In: Accounting
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:
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.
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.
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 |