Exam 2: Intercorporate Equity Investments: an Introduction

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?

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

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

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?

Forest Ltd. accounts for its investment in Leeds Co. using the cost method. During the year, Forest received $10,000 in dividends from Leeds. How should Forest report these dividends on its separate-entity financial statements?

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?

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?

Rudd Ltd. has a passive investment in Burke Ltd. Rudd has elected to treat Burke as a fair value through other comprehensive income (FVTOCI)investment under IFRS 9 Financial Instruments. Which of the following statements is true?

Ying Corporation formed a new subsidiary, Zang Limited, in 20X2. Ying is mainly involved in the manufacturing, distribution, 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 at December 31, 20X7, are shown below. Separate-Entity Financial Statements Statements of Financial Position for Ying and Zang December $31,20 \mathrm{X} 7$ (In 000s) ( In \ 000s) Ying \ Zang \ Assets Cash 160 320 Accounts receivable 2,300 620 Inventory 5,960 1,590 Property, Plant, and Equipment-net 10,900 5,980 Investment in Zang 1,500 Loan receivable - from sub 1,000 Total assets 19,360 7,570 Liabilities Accounts payable 5,600 1,250 Long term debt 8,500 1,880 Loan payable-to parent 1,000 Total liabilities Shareholders' equity Common shares 1,000 1,500 Retained earnings 4,260 1,940 Total shareholders' equity 5,260 Total liabilities and shareholders' equity Statements of Comprehensive Income for Ying and Zang Year Ended December 31, 20X7 (In 000s) ( In \ 000s) Ying \ Zang \ Sales 27,600 7,440 Cost of goods sold 19,320 4,840 Gross profit 2,600 Expenses Selling, general, and administration 3,670 1,530 Interest Total expenses Operating profit 3,860 810 Other income 1,330 0 Earnings before taxes 5,190 810 Income taxes Net earnings Statements of Changes in Equity-Retained Earnings Section for Ying and Zang Year Ended December 31, 20X7 (In 000s) ( In \ 000s) Ying \ Zang \ Retained Earnings-January 1, 20X7 2,740 1,800 Net earnings 3,120 490 Dividends paid (1,600) (350) Retained Earnings-December 31, 20X6 4,260 1,940 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 to Zang during the year. 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 at December 31, 20X7. Show details of all of your work to arrive at the consolidated balances. Provide the consolidating journal entries required.

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?

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: Net income Dividends January 31,20\times6 \ 42,000 \ 20,000 January 31,20\times7 \ 35,000 \ 15,000 The fair value of the investment in Mary shares was $310,000 and $260,000, on January 31, 20X6 and 20X7, respectively. Required: A)If Peter uses the FVTOCI 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 for 20X6 and 20X7?

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 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 from 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?

Ritva Co purchased a 38% interest in Saron Ltd on October 1, 20X9, for $795,000. Management at 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 a 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? On a cost basis? At fair market value through profit or loss? Under what circumstances would each of these be appropriate for reporting purposes?

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?

How do joint ventures differ from private corporations?

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 in 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?

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

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?

Rally Ltd. owns 70% of Neily Ltd. and records it using the cost method. Neily did not have any transactions with Rally with the exception of the payment of dividends. On its separate-entity financial statements, Rally plans to report its investment in Neily using the equity method. To this end, Rally has prepared a worksheet with adjustments to eliminate the dividends and recognize its share of Neily's current income. To recognize Rally's share of Neily's unremitted income in prior years, the following adjustments should be made:

On whose books are the consolidating adjusting entries recorded?