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 $560 million.

At the date of purchase, the book value of Vancouver's net assets was $855 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 $5 million for the inventory and by $30 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 $180 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

Solution:

1) All appropriate Journal entries related to the investment during 2021

Particulars (Account entries)	Debit	Credit
Investment Vancouver timber milling inc	560,000,000
To Cash		560,000,000
(being an investment in Vancouver timber milling inc)
Investment in Vancouver timber milling inc	72,000,000
To Investment income		72,000,000
($180 m * 40%)
Cash	8,000,000
To Investment in Vancouver timber milling inc.		8,000,000
($20 m * 40%)
Investment income	2,000,000
To Investment in Vancouver timber milling inc.		2,000,000
($5 m * 40%)
Investment income	800,000
To Investment in Vancouver timber milling inc.		800,000
($30 m / 15 * 40%)

2) What amount should Northwest report as its income from its investment in Vancouver for the year ended December 31, 2021?

Share in net income	72,000,000
Adjustment for:
Inventory	-2000,000
Depreciation	-800,000
Investment income	69,200,000

3) What amount should Northwest report in its balance sheet as its investment in Vancouver?

Acquisition cost	560,000,000
Investment income	69,200,000
Dividends	-8,000,000
Investment in Vancouver timber milling inc. ending	621,200,000

4) What should Northwest report in its statement of cash flows regarding its investment in Vancouver?

Cash flow from investing activities	560000000
Cash flow from operating activities	8,000,000