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Chapter 6
Intercompany Inventory and Land Profits
Copyright © 2013 McGraw-Hill Ryerson Limited. All rights reser ed.Solutions Manual, Chapter ! 1
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A "rie# description o# the ma$or points co ered in each case and pro"lem.
CA%&%
Case 6-1
'n this case( st)dents are as*ed to ill)strate the impact o# intercompany sales and )nreali+ed
pro#its in in entory on the separate entity and consolidated #inancial statements. %t)dents are
also as*ed to e,plain how "asic acco)nting principles are applied when acco)nting #or these
intercompany transactions.
Case 6-2
his case( adapted #rom a CA e,am( in ol es a change #rom e )ity method to #air al)e
method #or an in estment in a company that has e,perienced s)"stantial losses d)ring theperiod.
Case 6-3his is a m)lti-s)"$ect case #rom a CA e,am. %t)dents are as*ed to resol e a n)m"er o#
acco)nting iss)es incl)ding re en)e recognition( go ernment grants( contingency and
intercompany transactions.
Case 6-4
'n this case( adapted #rom a CA e,am( st)dents are as*ed to identi#y acco)nting iss)es related
to the preparation o# consolidated #inancial statements #or an /0 -owned s)"sidiary and a
0 -owned in estee company. 'ntercompany transactions and ac )isition di##erential ha e
not "een properly acco)nted #or.
Case 6-5
'n this case( adapted #rom a CA e,am( management appears to "e manip)lating income to
minimi+e the "on)s paid to )nion employees. %t)dents are re )ired to analy+e contro ersial
acco)nting iss)es incl)ding the al)ation o# in entory( p)rchase ret)rns and goodwill.
Case 6-6
his is a m)lti-s)"$ect case #rom a CA e,am. %t)dents are as*ed to resol e a n)m"er o#
acco)nting iss)es incl)ding re en)e and e,pense recognition( contri")tions to a partnership(
contingent consideration and o##setting o# assets against lia"ilities.
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R 4L&M%Problem 6-1 526 min.7
A short pro"lem re )iring calc)lation o# selected acco)nts #or consolidated statements whenthere are )nreali+ed pro#its in in entory and an e,planation o# impact o# intercompany
transactions on non-controlling interest.
Problem 6-2 520 min.7
his pro"lem consists o# a consolidated income statement that has "een incorrectly prepared
and re )ires correcting. 'ntercompany transactions and )nreali+ed pro#its in opening and
closing in entory ha e "een o erloo*ed.
Problem 6-3 520 min.7
A short pro"lem re )iring calc)lation o# selected acco)nts related to land #or separate entity
and consolidated #inancial statements #or three years when there are )nreali+ed pro#its in and
an ac )isition di##erential pertaining to land.
Problem 6-4 5 0 min.7
A parent has )sed the cost method to acco)nt #or its in estments in its two s)"sidiaries. here
are )nreali+ed pro#its in the in entory o# all three companies. he pro"lem re )ires the
preparation o# a consolidated income statement( a calc)lation o# consolidated retained
earnings( a calc)lation o# in estment income )nder the e )ity method and an e,planation o#
how the re en)e recognition principle is applied when ad$)sting #or )nreali+ed pro#its.
Problem 6-5 5 0 min.7
8nreali+ed in entory and land pro#its are in ol ed o er a two-year period. he pro"lem calls #or
e )ity method $o)rnal entries as well as the calc)lation o# consolidated net income each year(
a statement showing changes in non-controlling interest( and a calc)lation o# the "alance in
the in estment acco)nt )nder the e )ity method.
Problem 6-6 530 min.7
hree related companies are in ol ed in selling goods to each other. he pro"lem re )ires a
calc)lation o# consolidated pro#it and consolidated retained earnings when the parent )sed the
cost method.
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Problem 6-7 590 min.7
A comprehensi e pro"lem re )iring an ac )isition di##erential calc)lation( amorti+ation
sched)le( and a consolidated "alance sheet and statement o# changes in e )ity )nder the
entity theory pl)s an e,planation o# how the de"t to e )ity ratio wo)ld change )nder the parentcompany e,tension theory. he s)"sidiary was ac )ired se en years ago: there are
intercompany pro#its 5and losses7 in land and in entory: and the parent has )sed the cost
method to acco)nt #or its in estment.
Problem 6- 530 min.7
A parent has three s)"sidiaries that cond)ct intercompany transactions with each other and
the pro"lem re )ires the parent;s e )ity method $o)rnal entries and calc)lations o#
consolidated net income and consolidated retained earnings.
Problem 6-! 526 min.7
A parent has )sed the cost method to acco)nt #or its in estment and the pro"lem re )ires the
calc)lation o# consolidated net income attri")ta"le to the parent
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Copyright © 2013 McGraw-Hill Ryerson Limited. All rights reser ed.Solutions Manual, Chapter ! 6
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Problem 6-13 590 min.7
his comprehensi e pro"lem co ers e erything ill)strated to date and re )ires the preparation
o# a consolidated income statement and consolidated statement o# #inancial position when the
parent has )sed the e )ity method pl)s the calc)lation o# goodwill and non-controlling interest
)nder the parent company e,tension theory.
Problem 6-14 590 min.7 5 repared "y eter %ecord( %aint Mary&4-4A%&? R 4L&M%#eb Problem 6-1
he st)dent answers a series o# )estions "ased on the 2011 #inancial statements o# R =A
inc.( a Canadian company. he )estions deal with intercompany transactions in in entory and
land and the impact o# changes in acco)nting policies #or in entory and land on certain ratios.
#eb Problem 6-2
he st)dent answers a series o# )estions "ased on the 2011 #inancial statements o# Ceno )s
&nergy 'nc.( a Canadian company. he )estions deal with intercompany transactions inin entory and land and the impact o# changes in acco)nting policies #or in entory and land on
certain ratios.
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$%L&'I%($ '% )*+I*# ,&*$'I%($1 he pants are similar to a single economic entity composed o# a parent company and its
three s)"sidiaries. he trans#er o# economic reso)rces "etween the poc*ets in these
pants simply changes the location o# the reso)rces ")t does not represent re en)e or
e,pense( or pro#it or loss( to the com"ined entity.
2 he types o# intercompany re en)e and e,penses eliminated in the preparation o# the
consolidated income statement incl)de sales and p)rchases( rentals( interest( and
management #ees. hese eliminations ha e no e##ect on the amo)nt o# consolidated net
income or the net income attri")ta"le to non-controlling interest.
3 'ntercompany sales when collected and paid( intercompany cash sales( and intercompany
"orrowings do not alter the total cash o# the consolidated entity. 't is the same concept as
an indi id)al trans#erring cash among his@her "an* acco)nts( or #rom one poc*et to
another.
4 he intercompany pro#it recorded in eriod one is considered to "e reali+ed when the
partic)lar asset is sold o)tside the consolidated entity "y the p)rchasing a##iliate.
5 Re en)e sho)ld "e recogni+ed when it is earned with a transaction o)tside o# the
reporting entity. he reporting entity #or consolidated #inancial statements encompassesthe parent and all o# its s)"sidiaries. %ince intercompany transactions are transactions
within the reporting entity 5not o)tside o# the reporting entity7( they m)st "e eliminated
when preparing consolidated #inancial statements.
6 his statement is tr)e i# the selling a##iliate has an income ta, rate o# 0 . he 1(000
red)ction #rom ending in entory red)ces the consolidated entity;s net income. A
corresponding red)ction o# 00 in income ta, e,pense trans#ers the ta, #rom an
e,pense to an asset on the consolidated "alance sheet. >hen the 1(000 pro#it iss)"se )ently reali+ed( the 00 is trans#erred #rom the consolidated "alance sheet to the
consolidated income statement in order to achie e a proper matching o# e,pense to
re en)e.
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7 he matching principle re )ires that e,penses "e matched to re en)es. >hen
intercompany pro#its are eliminated #rom the consolidated #inancial statements( the
income ta, e,pense related to those pro#its m)st also "e eliminated. >hen the
pre io)sly )nrecogni+ed intercompany pro#its are recogni+ed in a later period( the income
ta, on these pro#its m)st "e e,pensed.
here is no ad$)stment to income ta, e,pense corresponding to the elimination o#
intercompany re en)e and e,penses "eca)se there is no change to the income "e#ore
ta, #or the consolidated entity: there#ore( there sho)ld "e no change to the ta, e,pense
#or the consolidated entity. >hate er ta, was paid or sa ed #or the two entities will not
change #or the consolidated entity since the income "e#ore ta, did not change. 'ncome
ta, e,pense is ad$)sted on consolidation when consolidated pro#its are changed d)e to
ad$)stments #or )nreali+ed pro#its.
! 'deally( intercompany losses sho)ld "e eliminated in the same manner as intercompany
gains. 'n t)rn( an impairment test wo)ld "e carried o)t. '# the reco era"le amo)nt were
less than the carrying amo)nt( an impairment loss wo)ld "e reported. >hen the
impairment loss is greater than the intercompany loss( one can get to the same res)lt "y
not re ersing the intercompany loss and simply reporting an impairment loss to "ring the
carrying amo)nt down to the reco era"le amo)nt.
