash $190,950 $156,000

Accounts receivable 200,000 150,000
Investment in Stanton Inc. 90,000

Inventory 100,000 30,000

Equipment (net) 350,000 25,000
Trademark -------- 10,000
Total assets $930,950 $371,000
Current liabilities $424,600 $280,000
Bonds payable 120,000 20,000
Common shares 200,000 30,000
Retained earnings 186,350 41,000
Total Liabilities and Equity $930,950 $371,000

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Other information:

• Both companies use a FIFO system, and Stanton's entire inventory on the date of acquisition
was sold during the following year.
• During 2022, Stanton borrowed $20,000 in cash from Remburn interest free to finance its
operations. The amount remains unpaid on December 31, 2022.
• Remburn uses the cost method to account for its investment in Stanton Inc.
• Stanton sold all of its land during the year for $28,000.
• The goodwill impairment for 2022 was determined to be $7,000.
• Remburn has chosen to use the identifiable net assets (INA) method to value the
noncontrolling interest in Stanton on the acquisition date.

Question Details

24.1) Prepare Remburn's consolidated income statement for the year ended December
31, 2022 and show the allocation of the consolidated net income between the controlling
and noncontrolling interests.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Topic : 05-16 Identifiable Net Assets Method
Bloom's : Apply
DifficultyMedium
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5

24.2) Prepare Remburn's statement of consolidated retained earnings as at December

31, 2022.

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24.3) Prepare a statement of changes in noncontrolling interest for the year ended
December 31, 2022.

24.4) Prepare a consolidated balance sheet for Remburn Inc. as at December 31, 2022.

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Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Topic : 05-16 Identifiable Net Assets Method
Bloom's : Apply
Difficulty : Hard
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5

24.5) Assume that Stanton's equipment, land and trademark on the date of acquisition
form part of a single asset group. Also assume that due to significant adverse changes in
Stanton's technological environment, the assets are expected to only generate future cash
flows of $40,000. Does this mean that Stanton will have to recognize animpairment loss?
Explain.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-01 Perform impairment tests on property, plant, equipment, intangible assets,
Bloom's : Remember
Topic : 05-03 Testing Goodwill and other Assets for Impairment
Topic : 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives
Bloom's : Apply
DifficultyMedium

24.6) Assume that Stanton had other intangible assets with indefinite lives on its books
at the date of acquisition. How would the impairment test differ from that which would
apply to its amortizable assets, if at all? A simple explanation is required. Please do not use
any numbers to support your answer.

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Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-01 Perform impairment tests on property, plant, equipment, intangible assets,
Bloom's : Remember
Topic : 05-03 Testing Goodwill and other Assets for Impairment
Topic : 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives
Bloom's : Apply
DifficultyMedium

24.7) Disregard the above goodwill impairment loss provided in the question. Instead,
assume that Stanton has only one cash-generating unit with goodwill and that Stanton's
common shares had a fair market value of $51,000 on December 31, 2022. Determine if
animpairment loss has resulted. If yes, apply the impairment loss to determine the revised
carrying amounts of the goodwill and identifiable assets.

Question Details
Accessibility : Keyboard Navigation
Learning Objective : 05-01 Perform impairment tests on property, plant, equipment, intangible assets,
Bloom's : Remember
Learning Objective : 05-04 Prepare consolidated financial statements using the identifiable net asset
Topic : 05-16 Identifiable Net Assets Method
Topic : 05-03 Testing Goodwill and other Assets for Impairment
Topic : 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives
Bloom's : Apply
Topic : 05-21 Analysis and Interpretation of Financial Statements
Difficulty : Hard

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25) Davis Inc. (Davis) purchased a controlling interest in Martin Inc. (Martin) on January 1,
2022, when Martin's common shares and retained earnings were carried at $180,000 and
$60,000, respectively. On that date, Martin's book values approximated its fair values, with the
exception of the company's inventories and a patent held by Martin. The patent, which had
anestimated remaining useful life of ten years, had a fair value which was $20,000 higher than its
book value. Martin's inventories on January 1, 2022 were estimated to have a fair value that was
$16,000 higher than their book value.
It was predicted that Martin's goodwill impairment test, which was to be conducted on
December 31, 2023, would result in a loss equal to 10% of the goodwill (regardless of the
amount) at the date of acquisition.
During 2022, Martin reported a net income of $60,000 and declared and paid $12,000 in
dividends. Martin's 2023 net income and dividends declared and paid were $72,000 and $15,000,
respectively. Martin uses straight-line amortization for all of its assets.

Assuming that Davis purchases 100% of Martin for $300,000, answer the following:

Required:

a) Prepare Davis' equity method journal entries for 2022 and 2023.

b) Compute the following as at December 31, 2023:

i. Investment in Martin Inc.

ii. Goodwill
iii. The remaining acquisition differential.

Question Details
Accessibility : Keyboard Navigation
Bloom's : Apply
DifficultyMedium
Learning Objective : 05-02 Prepare schedules to allocate and show changes to the acquisition differen
Topic : 05-09 Consolidation of a 100%-Owned Subsidiary
Topic : 05-10 Consolidated Statements, End of Year 5
Learning Objective : 05-05 Prepare journal entries and calculate balance in the investment account un
Topic : 05-20 Equity Method of Recording
Topic : 05-11 Consolidated Statements, End of Year 6

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26) Davis Inc. (Davis) purchased a controlling interest in Martin Inc. (Martin) on January 1,
2022, when Martin's common shares and retained earnings were carried at $180,000 and
$60,000, respectively. On that date, Martin's book values approximated its fair values, with the
exception of the company's inventories and a patent held by Martin. The patent, which had
anestimated remaining useful life of ten years, had a fair value which was $20,000 higher than its
book value. Martin's inventories on January 1, 2022 were estimated to have a fair value that was
$16,000 higher than their book value.
It was predicted that Martin's goodwill impairment test, which was to be conducted on December
31, 2023, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the
date of acquisition.
During 2022, Martin reported a net income of $60,000 and declared and paid $12,000 in
dividends. Martin's 2023 net income and dividends declared and paid were $72,000 and $15,000,
respectively. Martin uses straight-line amortization for all of its assets.
Davis uses the fair value enterprise (FVE) method.

