Exam 2: Intercorporate Equity Investments: an Introduction

Hattrick Corp.is a wholly owned,parent-founded subsidiary of Bobby Inc.Both Bobby and Hattrick report under IFRS.The unconsolidated statements of comprehensive income and part of the statement of changes in equity-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. Required: Prepare a consolidated statement of comprehensive income and consolidated statement of changes in equity - retained earnings section for Bobby Inc.for the year ended December 31,20X6.

Passive investments can be classified as fair value through profit or loss (FVTPL)or as fair value through other comprehensive income (FVTOCI).Which of the following statements is true?

On January 1,20X2,Soho Co.purchased 4,000 shares,representing 12%,of Rico Inc.for $78,000.Soho is a publicly traded company.During the next two years,the following information was available for Rico. Required: a.Assuming Soho classifies this investment as FVTPL,prepare the journal entries for the next two years related to this investment,and the carrying value of the investment at the end of 20X2 and 20X3. b.Assuming Soho classifies this investment as FVTOCI,prepare the journal entries for the next two years related to this investment,and the carrying value of the investment at the end of 20X2 and 20X3.

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 Rally's share of Neily's 20X2 income?

On February 1,20X5,Peter Co.purchased 20% of the outstanding shares of Mary Inc.at a cost of $275,000.During the next two fiscal years,Mary Inc.reported the following: Required: a.If Peter uses the cost method for recording its investment in Mary,what would the balance in the investment account be at January 31,20X7? What would be reported on the statement of comprehensive income with respect to this investment for 20X6 and 20X7? b.If Peter uses the equity method for recording its investment in Mary,what would the balance in the investment account be at January 31,20X7? What would be reported on the statement of comprehensive income with respect to this investment?

Jonas Co.owned 60% of Kara Co.'s voting shares and 25% of Lynn Ltd.'s voting shares.Kara owns 30% of Lynn's voting shares.Which of the following statements is true?

Townsend Ltd.has the following shareholders: Palermo Co.- 60% Nix Ltd.- 30% Riley Ltd.- 10% Nix does not conduct any business with Townsend,nor has it been able to secure a seat on the Board of Directors.Which of the following statements is true?

What is securitization?

Ritva Co purchased a 38% interest in Saron Ltd on October 1,20X9 for $765,000.The management of Ritva is now preparing the first set of financial statements since the acquisition and is unsure of how to report the investment. a.If Ritva is a publicly traded company following IFRS,can the investment be reported on an equity basis? On the cost basis? At fair market value through profit or loss? Under what circumstances would each of these be appropriate for reporting purposes? What would be the impact on net earnings under each method? What is the impact on the investment account under each method? b.If Ritva is a privately held corporation following ASPE,can the investment be reported on an equity basis? Or on the cost basis? Or at fair market value through profit or loss? Under what circumstances would each of these be appropriate for reporting purposes?

Jarrett Corporation uses the equity method to account for its 25% investment in Polo Corporation and receives $15,000 in dividends.How should Jarrett account for these dividends?

Bud Ltd.owns 100% of Calla Co.Calla owns 55% of Daisy Ltd.and Daisy owns 90% of Fern Ltd.Which of the following statements is true?

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 journal entry should Anwar make to record the dividends from Cruz?

On January 1,20X1,Belle Ltd.purchased 100% of the common shares of Dominique Corporation for $700,000.Dominique's net income was $30,000 for 20X1 and $50,000 for 20X2.DA paid dividends of $20,000 on its common shares during 20X1 and $100,000 during 20X2.As such,total dividends paid by Dominique exceeded income earned by Dominique since it was acquired by Belle.What is the balance in the investment in Dominique's account at the end of 20X2 under the cost and equity methods?

On whose books are the consolidating adjusting entries recorded?

O'Reilly Ltd.incorporated O'Reilly R&D Co.to conduct research and development activities.O'Reilly R&D is a(n)________.

How do joint ventures differ from private corporations?

PCo owns 60% of ACo and 20% of BCo and 10% of DCo.ACo owns 45% of DCo.Identify the basis that each company is required to use when reporting its equity investments (if any).

Bela Ltd.has invested in several domestic manufacturing corporations.Which of the following investments would most likely be accounted for under the equity method on Bela's financial statements?

On January 1,20X1,Best Décor Ltd.started Chic Styles Ltd.by contributing $500,000 and received 100% of the common shares of Chic Styles.Chic Styles reported net income of $50,000 in 20X1 and $75,000 in 20X2 and paid out 40% of its net income as dividends in each year.Under the equity method,what amount should be reported as Investment in Chic Styles on Best Décor's separate-entity 20X2 financial statements?

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 journal entry should Anwar make to record its share of Cruz's net income?