1" he elimination o# intercompany sales and p)rchases red)ces sales re en)e and cost o#
goods sold on the consolidated income statement. =o other items on the consolidated
statements are a##ected. he elimination o# intercompany pro#its in ending in entory
a##ects the #ollowing elements o# the consolidated statementsB cost o# goods sold is
increased: income ta, e,pense is decreased: net income is decreased: net income
attri")ta"le to the parent is decreased: net income attri")ta"le to the non-controlling
interest is decreased 5i# the s)"sidiary was the seller7: the asset in entory is decreased:
de#erred income ta, assets are increased: non-controlling interest in net assets is
decreased 5i# the s)"sidiary was the seller7: and consolidated retained earnings is
decreased.
11 or a downstream transaction( the ad$)stment #or )nreali+ed pro#its is applied to the
parent
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which is shared "etween the parent and non-controlling interest. 'n other words( the non-
controlling interest is a##ected "y elimination o# pro#it on )pstream transactions ")t is not
a##ected "y the elimination o# pro#it on downstream transactions.
12 At the end o# Dear 1( the )nreali+ed pro#it is remo ed #rom ending in entory and added tocost o# goods sold which decreases income. 'n Dear 2( the )nreali+ed pro#it is remo ed
#rom "eginning in entory( which decreases cost o# goods sold #or Dear 2 and increases
income #or Dear 2. Altho)gh Dear 1 and Dear 2 income "oth m)st "e ad$)sted( the
ad$)stments are o##setting. here#ore( the com"ined income #or the two years does not
change as a res)lt o# the ad$)stments.
13 't will not "e eliminated again on the consolidated income statement #or s)"se )ent
years. Howe er( i# the land remains within the consolidated entity( the )nreali+ed gain will"e eliminated in the preparation o# all s)"se )ent consolidated "alance sheets and
statements o# retained earnings )ntil s)ch time as the land is sold to o)tside parties.
14 Ad$)stments are re )ired on consolidation to "ring the consolidated "alances to the
amo)nts that wo)ld ha e "een on the s)"sidiary
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transactions "etween a parent and s)"sidiary( the entire amo)nt o# )nreali+ed pro#it is
eliminated and charged to the parent
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earnings impaired "y the poor per#ormance o# )een Limited 5 )een7. he #inancial
statements o# ing will "e widely distri")ted d)e to the share iss)e planned #or Dear 1/. he
a)ditor m)st "e aware o# management;s "ias and m)st ens)re that earnings and assets are
not o erstated.
he dr)g ind)stry is highly competiti e. he principal assets in this ind)stry are intangi"le d)e
to the large e,pendit)res on research and de elopment. he nat)re o# these assets creates
pro"lems. =ote disclos)re will "e ery important.
he relationship "etween ing and )een is )ncooperati e. 't will( there#ore( "e di##ic)lt to
o"tain s)##icient and appropriate a)dit e idence to s)pport the acco)nting method and al)es
)sed to record the )een in estment.
.cco/ntin for the investment
he choice o# the appropriate method to acco)nt #or the )een in estment depends primarily
on whether ing has signi#icant in#l)ence o er )een. he #ollowing #actors indicate that ing
does ha e signi#icant in#l)enceB
• ing;s ownership meets the 20 g)ideline:
• ing had mem"ership on the "oard o# directors( and ol)ntarily ga e it )p:
he #ollowing #actors indicate that ing does not ha e signi#icant in#l)enceB• inter-company transactions ha e declined and are no longer material:
• di idends ha e not "een paid recently( and perhaps earnings o# )een will not accr)e
to ing: and
• gi en the )ncooperati e nat)re o# )een and ing;s relationship( it does not appear
that ing has signi#icant in#l)ence o er )een.
(Students could have discussed other valid factors in determining whether King exerts
significant influence over Queen)
'# ing is a"le to e,ert signi#icant in#l)ence o er )een( then it will contin)e to )se the e )ity
method o# acco)nting #or the in estment. '# ing no longer has signi#icant in#l)ence( the
in estment in )een wo)ld "e reported at #air al)e. 't is di##ic)lt to determine whether
management o# ing manip)lated the change in in#l)ence "y ceasing to trade with )een and
remo ing the ing representati e #rom )een;s "oard o# directors. 'n any case( the change in
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method wo)ld "e acco)nted #or prospecti ely since the change was made d)e to a change in
circ)mstance. here#ore( the prior period ad$)stment reported in the dra#t #inancial statements
wo)ld not "e appropriate and sho)ld "e re ersed.
(Students should have reached a conclusion on the issue of significant influence and proceeded with their analysis of either the fair value method or the e uity method! "his
response discusses #oth methods! $owever, students were not expected to provide an
analysis of #oth the e uity and the fair value methods!)
* /ity method
ing m)st re#lect its share o# )een;s c)rrent loss. As shown in Appendi, '( the in estment
wo)ld "e written down #rom 29. million to +ero "eca)se ing
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Gi en that )een s)##ered h)ge losses and gi en that )een
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Re erse ad$)stment #or prior period ad$)stment 2( 00
Restated "alance )nder e )ity method( "eginning o# year 29( 00
&ntries #or year )nder e )ity methodB
Reali+ed pro#it in "eginning in entory 522 , 6(0007 1(1008nreali+ed pro#it in ending in entory 522 , 1(0007 52207
%hare o# )een
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• 4y e,cl)ding the go ernment grants #rom re en)es( MCL wo)ld "e in a loss position. '#
the year-to-date res)lts are typical( the long-term pro#ita"ility o# MCL may "e marginal.
Howe er( s)ch losses may( howe er( "e normal in a start-)p sit)ation.
• ?=? is the sole client and can cancel the contract i# the terms o# the contract are not
met. ?eli ery dates ha e "een missed: howe er( recent deli eries ha e "een made on
time.
• MCL;s wor*ing-capital position indicates potential insol ency i# go ernment grants are
not recei ed. MCL has not met the terms o# the $o"-creation grant( and this may e,plain
why the grant has not yet "een recei ed.
• he wor*ing-capital position has deteriorated #)rther "eca)se ?=? has not paid #or the
caissons recei ed to date. he metal caissons m)st meet high standards o# )ality( and
?=?;s inspection process may ha e slowed down appro als. Alternati ely( the #act that
?=? has not paid may mean that there are pro"lems that ha e not yet "een disclosed
to )s.
• here is nothing to indicate that the contract with ?=? will "e renewed at the end o#
#i e years or that the man)#act)ring process can "e changed to another prod)ct at that
time.
• he laws)it pending against MCL( i# s)ccess#)l( co)ld dri e the company into
"an*r)ptcy.
• Altho)gh there are many #actors that raise a concern a"o)t the a"ility o# MCL to
contin)e as a going concern( MCL contin)es to operate as a going concern. ?=? has
not yet cancelled the contract and the "an* has not called the loan. here#ore( MCL
sho)ld contin)e to report on a going-concern "asis. Howe er( they sho)ld disclose their
reliance on the ?=? contract and the signi#icant ris*s that may "ear on their a"ility to
contin)e as a going concern.
(Candidates were expected to address the going'concern issue! "he #etter responses presentedsome uantitative analysis! Most candidates failed to address this ma or issue in ade uate depth!)
overnment rants
At present( 9E o# MCL;s total wor*#orce is employed in the plant( which is "elow the /6
speci#ied in the $o"-creation grant. '# the conditions cannot "e met "y their d)e date( the grant
recei a"le will need to "e written o##.
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he recording o# the grants as re en)e is inappropriate )nder GAA since the grants pertain
to the cost o# the plant and cost o# employees. he grants do not pertain to the sale o# goods
or pro ision o# ser ices. he ")ilding grant sho)ld "e netted against the capitali+ed cost o# the
plant( or recorded as a de#erred credit and amorti+ed to income o er the li#e o# the plant. he
$o"-creation grant sho)ld "e de#erred and amorti+ed to income o er the three-year period o#the agreement. 't will "e necessary to disclose the terms o# the grants.
(Most candidates discussed the accounting implications of government grants in ade uate depth!)
Late delivery penalties
)rther re iew o# the contract with ?=? is re )ired. 't is apparent that the late deli ery
penalties 5 110(000 #or 66 days at 2(000 per day7 #or the #irst three caissons ha e not "een
accr)ed( and this iss)e m)st "e disc)ssed with management. ?=? sho)ld "e contacted to #ind
o)t whether the penalties will "e en#orced or wai ed and whether speci#ications ha e "een met
on all the caissons deli ered to date. '# the penalty is not wai ed( an accr)al #or the amo)nt o#
the penalty will "e re )ired.
Clari#ication is needed on the proced)res to "e #ollowed i# a caisson pro es )naccepta"le. o
date no caissons ha e "een ret)rned: howe er( the amo)nt o# the penalties may increase with
each day that the speci#ications contin)e not to "e met. Related disclos)res #or the contracts(
incl)ding the penalties( will "e re )ired.
(Most candidates did not uantify the amount of the possi#le penalty payment!)
