Ch06 beechy ism

CHAPTER 6
Subsequent-Year Consolidations:
General Approach
This chapter presents the last of the material that is crucial to an understanding of
intercorporate investments, business combinations, and consolidations. The material in the
Appendices to Chapter 6 (parent company investment in non-voting shares and
intercompany bond holdings involving premiums or discounts) are additional aspects that
are interesting and that occasionally arise in Canadian practice, but are not central
concepts of consolidations.
The previous two chapters illustrated intercompany sales of inventory and non-depreciable
capital assets, but avoided the additional complexity of intercompany sales of depreciable
capital assets. Therefore, this chapter begins with a discussion of such asset transfers.
The second major section presents the general approach to subsequent-year
consolidations. The example is of consolidation of a non-wholly owned subsidiary that
was acquired in a business combination—the most complex example. Consolidation of
wholly owned subsidiaries is simpler, and consolidation of wholly owned subsidiaries that
were founded by the parent are simpler still (and much more common). The direct
approach to consolidation is used throughout, as in the preceding chapters. The
worksheet approach is available on the companion website to this text. Equity basis
reporting and consolidated reporting of discontinued operations is also discussed.
Appendix 6A addresses those circumstances where the investee company has outstanding
restricted and/or preferred shares in addition to common shares. The treatment of these
preferred shares, whether owned by the parent company or by outside interests, on
consolidation is discussed. The impact of restricted shares on control and the allocation of
earnings is also discussed.
Appendix B to Chapter 6, available only online, discusses consolidation of
intercompany bond holdings. The Appendix illustrates both the par value and agency
approaches to intercompany bond holdings, including the impact on non-controlling
interest of each approach. Although the challenges presented by open-market
purchases of a related company’s bonds at a premium or discount are intellectually
interesting, such transactions are very seldom encountered in Canadian practice.
This appendix may be omitted without seriously jeopardizing students’
understanding of consolidations.
Copyright © 2014 Pearson Canada Inc. 290

Chapter 6 – Subsequent-Year Consolidations: General Approach
SUMMARY OF ASSIGNMENT MATERIAL
Case 6-1: International Consolidators Inc.
An analyst friend compares the return on equity calculated based on consolidated numbers two years after the
acquisition of the subsidiary with the return on equity of the parent and the subsidiary at the time of the
acquisition of the latter and concludes that there is no synergy between them. Students are required to adopt
the role of the friend of the analyst and are required to first calculate the separate entity financial statements
of the parent using the consolidated statements and the separate entity statements of the subsidiary, and
second to explain to the friend why consolidation-related adjustments might be clouding the return on equity
calculation based on the consolidated statements. Students are also required to explain whether and to what
extent the various financial statements truly represent the operations and financial position of the two entities.
Case 6-2: Alright Beverages Ltd.
Alright Beverages Ltd. is a multi-topic case that deals primarily with the reporting issues that arise from a
series of transactions among related companies. It is a demanding case that requires students to look beyond
the surface implications.
Case 6-3: Le Gourmand
Half of the issued voting shares of a small company have been purchased by the company’s largest customer.
Ownership of the other half of the voting shares is somewhat diffuse and the shareholders are disinterested in
the affairs of the company. Has the new owner acquired control? The case requires a discussion of the
alternative accounting options and a recommendation. A calculation of net income is also required.
Case 6-4: Constructive Inspirations Inc.
This case is quite demanding, especially when assigned as an exam question. It tests students’ understanding
of how consolidation-related adjustments relating to a non-wholly owned subsidiary purchased a few years
ago impact current net income and ending owners’ equity.
A couple is divorcing amicably, and the divorce settlement requires the valuation of an architectural company
run by one of them. Valuation is to be based on the greater of six times net income or ending owners’ equity,
both calculated based on IFRS. The architectural company, along with the friends of the architect spouse,
owns shares in a supplier of architectural products. The appropriate accounting option to account for this
investment has to be recommended. A discussion of the impact of consolidation-related adjustments on net
income and owners’ equity respectively is required. The case also requires a discussion of the “fairness” of
using IFRS-based financial statements for determining the company’s value.
P6-1 (20 minutes, medium)
This problem requires adjustments over a four-year period, ignoring taxes, for an intercompany depreciable
capital asset sale. There is a non-controlling interest in the subsidiary, and the sale is upstream.
Upstream sale of a 70% depreciated asset by an 80% owned subsidiary. The need to restore the original
accumulated depreciation adds a slight twist to the exercise. Eliminations for two non-consecutive years are
required.