Assuming that Davis purchases 70% of Martin for $280,000, answer the following:

Required:

a) Prepare Davis' equity method journal entries for 2022 and 2023.
b) Compute the following as at December 31, 2023:
i. Investment in Martin Inc.
ii. Goodwill
iii. The remaining acquisition differential.

Question Details
Accessibility : Keyboard Navigation
Bloom's : Apply
DifficultyMedium
Learning Objective : 05-05 Prepare journal entries and calculate balance in the investment account un
Topic : 05-20 Equity Method of Recording
Learning Objective : 05-03 Prepare consolidated financial statements using the fair value enterprise
Topic : 05-12 Consolidation of an80%-Owned Subsidiary-Direct Approach
Topic : 05-13 Consolidated Statements, End of Year 5
Topic : 05-14 Consolidated Statements, End of Year 6

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27) Linton Inc. (Linton) purchased 75% of Marsh Ltd. (Marsh) on January 1, 2022 for
$937,500. Marsh's common shares and retained earnings were worth $400,000 each on that date.
The acquisition differential was allocated as follows:
Trademark $15,000 (which had not been previously recorded)
Inventory $8,000 (fair value in excess of book value)

The balance was allocated to goodwill. The trademark had anestimated remaining useful life of
10 years from the date of acquisition. Marsh Ltd. uses straight line amortization.
In 2022, Marsh's net income was $40,000. Marsh declared and paid $5,000 in dividends to
shareholders on record as at December 31, 2022. In 2023, Marsh reported a net income of $8,000
and declared and paid $1,000 in dividends.

Required:

a) Prepare the equity method journal entries for Linton for 2022 and 2023.
b) Calculate the value of Marsh's trademark as at December 31, 2023.
c) Prepare a statement that shows the changes in Linton's non-controlling interest in 2023.
Answer: a)EquityMethodJournalEntries
2022: Debit Credit
Investment in Marsh Ltd. 937,500

Cash 937,500

Investment in Marsh Ltd. 30,000

Equity method income 30,000

Equity method income 7,125

Investment in Marsh Ltd. 7,125

Cash 3,750

Investment in Marsh Ltd. 3,750

2023: Debit Credit

Investment in Marsh Ltd. 6,000

Equity method income 6,000

Equity method income 1,125

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Investment in Marsh Ltd. 1,125

Cash 750

Investment in Marsh Ltd. 750

Calculation and Allocation of Acquisition Differential Schedule

Cost of 75% of Marsh $937,500

Implied value of 100% of Marsh $937,500/75% $1,250,000

Less: Carrying value of net identifiable ($400,000 common shares + $400,000 800,000
assets of subsidiary retained earnings)
Acquisition differential $450,000

Allocation: (FV–CV)

Inventory 8,000

Trademark 15,000

Balance - goodwill $427,000

Changes to Acquisition Differential Schedule

Balance – Jan. 1, Changes in 2022 Changes in 2023 Balance Dec. 31,
2022 2023
Inventory $8,000 $-8,000 $0 $0
Trademark 15,000 -1,500 -1,500 12,000
Goodwill 427,000 0 0 427,000
Total $450,000 $-9,500 $-1,500 $439,000

b) Trademark: $15,000 - ($1,500 × 2) = $12,000

c)ChangesinNoncontrollingInterest:
Noncontrolling Interest, January 1, 2022:

($1,250,000 × 25 %) $312,500

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2022 Net Income (noncontrolling share)

($40,000 × 25%) – ($8,000 + $1,500) × 25% 7,625

Less: 2022 Dividends (noncontrolling share)

($5,000 × 25%) (1,250)

2023 Net Income (noncontrolling share)

($8,000 × 25%) – ($1,500 × 25%) 1,625

Less: 2023 Dividends (noncontrolling share)

($1,000 × 25%) (250)

Noncontrolling Interest, December 31, 2023 $320,250

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28) Selectron Inc. (Selectron) acquired 60% of Insor Inc. (Insor) on January 1, 2022 for
$180,000, when Insor's common shares and retained earnings were worth $60,000 and $180,000,
respectively. Insor's fair values equaled their book values on that date. Selectron currently uses
the equity method to account for its investment in Insor.
During 2022, investment income in the amount of $12,000 and dividends in the amount of
$1,200 were recorded in Selectron's Investment in Insor account. During 2023, investment
income in the amount of $24,000 and dividends in the amount of $2,400 were recorded in
Selectron's Investment in Insor account. Insor declares dividends in the amount of 10% of its
earnings.

Required:

a) Compute Insor's net income for 2022 and 2023.

b) Compute the amount of dividends declared by Insor in each year.
c) Compute the balance in the non-controlling interest account as at December 31, 2023.
Answer: a) Insor's net income for 2022 and 2023 had to be $20,000 and $40,000 respectively.