Investment in $I
>ith a !0 ownership interest( MCL li*ely has control o er M%'. 8nder A% &( the in estment
in M%' can "e reported on a consolidated "asis or )sing the cost method or e )ity method.
%ince M%' is reporting pro#it in e,cess o# di idends paid( the consolidated statements or the
e )ity method wo)ld increase pro#its #or MCL. %ince consolidated statements are generally
iewed as more )se#)l( ' will ass)me that MCL will choose to report its in estment on a
consolidated "asis. %ince M%' reported a pro#it o# 0(000( the consolidated net income
attri")ta"le to MCL
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goods sold "y 30(000. %ince the pro#it o# 30(000 was initially reported "y M%'( "oth the
shareholders o# MCL and the non-controlling interests in M%' will "e a##ected when the pro#it is
eliminated. he portion attri")ta"le to the shareholders o# MCL is 1/(000 5!0 , 30(0007.
here#ore( the consolidated net income attri")ta"le to MCL
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iscellaneo/s iss/es
he #ollowing iss)es m)st also "e consideredB
1. >e m)st disc)ss with management whether there are plans to man)#act)re prod)cts #or
c)stomers other than the ?=?. MCL is economically dependent on the ?=? contract( andthis relationship m)st "e disclosed.
2. A#ter re iewing the go ernment contract and a#ter disc)ssions with management and the
?=?( we sho)ld consider whether the present method o# recording re en)e at the time the
prod)ct is shipped is appropriate. erhaps( re en)e sho)ld not "e recogni+ed )ntil the
client con#irms that the detailed speci#ications ha e "een met.
3. MCL;s lawyers will "e contacted to assess the progress o# the ?e)tsch rod)ction laws)it.
&ither the amo)nt o# the potential damages m)st "e accr)ed or the appropriate disclos)re
made a"o)t the contingent lia"ility depending on the certainty with respect to the o)tcome
o# the laws)it. his is a critical iss)e considering the materiality o# the amo)nt and its
impact on MCL as a going concern.
. >e m)st #ind o)t why no principal payments o# long-term de"t ha e "een recorded on the
#inancial statements. '# re )ired payments ha e not "een made( MCL co)ld "e in de#a)lt(
and this wo)ld "e yet another consideration in the assessment o# whether MCL is a going
concern. rincipal payments may also ha e "een erroneo)sly charged as interest e,pense.
6. he c)rrent portion o# the long-term de"t sho)ld "e classi#ied separately and disclos)re
made o# the de"t agreement and the principal payments to "e made o er the ne,t #i e
years.
!. 'nterest can "e capitali+ed d)ring the constr)ction period only )ntil prod)ction commences.
't appears that interest has "een capitali+ed "eyond this period and an ad$)stment sho)ld
"e made. nce properly calc)lated( the amo)nt sho)ld "e disclosed in the notes to the
#inancial statements.
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9. ?epreciation has "een calc)lated on plant e )ipment at what appears to "e a low rate.
he appropriateness o# the rate will ha e to "e assessed gi ing regard to the )se#)l li#e o#
the related assets "eing depreciated.
Case 6-4
Memo toB A)dit artner
romB A)dit %enior
ReB ? Ltd. J Consolidated inancial %tatements
As re )ested( ' ha e prepared the #ollowing memorand)m( which o)tlines the important
#inancial acco)nting iss)es o# ? and =( its s)"sidiary( and ( its in estee company.
1. he shares iss)ed "y ? to p)rchase = and sho)ld "e meas)red at their #air al)e at the
date o# ac )isition. or now( ' will ass)me that the #air al)e o# 1!0(000 common shares
was 2(000(000 when ? p)rchased its in estments in = and .
2. 't appears that there has "een no allocation o# the ! 0(000 ac )isition cost e,cess #or =
in the consolidated #inancial statements. he e,cess sho)ld "e #irst "e allocated to
identi#ia"le assets. Any remaining e,cess sho)ld "e allocated to goodwill. he goodwill
sho)ld "e chec*ed #or impairment at the end o# each year and written down i# there is an
impairment loss.
3. Gi en that = had capitali+ed some research and de elopment e,pendit)res( there may "esome al)e in what they were de eloping. he pro$ects that met the conditions #or
capitali+ation sho)ld "e meas)red at #air al)e at the date o# ac )isition ass)ming that the
assets can "e separately identi#ied and relia"ly meas)red. 'n t)rn( these assets sho)ld "e
amorti+ed o er their )se#)l li es. Amorti+ation sho)ld commence once the assets are "eing
)sed in operations and are generating re en)e #or the company.
. ? can )se either the entity theory or parent company e,tension theory in preparing the
consolidated #inancial statements. 8nder these theories( =
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Ac )isition cost #or /0 interest in = (000(000
'mplied al)e #or 100 interest in = 5 (000(000 @ ./7 6(000(000
=C'
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10. 4ased on the disc)ssion a"o e( ' ha e recalc)lated the #ollowing acco)nt "alances #or
the consolidated #inancial statements in the sched)les "elowB
Goodwill
'n estment in 5)nder e )ity method7=on-controlling interest on "alance sheet
ro#it
.llocation and amorti8ation of ac /isition cost for investment in (
Cost o# /0 in estment( %eptem"er( Dear 1 (000(000
'mplied al)e o# 100 in estment 5 (000(000 @ ./7 6(000(000
Carrying amo)nts o# =
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Retained earnings o# ( A)g. 31( Dear 2 1(910(000
Retained earnings o# ( at ac )isition 1(9!0(000
Change - 60(000
LessB pro#it in ending in entory 5200(000 , 1 - . 7 - 120(000
Ad$)sted increase - 190(000?
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%hareholders o# ? 60( 00
=on-controlling interests 520 , E/(0007 1E(!00
90(000
Case 6-5)*P%)' %( .CC%&('I( P%LICI*$ &$* I( '>* I(.(CI.L $'.'* *('$ % %%
,&.LI'; .&'% P.)'$ LI I'* %) '>* ;*.) *( * *:)&.); 2 ? ;ear 11
o the mem"ers o# the )nion( Good )ality A)to arts LimitedB
' ha e "een engaged to analy+e the #inancial statements o# Good )ality A)to arts Limited
5G 7 #or the year ended e"r)ary 2/( Dear 11 and determine whether there are any
contro ersial acco)nting iss)es. or the p)rposes o# this report( Ocontro ersial acco)nting
iss)esO will "e de#ined as acco)nting policies that ha e the e##ect o# red)cing payments )nder
the pro#it-sharing plan to the )nion mem"ers.
he e,istence o# the pro#it-sharing contract creates incenti es #or the management o# G to
ma*e acco)nting choices that red)ce net income and there"y red)ce the payments that m)st
"e made to the )nion mem"ers. Acco)nting standards #or pri ate enterprises 5A% &7 allow
considera"le #le,i"ility and $)dgment "y the preparers o# #inancial statements in selecting
acco)nting policies. %ince the company is pri ately owned( the costs 5real or percei ed7 o#
reporting lower income may "e small relati e to the sa ings generated. or e,ample( the
e##ect o# lower income on new or e,isting lenders may "e considered less important than the
sa ings deri ed #rom red)ced pro#it sharing. 'n addition since the term o# the contract is only
three years( some o# the income de#erral may yield permanent sa ings i# the pro#it-sharing
component is not renewed in s)"se )ent contracts.
'n analy+ing the acco)nting policies( ' will "e ta*ing as strong a position as can "e $)sti#ied to
s)pport the )nion;s o"$ecti e o# ma*ing net income as large as possi"le. his is in con#lict with
the o"$ecti e o# management( which is to red)ce net income.
Inventory 0rite-do0n
Acco)nting practice re )ires that in entory "e meas)red at the lower o# cost and net reali+a"le
al)e. h)s( i# the in entory cannot "e sold( management can $)sti#y its write-o##. Howe er(
since m)ch o# the in entory has "een on hand #or se eral years( the decision to write it o## this
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year raises a )estion as to the moti ation #or the write-o##. Management co)ld "e writing o##
the in entory solely to red)ce income( there"y red)cing the payments re )ired )nder the
pro#it-sharing plan. he pro"lem m)st "e considered #rom two points o# iew. irst( is the
in entory gen)inely )nsalea"leP '# not( then the entry to write down the in entory m)st "e
re ersed( res)lting in a higher net income #ig)re. Ass)ming that the in entory is )nsalea"le(the ne,t )estion is whether the write-o## legitimately "elongs in the c)rrent period. '# the
in entory "ecame )nsalea"le in the c)rrent year( then the write "elongs in the c)rrent period.
'# the in entory was )nsalea"le in prior years( it sho)ld ha e "een written down in prior years.
'n that case( the #inancial statements sho)ld "e retroacti ely restated to correct the error in the
appropriate period.
.llo0ance for ret/rns
he ret)rn estimate represents a legitimate cost o# doing ")siness d)ring the period. >hat isin )estion is whether the more conser ati e estimate represents a gen)ine re#lection o# a
change in economic conditions or an opport)nistic )se o# acco)nting $)dgment to red)ce net
income. G ;s a)ditor wo)ld pro"a"ly not o"$ect to the increased e,pense since conser atism
is a *ey acco)nting principle. Howe er( the )nion;s interests are not ser ed "y conser atism.