This problem examines the adjustments required for an unrealized profit in inventory and a gain on the sale of
land, both upstream, where there is a 30% non-controlling interest over a two-year period.
Intercompany sales of inventory, land and building between a parent and two subsidiaries (80% and 70%
owned). Eliminating entries and NCI effects are required.
Calculation of NCI and consolidated net income four years after acquisition. A good problem for practice at
applying the techniques of consolidation without going through an entire set of consolidated statements.
Computation of consolidated net income and retained earnings for a parent and two subsidiaries. The
emphasis is on intercompany sales of inventory wherein one subsidiary sells to the parent, which in turn sells
to the other subsidiary.
P6-7 (45 minutes, easy)
This is a straight-forward exercise on preparing a consolidated statement of financial position five years after
acquisition. It is a good practice exercise (or examination question) as it contains no unexpected twists.
Cost versus equity reporting of the investment account five years after purchase. Includes amortization of a
FVI on a building.
Calculation of equity-basis earnings and investment account one year following acquisition. This problem
illustrates equity-basis adjustments for FVI’s, but does not include any intercompany transactions. P6-10
extends this problem for one more year and does include intercompany sales of inventory and unrealized
profits.
This is an extension of P6-9 that adds intercompany transactions and unrealized profits. Equity-basis
investment income and investment account balance are required, two years after the investment.
Cost versus equity reporting of a 30% investment three years after purchase. An equity-basis investor
statement of comprehensive income is required, plus determination of the investment account. There are no
FVIs or intercompany transactions.
This problem involves investments in three other companies, with two reported on the equity basis and one
on the cost basis. Discussion of the appropriateness of the cost and equity methods is required. The
transactions and the entries required cover a one-year period.
Consolidated SFP amounts (not a full SFP) and equity basis earnings in the subsidiary are required for an

80% subsidiary four years after acquisition. There are several unrealized profits (and one intercompany loss
that may be assumed to reflect a decline in recoverable value).
Preparation of a consolidated statement of financial position following upstream sales of inventory and a
downstream sale of equipment.
Calculation of the carrying value of goodwill when 80% of the shares have been purchased, preparation of a
consolidated statement of comprehensive income three years later, including upstream and downstream
unrealized profits and calculation of inventory and non-controlling interest on the statement of financial
position three years later.
This problem requires the calculation of consolidated net income and selected SFP amounts two years after
the purchase of a 70% interest in a subsidiary. In addition, the journal entry at the time of acquisition is
required.
This problem requires the preparation of a consolidated statement of comprehensive income and consolidated
statement of retained earnings six years after a 70% purchase, the calculation of consolidated retained
earnings at the beginning of the year and an explanation of the treatment of the unrealized profit on an
equipment sale. A number of adjustments are required including fair value increments, unrealized profits on
inventory (upstream) and a gain on sale of equipment (downstream). This problem also includes an
impairment of goodwill.
This problem requires the preparation of a consolidated statement of comprehensive income and the
calculation of specific accounts on the consolidated statement of financial position six years after a 70%
acquisition. In addition to unrealized upstream inventory profits, this problem incorporates the sale to
external parties of a trademark with an unrealized gain.
This problem is similar to P6-16 as it requires the preparation of a consolidated statement of comprehensive
income and the calculation of specific accounts on the consolidated statement of financial position four years
after a 70% acquisition. There are a number of adjustments including an unrealized profit on an upstream
land sale, downstream unrealized inventory profits and a goodwill impairment.
P6-20 (45 minutes, difficult)
The challenge in this problem is in preparing the consolidated statement of comprehensive income given a
variety of intercompany sales and other intercompany transactions. A challenging and worthwhile problem.
Case 6A-1
This case is an adaptation of the comprehensive exam of the 1999 UFE. The students need to consider the
impact of an acquisition on the EPS and accounting policies. There is a potential for loss of control
depending on the method of financing that is selected for the acquisition. Audit issues also need to be
considered.

Case 6A-2
It is not always clear just when a joint venture qualifies for joint venture accounting. In this case, a joint
venture is described in which one partner does have a majority of the board of directors but is restricted in its
control by only 50% voting rights and by a joint venture agreement that requires consent of both co-ventures
for substantive alteration of the terms. The case asks students to discuss the appropriateness of using four
methods of accounting for the investment.
P6A-1 (40 minutes, easy)
This is an exercise in separating the reporting effects of an investment in both common and preferred shares.
Equity reporting is assumed rather than consolidation.
P6A-2 (45 minutes, medium)
A consolidated statement of financial position is required where the parent owns a portion of the outstanding
preferred shares. The purchase price of the subsidiary’s share differs from the redemption value.
P6A-3 (15 minutes, easy)
Calculation of the non-controlling interest on the consolidated statement of financial position at the date of
acquisition and one year later is required. The subsidiary has preferred and common shares outstanding and
the parent owns 80% of the common shares.
P6B-1 (20 minutes, medium)
Elimination entry for an intercompany bond investment in a subsidiary, assuming first that the subsidiary is
wholly owned, and then that it is 75% owned. Both agency and par value approaches are required.
Calculation of selected amounts one year after acquisition of an 80% interest, given downstream sales of
inventory and land and a purchase of subsidiary bonds by the parent at a premium.
This problem has two distinct and separable parts: (1) an upstream sale of land and buildings by one
subsidiary, and (2) a purchase of another subsidiary’s bonds by the parent. Statement amounts are required
(including non-controlling interest in earnings) rather than eliminating entries. The bond aspect requires use
of the par-value method.
A consolidated statement of comprehensive income is required, plus calculation of specified statement of
financial position amounts. The bond transaction does not affect non-controlling interest. The fixed asset sale
is upstream.
ANSWERS TO REVIEW QUESTIONS
Q6-1: Profits on intercompany sales are unrealized when the merchandise or other assets have not been
resold to outside third parties or been consumed by amortization or depreciation.
Q6-2: The unrealized loss on sale of a capital asset at its fair market value may or may not be eliminated on

