Investment in Associate – Equity Method (Lesson 5 Summary Problem)

INCO Ltd. purchased 25% of AMCO on January 1, Year 1, and uses the equity method to account for its investment. At that time, the carrying value and FV of AMCO’s identifiable net assets were equal. The goodwill at acquisition was determined to be $7,000.

As at December 31, Year 4, INCO reported its investment in AMCO at $390,000 on its SFP. On February 1, Year 5, INCO sold its investment in AMCO for $400,000. AMCO reported comprehensive income of $10,000 for the month of January Year 5. AMCO declared $16,000 in dividends on January 10, Year 5.

Which of the following items would be included in INCO’s journal entry for the sale of its investment in AMCO? Assume that INCO reports using the IFRS framework.

he dividends declared in January Year 5 were not deducted from the investment account. Incorrect calculation: [$390,000 + ($10,000 × 25%)] = $392,500.

In Year 1, Lefty Ltd., a publicly accountable enterprise, purchased 32% of the common shares of Right Corp. At the time, there were no FV differentials.

In Year 2, Lefty sold inventory to Right for $80,000. $15,000 of this inventory was sold by Right in Year 3, with the rest sold by Right in Year 2. Also, during Year 3, Lefty sold additional inventory to Right for $60,000, of which $30,000 remains in inventory at year end. Lefty earns a gross profit of 35% on sales of its inventory.

During Year 3, Right earned profit of $200,000.

What is the amount of equity income reported by Lefty in Year 3?

Equity income for Lefty’s investment in Right for Year 3 is calculated as follows:

Lefty's share of Right's profit: $200,000 × 32%	$64,000
Current-period amortization of FV differentials
Realized profit on inventory sold to Right in Year 2
$15,000 × 35% gross profit × 32% ownership	1,680
Unrealized profit in Right's inventory on hand at year end Year 3
$30,000 × 35% gross profit × 32% ownership	(3,360)
Equity income	$62,320

Plotting Corp. owns a 45% investment in an associate, Map Corp. As at June 30, Year 1, Plotting’s year end, the investment has a carrying value of $330,000 and an FV of $350,000.

Which of the following describes how the investment in Map should be presented on Plotting’s SFP as at June 30, Year 1? Assume that Plotting reports using IFRS.

As a current asset at $350000

Gem Corp. purchased 30% of the outstanding common shares of Rock Corp. on December 31, Year 1, for $700,000 and transaction costs of $4,500. On this date, the carrying value of Rock’s common shares and retained earnings were $300,000 and $1,500,000, respectively. Gem’s controller determined that the company has significant influence over Rock and that Gem reports using IFRS. The FV of Rock’s identifiable net assets was equal to their carrying value except for a patent, whose FV was $200,000 with a carrying value of zero. The patent is expected to have a remaining useful life of 10 years.

What is the value of goodwill arising from the acquisition?

The goodwill arising on acquisition of the investment is calculated using the acquisition differential schedule as follows:

Purchase price		$   700,000
Plus: transaction costs		4,500
Total investment in associate		704,500
Less:
Net BV of Rock ($300,000 + $1,500,000)	$1,800,000
Percentage acquired	30%	540,000
Acquisition differential		164,500
Allocated to FV differential on patent ($0 − $200,000)	(200,000)
Percentage acquired	30%	(60,000)
Goodwill on acquisition		$   104,500

In Year 1, Super Inc., a publicly accountable enterprise, purchased a 25% equity interest in Mini Corp. for $850,000. Super has accounted for its investment as an investment in an associate. On June 30, Year 8, the BV of Super’s investment in Mini was $790,000.

On July 1, Year 8, Super acquired an additional 30% interest in Mini for total consideration of $900,000. Super must now account for its interest in Mini as an investment in a subsidiary.

Which of the following journal entries is required by Super to account for this change in ownership of Mini?

The investment in associate account is decreased by its FV ($790,000 BV – $40,000 loss on revaluation to FV = $750,000). The cash is decreased by the purchase price. Finally, the investment in the subsidiary is record for the FV of the total investment ($900,000 price / 30% purchased = $3,000,000 total imputed FV × 55% owned = $1,650,000).

Mark Ltd. (ML) historically held 30,000 common shares of Amaya Corp. (AC), representing a 30% ownership interest. On March 1, Year 1, ML sold 10,000 shares of AC to an unrelated significant shareholder of AC for $100,000, retaining 20,000 shares and a 20% ownership interest. Pertinent facts follow:

• Both companies have a February 28 year end and report under IFRS.

• ML continues to exert significant influence over AC.

• As at February 28, Year 1, the balance in ML’s investment account pertaining to this investment was $225,000.

Which of the following statements accurately describes the total effect of the journal entry or entries ML will record on March 1, Year 1, as a result of the transaction described above?

The gain is calculated as: $100,000 – {$225,000 × [(30% – 20%) / 30%]} = $25,000.

The journal entry to record ML’s decrease in ownership interest of AC is:

DR Cash	100,000
CR Investment in associate		75,000
CR Gain on sale of investment in associate		25,000