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, 2016, 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 2016. Vancouver reported net income of $180 million for the year ended December 31, 2016. Vancouver paid a cash dividend of $20 million.

Required: 1. Prepare all appropriate journal entries related to the investment during 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

2. What amount should Northwest report as its income from its investment in Vancouver for the year ended December 31, 2016? (Enter your answer in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

3. What amount should Northwest report in its balance sheet as its investment in Vancouver? (Enter your answer in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

4. What should Northwest report in its statement of cash flows regarding its investment in Vancouver? (Enter your answers in millions. (i.e., 10,000,000 should be entered as 10).)

Answer 1

Answer

1.

Appropriate journal entries related to the investment during 2016:

Date	Particulars	Dr (in millions)	Cr (in millions)
1.	Investment Revenue	$0.80
	Investment in Vancouver inc.		$0.80
	(To record the additional depreciation )
2.	Investment Revenue	$2
	Investment in Vancouver inc.		$2
	(To record the adjustment of excess fair value of inventory)
3.	Investment in Vancouver inc.	$560
	Cash		$560
	(To record the investment)
4.	Investment in Vancouver inc.	$72
	Investment revenue		$72
	(To record the investment revenue)
5.	Cash($20*40%)	$8
	Investment in Vancouver inc.		$8
	(To record the dividend received in cash)

Working:

1.

Depreciation = Diff in value* share of Northwest Company/ life of asset

                   =30million*40%/15years = 0.80million

2.

Adjustment amount = Diff amount*share of Northwest Company

                             =5million*40% = 2million

4.

Shares of income = Total income*share of Northwest Company

                           =180million*40% =72million

2.

Amount should Northwest report as its income from its investment in Vancouver for the year ended December 31, 2016:

Particulars	Amount(in millions)
Share of income($180*40%)	$72
Less:Adjustments
1.Depreciation	($0.8)
2.inventory	($2)
Investment revenue	$69.2

3.

Amount should Northwest report in its balance sheet as its investment in Vancouver:

Particulars	Amount(in millions)
Cost of investment	560
Share of income($180*40%)	72
Less:Dividend	8
Less:Adjustments
1.Depreciation	(0.8)
2.Inventory	(2)
Investment revenue	621.20

4.

Northwest report in its statement of cash flows regarding its investment in Vancouver:

Particulars	Amount(in millions)	Amount(in millions)
Operating Activities:
Net income
Less: dividend income	($8)
Investing Activities:
Dividend Received		$8
Purchase of investment		($560)