Insor's net income for 2022 is calculated as follows:

2022 net income flowing through investment account = $12,000;

$12,000/60% = $20,000
Insor's 2023 net income would be calculated in the same manner, and would be $40,000
($24,000/60%)
b) Dividends, 2022 = $20,000 × 10 % = $2,000 (or $1,200/60%). Dividends, 2023 = $4,000
($40,000 × 10 % = $4,000 (or $2,400/60%)

c) Non-Controlling Interest:
Fair value of Insor at date of acquisition: ($180,000/60%) $300,000
Add: 2022 Net Income 20,000
Less: 2022 Dividends (2,000)
Add: 2020 Net Income 40,000
Less: 2020 Dividends (4,000)
Book value of Insor, December 31, 2023 $354,000
Non-Controlling Interest (40%) $141,600

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29) Subsequent to the date of acquisition, a parent company can choose between the
consolidation method or equity method when accounting for aninvestment in a subsidiary in its
own internal accounting records.

29)

⊚ true
⊚ false

30) The Canada Revenue Agency requires consolidated financial statements for income tax
assessment purposes.

30)

⊚ true
⊚ false

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31) If the noncontrolling interest (NCI) is measured using the identifiable net assets method,
the NCI's share of the subsidiary's goodwill is excluded.

31)

⊚ true
⊚ false

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Answer Key

Test name: chapter 5

1) A
2) C
3) C
4) D
5) D
6) A
7) B
8) D
9) D
10) C
11) A
The parent's use of the equity method should always produce the
following results:

• The parent's net income reported in its internal records in any one year
will always be equal to consolidated net income attributable to the
shareholders of the parent for that year.
• The parent's retained earnings in its internal records are always equal to
consolidated retained earnings.
12) D
13) D
14) B
15) B
16) C
17) D
18) Section Break

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18.1) D
Calculation of Acquisition Differential & Goodwill:
Cost of 100% of Sol $420,000

Less: carrying value of net identifiable assets of Sol

Common shares $100,000

Retained earnings 233,000 333,000

Acquisition differential $87,000

Allocated: (FV-CV)

Inventory $45,000 - $34,000 11,000

Plant assets (net) $240,000 - $220,000 20,000
Patent $84,000 - $70,000 14,000
Bonds payable $67,496 – $60,000 (7,496)
Balance: goodwill $49,496

18.2) A
The acquired goodwill is recorded on the consolidated balance sheet
only; not on the separate-entity balance sheet of either entity.
18.3) B
Calculation of Acquisition Differential & Goodwill:
Cost of 100% of Sol $420,000

Less: carrying value of net identifiable assets of

Sol
Common shares $100,000

Retained earnings 233,000 333,000

Acquisition differential $87,000

Allocated: (FV-CV)

Inventory $45,000 - $34,000 11,000

Plant assets (net) $240,000 - $220,000 20,000
Patent $84,000 - $70,000 14,000
Bonds payable $67,496 – $60,000 (7,496)

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Balance: goodwill $49,496

Goodwill on acquisition date = $49,496

Recoverable amount on December 31, 2022 = $40,000
Goodwill impairment loss = $49,496 - $40,000 = $9,496
18.4) A
Under the equity method, dividends received are a reduction to the
Investment in subsidiary account.
18.5) D
Under the cost method, dividends received are recorded in the
income statement as revenue.
18.6) A
Changes to Acquisition Differential Schedule
Balance January Changes in 2022 Balance December Unamortized Dec.
1, 2022 31, 2022 31, 2019
Inventory $11,000 $-11,000 $----------

Plant assets (8 20,000 -2,500 17,500 $17,500

years)
Patents (10 years) 14,000 -1,400 12,600 12,600
Bonds payable -7,496 600 -6,896
(see below)
Goodwill 49,496 -9,496 40,000

$87,000 $-23,796 $63,204

Bond Premium Amortization Schedule

Date Cash Paid Interest Expense Bond Premium Amortized Cost of
Amortization Bonds
Jan. 1, 2022 $67,496

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Dec.31, 2022 $6,000 $5,400(rounded) $600 66,896

18.7) C
Under the equity method, the subsidiary's net income is recorded as
anincrease to the investment asset account and as revenue in the
income statement. ($120,000 × 100%).
18.8) A
Since Planet owns 100% of Sol, all of the consolidated net income
is attributable to shareholders of the Planet:
Planet’s net income $180,000

Less: dividend revenue from Sol (12,000)

$168,000

Sol’s net income $120,000

Changes in acquisition differential (23,796) 96,204

Planet’s consolidated net income using the equity method $264,204

18.9) B
The retained earnings on the consolidated financial statements is
equal to the parent's retained earnings on the date of acquisition.
18.10) D

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Consolidated retained earnings = $300,000 = opening retained

earnings of parent $70,000 + parent's separate entity net income
excluding any investment income from subsidiary $160,000 +
subsidiary's net income flowed to the parent $70,000 (= $90,000 net
income - $16,000 amortization of acquisition differential - $4,000
goodwill acquisition differential impairment loss).
Planet’s retained earnings, January 1, $320,000
2022 (acquisition date)
Add: Planet’s separate entity net income 160,000
excluding any investment income from
Sol
$480,000

Sol’s net income $120,000

Changes in acquisition differential (23,796) 96,204

Planet’s consolidated retained earnings, $576,204
December 31, 2022
19) Section Break
19.1) B
19.2) D
19.3) A
Under the cost method, Great would record $10,000 as dividend
income, whereas under the equity method, Great would record
$40,000 as equity method income. Overall, comprehensive income
would be $30,000 higher under the equity method.
20) Section Break
20.1) A
20.2) D
21) Section Break
21.1) C
Calculation and allocation of acquisition differential:
Cost of 80% of Humble $360,000

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Implied value of 100% of Humble ($360,000/0.80) $450,000