consolidation. The key question is whether the reduced fair market value reflects an impairment in the value
of the asset. Under IFRS, an impairment loss exists when the carrying value of the asset exceeds its
recoverable value. The recoverable value of an asset represents the higher of its (1) fair value less costs to
sell, and (2) value in use. If the original carrying value of the asset still does not exceed the asset’s
recoverable value to the consolidated enterprise despite the low resale value, then the loss would be
eliminated. If, on the other hand, the resale value is low because the recoverable value of the asset has been
impaired, the intercompany loss would not be eliminated.
Q6-3: When assets are sold horizontally between non-wholly owned subsidiaries, the unrealized profit is in
the accounts of the selling company. Further, such sales are treated as upstream sales. Therefore, 100% of
the unrealized gains has to be eliminated in the consolidated financial statements, allocating 60% to the
parent’s owners and the rest, 40%, to the non-controlling interest. Thus, while the consolidated net income
should be adjusted to the full extent of the unrealized gain of $20,000, 60% or $12,000 should be allocated
to the owners of P and 40%, $8,000 should be allocated to the non-controlling interest.
Q6-4: Equity-basis earnings should be adjusted for the investor company’s share of unrealized profits from
sales between significantly influenced investee corporations. In this example, $20,000 of unrealized profit is
in the reported net income of IE1, of which IR has a 30% share. Therefore, the adjustment to IR’s share of
IE1’s earnings will be $6,000.
Q6-5: The profit on an intercompany sale of a depreciable asset is gradually realized over the productive life
of the asset, as the asset is used in the revenue generating activities of the buying company. In accounting
terms, the using up of the asset is reflected by depreciation. Therefore, the unrealized profit is realized year-
by-year as the asset is depreciated.
Q6-6: If a company sells a long-lived asset that is part of its inventory, either upstream or downstream, it is
accounted for as sales revenue with offsetting cost of sales instead of as a gain on sale. The gross profit on
the sale would still be considered unrealized.
Q6-7: IAS 38, Intangible Assets, requires disclosure of the gross carrying amount and any accumulated
amortization at the beginning and end of each period for each class of intangible assets. Therefore, entities
following IFRS will need to keep track of the gross and accumulated amortization amounts separately in
different accounts for various classes of intangible assets. Such requirements apply to capital assets as well.
Hence, under IFRS, adjustments required upon the sale of an intangible asset with a limited life such as a
patent will be the same as the adjustments required on the sale of a capital asset. However, earlier standards
did not impose the same disclosure requirements as required under IFRS for intangible assets. Therefore, a
separate accumulated amortization amount may not have been maintained in relation to these intangible
assets. In such an event, upon the sale of an intangible asset instead of a capital asset, the two amounts for
the asset account and the accumulated amortization account would have been netted together.
Q6-8: Consolidated retained earnings is comprised of the parent’s retained earnings, plus the parent’s share
of earnings retained by the subsidiary since the date of acquisition (less any unrealized profits of the parent,
the parent’s share of any unrealized profits of the subsidiary, and amortization of any fair-value increments,
decrements or goodwill).
Q6-9: Ordinarily, any unrealized profit on an upstream intercompany asset sale is deducted from the recorded
carrying value of the asset on the parent’s books and from the consolidated retained earnings. However, a
subsidiary might sell an asset on which an unamortized fair value increment from the time of the purchase of

