Question

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	Fairvalue
Cash	400000	10000	10000
Accounts receivable	80000	25000	22000
Inventory	100000	70000	75000
Plant	500000	165000	175000
Patents	100000	25000	25000
Trade marks	-	-	20000
Goodwill	120000	10000	10000
Total Assets	1300000	305000
Liabilities and Equity:
Current liabilities	160000	55000	60000
Longterm liabilities	100000	65000	60000
Common shares (at $10 per share)	1000000	100000
Retained earnings	40000	85000
Total liabilities and equity	1300000	305000

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.

Now assume that Thompson Inc. is a publicly traded company. It follows IFRS for the preparation and presentation of its annual financial reports. Based on this assumption, 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:

Wholly-Owned Subsidiary

1. Suppose Thompson Inc. purchased all the identifiable assets except cash and goodwill from Panna Corporation and assumed both the current liabilities and long-term liabilities by paying $ 210,000 cash on January 1, 2018.

• Identify the form of business combination and accounting requirements.

• Journal entry/entries required in the book of Thompson Corporation.

• Balance sheet of Thompson Inc. on January 1, 2018 after this purchase.

2. Suppose Thompson Inc. purchased all the outstanding shares of Panna Corporation for $250,000 on January 1, 2018. The amount is paid partly by cash of $125,000 and the rest by issuing 10,000 additional shares at a market value of $12.50 per share. The stock issuance costs amount to $ 5,000. In this situation, you are required to :

• Identify the form of business combination and accounting requirements.

• Journal entry/entries required in the book of Thompson Corporation.

• Consolidated Balance sheet of Thompson Inc. on January 1, 2018 after this purchase.

3. Suppose Thompson Inc. purchased all the outstanding shares of Panna Corporation for $200,000 on January 1, 2013. The amount is paid fully by cash. Legal fees for this purchase amount to $ 5,000. In this situation, you are required to :

• Give Journal entry/entries required in the book of Thompson Corporation.

• Consolidated Prepare Balance sheet of Thompson Inc. on January 1, 2018 after this purchase.

Non-Wholly Owned Subsidiary

4. Suppose, Thompson Inc. purchased 70% of outstanding shares of Panna Corporation for $ 120,000 on January 1, 2018. For non-wholly owned subsidiary, the consolidation of financial statements is a complex system. There will be two groups of shareholders – Controlling and non-controlling. There are many theories for the determination of non-controlling interest (NCI). One acceptable method of consolidating subsidiaries after January 1, 2011, is “Entity Theory”. Under this theory, the full fair value of the subsidiary is determined by combining the fair value of the controlling interest and the fair value of NCI. Another theory for the determination of NCI value is “Parent Company Extension Theory” which is also acceptable method for the valuation of NCI after January 1,2011.Under IFRS, either entity theory or parent company extension theory can be used. It is also stated in IFRS that a gain on a bargain purchase can only be recognized by the acquirer. It means NCI must be measured at its share of fair value of the identifiable net assets. In this situation, you are required to –

• Explain the appropriate theory applicable for NCI valuation.

• Prepare Balance sheet of Thompson Inc. on January 1, 2018 after this purchase.

Answer 1

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