Less: Carrying value of net identifiable ($180,000 common shares + $90,000 270,000
assets of subsidiary retained earnings)
Acquisition differential $180,000

Allocation: (FV–CV)

Inventory $50,000 - $45,000 5,000

Equipment (net) $72,000 - $80,000 -8,000
Trademark $193,000- $90,000 103,000
Bonds Payable $40,000 - $70,000 30,000
Balance - goodwill $50,000

Changes to Acquisition Differential Schedule

Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

Trademark 103,000 0 0 103,000
Bonds payable 30,000 -6,000 -3,000 21,000
Goodwill 50,000 -10,000 0 40,000
Total $180,000 $-17,800 $-1,400 $160,800
21.2) C
Acquisition cost for 80% = $360,000. Implied acquisition cost for
100% = $450,000. NCI = $450,000 × 20% = $90,000.
21.3) A
Depreciation expense on consolidated income statement =
$113,400.
Big Guy (parent) depreciation $81,000

Humble (subsidiary) depreciation 34,000

Changes in acquisition differential on equipment ($-8,000/5 years) (1,600)

(net)

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Consolidated depreciation expense $113,400

Changes to Acquisition Differential Schedule

Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

Trademark 103,000 0 0 103,000
Bonds payable 30,000 -6,000 -3,000 21,000
Goodwill 50,000 -10,000 0 40,000
Total $180,000 $-17,800 $-1,400 $160,800
21.4) D
Interest expense on consolidated income statement = $63,000.
Big Guy (parent) interest expense $34,000

Humble (subsidiary) interest expense 26,000

Changes in acquisition differential on bonds payable ($30,000/10 years) 3,000

Consolidated interest expense $63,000

Changes to Acquisition Differential Schedule

Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

Trademark 103,000 0 0 103,000
Bonds payable 30,000 -6,000 -3,000 21,000
Goodwill 50,000 -10,000 0 40,000
Total $180,000 $-17,800 $-1,400 $160,800
21.5) C
Other expenses on consolidated income statement = $13,000.
Big Guy (parent) other expenses $5,000

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Humble (sub) other expenses 8,000

Changes in acquisition differential (none relating to other expenses) 0

Consolidated other expenses $13,000

21.6) C
Big Guy's net income under the equity method is equal to
consolidated net income attributable to Big Guy's shareholders -
$228,480

Proof:
TOTAL Big Guy’s portion NCI portion
(80%) 20%
Big Guy’s net income $228,480

Less: equity method earnings 8,480

from sub
Big Guy’s adjusted net income $220,000 $220,000 $0

Humble’s net income $12,000

Less: changes in acquisition $(1,400)

differential 2023
10,600 8,480 2,120

Consolidated net income $230,600 $228,480 $2,120

Changes to Acquisition Differential Schedule

Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

Trademark 103,000 0 0 103,000
Bonds payable 30,000 -6,000 -3,000 21,000
Goodwill 50,000 -10,000 0 40,000
Total $180,000 $-17,800 $-1,400 $160,800

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21.7) B
The dividends that would appear on Big Guy's consolidated
statement of retained earnings as at June 30, 2023 = $20,000
(dividends declared by Big Guy (parent) to its shareholders).
21.8) C
Calculation of consolidated net income:
TOTAL Big Guy’s portion NCI portion
(80%) 20%
Big Guy’s net income $228,480

Less: equity method earnings 8,480

from sub
Big Guy’s adjusted net income $220,000 $220,000 $0

Humble’s net income $12,000

Less: changes in acquisition $(1,400)

differential 2023
10,600 8,480 2,120

Consolidated net income $230,600 $228,480 $2,120

Consolidated Net Income Attributable to NCI = $10,600 × 20% =

$2,120

Changes to Acquisition Differential Schedule

Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

Trademark 103,000 0 0 103,000
Bonds payable 30,000 -6,000 -3,000 21,000
Goodwill 50,000 -10,000 0 40,000
Total $180,000 $-17,800 $-1,400 $160,800

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21.9) A
Under the equity method, consolidated retained earnings are equal
to the retained earnings of the parent = $1,169,040.
21.10) A
NCI on consolidated balance sheet = $79,760.
Humble’s Shareholders’ equity on June 30, (common shares $180,000 + retained $238,000
2023 earnings $58,000)
Remaining acquisition differential (on current 160,800
year end date)*
$398,800

NCI ownership × 20%

$79,760

*Changes to Acquisition Differential Schedule

Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

Trademark 103,000 0 0 103,000
Bonds payable 30,000 -6,000 -3,000 21,000
Goodwill 50,000 -10,000 0 40,000
Total $180,000 $-17,800 $-1,400 $160,800
21.11) D
21.12) C
Consolidated goodwill = $40,000 = $50,000 goodwill on original
business combination - $10,000 impairment loss.
Changes to Acquisition Differential Schedule
Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

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Trademark 103,000 0 0 103,000

Bonds payable 30,000 -6,000 -3,000 21,000
Goodwill 50,000 -10,000 0 40,000
Total $180,000 $-17,800 $-1,400 $160,800
21.13) C
Equipment (net) on consolidated balance sheet = $881,800.
Big Guy (parent) equipment $820,000
Humble (sub) equipment 65,000
*Remaining acquisition differential for equipment (3,200)
Consolidated equipment (net) $881,800

Changes to Acquisition Differential Schedule

Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

Trademark 103,000 0 0 103,000
Bonds payable 30,000 -6,000 -3,000 21,000
Goodwill 50,000 -10,000 0 40,000
Total $180,000 $-17,800 $-1,400 $160,800
21.14) C
Current liabilities on consolidated balance sheet = $662,000.
Big Guy (parent) current liabilities $350,000
Humble (sub) current liabilities 332,000
Elimination of intercompany A/R and A/P (20,000)
Consolidated current liabilities $662,000
21.15) B
Accounts receivable on consolidated balance sheet = $305,000.
Big Guy (parent) accounts receivable $270,000
Humble (sub) accounts receivable 55,000
Elimination of intercompany A/R and A/P (20,000)
Consolidated accounts receivable $305,000
21.16) C
NCI (INA method) on consolidated balance sheet = $71,760.

