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 $490 million.

At the date of purchase, the book value of Vancouver's net assets was $820 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 12 years. All inventory acquired was sold during 2021.

Vancouver reported net income of $230 million for the year ended December 31, 2021. Vancouver paid a cash dividend of $50 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

Solution

1. Journal Entries

Working Note :

1) Share of  Revenue in Vancouver Inc. = $230 Million * 40 % = $ 92 Million

2) Share in Dividend Received in Vancouver Inc. = $50 Million * 40 % = $ 20 Million

3) Adjustment of Inventory = Exceeded fair value of Inventory * 40%

= $10 Million * 40%

= $4 Million

4) Adjustment of Depreciation = (Exceeded fair value of Plant * 40%) / Useful life of Plant

= ($15 Million * 40%) / 12 Years

= $0.5 Million

2. Income from its investment in Vancouver:

Amount of Income from Investment for year ending December 31, 2021 would be:

= Investment Revenue - Adjustments

= $92 Million - $4 Million - $0.5 Million

= $87.5 Million

Therefore, Northwest will report $87.5 Million as its income from its investment in Vancouver for the year ended December 31, 2021.

3. Investment Value in Balance Sheet

Northwest would report $557.50 Miilion in its balance sheet as its investment in Vancouver.

4. Cash Flow statement regarding Investment

Cash flow from Operating Activities

Net Income from Investment	$87.5 Million
Less: Gain on Investment value ( 557.5 - 490)	($67.5 Milllion)
Cash flow from Operating Activities	$20 Million

Therefore, Operating cash inflow of $20 Million.

Cash flow from Investing Activities

Purchase of Shares in Vancouver	($490 Million)
Cash flow from Investing Activities	($490 million)

Therefore, Investing Cash Outflow of $490 Million.