Pot Ltd. is a large Canadian manufacturing company. It plans to vertically integrate for strategic reasons. The board of directors decided in December 20X1 that it would be wise to take control over a key supplier, Soil Inc. This would be Pot’s first controlling investment. In keeping with its vertical integration strategy, the board decided in March 20X2 to divest its significant holdings in its current associate, Apple Co., in favor of obtaining significant influence over Aster Co. Based on these directives, management took action. On January 1, 20X2, Pot purchased 80% of the outstanding common shares of Soil for $300,000. The following financial statement information was available for Soil on this date: Book value
Fair value
Cash $ 5,000 $ 5,000
Accounts receivable 20,000 20,000
Inventory 10,000 15,000
Equipment, net 120,000 140,000
Goodwill 15,000
Licence — 50,000
Total assets $ 170,000
Current liabilities 15,000 15,000
Bonds payable 30,000 $ 26,000
Common shares 55,000
Retained earnings 70,000
Total liabilities and equity $ 170,000
Equipment had a cost of $200,000, accumulated depreciation of $80,000, and remaining 10-year life, the license was useful for another 20 years, and the bonds mature in five years. Management was unsure whether to use the FVE or the INA approach to value the NCI.
Pot sold its investment in Apple on March 31, 20X2, for $110,000. Apple reported a comprehensive income of $13,000 for the period ending March 31, 20X2. Apple had also declared and paid dividends of $5,000 on March 1, 20X2. Pot owned 30% of Apple before the sale and uses the equity method to report its investment in Apple. No equity method entries have been prepared for Pot for its year ended December 31, 20X2. On January 1, 20X2, the balance in the investment in associate account related to Apple was $98,000. At the date of acquisition, the book value and fair value of Apple’s net assets were equal.
After much negotiation, Pot purchased 40% of the outstanding common shares of Aster on October 1, 20X2, for $60,000. Aster reported common shares of $15,000 and retained earnings of $79,292 [$70,000 + (9/12 × $12,390)]. On this date, the fair values of Aster’s net assets approximated their book values except for equipment, whose fair value was $10,000 higher than its book value. Equipment had a remaining useful life of four years.
Other information:
• Pot has various passive investments in addition to the strategic investments noted above.
• Pot did not pay any dividends in 20X2.
Soil declared and paid $4,000 in dividends on June 15, 20X2.
• Post accounts for Soil using the cost method.
• Pot has established that Soil is a CGU. Pot tests its investment in Soil annually for impairment. There was no impairment for 20X2. There was a $15,000 impairment for 20X3.
• Aster paid dividends on November 20, 20X2.
• Aster’s retained earnings balance on December 31, 20X2, was $80,390.
Aster’s non-consolidated statement of comprehensive income for the year ended December 31, 20X2, is set out below: Aster
Sales $ 130,000
Cost of goods sold 75,000
Gross margin 55,000
Operating expenses:
Distribution 12,000
Administration 14,000
Depreciation 10,000
Operating income 19,000
Interest expense 1,300
Net income before tax 17,700
Tax expense (30%) 5,310
Comprehensive income $ 12,390
Required:
a) Calculate the goodwill and NCI at the date of acquisition of Soil using the FVE method and INA approach. (4 marks)
b) Prepare an acquisition differential amortization and impairment schedule using the FVE approach for the period January 1, 20X2, to December 31, 20X3. (2 marks)
c) Prepare all the journal entries Pot would have made to record equity method journal entries for 20X2 for its investment in Apple and for the sale of its investment in Apple on March 31, 20X2. (2 marks)
d) i) Prepare the adjusting journal entry (or entries) required for the year ended December 31, 20X2, related to the investment in Aster. (2.5 marks)
ii) Determine the balance in the investment in Aster account at December 31, 20X2. (0.5 marks)