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Humble’s Shareholders’ equity on June 30, 2023 (common shares $180,000 + $238,000
retained earnings $58,000)
Remaining acquisition differential (on current year 160,800
end date) not including goodwill
$398,800

NCI ownership × 20%

NCI under FVE Method $79,760

Less: NCI’s share of goodwill 20% × $40,000 (8,000)

NCI under INA method $71,760

*Changes to Acquisition Differential Schedule

Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

Trademark 103,000 0 0 103,000
Bonds payable 30,000 -6,000 -3,000 21,000
Sub-total $120,800

Goodwill 50,000 -10,000 0 40,000

Total $180,000 $-17,800 $-1,400 $160,800
21.17) A
Common shares on consolidated balance sheet = common shares on
Big Guy (parent) balance sheet = $900,000.
21.18) A
Bonds payable on consolidated balance sheet = $309,000.
Big Guy (parent) bonds payable $260,000
Humble (sub) bonds payable 70,000
Remaining acquisition differential on bonds payable (10 years)* (21,000)
Consolidated bonds payable $309,000

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*Changes to Acquisition Differential Schedule

Balance – July 1, Changes in 2021 & Changes in 2023 Balance June 30,
2020 2022 2023
Inventory $5,000 $-5,000 $0

Equipment -8,000 3,200 $1,600 -3,200

Trademark 103,000 0 0 103,000
Bonds payable 30,000 -6,000 -3,000 21,000
Goodwill 50,000 -10,000 0 40,000
Total $180,000 $-17,800 $-1,400 $160,800
22) Section Break
22.1)BrandXInc.
ConsolidatedBalanceSheet
asatDecember31,2023
Cash ($200,000 + $45,000) $245,000
Accounts receivable ($100,000 + $40,000) 140,000
Inventory ($80,000 + $55,0000 – $5,000 + $5,000) 135,000
Equipment (net) ($220,000 + $100,000 – $30,000 + $3,000) 293,000
Patent ($60,000 + $24,000 – $4,000) 80,000
Goodwill See below 154,000
Total Assets $1,047,000

Current liabilities ($480,000 + $53,000) $533,000

Bonds payable ($270,000 + $50,000 –$5,000 + $1,000) 316,000
Common shares 100,000

Retained earnings 98,000

Total liabilities and equity $1,047,000

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Note:consolidatedretainedearningsarethesameastheparent'sreta
inedearningsundertheequitymethod.

The following explanation may help students understand how some

of these figures were derived:

Calculation and Allocation of Acquisition Differential Schedule

Cost of 100% of Brand Y $350,000
Less: NBV of net assets 200,000
AD $150,000
Allocated:

Inventory -5,000
Equipment -30,000
Patent 24,000
Bonds payable 5,000
Balance - goodwill $156,000

Changes to Acquisition Differential Schedule

Balance – Jan. 1, 2023 Changes in 2023 Balance Dec. 31, 2023

Inventory $-5,000 $5,000 $0

Equipment -30,000 3,000 -27,000
Patent 24,000 -4,000 20,000
Bonds payable 5,000 -1,000 4,000
Goodwill 156,000 -2,000 154,000
Total $150,000 $1,000 $151,000
22.2)BrandXInc.
ConsolidatedBalanceSheet
AsatDecember31,2023
Cash ($200,000 + $45,000) $245,000
Accounts receivable ($100,000 + $40,000) 140,000
Inventory ($80,000 + $55,0000 – $5,000 + $5,000) 135,000

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Equipment (net) ($220,000 + $100,000 – $30,000 + $3,000) 293,000

Patent ($60,000 + $24,000 – $4,000) 80,000
Goodwill See below 241,500
Total Assets $1,134,500

Current liabilities ($480,000 + $53,000) $533,000

Bonds payable ($270,000 + $50,000 –$5,000 + $1,000) 316,000
Common shares 100,000

Retained earnings 98,000

Non-controlling interest 87,500

Total liabilities and equity $1,134,500

The following explanations may help students understand how

some of the figures were derived:

Non-ControllingInterest:
NCI at acquisition – $437,500 × .2 $87,500
Income ($50,000 × .2) 10,000
Dividends ($51,000 × .2) (10,200)
Inventory 5,000 × 20% 1,000
Equipment (30,000/10) × 20% 600
Patent (24,000)/6 = (4,000) × 20% (800)
Bond (5,000)/5 = (1,000)× 20% (200)
Goodwill 2,000× 20% (400)
$87,500

Or [$199,000 (NBV of Brand Y) + $238,500 (remaining AD)] x

20% = $87,500
Calculation and Allocation of Acquisition Differential Schedule
Cost of 80% of Brand Y $350,000
Implied value (100%) of Brand Y 350,000/.80 $437,500
Less: NBV of net assets 200,000

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AD $237,500
Allocated

Inventory -5,000
Equipment -30,000
Patent 24,000
Bonds payable 5,000
Goodwill $243,500