the subsidiary by the parent exists. In such a case, the unamortized fair value increment reduces the
unrealized profit from the viewpoint of the consolidated entity. Therefore, the unrealized profit elimination is
not for the amount of profit booked by the subsidiary but is for the difference between the intercompany sales
price and the amortized fair value of the asset (i.e. carrying value of the asset from the consolidated
perspective). The remaining gain will be offset by the unamortized fair value increment adjustment.
Q6-10: In the year of the sale, any unamortized fair value increment on the asset sold is charged to the gain
or loss that has been recorded for the sale. In subsequent years, the charge will be to consolidated retained
earnings.
Q6-11: When the equity method is used for recording, the parent’s share of the subsidiary’s earnings is
included in the parent’s retained earnings. Since the same amounts also appear in the subsidiary’s retained
earnings, the subsidiary’s earnings will be counted twice unless they are adjusted. Therefore, the process of
consolidation under the equity method differs from the process under the cost method of recording only in
that the equity pick-up of earnings made by the parent must be reversed or eliminated in order to avoid
double counting the earnings and the investment account must be eliminated.
Q6-12: The equity-basis balance represents the parent’s share of the amortized fair values of the subsidiary’s
net assets as originally acquired, plus the parent’s share of the change in the subsidiary’s net assets since the
date of acquisition less/plus any unrealized gains/losses relating to inter-company transactions at year-end.
Q6-13: Under equity basis reporting, the “equity in earnings” captures all of the effects of the relationship
between the investor and the investee corporations, without disturbing the basic financial reporting of the
activities of the parent or investor corporation. In addition, the “equity in earnings” reflects the change in the
investor’s investment account and all changes in net asset values that relate to that account.
CASE NOTES
Case 6-1
Role:
First, prepare the separate entity financial statements of ICI and the associated calculations. Second, compare
the financial statements prepared by me with the consolidated statements of ICI and the separate entity
statements of PTI and explain to my friend how the consolidation-related adjustments may potentially mask
the presence of synergy between ICI and PTI. Third, explain to my friend to what extent the separate entity
and consolidated financial statements of ICI appropriately reflect the true economic operations and situation
of ICI.
Constraints:
Since ICI has used IFRS to arrive at its financial statements, all consolidation-related adjustments required
under IFRS need to be undone.
Critical Success Factors:
Correctly prepare the separate entity FS of ICI and explain to my friend using non-technical language the
impact of consolidation-related adjustments on the financial results reported by ICI in its consolidated
financial statements. Further explain to my friend to what extent the separate entity and consolidated financial

statements of ICI respectively reflect its true economic operations and position.
Users & Objectives:
The financial statements and my report are being prepared for the sole use of my friend. My friend is trying to
analyze the financial results of ICI from the point of view of an analyst; specifically he is looking to see
whether the synergy between ICI and PTI touted by the management of ICI at the time of its acquisition of
PTI is indeed present. There are no other users of the financial statements and report prepared by me.
However, the financial statements provided to me, the consolidated financial statements of ICI and the
separate entity financial statements of PTI were prepared and reported by their respective management and
thus may be biased to the extent the respective management teams have tried to meet their objectives keeping
in mind the users of their respective financial statements and their objectives.
Separate Entity Financial Statements of ICI and Related Calculations:
Check to ensure no gain on bargain purchase:
Assets $4,150,000
Liabilities 600,000
$3,550,000
80% share 2,840,000
Purchase price 3,220,000
Excess of purchase price over share of net identifiable assets $380,000
Therefore, there is no gain on bargain purchase.
Measure:
Purchase price
$3,220,00
0
Grossed-up fair value based on purchase price
$4,025,00
0
Carrying value of assets 950,000
Fair value adjustment
$3,075,00
0
Carrying
Fair
Value FVA FVA All.
FVA
All.
FVA All.
Total
Assets
Cash $75,000 $75,000 $0 $0 $0
Inventory 75,000 150,000 75,000 75,000 75,000
Accounts receivables 200,000 375,000 175,000 175,000 175,000
Buildings 500,000 600,000 400,000 (300,000)
400,00
0 400,000
Acc. depreciation--buildings (300,000) 300,000
Plant & equipment 800,000 700,000 300,000 (400,000)
300,00
0 300,000
Acc. depreciation--plant &
equipment (400,000) 400,000
Land 500,000
1,500,00
0 1,000,000
1,000,00
0 1,000,000
Patents 750,000 750,000 750,000 750,000

Liabilities & Owners’
Equity
Accounts payable $200,000 $200,000 $0 0
Long-term debt 300,000 400,000 (100,000) (100,000) (100,000)
FVA allocated to net identifiable assets
$2,600,00
0
Goodwill $475,000
FVA Total
Useful
life
Amort./
year 20X6 20X7 Balance
Inventory $75,000 $75,000 $0
AR 175,000 175,000 0
Buildings 400,000 10 40,000 40,000 40,000 320,000
Plant &
Equipment 300,000 10 30,000 30,000 30,000 240,000
Land 1,000,000 1,000,000
Patents 750,000 10 75,000 75,000 75,000 600,000
Long-term Debt (100,000) 10 (10,000) (10,000) (10,000) (80,000)
Goodwill 475,000 300,000 175,000
Total $3,075,000 $385,000 $435,000
$2,255,00
0
Eliminate:
Eliminate Intercompany Transactions & Balances
Downstream Sales $1,472,900
Upstream Sales 1,499,680
Inter-company dividends 48,000
Eliminate Unrealized Gains:
Gross profit percentage on upstream sales
Gross profit $1,387,204
Revenue 3,749,200
37%
Gross profit percentage on downstream sales (provided) 45%
Upstream
Beginning inventory $100,000
Realized gain 37,000
Ending inventory $150,000