&se of accelerated depreciation
here is no re )irement that all assets owned "y a #irm "e depreciated in the same way.
h)s( G can arg)e that the )se o# an accelerated method on the new e )ipment "etterre#lects the pattern in which the asset
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red)ction o# e,penses7 or as a red)ction in the capital cost o# the comple, 5"alance sheet7.
'# C inc)rred additional costs "eca)se o# the delay in opening the new comple,( and the
penalty was compensation #or those additional costs inc)rred( then the penalty sho)ld "e )sed
to o##set those costs inc)rred. '# the additional costs inc)rred related to the capital cost o# thecomple,( then the penalty sho)ld "e )sed to red)ce the capital cost o# the comple,. Analogies
might "e drawn with the ' R% standard on go ernment grants 5'A% 207. his section
recommends that payments s)ch as grants sho)ld "e treated as cost red)ctions. he parallel
here is that the penalty payment is li*e a grant and there#ore sho)ld "e treated as a red)ction
in the capital cost o# the comple, or in costs e,pensed as inc)rred.
n the other hand( i# the penalty payment was compensation #or lost re en)e( then an
arg)ment might "e made #or treating the penalty as re en)e. '# the penalty is treated asre en)e( then we m)st consider whether it sho)ld "e disclosed separately. %ince the penalty
payment is non-rec)rring( #inancial statement )sers wo)ld #ind separate disclos)re in#ormati e
"eca)se the portion o# re en)e and income that is non-rec)rring can "e al)ed di##erently "y
the mar*et and "y indi id)al in estors and in#l)ence the e al)ation o# management.
here#ore( i# material( the penalty sho)ld "e disclosed as a separate re en)e item either on
the #ace o# the income statement or in the notes.
@)/e $t Aac /esB
ic*et proceeds
C wo)ld pre#er to recogni+e re en)e as early as possi"le with the earliest date "eing the
sale o# the tic*ets. Howe er( the most appropriate treatment #or recogni+ing re en)e #or QR)e
%t. Fac )es is when the show is per#ormed.
*AS + , paragraph +-' Admission fees,re )ires Qre en)e #rom artistic per#ormances( "an )ets
and other special e ents is recogni+ed when the e ent ta*es place. >hen a s)"scription to a
n)m"er o# e ents is sold( the #ee is allocated to each e ent on a "asis which re#lects the e,tent
to which ser ices are per#ormed at each e ent.
er#ormance is the critical e ent in the earnings process( and there#ore re en)e is not earned
)ntil the show is p)t on. here is no ass)rance that the prod)ction will "e completed( or that
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any per#ormance #or which tic*ets are sold will ta*e place 5#or e,ample( the show co)ld "e
closed down "e#ore it "egins its r)n or e en a#ter it "egins its r)n7. 'n that case( it will "e
necessary to re#)nd the ac )isition cost o# tic*ets to ")yers.
'nterest on tic*et proceeds
C earns a signi#icant amo)nt o# interest "y holding the money paid in ad ance "y tic*et
p)rchasers. he interest re en)e co)ld "e treated as either income or de#erred re en)e
depending on the #acts and circ)mstances. Management
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'# C chooses to capitali+e the pre-prod)ction costs( they m)st "e amorti+ed o er a
reasona"le period o# time. ne method is to e,pense costs against net re en)es dollar #or
dollar )ntil the pre-prod)ction costs are co ered 5i.e. cost reco ery #irst method7. >ith this
method the show will generate no income )ntil the pre-prod)ction costs ha e "een reco ered. A second alternati e is to amorti+e o er the estimated li#e o# the show.
# co)rse( once the show opens( ongoing prod)ction costs sho)ld "e e,pensed as inc)rred.
.dvertisin and promotion
C paid 12 million #or ad ertising and promotion costs a large part o# which related to the
QR)e %t. Fac )es show. hese costs sho)ld "e e,pensed as inc)rred "eca)se it is di##ic)lt toassess the e##ecti eness o# ad ertising costs i.e. to determine whether they pro ide #)t)re
"ene#it.
ebt defeasance
C has str)ct)red the de"t-retirement transaction as an in-s)"stance de#easance o# de"t.
he e##ect o# the transaction is to remo e de"t #rom the "alance sheet and there"y red)ce the
amo)nt o# de"t reported 5th)s( #or e,ample( decreasing the de"t-to-e )ity ratio7.8n#ort)nately( ' R%s do not allow the )se o# this type o# arrangement.
'A% 1( paragraph 32 states QAn entity shall not o##set assets and lia"ilities or income and
e,penses( )nless re )ired or permitted "y an ' R%. aragraph 33 states QAn entity reports
separately "oth assets and lia"ilities( and income and e,penses. ##setting in the statements
o# comprehensi e income or #inancial position or in the separate income statement 5i#
presented7( e,cept when o##setting re#lects the s)"stance o# the transaction or other e ent(
detracts #rom the a"ility o# )sers "oth to )nderstand the transactions( other e ents and
conditions that ha e occ)rred and to assess the entity
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a. c)rrently has a legally en#orcea"le right to set o## the recogni+ed amo)nts: and
". intends either to settle on a net "asis( or to reali+e the asset and settle the lia"ility
sim)ltaneo)sly.
4oth o# these conditions m)st "e met in order to o##set a #inancial asset and a #inancial lia"ility.
Howe er( the #acts indicate that the holders o# the company
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4ased on the in#ormation a aila"le( it is not possi"le to concl)de whether these sales do
represent part o# ongoing operations. >e sho)ld re iew the sale agreements and "oard
min)tes to con#irm that these sales are indeed Qongoing. '# the sales are ongoing( the theatres
wo)ld ha e to "e reported as a c)rrent asset similar to in entory. '# the theatres contin)e to "e
reported as part o# property( plant and e )ipment( then it wo)ld "e inappropriate to report thesales thro)gh re en)e: the sales sho)ld "e reported as gains on sale.
'# the sales can "e considered part o# ongoing operations( consideration sho)ld "e gi en to
whether there sho)ld "e separate disclos)re o# the re en)e #rom theatre sales. 4)rying the
re en)es #rom theatre sales will ma*e it more di##ic)lt #or )sers and the capital mar*ets to
al)e the company "eca)se re en)e #rom sales o# theatres may not "e as reg)lar or
predicta"le as re en)es #rom other so)rces. '# s)ch sales are material( separate disclos)re o#
re en)e sho)ld "e made either on the #ace o# the income statement or in the notes.
%elling o## a signi#icant n)m"er o# theatres raises the )estion o# whether the n)m"er "eing
sold is large eno)gh to "e considered a discontin)ed operation( re )iring separate disclos)re
o# in#ormation. or the theatre sales to )ali#y as a discontin)ed operation( they m)st
represent a separate ma$or line o# ")siness or geographical area o# operations. My
assessment is that the sale o# theatres sho)ld not "e considered a discontin)ed operation
"eca)se C is contin)ing in the theatre ")siness. '#( #or e,ample( C were ceasing to
operate all o# its mo ie theatres to #oc)s on li e theatre( an arg)ment #or discontin)ed
operations might "e made. 'n this case( the sale o# theatres appears to "e part o# a contin)ingreassessment o# its port#olio o# theatres.
he sales #or pro#it are consistent with management
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#or sale7 are presented separately on the "alance sheet.
Partnership a reement
C #ormed a partnership with an )nrelated company where"y the other company contri")tedcash and C contri")ted tele ision prod)ction e )ipment. As part o# the deal( C withdrew
the cash contri")ted "y the other company #or its own )se. he s)"stance o# the transaction
appears to "e the sale 5rather than contri")tion7 o# assets to the partnership and the recording
o# the gain on sale. 4y )sing this approach( management may "e attempting to increase
income arti#icially "y recogni+ing the #)ll gain.
he #acts s)ggest that this transaction is a partial sale o# assets. '# this is the case( the #)ll
gain sho)ld not "e recogni+ed. he #acts s)pporting this assertion are as #ollows. irst( cashcan "e withdrawn immediately: th)s the partnership acted as a cond)it #or selling o# the
assets. %econd( the deal is "ased on #)t)re pro#its: that is( the al)e o# Ce can then #orm an opinion on the appropriate method o#
acco)nting.
he acco)nting #or the in estment in the partnership depends on Cith a 66 interest( C may "e a"le
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to determine these policies and wo)ld ha e control o er the partnership. '# so( they wo)ld
consolidate the partnership #inancial statements with their own #inancial statements.
'# "oth parties to the partnership ha e e )al say o er the policies o# the partnership( then the
partnership wo)ld "e deemed to "e a $oint ent)re. 8nder ' R% 11( C co)ld report itsin estment )sing the e )ity method.