Changes to Acquisition Differential Schedule

Balance – Jan. 1, 2023 Changes in 2023 Balance Dec. 31, 2023

Inventory $-5,000 $5,000 $0

Equipment -30,000 3,000 -27,000
Patent 24,000 -4,000 20,000
Bonds payable 5,000 -1,000 4,000
Goodwill 243,500 -2,000 241,500
Total $237,500 $1,000 $238,500
23) Section Break
23.1)ParInc.
ConsolidatedBalanceSheet
asatJanuary1,2023
Cash ($600,000 + $515,000) $1,115,000
Accounts receivable ($140,000 + $85,000) 225,000
Inventory ($60,000 + $45,000 + $15,000) 120,000
Equipment (net) ($50,000 + $180,000 + $5,000) 235,000
Land ($115,000 + $85,000) 200,000
Goodwill 306,879
Total assets $2,201,879
Current liabilities ($100,000 + $280,000) $380,000
Bonds payable ($160,000 + $80,000 -$8,121) 231,879
Non-controlling interest (30% × $1,000,000) 300,000
Common shares 800,000

Retained earnings 490,000

Total Liabilities and Equity $2,201,879

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Calculation and Allocation of Acquisition Differential Schedule

Cost of 70% of Sub $700,000
Implied value (100%) of Sub 700,000/.70 $1,000,000
Less: NBV of net assets ($410,000 + $170,000) 580,000
AD $420,000
Allocated

Inventory 15,000
Equipment 5,000
Land 85,000
Bonds payable 8,121
Goodwill $306,879

Changes to Acquisition Differential Schedule

Balance – Jan. 1, Changes in 2023 Changes in 2024 Balance Dec. 31,
2023 2024
Inventory $15,000 $(15,000) $0

Equipment 5,000 (1,000) $(1,000) 3,000

Land 85,000 -------- -------- 85,000
Bonds payable 8,121 (1,194) (1,254) 5,673
Goodwill 306,879 ---------- --------- 306,879
Total $420,000 $(17,194) $(2,254) $400,552

BondDiscountAmortizationSchedule
Date Cash Paid Interest Bond Discount Amortized Cost of
Expense Amortization Bonds
01-Jan-23 $71,879

31-Dec-23 $2,400 $3,594 $1,194 73,073

31-Dec-24 2,400 3,654 1,254 74,327
23.2) ParInc.
ConsolidatedIncomeStatement
FortheyearendedDecember31,2024

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Sales ($800,000 + $300,000) $1,100,000

Less: expenses:

Cost of goods sold: ($240,000 + $180,000) 420,000

Depreciation ($10,000 + $20,000 + $1,000) 31,000
Interest expense ($12,000 + $40,000 + $1,254) 53,254
Other expenses ($8,000 + $10,000) 18,000
Net income $577,746

Attributable to:

Shareholders of Par [$577,746 - $14,324 (amount attributable to NCI)] $563,422

Noncontrolling interest ($50,000 – $1,000 – $1,254) × 30% 14,324

Changes to Acquisition Differential Schedule

Balance – Jan. 1, Changes in 2023 Changes in 2024 Balance Dec. 31,
2023 2024
Inventory $15,000 $(15,000) $0

Equipment 5,000 (1,000) $(1,000) 3,000

Land 85,000 -------- -------- 85,000
Bonds payable 8,121 (1,194) (1,254) 5,673
Goodwill 306,879 ---------- --------- 306,879
Total $420,000 $(17,194) $(2,254) $400,552

BondDiscountAmortizationSchedule
Date Cash Paid Interest Bond Discount Amortized Cost of
Expense Amortization Bonds
01-Jan-23 $71,879

31-Dec-23 $2,400 $3,594 $1,194 73,073

31-Dec-24 2,400 3,654 1,254 74,327
23.3) ParInc.
StatementofConsolidatedRetainedEarnings
FortheyearendedDecember31,2024
Balance, January 1, 2024 $477,964
Net income 563,422

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Dividends (10,000)
Balance, December 31, 2024 $1,031,386
23.4) ParInc.
ConsolidatedBalanceSheet
AsatDecember31,2024
Cash ($647,500 + 665,000) $1,312,500
Accounts receivable ($250,000 + $35,000 – $10,000) 275,000
Inventory ($90,000 + $45,000) 135,000
Equipment (net) ($750,000 + $170,000 + $3,000) 923,000
Land ($0 + $115,000 +$85,000) 200,000
Goodwill 306,879

Total assets $3,152,379

Current liabilities ($464,000 + $325,000 – $10,000) $779,000

Bonds payable ($160,000 + $80,000 – $5,673) 234,327
Noncontrolling interest See below 307,666
Common shares 800,000

Retained earnings 1,031,386

Total Liabilities and Equity $3,152,379

Changes to Acquisition Differential Schedule

Balance – Jan. 1, Changes in 2023 Changes in 2024 Balance Dec. 31,
2023 2024
Inventory $15,000 $(15,000) $0

Equipment 5,000 (1,000) $(1,000) 3,000

Land 85,000 -------- -------- 85,000
Bonds payable 8,121 (1,194) (1,254) 5,673
Goodwill 306,879 ---------- --------- 306,879
Total $420,000 $(17,194) $(2,254) $400,552

Noncontrollinginterestcalculation:

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Shareholders’ equity – Sub

Common shares $410,000

Retained earnings 215,000
Remaining AD 400,552
$1,025,552

Noncontrolling interest’s ownership 30%

$307,666

BondDiscountAmortizationSchedule
Date Cash Paid Interest Bond Discount Amortized Cost of
Expense Amortization Bonds
01-Jan-23 $71,879