Unrealized gain 55,500
Downstream
Beginning inventory $40,000
Realized 18,000
Ending inventory $50,000
Unrealized 22,500
Unrealized and Realized Gain on Upstream Sale of Depreciable Asset:
Sale price $200,000
Original cost $200,000
Accumulated depreciation 100,000
Carrying value 100,000
Gain 100,000
Remaining useful live 10
Additional depreciation charged by ICI 10,000
Separate Entity Statements of ICI:
Consolidated SCI of ICI for the Year
Ended December 31, 20X7
PTI SE SCI
Subtracted Consolidated Adjustments Undone ICI SE SCI
Sales Revenue $6,668,220 $3,749,200 1,472,900 1,499,680 $5,891,600
COGS 2,652,796 2,361,996 1,472,900 1,499,680 37,000 18,000
(55,500) (22,500) 3,240,380
Gross profit $4,015,424 1,387,204 2,651,220
Dividend Income $0 48,000 48,000
Amortization expense 365,000 50,000 (40,000) (30,000) (75,000) 10,000 180,000
Administrative expenses 1,109,404 412,412 10,000 706,992
Selling & marketing
expenses 1,643,530 612,500 1,031,030
Loss on impairment of
goodwill 300,000 (300,000) 0
Income tax expense 209,098 62,458 146,640
Net income and
comprehensive income $388,392 249,834 634,558
Allocated to:
Shareholders of ICI $667,125
Non-controlling interest $21,267

Statement of Changes in Equity—Retained Earnings Section
Cons. ICI SE ICI
BRE parent $1,386,732 1,598,460
Net income attributable to
shareholders of ICI 427,125 634,558
Dividends for the year (200,000) (200,000)
Ending RE $1,613,857 2,033,018
SFP as of December 31, 20X7
Cons. ICI PTI SE Consolidated Adjustments Undone ICI SE
Assets
Cash $515,202 $252,184 $263,018
Inventory 252,000 80,000 55,500 22,500 250,000
Accounts receivables 555,000 225,000 330,000
Buildings 2,100,000 500,000 300,000 (400,000) 1,500,000
Acc. depreciation—
buildings (990,000) (340,000) (300,000) 80,000 (870,000)
Plant & equipment 2,700,000 600,000 400,000 (300,000) 2,200,000
Acc. depreciation--plant
& equipment (1,540,000) (360,000) (400,000) 60,000 (20,000) 100,000 (1,440,000)
Land 3,250,000 800,000 (1,000,000) 1,450,000
Patents 600,000 (750,000) 150,000 0
Investment in PTI 0 3,220,000 3,220,000
Goodwill 175,000 (475,000) 300,000 0
TOTAL ASSETS $7,617,202 $1,757,184 $6,903,018
Liabilities & Owners’
Equity
Accounts payable $422,510 $172,510 $250,000
Long-term debt 655,000 175,000 (100,000) 20,000 400,000
Contributed capital 4,220,000 500,000 4,220,000
Retained earnings 1,613,857 909,674 2,033,018
NCI 705,835 0
TOTAL LIABILITIES
& OWNERS' EQUITY $7,617,202 $1,757,184 $6,903,018

Independent Calculation of SE Beginning RE of ICI (not required):
Beg. SE RE ICI $1,598,460
Beg. RE PTI
Ending RE $909,674
Less income for the year (249,834)
Add dividends declared for the year 60,000
Beg. RE 719,840
RE at acquisition 450,000
Change in RE 269,840
Less FVA amortization 20X6 (385,000)
Less gain on sale of P&E (100,000)
Add realization of gain 10,000
Unrealized gain beginning upstream (37,000)
Adj. change RE of PTI (242,160)
ICI's share (193,728)
Unrealized gain beginning downstream (18,000)
Consolidated Beg. RE ICI $1,386,732
Independent Calculation of SE Ending RE of ICI:
RE Ending $2,033,018
Less Unrealized gain ending (22,500)
RE Ending 909,674
RE acquisition (450,000)
Change in RE 459,674
Less Unrealized gain ending (55,500)
Less unrealized gain P&E (80,000)
Adj. change in RE (495,826)
Parent's share (396,661)
Consolidated End RE ICI $1,613,857
Analysis of Financial Statements & Report to Friend:
I have calculated different returns on equity measures based on the separate entity financial statements of ICI
and PTI respectively, and alternate returns on equity measures based on the consolidated financial statements
of ICI. While these different measures can be used to compare the performance of ICI and PTI in 20X7 with
their performance at the time of the acquisition of PTI, it is important to understand that such comparison
may not necessarily shed light on the presence or absence of synergy between ICI and PTI.