Concl/sion
As indicated in Appendi, '( income wo)ld decrease i# the pre-prod)ction costs and@or
ad ertising costs ha e "een capitali+ed and sho)ld ha e "een e,pensed. As indicated in
Appendi, ''( income sho)ld "e red)ced #or the )nreali+ed gain on the trans#er o# assets to the
partnership and de"t sho)ld "e increased to re erse the de"t de#easance transaction. A#ter
ad$)stment( the ret)rn on e )ity on an ann)ali+ed "asis is only 1/./ ( which is "elow thecompany
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- capitali8e and later e9pense
- e9pense as inc/rred 15D 15D I
Ad ertising K promotion costs- capitali8e and later e9pense
- e9pense as inc/rred 12D 12D I
?e"t de#easance- if loss 0as previo/sly recorded 5 5 I
- if deferred char e 0as recorded
%ale o# theatres as re en)e
'n estment in partnership- if f/ll consolidation I I
- if proportionate consolidation I I
F (otationsE' I increase? I decrease= H'=G = &? I no change
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.PP*( I II
I P.C' % .CC%&('I( C>.( *$ %(
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Consolidated acco/nt balances
'n entory 5600(000 T 300(000 J 5d7 21(0007 99E(000
Acco)nts paya"le 5!00(000 T 320(000 J 5"7 0(0007 //0(000
Retained earnings( "eginning o# year
A 2( 00(000 %A R@&( "eginning o# year 1(100(000
%A R@&( date o# ac )isition E00(000
Change since ac )isition 200(000
LessB )nreali+ed pro#it in "eginning in entory 5c7 - 10(/00
1/E(200
A
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5100(000 , .60 , .307 16(000 !(000 E(000 5e7
Calc/lation of non-controllin interestE
'ncome o# s)"sidiary 5E(000 @ 10 7 E0(000
AddB opening in entory pro#it 5d7 3(000 Ad$)sted E3(000
10
E(300 5#7
Parent Company
Consolidated Income $tatement
for the C/rrent ;ear
%ales 5600(000 J 5a7 1/0(0007 320(000
Rental re en)e 52 (000 J 5"7 2 (0007
'nterest re en)e 560(000 J 5c7 36(0007 16(000
otal re en)e 336(000
Cost o# goods sold
5360(000 J 5a7 1/0(000 J 5d7 6(000 T 5e7 16(0007 1/0(000
Rent e,pense 52 (000 J 5"7 2 (0007
'nterest e,pense 536(000 J 5c7 36(0007
Administration e,penses 6(000
'ncome ta, e,pense 5 2(000 T 5d7 2(000 J 5e7 !(0007 3/(000
otal e,pense 2!3(000
ro#it 92(000
Attri")ta"le toB
%hareholders o# parent !2(900
=on-controlling interests 5#7 E(300
92(000Proof:
ro#it pre io)sly reported !E(000
AddB opening in entory pro#it 53(000 , E0 7 2(900
91(900
LessB closing in entory pro#it E(000
Consolidated pro#it attri")ta"le to shareholders o# parent !2(900
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Dears J 6 1E(000 5c7
Dear ! J0J
Intercompany )even/es and *9penses
%ales 5E0(000 T 190(000 T 160(0007 10(000 5d7
Rent 526(000 T 1 (0007 3E(000 5e7
'nterest 10(000 5#7
?i idend 'ncomeB All intercompany #rom >aste K 4aste 3(960 5g7Intercompany Profits
:efore ta9 4"H ta9 .fter ta9
pening in entory J >aste selling
516(000 , .307 (600 1(/00 2(900 5h7
&nding in entory J 4aste selling
5!0(000 , .307 1/(000 9(200 10(/00 5i7
J aste selling522(000 , .307 !(!00 2(! 0 3(E!0 5$7
J >aste selling
5!0(000 , .307 1/(000 9(200 10(/00 5*7
2(!00 19(0 0 26(6!07 5l7
Paste Company
Consolidated Income $tatement
for the ;ear *nded ecember 31? ;ear 6
%ales 5 60(000 T 290(000 T 1E0(000 J 5d7 10(0007 600(000
?i idends 5 3(960 J 5g7 3(9607
'nterest 510(000 J 5#7 10(0007
Rent 5130(000 J 5e7 3E(0007 E1(000
otal income 6E1(000
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Cost o# sales 5300(000 T 1!3(000 T 1 6(000 J 5d7 10(000
J 5h7 (600 T 5l7 2(!00 T 5"7 1(/967 239(E96
General K administrati e 5E3(000 T /(000 T 2E(000 J 5e7 3E(0007 131(000
'nterest 510(000 J 5#7 10(0007
'ncome ta, 529(000 T 96(000 T 9(000 T 5h7 1(/00 J 5l7 19(0 07 E3(9!0otal e,penses !2(936
ro#it 12/(2!6
Attri")ta"le toB
%hareholders o# aste 10E(E10
=on-controlling interests 520 , E (026U T 26 , -1(/00U7 1/(366
12/(2!6
U see part 5c7 #or calc)lation o# E (026 and J1(/00
bD
Calc/lation of consolidated retained earnin s = ecember 31? ;ear 6
Retained earnings o# aste ?ecem"er 31( Dear ! 903(960
ro#it in ending in entory 5$7 53(E!07
Retained earnings o# >aste ?ecem"er 31( Dear ! 1 !(000
Retained earnings o# >aste J ac )isition 0(000'ncrease 10!(000
LessB pro#it in ending in entory 5*7 10(/00
amorti+ation o# ac )isition di##erential 5a7 E(396 T 5"7 1(/96 11(260
Ad$)sted increase /3(E60
aste;s ownership /0 !9(1!0
Retained earnings o# 4aste ?ecem"er 31( Dear ! 9E(000
Retained earnings o# 4aste J ac )isition /0(000
?ecrease 51(0007
LessB amorti+ation o# ac )isition di##erential #or 4aste 5c7 1E(000
pro#it in ending in entory 5i7 10(/00
530(/007
aste;s ownership 96 523(1007
Consolidated retained earnings ?ecem"er 31( Dear ! 9 3(/60
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5c7
ro#it o# >aste 10 (000
AddB pro#it in opening in entory 5h7 2(90010!(900
LessB pro#it in ending in entory 5*7 10(/00
amorti+ation o# ac )isition di##erential 5"7 1(/96
E (026
aste
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Cash 1/(960
'n estment in D Co. 1/(960
96 , 26(000 di idends.
'n estment in D Co. E9(600'n estment income E9(600
96 , 130(000 net income.
'n estment income 13(600
'n estment in D Co. 13(600
o hold "ac* 96 o# the 1/(000 a#ter-ta,
in entory pro#it J D selling
5!0 , 30(000 I 1/(0007.
'n estment income 22(200
'n estment in D Co. 22(200
o hold "ac* the a#ter-ta, land pro#it J
V selling 5!0 , 39(000 I 22(2007.
'n estment income 9(260
'n estment in D Co. 9(260 Ac )isition di##erential amorti+ation J Dear 1
'n entory !0(000
& )ipment 6(000@16 I 3(000
!3(000
, Co.
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'n estment in D Co. 12(000
96 , 1!(000 net loss.
'n estment income 2(260
'n estment in D Co. 2(260 Ac )isition di##erential 5e )ipment7 amorti+ation. 53(000 , 96 7
'n estment in D Co. 13(600
'n estment income 13(600
o reali+e opening in entory pro#it J D selling.
'n estment in D Co. 22(200
'n estment income 22(200o reali+e land pro#it J V %elling
'n estment income 9(200
'n estment in D Co. 9(200
o hold "ac* a#ter-ta, in entory pro#it J V selling
5!0 , 12(0007
(oteE Dear 2 in estment income is 1 (260 5J12(000 J 2(260 T 13(600 T 22(200 J 9(2007
bD Calc/lation of consolidated net income = ;ear 1
=et income o# V 00(000
LessB Land pro#it 22(200
Ad$)sted 399(/00
=et income o# D 130(000
LessB closing in entory pro#it 51/(0007
ac )isition di##erential amorti+ation 5!3(0007
Ad$)sted E(000
Consolidated net income 2!(/00
Attri")ta"le toB
%hareholders o# V 1 (660
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=on-controlling interests 526 , E(0007 12(260
2!(/00
Calc/lation of Consolidated (et income = ;ear 2
=et income o# V 92(000
LessB closing in entory pro#it 9(200
! (/00
AddB land pro#it reali+ed 22(200
Ad$)sted net income /9(000
=et income 5loss7 o# D 51!(0007
AddB opening in entory pro#it reali+ed 1/(000
LessB ac )isition di##erential amorti+ation 53(0007 Ad$)sted net income 51(0007
Consolidated net income /!(000
Attri")ta"le toB
%hareholders o# V /!(260
=on-controlling interests 526 , -1(0007 52607
/!(000
cD
Chan es in (on-controllin Interest ;ears 1 and 2
4alance Fan. 1 Dear 1 26 , 5190(000 T 106(0007 !/(960
Allocation o# D Co.