31-Dec-23 $2,400 $3,594 $1,194 73,073

31-Dec-24 2,400 3,654 1,254 74,327
24) Section Break
24.1)RemburnInc.
Consolidated Income Statement
For the Year ended December 31, 2022
Sales ($295,750 + $125,000) $420,750
Less: expenses

Cost of goods sold ($200,000 + $19,000 + 239,000

20,000)
Depreciation ($10,000 + $25,000 – 500) 34,500
Interest Expense ($16,000 + $36,000 – 500) 51,500
Other Expenses ($5,000 + $28,000 + 1,000) 34,000
Loss on Sale of Land ($-8,000 + 10,000) 2,000
Goodwill impairment 7,000

Net Income $52,750

Attributable to:

Shareholders of Remburn [$52,750 + 500 (amount attributable $53,250

to NCI)]

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Noncontrolling interest 25,000 × 10% = 2,500 – (30,000 × (500)

10%) = (500)

Changes to Acquisition Differential Schedule

Balance January 1, 2022 Changes in 2022 Balance December 31, 2022

Inventory $20,000 $(20,000) $0

Equipment (5,000) 500 (4,500)
Land 10,000 (10,000) 0
Trademark 5,000 (1,000) 4,000
Bonds payable (10,000) 500 (9,500)
Sub-total 30,000

Goodwill 27,000 (7,000) 20,000

Calculation of Acquisition Differential

Cost of 90% of Stanton $90,000
Implied value (100%) of Stanton $90,000/.90 $100,000
Carrying amount of Stanton’s net assets 50,000
Acquisition differential $50,000
Allocated:

Inventory ($50,000 - $30,000) 20,000

Equipment ($20,000 - $25,000) -5,000
Land ($30,000 - $20,000) 10,000
Trademark ($15,000 - $10,000) 5,000
Bonds payable ($30,000 - $20,000) -10,000
Goodwill under FVE method $30,000
Less: NCI’s shares of goodwill (x 10%) 3,000
Goodwill under INA method $27,000
NCI under FVE method (10% × $100,000) $10,000
Less: NCI’s shares of goodwill 3,000
NCI under INA method $7,000
24.2) RemburnInc.
StatementofRetainedEarnings
AsatDecember31,2022

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Balance, January 1 $130,000

Net income 53,250
Less: Dividends: (12,000)
Balance, December 31 $171,250
24.3) RemburnInc.
Statement of Changes in Noncontrolling Interest
For the year ended December 31, 2022
Balance, January 1 $7,000
Allocated income (loss) of entity (500)
Dividends to noncontrolling shareholders (400)
Balance, December 31 $6,100
24.4) RemburnInc.
ConsolidatedBalanceSheet
AsatDecember31,2022
Cash (190,950 + 156,000) $346,950
Accounts receivable (200,000 + 150,000 – 20,000) 330,000
Inventory (100,000 + 30,000) 130,000
Equipment (net) (350,000 + 25,000 – 4,500) 370,500
Trademark (0 + 10,000 + 4,000) 14,000
Goodwill * see below 20,000
Total assets $1,211,450

Current liabilities (424,600 + 280,000 – 20,000) $684,600

Bonds payable (120,000 + 20,000 + 9,500) 149,500
Noncontrolling interest 6,100

Common shares 200,000

Retained earnings 171,250

Total liabilities and equity $1,211,450

Calculation of Acquisition Differential

Cost of 90% of Stanton $90,000
Implied value (100%) of Stanton $90,000/.90 $100,000
Carrying amount of Stanton’s net assets 50,000

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Acquisition differential $50,000

Allocated:

Inventory ($50,000 - $30,000) 20,000

Changes to Acquisition Differential Schedule

Balance January 1, 2022 Changes in 2022 Balance December 31, 2022

Inventory $20,000 $(20,000) $0

Equipment (5,000) 500 (4,500)
Land 10,000 (10,000) 0
Trademark 5,000 (1,000) 4,000
Bonds payable (10,000) 500 (9,500)
Total 30,000

Goodwill 27,000 (7,000) 20,000

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24.5) Not necessarily. Given the above information, Stanton has

"failed" the first part of the required two-part impairment test
required for long-lived assets since the expected future cash flows
of this asset group of $40,000 falls well short of the carrying values
of the assets within the group, which total $55,000. Given this
information, the second part of the two-part impairment test must be
applied.
The second part of the impairment test requires that animpairment
loss be recognized if Stanton fails the first part of the impairment
test and the fair values of the assets within the group are less than
their total carrying values. However, since the fair values
(recoverable amount) are higher than their carrying values ($65,000
vs. $55,000 respectively), there would be no impairment loss in this
case.
24.6) Intangible assets with indefinite useful lives must be assessed
for impairment on anannual basis, regardless of whether there is any
indication that they might be impaired. Only the second part of the
two-part impairment test would be required. Thus, animpairment
loss would have to be recognized if the recoverable amount of the
relevant asset group were less than its carrying value.
24.7) Yes, animpairment loss has resulted and calculated as follows:
Carrying amount of Stanton’s–Dec. 31, 2022

Identifiable net assets $71,000

Goodwill** 30,000
Total carrying amount $101,000
Recoverable amount 51,000
Total impairment loss 50,000

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The impairment loss is first applied to goodwill then to the

identifiable assets. Since the calculation of impairment loss included
a value for the NCI's unrecognized shares of goodwill, part of the
impairment loss will be allocated to the NCI as follows:
Parent’s NCI’s Goodwill Identifiable Assets Total
Goodwill
Carrying amount $27,000 $3,000 $71,000 $101,000
Impairment loss (27,000) (3,000) (20,000) (50,000)
Carrying amount after impairment 0 0 $51,000 $51,000
loss

