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 $590 million.

At the date of purchase, the book value of Vancouver's net assets was $870 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 15 years. All inventory acquired was sold during 2018.

Vancouver reported net income of $210 million for the year ended December 31, 2018. Vancouver paid a cash dividend of $50 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

Q1:

Date	Account titles and explanations	Debit ($' million)	Credit ($' million)
02-Jan-18	Investment in common stock of Vancouver	358.00
	Goodwill	232.00
	Bank		590.00
	(Being investment made in common stock of Vancouver)

Working note 1:

Note 1:
Particulars	Amount ($' Million)	Amount ($' Million)
Book value of Vancouver’s net assets as on the date of acquisition of stock		870.00
Add: Increase in fair value of:
Inventory	10.00
Plant assets	15.00
		25.00
Fair value of net assets as on the date of acquisition of stock		895.00
Share of North waste Paperboard Company	0.40
Share inn net assets (895 x 40%)	358.00
Amount paid to acquire 40% stock	590.00
Amount of goodwill as on the date acquisition (590 - 358)	232.00

Particulars	Amount ($' Million)	Amount ($' Million)
Q2
Income from investment is the amount of dividend received
(50 x 40%)	20.00
Q3
Investment in common stock of Vancouver	358.00
Goodwill	232.00
		590.00
Q4
Cash flow regarding investment activities
Investment purchased	(590.00)
Cash dividend received	20.00
Net cash used in investment activities		(570.00)