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Proof:
D - Common shares 100(000
- Retained earnings 590(000 T 130(000 − 26(000 − 1!(000 − 6(0007 16 (000
- %hareholders; e )ity ?ec. 31( Dear 2 26 (000- 8namorti+ed ac )isition di##erential 3E(000
2E3(000
26
93(260
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dD Calc/lation of Investment in ; Co * /ity ethodD
.s at ecember 31? ;ear 2
%hareholders; e )ity o# D Fan. 1( Dear 1 190(000
Ac )isition di##erential106(000
296(000
V;s ownership 96
Cost o# 96 in estment in D Fan. 1( Dear 1 20!(260
'n estment income J Dear 1 1 (660
Dear 2 1 (260 2/(/00
236(060
LessB ?i idends recei edDear 1 596 , 26(0007 1/(960
Dear 2 596 , 6(0007 3(960 22(600
'n estment in D ?ec. 31( Dear 2 212(660
Proof:
%hareholders; e )ity o# D 26 (000
4alance( )namorti+ed e )ipment 5 6(000 − !(0007 3E(0002E3(000
V;s ownership 96
21E(960
LessB Hold"ac* o# in entory pro#it J V selling 9(200
'n estment in D( ?ecem"er 31( Dear 2 212(660
Problem 6-6
Intercompany profits
:efore ta9 4"H ta9 .fter ta9
pening in entory selling /0(000 32(000 /(000 5a7
L selling 62(000 20(/00 31(200 5"7
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&nding in entory selling 36(000 1 (000 21(000 5c7
L selling 11/(000 9(200 90(/00 5d7
aD Calc/lation of consolidated profit
ro#it o# L 6/0(000
LessB ?i idends
rom M 5/0 , 200(0007 1!0(000
rom 590 , 160(0007 106(000
&nding in entory pro#it 5d7 90(/00 336(/00
2 (200
AddB opening in entory pro#it 5"7 31(200
Ad$)sted pro#it 296( 00
ro#it o# M 3!0(000
ro#it o# 2 0(000
LessB ending in entory pro#it 5c7 21(000
21E(000
AddB opening in entory pro#it 5a7 /(000
2!9(000Consolidated pro#it E02( 00
Attri")ta"le toB
%hareholders o# L 960(300
=on-controlling interests 520 , 3!0(000 T 30 , 2!9(0007 162(100
E02( 00
bD
Calc/lation of consolidated retained earnin s = be innin of c/rrent year
Retained earnings o# L E9!(000
LessB opening in entory pro#it 5"7 31(200
Ad$)sted E (/00
Retained earnings o# M / 3(000
Ac )isition retained earnings 600(000
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'ncrease 3 3(000
L;s ownership /0 29 ( 00
Retained earnings o# !/2(000
Ac )isition retained earnings 60(000'ncrease !32(000
LessB opening in entory pro#it 5a7 /(000
Ad$)sted increase 6/ (000
L;s ownership 90 0/(/00
Consolidated retained earnings J "eginning o# year 1(!2/(000
Problem 6-7
Calc/lation? allocation? and amorti8ation of ac /isition differential
Cost o# /0 in estment( Fan. 1( Dear 3 1(!00(000
'mplied al)e o# 100 in estment 2(000(000
Carrying amo)nts o# Least;s net assetsB
Assets 3(000(000
Lia"ilities 1(600(000
otal shareholders; e )ity 1(600(000
Ac )isition di##erential 600(000 AllocationB N - CA
Acco)nts recei a"le - 20(000
'n entories - 60(000
lant and e )ipment 5net7 36(000
Long-term lia"ilities 100(000 !6(000
4alance J goodwill 36(000
:alance .morti8ation :alanceAan 1 ec 31
;ear 3 ;ears 3 to ;ear ! ;ear !
Acco)nts recei a"le - 20(000 - 20(000
'n entories - 60(000 - 60(000
lant and e )ipment 5net7 36(000 2!(260 (396 (396 5a7
Long-term lia"ilities 100(000 100(000
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Goodwill 36(000 62(200 /(900 39 (100 5"7
600(000 10/( 60 5c7 13(096 5d7 39/( 96
Intercompany reven/es and e9penses
%ales and p)rchases 52(000(000 T 1(600(0007 3(600(000 5e7
Intercompany profits
:efore ta9 4"H ta9 .fter ta9
Loss on land( F)ly 1( Dear 9
reali+ed in Dear E J Most selling 60(000 20(000 30(000 5#7
pening in entory J Most selling
5312(600 , 0.207 !2(600 26(000 39(600 5g7
J Least selling
5/69(1 0 , 0.307 269(1 2 102(/69 16 (2/6 5h7
31E(! 2 129(/69 1E1(9/6 5i7
&nding in entory J Most selling
5600(000 , 0.207 100(000 0(000 !0(000 5$7
J Least selling
591 (2/0 , 0.307 21 (2/ /6(91 12/(690 5*7
31 (2/ 5l7 126(91 1//(690
'ntercompany di idends declared ")t not paid 5/0 , 100(0007 /0(000 5m7
?e#erred income ta,es J ending in entory 5 0(000 T /6(91 7 126(91 5n7
Calc/lation of consolidated retained earnin s = Aan 1 ;ear !
Retained earnings o# Most( Fan. 1( Dear E
510( 00(000 J 1(000(000 T 360(0007 E(960(000
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LessB ro#it in opening in entory 5g7 39(600
E(912(600
AddB land loss 5#7 30(000
Ad$)sted retained earnings E(9 2(600
Retained earnings o# Least( Fan. 1( Dear E52(300(000 J 00(000 T 100(0007 2(000(000
Retained earnings o# Least at ac )isition 1(000(000
'ncrease 1(000(000
LessB pro#it in opening in entory 5h7 16 (2/6
amorti+ation o# ac )isition di##erential 5c7 10/( 60
Ad$)sted increase 939(2!6 5o7
Most;s ownership /0 6/E(/12
Consolidated retained earnings( Fan. 1( Dear E 10(332(312
Calc/lation of consolidated net income = ;ear !
=et income o# Most 1(000(000
LessB ?i idends #rom Least 5100(000 , /0 7 /0(000
ro#it in closing in entory 5$7 !0(000
Land loss 5#7 30(000 190(000
/30(000
AddB pro#it in opening in entory 5g7 39(600 Ad$)sted net income /!9(600
=et income o# Least 00(000
AddB pro#it in opening in entory 5h7 16 (2/6
66 (2/6
LessB pro#it in closing in entory 5*7 12/(690
amorti+ation o# ac )isition di##erential 5d7 13(096
Ad$)sted net income 12(! 0
Consolidated net income 1(2/0(1 0
Attri")ta"le toB
%hareholders o# Most 1(1E9(!12
=on-controlling interests 520 , 12(! 07 /2(62/
1(2/0(1 0
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Calc/lation of consolidated non-controllin interests = Aan 1 ;ear ! ethod 1D
Least
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LessB pro#it in ending in entory 5*7 12/(690
amorti+ation o# ac )isition di##erential
55c7 10/( 60 T 5d7 13(0967 121(626
Ad$)sted increase 1(0 E(E06 5p7
Most;s ownership /0 /3E(E2Consolidated retained earnings( ?ec. 31( Dear E 11(19E(E2
Proof of non-controllin interest? end of ;ear ! ethod 1D
Retained earnings o# Least 2(300(000
Common shares o# Least 600(000
otal shareholders; e )ity 2(/00(000
LessB pro#it in ending in entory 5*7 12/(690
Ad$)sted shareholders; e )ity 2(!91( 30 AddB )namorti+ed ac )isition di##erential 39/( 96
3(0 E(E06
20
=on-controlling interest( ?ec. 31( Dear E !0E(E/1
Calc/lation of consolidated non-controllin interests = end of ;ear ! ethod 2D
=on-controlling interests at date o# ac )isition 520 , 1(!00(000 @ ./ 7 00(000
Least
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'n estment in Co. 530(000 , /6 7 26(600
'n estment in F Co. 56(000 , E0 7 (600
'n estment income 0(000
o record share o# s)"sidiaries; pro#it
'n estment 'ncome 1(230
'n estment in L Co. 53(000 , .E67 2(/60
'n estment in Co. 5 (/00 , ./67 (0/0
o hold "ac* a#ter-ta, in entory pro#it in ending in entory 5 Co.7 and add "ac* a#ter-ta,
in entory
pro#it in "eginning in entory 5L. Co.7
'n estment 'ncome is 0(000 − 1(230 I 3/(990.
bD Calc/lation of consolidated profit attrib/table to shareholders of > Co = ;ear 5
ro#it o# L 20(000
AddB pro#it in opening in entory 5a7 3(000
Ad$)sted pro#it 23(000
H Co.;s ownership E6 21(/60
ro#it o# F 56(0007
H Co.;s ownership E0 5 (6007
ro#it o# 30(000
LessB pro#it in ending in entory 5"7 (/00
Ad$)sted pro#it 26(200
H Co.;s ownership /6 21( 20
Consolidated pro#it attri")ta"le to shareholders o# H Co. J Dear 6 3/(990
cD > Company
Consolidated )etained *arnin s $tatement
for the ;ear *nded ecember 31? ;ear 5
Retained earnings( Fan)ary 1 12(000
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AddB pro#it 3/(990
60(990
LessB di idends 10(000
Retained earnings( ?ecem"er 31 0(990
Problem 6-!