Return of Equity of PTI in 20X7
Owners' equity $1,409,674
Net income 249,834
Return on equity 17.72%
Consolidated Return on Equity of ICI in 20X7 (provided):
Total owners' equity including NCI equity $6,539,692
Consolidated net income and comprehensive income 388,392
Alternate Consolidated Return on Equity of ICI in 20X7 Excluding NCI:
Owners' equity excluding NCI equity $5,833,857
Net income attributable to shareholders of ICI 427,125
7.32%
Return of Equity of ICI in 20X7:
Owners' equity $6,253,018
Net income 634,558
The provided returns on equity of PTI and ICI at the time of acquisition are 20.42% and 10.69%
respectively. In comparison, the returns on equity of PTI and ICI for 20X7, as calculated above, are 17.72%
and 10.15%. Thus, both returns on equity in 20X7 are lower than their comparatives at the time of
acquisition. However, notice that both these returns of equity are far above the alternate returns on equity
calculated based on the consolidated numbers, 5.94% and 7.32%. In short, the returns on equity based on the
separate entity financial statements of PTI and ICI are not as bad as those based on the consolidated financial
statements. The reasons for this disparity are:
• The loss of $300,000 recognized in the consolidated SCI relating to the impairment of the goodwill
arising from the acquisition of PTI,
• The fair value adjustment amortization of $135,000 relating to the identifiable net assets of PTI on the
consolidated SCI in 20X7,
• The unrealized gains present in the ending inventories of PTI and ICI relating to the inter-company sales
of inventory between them being higher by $23,000 compared to the unrealized gains in the beginning
inventories of the two companies.
Note that these additional expenses/adjustments do not show up on the separate entity financial statements of
PTI. Thus, comparing the consolidated results with the results of PTI at the time of its acquisition, based on
its separate entity statements at that time, is incorrect. Nevertheless, note that the consolidated adjustments
highlighted above are done for genuine reasons. When one company controls another, the consolidated
statements should represent only the results of those transactions that exist between the consolidated entity
and outside entities. Otherwise, a consolidated entity can very easily inflate the results presented in the
consolidated statements by suitably structuring inter-company transactions.
Additional consolidation-related adjustments include the elimination of upstream as well as downstream sales

between ICI and PTI. Such sales represent 28.53% of the total sales of ICI and PTI. Thus intercompany sales
represent a significant proportion of the total sales of the two entities and indicate the presence of strong
links and potential synergy between them. It is not clear whether such inter-company transactions existed
prior to the acquisition of PTI and ICI. This opens up the question of why ICI acquired PTI in the first place.
ICI may have acquired PTI to consolidate the market for the products of the two companies, or to fend off a
competitor from acquiring PTI. ICI may have perceived that the market for its products is slowly drying up
or the profit margins are being squeezed, and thus might have purchased PTI to prevent further erosion of its
market share or profitability. If that was the aim of acquiring PTI, the acquisition may indeed have achieved
its desired purpose despite the subsequent decrease in the return on equity.
Therefore, it is not clear why the management of ICI decided to take an impairment loss of $300,000 in
relation to the goodwill arising from the acquisition of PTI. While the separate entity returns on equity of PTI
and ICI in 20X7 are no doubt lower than their counterparts at the time of the acquisition of PTI, the
differences between them do not appear to be that large so as to warrant writing off the goodwill. There may
be many different reasons for such a decrease, some of which were already pointed out earlier. Further, the
recent downturn in the economy may be temporarily depressing the returns of the two companies. In such an
event I think writing off the goodwill may not be warranted. On the other hand, and notwithstanding the
previous reasons, the decrease in the returns on equity may indeed indicate a permanent decrease in the
profitability of the two companies, meaning that the expected synergy has not occurred. Therefore, if the
goodwill was paid in relation to the expected synergy it is appropriate to write-off the portion of the goodwill
that has no future value. The performance of the combined entity with those of other companies in the same
industry may provide some clues on this issue. However, such comparison has to be done with caution, since,
as we have already seen, the method and type of accounting adopted by individual companies can have a
significant impact on their returns, thereby making an one-on-one comparison of their results with those of
other companies difficult if not impossible.
Another reason for exercising caution while using consolidated SFP numbers is the fact that the consolidated
SFP includes the net assets of ICI at their carrying values, while including the net assets of PTI at their fair
values at the time of PTI’s acquisition less related amortization. This is like trying to add apples to oranges.
Thus, it is really difficult to make sense of any ratios that you might obtain based on the consolidated
numbers. Consequently, it is incorrect to compare the return on equity calculated based on the consolidated
statements of ICI at the end of 20X7 to the returns on equity at the time of acquisition and conclude that
there is no synergy between ICI and PTI.
In summary, it is premature to conclude based on the decrease in the return on equity of the two companies
subsequent to the acquisition of PTI that synergy between them is absent.
True Picture of the Operations and Financial Position of ICI and PTI:
None of the financial statements provide a true picture of the operations and economic situation of ICI and
PTI at the end of 20X7. Accounting based SFPs report the carrying values of a significant portion of the net
assets of entities most often than not at their historical values, not at their fair values. For example, it looks as
if the fair values of the net assets of ICI including its land holdings at the end of 20X7 are significantly higher
than their carrying values on its separate entity SFP. PTI’s assets including its significant land holding may
also have similarly increased in value since the time of its acquisition in 20X5. However, such increases are
not reported on the any of the financial statements, separate entity or consolidated. Since land appears to
represent a significant portion of the net assets of PTI and ICI, the consolidated and separate entity SFPs
may be significantly misreporting the true values of the net assets of both companies at the end of 20X7.
Consequently, if returns from holding land represent a significant source of returns for both companies, such
returns will not be shown on the separate entity or consolidated SCIs of the two companies. In summary,
both the returns and the financial positions of ICI and PTI may not be correctly reflected in their respective
separate entity and consolidated financial statements. This misrepresentation can be alleviated partially if both