** Goodwill will need to be grossed-up when the identifiable net

assets method is used to account for NCI. The carrying amount of
goodwill allocated to the unit will have to be grossed up to include
the goodwill attributable to the non-controlling interest - $3,000.
This adjusted carrying amount for goodwill ($30,000) is then
compared with the recoverable amount of the unit to determine
whether the cash-generating unit is impaired.
25)a)EquityMethodJournalEntries
2022: Debit Credit
Investment in Martin Inc. 300,000

Cash 300,000

Investment in Martin Inc. 60,000

Equity method income 60,000

Equity method income 18,000

Investment in Martin Inc. 18,000

Cash 12,000

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Investment in Martin Inc. 12,000

2023: Debit Credit

Investment in Martin Inc. 72,000

Equity method income 72,000

Equity method income 4,400

Investment in Martin Inc. 4,400

Cash 15,000

Investment in Martin Inc. 15,000

Calculation and Allocation of Acquisition Differential Schedule

Cost of 100% of Martin $300,000

Less: Carrying value of net identifiable ($180,000 common shares + $60,000 240,000
assets of subsidiary retained earnings)
Acquisition differential $60,000

Allocation: (FV–CV)

Inventory 16,000

Patent 20,000

Balance – goodwill $24,000

Changes to Acquisition Differential Schedule

Balance – Jan. 1, Changes in 2022 Changes in 2023 Balance Dec. 31,
2022 2023
Inventory $16,000 $-16,000 $0

Patent 20,000 -2,000 -2,000 16,000

Goodwill 24,000 0 -2,400 21,600
Total $180,000 $-18,000 $-4,400 $37,600

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b) i)InvestmentinMartinInc.:
Cost: $300,000
Add: 2022 income: 60,000
Less: 2022 dividends (12,000)
Less: 2022 changes to acquisition differential (18,000)
Add: 2023 income: 72,000
Less: 2023 dividends (15,000)
Less: 2023 changes to acquisition differential (4,400)
Investment in Martin Inc., December 31, 2023: $382,600

ii) Goodwill:$21,600
Calculation and Allocation of Acquisition Differential Schedule
Cost of 100% of Martin $300,000

Less: Carrying value of net identifiable ($180,000 common shares + $60,000 240,000
assets of subsidiary retained earnings)
Acquisition differential $60,000

Allocation: (FV–CV)

Inventory 16,000

Patent 20,000

Balance – goodwill $24,000

Changes to Acquisition Differential Schedule

Balance – Jan. 1, Changes in 2022 Changes in 2023 Balance Dec. 31,
2022 2023
Inventory $16,000 $-16,000 $0

Patent 20,000 -2,000 -2,000 16,000

Goodwill 24,000 0 -2,400 21,600
Total $60,000 $-18,000 $-4,400 $37,600

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iii) The remaining acquisition differential on December 31, 2023 would

be $16,000 (patent) and $21,600 (goodwill) for a total of $37,600.
26)a) Equity Method Journal Entries
2022: Debit Credit
Investment in Martin Inc. 280,000

Cash 280,000

Investment in Martin Inc. 42,000

Equity method income 42,000

Equity method income 12,600

Investment in Martin Inc. $12,600

Cash 8,400

Investment in Martin Inc. 8,400

2023: Debit Credit

Investment in Martin Inc. 50,400

Equity method income 50,400

Equity method income 10,080

Investment in Martin Inc. 10,080

Cash 10,500

Investment in Martin Inc. 10,500

Calculation and Allocation of Acquisition Differential Schedule

Cost of 70% of Martin $280,000

Implied value of 100% of Martin $280,000/70% $400,000

Less: Carrying value of net identifiable ($180,000 common shares + $60,000 240,000

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assets of subsidiary retained earnings)

Acquisition differential $160,000

Allocation: (FV–CV)

Inventory 16,000

Patent 20,000

Balance - goodwill $124,000

Changes to Acquisition Differential Schedule

Balance – Jan. 1, Changes in 2022 Changes in 2023 Balance Dec. 31,
2022 2023
Inventory $16,000 $-16,000 $0 $0
Patent 20,000 -2,000 -2,000 16,000
Goodwill 124,000 0 -12,400 111,600
Total $160,000 $-18,000 $-14,400 $127,600

b) i)InvestmentinMartinInc.:
Cost: $280,000
Add: 2022 income: 42,000
Less: 2022 dividends (8,400)
Less: 2022 changes to acquisition differential (12,600)
Add: 2023 income: 50,400
Less: 2023 dividends (10,500)
Less: 2023 changes to acquisition differential (10,080)
Investment in Martin Inc., December 31, 2023: $330,820

ii) Goodwill
Calculation and Allocation of Acquisition Differential Schedule
Cost of 70% of Martin $280,000

Implied value of 100% of Martin $280,000/70% $400,000

Less: Carrying value of net identifiable ($180,000 common shares + $60,000 240,000

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assets of subsidiary retained earnings)

Acquisition differential $160,000

Allocation: (FV–CV)

Inventory 16,000

Patent 20,000

Balance - goodwill $124,000

Changes to Acquisition Differential Schedule

iii) The remaining acquisition differential would be $16,000 for the

patent, plus the goodwill of $111,600 for a total of $127,600.
29) FALSE
Only the cost and equity methods are permitted when accounting for
aninvestment in a subsidiary in its own internal accounting records. The
consolidation method is used for reporting in the external financial
statements.
30) FALSE
Income tax is assessed at a separate-entity level; therefore,
nonconsolidated financial statements are required by the Canada
Revenue Agency.
31) TRUE

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