Intercompany profits :efore 4"H .fter
ta9 ta9 ta9
pening in entoryU J )rple selling E6(63/ 3/(216 69(323
&nding in entory J )rple selling 1E (000 99(!00 11!( 00
Land J )rple selling
52!0(000 J 203(6007 6!(600 22(!00 33(E00
U 'n entory at selling price 5!E0(000 , !0 7 1 (000
'n entory at cost 5 1 (000 @ 1.307 31/( !2
ro#it E6(63/
Calc/lation of consolidated net income attrib/table to P/rple s shareholders = c/rrent
year
=et income o# )rple 6!/(100
AddB opening in entory pro#it 69(323
!26( 23
LessB &nding in entory pro#it 11!( 00
Land pro#it 33(E00 160(300 Ad$)sted pro#it 96(123
=et income o# %and 2 /(!90
)rple
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he intercompany rentals and interest re en)e@e,pense cancel each other o)t when %and;s
net income is added to )rple;s.
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Calc/lation of consolidated net income = ;ear 5
=et income o# Company !0(000
LessB ?i idends #rom % 510(000 , E0 7 E(000
ro#it in ending in entory 5g7 1(200 10(200E(/00
AddB pro#it in opening in entory 5d7 920
Ad$)sted net income 60(620
=et income o# % Company /(000
LessB pro#it in ending in entory 5#7 (/00
patent amorti+ation 5"7 (000
3E(200
AddB pro#it in opening in entory 5c7 1(!/00(//0
Consolidated net income E1( 00
Attri")ta"le toB
%hareholders o# Co. /9(312
=on-controlling interests 510 , 0(//07 (0//
E1( 00
Calc/lation of consolidated retained earnin s = Aan 1? ;ear 5
Retained earnings o# ( Fan. 1( Dear 6
5101(000 T 12(0007 113(000
LessB pro#it in opening in entory 5d7 920
Ad$)sted retained earnings 112(2/0
Retained earnings o# % 53 (000 T 10(0007 (000
Retained earnings o# % at ac )isition 20(000
'ncrease since ac )isition 2 (000
LessB Amorti+ation o# patents 5a7 1!(000
Land gain 5i7 !(000
ro#it in opening in entory 5c7 1(!/0 23(!/0
Ad$)sted increase 320 5$7
;s ownership E0 2//
Consolidated retained earnings( Fan. 1( Dear 6 112(6!/
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Calc/lation of consolidated non-controllin interests? be innin of ;ear 5 ethod 1D
Company % shareholders; e )ity
Common shares !0(000
Retained earnings (000
10 (000LessB Land gain 5i7 !(000
ro#it in "eginning in entory 5c7 1(!/0 9(!/0
Ad$)sted shareholders; e )ity E!(320
8namorti+ed ac )isition di##erential (000
100(320
10
=on-controlling interest( Fan 1( Dear 6 10(032
Calc/lation of consolidated non-controllin interests = Aan 1 ;ear 5 ethod 2D
=on-controlling interests at date o# ac )isition 510 , E0(000 @ .E7 10(000
% Co.
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5101(000 T !0(0007 1!1(000
LessB ro#it in ending in entory 5g7 1(200
Ad$)sted retained earnings 16E(/00
Retained earnings o# %( ?ec. 31( Dear 6
53 (000 T /(0007 /2(000Retained earnings o# % at ac )isition 20(000
'ncrease since ac )isition !2(000
LessB Amorti+ation o# the patents
55a71!(000 T 5"7 (0007 20(000
Land gain 5i7 !(000
ro#it in ending in entory 5#7 (/00 30(/00
Ad$)sted increase 31(200 5*7
;s ownership E0 2/(0/0Consolidated retained earnings( ?ec.( 31( Dear 6 1/9(//0
Calc/lation of consolidated non-controllin interests = ec 31 ;ear 5 ethod 1D
Company % shareholders; e )ity
Common shares !0(000
Retained earnings /2(000
1 2(000
LessB Land gain 5i7 !(000ro#it in ending in entory 5#7 (/00 10(/00
Ad$)sted shareholders; e )ity 131(200
8namorti+ed ac )isition di##erential 0
131(200
10
=on-controlling interests( ?ec. 31( Dear 6 13(120
Calc/lation of consolidated non-controllin interests = ec 31 ;ear 5 ethod 2D
=on-controlling interests at date o# ac )isition 510 , E0(000 @ .E7 10(000
% Co.
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Problem 6-12.c /isition differential amorti8ation = ;ear 5
lant and e )ipment depreciation 5!0(000 @ 67 12(000 5a7
atent amorti+ation 5 0(000 @ /7 6(000 5"7
Goodwill impairment loss 3(000 5c7
20(000 5d7
Intercompany reven/es and e9penses
%ales J R)nner to Road 20(000 5e7
Rental J R)nner to Road 36(000 5#7
Intercompany profits
:efore ta9 4"H ta9 .fter ta9
pening in entory J R)nner selling 96(000 30(000 6(000 5g7
&nding in entory J R)nner selling 0(000 1!(000 2 (000 5h7
aD )oad Ltd
Consolidated Income $tatement
for the ;ear *nded ecember 31? ;ear 5
%ales 5 (000(000 T 2(100(000 - 5e7 20(0007 6(!/0(000
Rental re en)e 590(000 - 5#736(0007 36(000
otal income 6(916(000
Materials )sed in man)#act)ring
52(000(000 T /00(000 - 5e7 20(0007 2(3/0(000
Change in wor*-in-progress K #inished goods in entory
5 6(000 - 20(000 - 5g796(000 T 5h7 0(0007 510(0007
&mployee "ene#its 5660(000 T /0(0007 1(030(000
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'nterest e,pense 5260(000 T 1 0(0007 3E0(000
?epreciation 5 06(000 T 2 6(000 T 5a712(0007 !!2(000
atent amorti+ation 526(000 T 5"76(0007 30(000
Goodwill impairment loss 5c7 3(000
'ncome ta, 5300(000 T 200(000 T 5g730(000 - 5h71!(0007 61 (000otal e,penses (EEE(000
ro#it 91!(000
Attri")ta"le toB
%hareholders o# Road !26(900
=on-controlling interests
530 , 300(000 J 5d720(000 T 5g7 6(000 - 5h72 (000 7 E0(300
91!(000
bD
%ince Road )ses the e )ity method o# acco)nting #or its in estment in R)nner( consolidated
retained earnings at ?ecem"er 31( Dear 6 wo)ld "e 2(626(900( which is e )al to Road
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51/(000 , 0.267 (600 1(/00 2(900 5l7
11(600 (!00 !(E00 5m7
eferred income ta9es = ecember 31? ;ear 3
'n entory (!00Land 12(000
1!(!00 5n7
Acc)m)lated depreciation at date o# ac )isition #or %age 10(000 5o7
Calc/lation of consolidated profit
ro#it o# ost 109(E9E
LessB 'n estment income #rom %age1( 9E
ro#it in ending in entory 5l7 2(900 (19E
Ad$)sted pro#it 103(/00ro#it o# %age 2 (000
AddB pro#it in opening in entory 5$7 2(100
2!(100
AddB Amorti+ation o# ac )isition di##erential 5d7 2(090
LessB ro#it in ending in entory 5*7 (200
Land gain 5i7 1/(000 -22(200
Ad$)sted pro#it 6(E90
ro#it 10E(990 Attri")ta"le toB
%hareholders o# ost 109(E9E
=on-controlling interests 530 , 6(E907 1(9E1
10E(990
aD 5i7 Post Corporation
Consolidated $tatement of Profit
or the ;ear *nded? ecember 31? ;ear 3
%ales 5E00(000 T 2 0(000 J 5g7216(0007 E26(000
'nterest re en)e 5!(/00 J 5h73(3007 3(600
otal re en)e E2/(600
Cost o# goods sold
56 0(000 T 1!2(000 J 5g7216(000 - 5$73(600 T 5m711(6007 E6(000
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'nterest e,pense 520(000 J 5h73(3007 1!(900
ther e,pense
51/0(000 T 9 (/00 J 5#72!(600 - 5a73(!007 22 (900
Goodwill impairment loss 5"7 1(630
'ncome ta, e,pense5/0(000 T 1!(000 T5$7 1( 00 J 5m7 (!00 J 5i7 12(0007 /0(/00
otal e,penses /1/(930
ro#it 10E(990
Attri")ta"le toB
%hareholders o# ost 109(E9E
=on-controlling interests 530 , 6(E907 1(9E1
10E(990
Calc/lation of non-controllin interests = ecember 31? ;ear 3
rdinary shares 60(000
Retained earnings /1(000
otal shareholders; e )ity 131(000
LessB ro#it in ending in entory 5*7 (200
Land gain 5i7 1/(000 - 22(200
AddB )namorti+ed ac )isition di##erential 3(210 Ad$)sted shareholders; e )ity 162(010
=on-controlling interest
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?e#erred income ta,es 5n7 1!(!00
'n entory 53 (000 T 29(000 J 5m711(6007 E(600
Acco)nts recei a"le 519(200 T E(1007 2!(300
