Exam 2: Intercorporate Equity Investments: an Introduction

Ying Corporation formed a new subsidiary,Zang Limited,in 20X2.Ying is mainly involved in the manufacturing,distributing and retailing of dog food and Zang manufacturers and distributes cat food.At that time,Ying provided all of the start up capital to Zang in the form of equity,purchasing all of Zang's shares for $1.5 million.The unconsolidated statements for the two companies as at December 31,20X7 are shown below: During 20X7,the following transactions took place (all dollars are in thousands): • Ying provided a loan to Zang and charged interest totalling $80. • Zang sold merchandise to Ying totalling $3,270,which was all subsequently sold to outside third parties by the end of the year. • Included in Zang's receivables is $270 still owed by Ying for these sales. • Ying charged management fees of $900 during the year to Zang. Required: Using the direct approach,prepare the consolidated statements of comprehensive income;statement of changes in equity-retained earnings section;and statement of financial position as at December 31,20X7.Show details of all of your work to arrive at the consolidated balances.Provide the consolidating journal entries required.

Chow HK Ltd.acquired 40% of the common shares of Welsh Trading Co.Chow paid a purchase price discrepancy (PPD)and uses the equity method to report the investment.Which of the following adjustment does Chow not have to make in calculating its share of Welsh's earnings?

Townsend Ltd.has the following shareholders: Palermo Co.- 60% Nix Ltd.- 30% Riley Ltd.- 10% Nix has two seats on Townsend's five-person board of directors.Which of the following statements is true?

In 20X5,Bing created a wholly owned subsidiary called Bango Limited.Bing is a private company and reports under ASPE.Bing is currently using the cost method to record its investment in Bango,but is trying to decide if it should report using the equity method or the consolidation method.This is the only subsidiary that Bing has. Statements of Earnings and Retained Earnings for Bing and Bango for the year ended December 31,20X5. Other Information During the year,the following transactions occurred between the two companies: 1.Bing sold merchandise to Bango for $560,000.At the end of the year,Bango still owed Bing $25,000 for this merchandise. 2.Bango charged rent of $20,000 to Bing for office space. 3.Licensing fees were paid by Bango to Bing in the amount of $150,000. Required: (a)Prepare the Statement of Earnings and Retained Earnings for Bing using the equity method of reporting its investment in Bango. (b)Prepare the Consolidated Statement of Earnings and Retained Earnings for Bing. (c)Compare the equity method and the consolidation method and discuss any similarities and differences. (d)If Bing had other subsidiary investments,what other factors would be considered in trying to decide if the consolidation or equity method should be used?

At the beginning of 20X1,Anwar Ltd.acquired 15% of the voting shares of Cruz Co.for $150,000.Anwar does not have any significant influence over Cruz.Anwar reports the investment using the cost method.In 20X1,Cruz earned net income of $70,000 and paid dividends of $40,000.In 20X2,Cruz earned net income of $80,000 and paid dividends of $100,000.At the end of 20X2,what is the balance of Anwar's "Investment in Cruz" account?

Diaz Ltd.acquired 35% of Saturn Ltd.many years ago.At first,Saturn was profitable,but recently,it has been posting losses.Diaz believes that Saturn will be profitable again and has no plans to dispose of it,even though Diaz's share of the losses has exceeded its investment interest.Diaz uses the equity method.Which of the following statements is true?

In changing from the cost method to consolidation,which of the following is not required?

Under which method does the Statement of Comprehensive Income show "Equity in earnings of Subsidiary"?

Which of the following statements about the direct approach to consolidation is true?

Forest Ltd.reports its investment in Leeds Co.on an equity basis.During the year,Forest received $10,000 in dividends from Leeds.How should Forest report these dividends?

At the beginning of 20X1,Rally Ltd.acquired 18% of Neily Co.for $90,000.Rally has significant influence over Neily.Rally records the investment in Neily using the cost method.Rally's share of Neily's income was $29,000 for 20X1 and $33,000 for 20X2.Rally received dividends from Neily of $25,000 for 20X1 and $35,000 in 20X2.For reporting purposes in 20X2,what adjustment must be made to recognize unremitted earnings from 20X1?

Gunnar Ltd.owns 100% of the common shares of Ivy Ltd.During the year,Gunnar reported net income of $108,000 including its income from its investment in Ivy accounted for under the cost method.Ivy reported net income of $20,000 and paid dividends of $8,000 during the year.What net income will be reported by Gunnar on its separate-entity financial statements under the equity method and on its consolidated financial statements?

Rasor Inc.uses the equity method of reporting its 40% investment in Ivan Co.The balance in the Investment in Ivan was $50,750 at January 1,20X3.During the next three years,Ivan reported the following net earnings (losses)and dividends paid. Required: Calculate the balance of the Investment in Ivan account at December,31 20X5.

Carr Co.owns 100% of the common shares of Ice Tops Ltd.Carr records its investment in Ice Tops using the cost method.Carr and Ice Tops have transactions with each other.In preparing Carr's consolidated financial statements,which of the following should be done?

Hattrick Corp.is a wholly owned,parent-founded subsidiary of Bobby Inc.The unconsolidated statements of income and the statement of changes of retained earnings for the two companies for the year ended December 31,20X6,are as follows (in 000s): Additional information: • Bobby sells some of its output to Hattrick.During 20X6,intercompany sales amounted to $25,000,000.Hattrick has accounts payable owing to Bobby for $200,000 at December 31,20X6. • Bobby owns the land on which Hattrick's building is located.Bobby leases the land to Hattrick for $30,000 per month. Bobby accounts for its investment in Hattrick under the cost method Assume that Bobby is a private corporation that reports under ASPE.Prepare the statement of income and retained earnings for Bobby for the year 20X6 using the equity method.

Which methods will result in the same income and shareholders' equity?

In Canada,what subsidiaries must be included in consolidated financial statements?

On January 1,20X8,XZ Co.purchased 3,000 shares,representing 30% of AR Limited,for $390,000.XZ is a publicly traded company.AR's total net income was $86,000 for the year ended December 31,20X8.AR also paid dividends in total of $25,000 during 20X8.At the year end,each share of AR was trading at $150 per share. Required: a.Based on the information above,show the journal entries that XZ would have used to report its original purchase and any related investment income for AR for 20X8 assuming that XZ reports its investment in AR using FVTPL.What is the investment account balance at the end of December 31,20X8? b.Based on the information above,show the journal entries that XZ would have used to report its original purchase and any related investment income for AR for 20X8 assuming that XZ reports its investment in AR as a significantly influenced investment.What is the investment account balance at the end of December 31,20X8?

Which of the following is not an indicator of significant influence?

How are most significant influence investments in equity securities actually recorded on the investors books?