Question

In: Accounting

Mr. Thompson is a businessman. He started a business five years ago and it has increased in size gradually for its continuous success.

Problem:

Mr. Thompson is a businessman. He started a business five years ago and it has increased in size gradually for its continuous success. Thompson Inc. is a private company and it uses ASPE for preparing its financial statements. It has completed accounting year on December 31, 2017. At the end of 2017, the financial position statement shows that there is huge amount of surplus cash and Thompson has shown interest in investing a part of the surplus amount to the equity securities of Panna Corporation. It is also a growing company in the same industry. The balance sheets of Thompson Inc. and Panna Corporation as on December 31, 2017 with fair values of assets and liabilities of Panna Corporation are presented below:

Assets:

Thompson Inc.

Panna Corporation

Carrying Amount

Carrying Amount

Fair value

Cash

$400,000

$10,000

$10,000

Accounts receivable

80,000

25,000

22,000

Inventory

100,000

70,000

75,000

Plant

500,000

165,000

175,000

Patents

100,000

25,000

25,000

Trade marks

-

-

20,000

Goodwill

120,000

10,000

10,000

Total Assets

1,300,000

305,000


Liabilities and Equity:




Current liabilities

$160,000

55,000

60,000

Long-term liabilities

100,000

65,000

60,000

Common shares (At $10 per share)

1,000,000

100,000


Retained earnings

40,000

85,000


Total liabilities and equity

1,300,000

305,000


You, a CPA, CGA, the CFO of Thompson Inc., were asked by Mr. Thompson to give your opinion on the following different situations regarding the –

  • Accounting requirements for the following investment proposals; and

  • Presentation of Financial statement for each independent investment proposals of Mr. Thompson.

Situations:

  1. Suppose Thompson purchased 1,000 shares of Panna Corporation at $ 1,100 on January 1, 2018. Show the journal entry for this transaction in the book of Thompson and present the balance sheet of Thompson Inc. after this investment on January 1, 2018.

  2. Suppose Thompson purchased 4,000 shares of Panna Corporation at $ 4,500 on January 1, 2018. These shares are traded in Toronto Stock Exchange. Thompson Inc. gained significant influence over the investee (Panna Corporation) by this investment. Explain to Mr. Thompson what will be the appropriate accounting method for this transaction. Show the journal entry for this transaction in the book of Thompson on January 1, 2018.

Solutions

Expert Solution

Investment A/C                11,00,000
            TO CASH A/c                   4,00,000
            To Long Term Liabilities 700000
(Being invetsment made in equity share and balance amount is assumed to be a long term liability(loan))
Assets: Thompson Inc.
Carrying Amount
Cash 0
Accounts receivable 80,000
Inventory 1,00,000
Plant 5,00,000
Patents 1,00,000
Investment 11,00,000
Trade marks -
Goodwill 1,20,000
Total Assets 20,00,000
Liabilities and Equity:
Current liabilities 1,60,000
Long-term liabilities 8,00,000
Common shares (At $10 per share) 10,00,000
Retained earnings 40,000
Total liabilities and equity 20,00,000
Investment A/C             1,80,00,000
            TO CASH A/c                   4,00,000
            To Long Term Liabilities             1,76,00,000
(Being invetsment made in equity share and balance amount is assumed to be a long term liability(loan))
OR
Investment A/C             1,80,00,000
            TO CASH A/c                   4,00,000
            To Long Term Liabilities                   7,00,000
To Goodwill             1,69,00,000
Assets: Thompson Inc.
Carrying Amount
Cash 0
Accounts receivable 80,000
Inventory 1,00,000
Plant 5,00,000
Patents 1,00,000
Investment 1,80,00,000
Trade marks -
Goodwill 1,20,000
Total Assets 1,89,00,000
Liabilities and Equity:
Current liabilities 1,60,000
Long-term liabilities 1,77,00,000
Common shares (At $10 per share) 10,00,000
Retained earnings 40,000
Total liabilities and equity 1,89,00,000

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