Question

Northwest Paperboard Company, a paper and allied products manufacturer, was seeking to gain a foothold in Canada. Toward that end, the company bought 40% of the outstanding common shares of Vancouver Timber and Milling, Inc., on January 2, 2021, for $410 million. At the date of purchase, the book value of Vancouver's net assets was $780 million. The book values and fair values for all balance sheet items were the same except for inventory and plant facilities. The fair value exceeded book value by $10 million for the inventory and by $15 million for the plant facilities. The estimated useful life of the plant facilities is 15 years. All inventory acquired was sold during 2021. Vancouver reported net income of $150 million for the year ended December 31, 2021. Vancouver paid a cash dividend of $20 million.Required: 1. Prepare all appropriate journal entries related to the investment during 2021. 2. What amount should Northwest report as its income from its investment in Vancouver for the year ended December 31, 2021? 3. What amount should Northwest report in its balance sheet as its investment in Vancouver? 4. What should Northwest report in its statement of cash flows regarding its investment in Vancouver?

Answer 1

Answer:

Vancouver timber investment            312,000,000 debit

fair value inventory Vancouver Timber 4,000,000 debit

fair value facilities Vancouver Timber   6,000,000 debit

goodwill Vancouveer Timber              88,000,000 debit

                                Cash                           410,000,000 credit

--to record acquisition--

amortization expense        4,400,000 debit

fair value inventory Vancouver Timber 4,000,000 debit

fair value facilities Vancouver Timber       400,000 debit

--to record adjustment of Vancouver fair value of his assets--

Vancouver timber investment           80,000,000 debit

           Gain on Vancouber Timber             80,000,000 credit

--to record Vancouver trimber net income--

Cash                                                 8,000,000 debit

         Vancouver timber investment            8,000,000 credit

--to record Vancouver Timber dividends--

Vacouver Timber:

investment at equity method: 364,000,000

goodwill                                      88,000,000

fair value facilities                       5,600,000  

                                  net         467,600,000

Cash flow:

purchase of shares:    -410,000,000

dividends received         8,000,000

net                              -402,000,000

Explanation:

780,000,000 x 40% =           312,000,000

inventory 10,000,000 x 40% = 4,000,000

facilities 15,000,000 x 40% =    6,000,000

                    Total                    322,000,000

Goodwill: 410,000,000 - 322,000,000 = 88,000,000

year-end adjustment:

entire inventory was sold so the difference disappears.

the facilities is depreciate over 15 year

6,000,000 / 15 = 400,000

net income: 150,000,000 x 40% = 60,000,000

dividends: 20,000,000 x 40% = 8,000,000

Balance at year-end:

investment  312,000,000 + 60,000,000 - 8,000,000 = 364,000,000

For the cash flow we consider the purchase and the dividend amount received.