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, 2018, for $420 million.

At the date of purchase, the book value of Vancouver's net assets was $785 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 2018.

Vancouver reported net income of $160 million for the year ended December 31, 2018. Vancouver paid a cash dividend of $30 million.

Required:
1. Prepare all appropriate journal entries related to the investment during 2018.
2. What amount should Northwest report as its income from its investment in Vancouver for the year ended December 31, 2018?
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

(1).

Date	Accounts Title & Explanation	Debit	Credit
Jan. 2, 2018	Investment in Vancouver’s Shares	$420
	Cash		$420
	(To record purchase of shares of Vancouver)
Dec.31, 2018	Investment in Vancouver’s Shares	$64
	Investment Revenue ($160 * 0.4)		$64
	(To record investment revenue)
Dec.31, 2018	Cash ($30 * 0.4)	$12
	Investment in Vancouver’s Shares		$12
	(To record receipts of dividend)
Dec.31, 2018	Investment Revenue ($5 * 0.4)	$2
	Investment in Vancouver’s Shares		$2
	(To record adjustment for fair value of inventory)
Dec.31, 2018	Investment Revenue ($30 / 15) * 0.4	$0.8
	Investment in Vancouver’s Shares		$0.8
	(to record adjustment for depreciation of plant)

(2).

Northwest should report as its income from its investment in Vancouver for the year ended December 31, 2018 = $61.20 Million

Explanation;

Income from its investment in Vancouver will be calculated as follow;

$64 million – $2 million - $0.8 million = $61.2 million

(3).

Northwest should report in its balance sheet as its investment in Vancouver = $469.2 million

Explanation;

Cost of investment	$420 million
Add: Share in income	$64 million
Less: Dividends received	($12) million
Less: Inventory adjustment	($2) million
Less: Depreciation adjustment on plant	($0.8) million
Investment in Vancouver	$469.2 million

(4).

Operating cash inflows = 12 million

Investing cash outflows = ($420) million

Explanation;

Operating cash outflow is calculated as follow;

Net income – (Closing value of investment – Beginning value of investment)

$61.2 million – ($469.2 – $420) = 12 million

Investing cash outfows is given in the question because it has purchased shares on January 2, 2018 for $420 million.