companies use the revaluation method of accounting for reporting their assets on their financial statements.
Case 6-2: Alright Beverages Ltd.
Objectives of the Case
This case deals with a number of issues, but the basic focus is on the reporting implications of transactions
among a family of related companies, including revenue recognition, adjustments for unrealized profits, and
reporting long-term installment purchase contracts. The required for the case can be expanded to include
income tax issues.
Objectives of Financial Reporting
The company is publicly held, and thus is IFRS-constrained. It also has debt financing (bank loans). There is
a bonus scheme for at least some of management, including the management of Concentrated Vending Ltd.
(CVL). There is explicit mention of tax deferral as an objective. Therefore, the reporting objectives would
include the following:
1. Performance evaluation
2. Tax deferral
3. Cash flow prediction
4. Profit maximization
Note that there may be different priorities for these objectives in the different reporting units. The relative
ranking of objectives shown above is essentially for the consolidated enterprise. For CVL as a separate entity,
however, profit maximization may move into first or second place due to the bonus arrangement with the
managers of CVL. If the other 30% of CVL is not publicly held, then performance evaluation may not be an
important objective for CVL.
Accounting and Reporting Issues
Sales by VSL to Local Operators
VSL is selling the machines on an easy-payment plan to local operators. The sales contract includes implicit
interest. The alternatives for recognizing revenue include the following:
1. Recognize the present value of the payments, discounted at a market rate of interest for conditional sales
contracts. The interest would be recognized over the life of the sales contracts on an effective yield basis.
This alternative would cause recognition of at least some profit above the $5,000 cost of the machines to
VSL at the time the contract starts. This alternative permits the earliest recognition of revenue. An
allowance for doubtful contracts would have to be set up. Given the lack of any track record for these
contracts, there may be considerable uncertainty associated with this alternative. If an allowance cannot be
estimated, this method would not be appropriate.

2. Discount the payments to the cost of the machines to VSL of $5,000 each. Revenue would be recognized
only in the form of interest as the contract matures. Revenue would be recognized later in this alternative
than in the former alternative, but it would also tend to delay income taxes, as was considered desirable.
3. Discount the payments to the cost of the machines to CVL of $3,000 each. This alternative would work
on a consolidated basis, but not very well on a separate-entity basis for VSL. On the other hand, there
may be no need for separate-entity statements for VSL as it is a wholly-owned subsidiary of ABL. This
alternative would also solve the unrealized-profit problem on consolidation, as will be discussed in the
following section.
4. Recognize revenue on a cost-recovery basis. This is the most conservative approach and it would delay
recognition (and taxes) the longest. It is not advantageous for fulfilling the other reporting objectives,
however.
Sales by CVL to VSL
From the viewpoint of CVL as a separate entity, there is no problem with recording the sales when they
occur. However, there is some question as to the permanence of those sales. If VSL cannot unload all of the
machines that it takes, will CVL be required to accept them back? Are returns estimable? VSL is already
expecting to hold 1,200 machines in inventory at the end of the year, almost 20% of the total purchases.
There is a suggestion of profit manipulation for the benefit of CVL (or its managers). Of course, the
intercompany profit will have to be eliminated upon consolidation.
A less obvious unrealized-profit issue arises from the sale of the machines by VSL to the local operators. To
the extent that the revenue from the outside sales has not been recognized, then that portion of the
intercompany profit per machine must also be eliminated. Therefore, there is a degree of interaction between
the revenue recognition policy for sales by VSL and the realization of profit by CVL within the consolidated
reports of ABL.
Sales by ABL to Bottlers
The bottlers in major cities are wholly owned subsidiaries of ABL. ABL sells the syrups to the bottlers,
presumably at a profit. Revenue could be recognized by ABL (as a separate entity) when the syrup is sold, or
only when the syrup has been used and the product sold by the bottler. As a separate entity, profit should
probably be recognized when the syrup is sold by ABL. For consolidated reporting, however, unrealized
profits on syrup held by the bottlers should be eliminated, if material in aggregate.
Business Combination
The acquisition of CVL by ABL should be reported by the acquisition method. If the fair values of the net
assets acquired were greater than the purchase price paid by ABL, then the negative goodwill would have to
be recognized as a gain from a bargain purchase. Although the price paid by ABL was well below the
proportionate carrying value, it is possible that the fair value of the net assets was even lower, thereby
resulting in goodwill. Although the presence of goodwill is unlikely given that CVL was in financial difficulty,
a bargain purchase still could have occurred. If there is goodwill, it must be tested for impairment on an
annual basis.