Cash 512(200 T 12(E007 26(100
otal assets !90(610
rdinary shares 100(000
Retained earnings 2!6(909
=on-controlling interests 6(!03
11(310
8n#a o)ra"le lease agreement 9(200
Acco)nts paya"le 5212(000 T 0(0007 262(000
otal shareholders< e )ity K lia"ilities !90(610
bD
Goodwill impairment loss J entity theory 1(630
LessB =C'
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Problem 6-14
aD .c /isition cost .llocation Ac )isition Fan)ary 1( Dear 1
Cost
5!0(000 , /07
(/00(000
'mplied al)e o# 100 in estment 5/0(000 shares , /07
!( 00(000
CAB rdinary %hares 3(600(000
Retained &arnings 2(100(000
6(!00(000
Ac )isition di##erential
/00(000
Allocati
onB
Li#e
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atents
00(0
00 ?r
6
L. . Lia"ility
100(0
00 Cr
%)"total
200(000 ?r
4alanceB Goodwill
!00(000 ?r
/00(000 ?r
=on-controlling interest 520(000 shares W /07 1(!00(000
.morti8ation 'ableE
Allocation Li#e
Amorti+ation 4alance
DR 1 J DR DR 6 ?ec. 3( DR 6
'n entory 100(000 Cr 1Copyright © 200/ McGraw-Hill Ryerson Limited. All rights reser ed.92 Modern Advanced Accounting in Canada, i#th &dition
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100(000Cr
0
0
Land 200(000 ?r
200(000 ?r
& )ipment 200(000 Cr 10
/0(000Cr
20(000 Cr
100(000 Cr
atents 00(000 ?r 6
320(000?r /0(000?r
0
L. . Lia"ility 100(000 Cr
100(000Cr
0
Goodwill !00(000 ?r
!00(000 ?r /00(000 ?r 0(000 ?r
!0(000 ?r
900(000 ?r
?e ine
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4 a, A LandB 8pstream Gain %ept 1( DR 6 00(000
1!0(0002 0(000
8nreali+ed ro#itsB
4
a,
A
pening8pstream 100
W 00(000 1!(000 2 (000
?ownstream300
W 33 1@3
100(0000(000
!0(000
&nding 8pstream600
W 0
200(000/0(000
120(000
?ownstream !00 W 331@3200(000
/0(000
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120(000
bD Consolidated Income $tatement for the year endin ecember 31? ;ear 5
%ales 511.! M T 3 M J 3.2 M711( 00(000
?i idend( 'n estment 'ncome( and Gains 5 00 T 1(000 J 396 J 00 7
!26(000
12(026(000
Cost o# Goods %old5/M T 1.6 M J 3.2 M - 0 J 100 T 200 T 200 7 !(6!0(000
ther &,penses 5600 T 300 J 20 5& )ip7 T /0 5 atent7 /!0(000
a,es 5600 T 200 J 1!0 T 1! T 0 J/0 J /0 7 3!(000
otal e,penses 9(/6!(000
ro#it (1!E(000
Attri")ta"le toB
%hareholders o# Nine 3(9!/(000
=on-controlling interests 52M J 2 0 J120 T 2 J !0 7 , .26 01(000
(1!E(000
)econciliationE
Nine ro#itB
3(000(000
?i idends #rom ?e ine 'ncl)ded 5396(0007
& )ity in &arnings o# ?e ine 1(1 3(000
Consolidated ro#it Attri")ta"le to Nine
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arent retained earnings at ?ecem"er 31( Dear 6
12(000(000
%)" retained earnings at ?ecem"er 31( Dear 6 9(000(000
Retained earnings at ac )isition 2(100(000'ncrease since ac )isition (E00(000
LessB )nreali+ed pro#its( ending in entory 5120(0007
Land 52 0(0007
LessB c)m)lati e amorti+ation o# ac )isition di##erential 5100(0007
Reali+ed retained earnings since ac )isition ( 0(000
5a7
arent
96 3(330(000
LessB )nreali+ed pro#its( ending in entory 5120(0007
Consolidated retained earnings
16(210(000
dDConsolidated $tatement of inancial Position
ecember 31? ;ear 5
.ssetsLand 5!M T 2.6 M T 200 J 00 7 /(300(000
lant and & )ipment 51/./M T 11./M J 200 J 600 7 2E(E00(000
Acc)m)lated depreciation 56./M T 6.0M J 100 J 600 7 510(200(0007
Goodwill !00(000
?e#erred 'ncome a, 51!0 T /0 T /0 7 320(000
'n entories 5 .! M T 2. M J 200 J 200!(!00(000
Cash and C)rrent Recei a"les 5E00 T 300 71(200(000
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* /ities and Liabilities
rdinary shares
10(000(000
Retained &arnings 5%ee part c7
16(210(000
=on-controlling interests 5%ee 4elow7 2(910(000
Long erm Lia"ilities 5!.! M T 1.1 M7 9(900(000
?e#erred 'ncome a,es 5200 T100 7 300(000
C)rrent Lia"ilities 5900 T 300 J 200 ad ances7 /00(000
3!(920(000
(on-controllin InterestsE ethod 1D
?e ine J Carrying amo)nt ?ecem"er 31( Dear 6 10(600(000
8nreali+ed ro#its J 8pstreamB
Land 52 0(0007
'n entory 5120(0007
8namorti+ed ac )isition di##erential 900(000
10(/ 0(000
26
=on-controlling interest 2(910(000
Calc/lation of non-controllin interests = ecember 31? ;ear 5 ethod 2D
=on-controlling interests at date o# ac )isition 526 , (/00(000 @ .967 1(!00(000
?e ine
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?ecrease in non-controlling interest 100(000=on-controlling interest( ?ecem"er 31( Dear 3- as pre io)sly calc)lated 2(910(000- as per new calc)lation 2(!10(000
Goodwill at ?ecem"er 31( Dear 3- as pre io)sly calc)lated !00(000- decrease d)e to change in non-controlling interest 100(000- as per new calc)lation 600(000
Problem 6-15
aD
Cost o# 90 in estment( Fan)ary 1( Dear 2 / (000
'mplied al)e o# 100 in estment 120(000
Carrying amo)nt o# %and
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%ales 5 9E/(000 T 300(000 J 100(000 27 EE/(000
'n estment and interest income 5 1(600 T 3(!00 J 1600 J 2( 00 37 1(200
otal re en)e EEE(200
Cost o# goods sold 5 /0(000 T 200(000 J 100(000 2 T 10(600 ! 7 6E0(600'nterest e,pense 5 10(000 J 2( 00 37 9(!00
Research K de elopment e,penses 5 0(000 T 12(000 T 5a7 (0007 6!(000
Miscellaneo)s e,pense 5 10!(000 T 31(!00 T 5"7 21(600 J 2 (000 17 136(100
'ncome ta,es 5 /0(000 T 32(000 J (200 ! J /(000 67 EE(/00
otal e,penses //E(000
=et income 110(200
Attri")ta"le toB
%hareholders o# aper 109(060 =on-controlling interest 5 /(000 J 12(000 J 26(6007 530 7 3(160
110(200
(otesE1 Management #ee 5 2(000 X 127 2 (0002 ?ownstream sales 100(0003 'nterest 5 0(000 X / X E@127 2( 00
'n estment income #rom %and 1600
Intercompany profits
:efore ta9 4"H ta9 .fter ta96 Land S )pstream 20(000 /(000 12(000! &nding in entory S downstream5 30(000 X 36 7 10(600 (200 !(300
cD
i7 'n entory 5 !!(000 T (000 J 10(600 ! 7 EE(600
ii7 Land 5 160(000 T 30(000 J 20(000 67 1!0(000
iii7 =otes paya"leB he notes paya"le wo)ld not "e shown on the consolidated "alance sheet.
i 7 =on-controlling interest 5 60(000T 120(000J 12(000T5c7 11(6007 530 7 60(/60
7 Common shares 160(000
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dD
=on-controlling interest J at date o# ac )isition- )nder implied al)e approach 530 , 120(0007 3!(000- )sing independent appraisal 30(000?ecrease in non-controlling interest and goodwill !(000
Goodwill impairment loss #or the year ended ?ecem"er 31( Dear 6- as pre io)sly calc)lated 21(600- decrease d)e to change in goodwill at ac )isition !(000- as per new calc)lation 16(600
ro#it attri")ta"le to non-controlling interest #or the year ended ?ecem"er 31( Dear 3- as pre io)sly calc)lated 3(160- increase d)e to red)ced goodwill impairment loss !(000- as per new calc)lation E(160
$%L&'I%($ '% #*:-:.$* P)%:L* $#eb Problem 6-1he #ollowing answers are "ased on the 2011 consolidated #inancial statements #or R =A 'nc.B
5a7 R =A )ses the weighted a erage cost method to cost its in entory. his is
disclosed in the in entory al)ation acco)nting policy as descri"ed in note 35d7 to
the consolidated #inancial statements.
5"7 At the end o# 2011( in entory represented 30.2 5/ 0(2/9 @ 2(9/0(39/7 o# R =A
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net income wo)ld stay the same and e )ity wo)ld increase.