Inventory Valuation
The case mentions that CVL’s current cost to manufacture the machines is “significantly lower than in
previous years.” This comment should trigger examination of CVL’s finished goods inventory to see if there
are machines in stock that are being carried at higher than replacement cost. If so, a partial write-down may
be appropriate if net realizable value has also declined.
Operating Segment Reporting
The additional sales by CVL to VSL will increase CVL’s revenues. Operating segments reporting may
therefore be appropriate. Management may argue, however, that the machine sale is just a part of an
integrated soft drink enterprise, and that the production and distribution of soft drinks (including the
manufacture of the vending machines) is a dominant industry segment that comprises over 75% of the
company’s revenue, profit, and assets.
Note: Segment reporting is discussed extensively in Chapter 7. However, most students will have been
exposed to segment reporting in Intermediate Accounting and therefore should be familiar with the
broad outlines of segment reporting requirements.
Case 6-3: Le Gourmand
Objectives of the Case
This case asks the student to examine the evidence in a business combination and determine what method of
reporting is appropriate for the acquirer. It also requires the calculation of net income.
Objectives of Financial Reporting
Le Gourmand is an incorporated company, as indicated by the name (Le Gourmand Inc). It appears to be
owned by one shareholder, Francois LeClerc, whose main concern regarding the combination with Ombre
Wines is the cash flow from dividends. Le Gourmand has no long term debt outstanding; its only financing is
from short term creditors. Accordingly, unless a bank or other user requires financial statements in
accordance with IFRS, IFRS does not appear to be mandatory, and the choice of accounting policy should be
based on LeClerc’s needs, not on what is required under IFRS. Accounting Standards for Private Enterprises
(ASPE) are an option for Le Gourmand.
Alternative Accounting Policy Choices
Le Gourmand Inc. has purchased 50% of the outstanding voting shares (3,000 of 6,000 issued common
shares) of Ombre Wines Ltd. This is not a majority of the outstanding voting shares, but may be sufficient to
elect a majority of the Board of Directors and to control the operations of Ombre Wines. The evidence must
be examined. Under IAS 27, Consolidated and Separate Financial Statements, control exists when one
entity has the power to direct the financing and operating activities of another entity to derive benefits from

that entity.
While the ownership of a majority of voting shares is usually evidence of control, control can exist when
there is ownership of 50% or less of the voting shares, combined with: (1) an irrevocable agreement with
other shareholders conferring their voting rights to the enterprise, or (2) ownership of rights, options,
warrants, convertible debt, convertible non-voting equity or other instruments, which, if converted, would
result in the enterprise owning a majority voting interest. Further, the existence of de facto control by a
minority shareholder should also be considered in the absence of formal arrangements which would give it
majority of the voting rights. For example, control is possible when the ownership of the balance of shares is
dispersed and such owners have not organized themselves in such a manner as to exercise more voting shares
than the minority shareholder.
Francois LeClerc’s expectation of future dividends implies that LeClerc intends to hold the shares for a long
time. It also indicates that he expects to be able to control or at least influence the declaration of dividends,
thus control or influence the company. LeClerc purchased most of the Ombre Wines trading shares, further
indicating his desire for control. The fact that he only purchased 50%, when there were more than 50%
trading (since some shares were still available to the public) indicates that LeClerc felt that 50% was enough
to obtain control. He may have based this on the following: (1) Le Gourmand was Ombre Wines’ largest
customer, and (2) although the founders of the company are still active, their children are selling their
interests and do not plan to take over the business. Thus, there is evidence that Le Gourmand has acquired
control of Ombre Wines.
The common shares held by the original founders and their families must be less than 50%. However, the
original founders own the preferred shares of the company and could potentially acquire the 1,000 common
shares that have not been issued, unless LeClerc is in a position to block the issue of such shares. This would
effectively block Le Gourmand’s control of the company. Further evidence of control by Le Gourmand, or
lack of control on the part of the original owners, needs to be gathered before it can be concluded that Le
Gourmand has control.
If Le Gourmand could show control, consolidation would be the appropriate accounting policy for reporting
its investment in Ombre Wines under IFRS. However, under ASPE, LeClerc can also elect to account for an
investment subject to control using either the cost or equity methods. If control cannot be exercised, the
equity method would be appropriate. Here, LeClerc could elect to use the cost method if ASPE are adopted.
Le Gourmand’s 20X5 net income would be identical under the consolidation and equity methods. The cost
method would not be appropriate under IFRS since Le Gourmand has more than a passive interest. As
mentioned above, however, the owner, Francois LeClerc, could elect the cost method under ASPE, or accept
a qualified or adverse report. It is possible that Francois may want to minimize his bookkeeping costs and
therefore choose the method that is the least costly.
Measure Step:
Purchase price of 50% of the shares of Ombre
$207,00
0
Imputed value of 100% of Ombre based on purchase price $414,000
Carrying value of net identifiable assets:
Preferred shares $20,000
Common shares 137,000
Retained earnings 170,000

Net assets 327,000
Less: Preferred shares (20,000)
Dividends in arrears (2004 - $20,000 × 0.06) (1,200)
(305,800
)
Fair Market Value Increments
Investment land 20,000
Factory land 15,000
Grape press 4,000 (39,000)
Goodwill @ 100% $69,200

Amortization:
Grape press $4,000 ÷ 5 years = $800/year 800
Net Income Calculations:
Le Gourmand's net income
$25,00
0
Ombre Wines net income $76,400
Less write down of land not sold* (2,000)
Amortization of FVIs:
Piece of land sold
(10,000
)
Impairment of land not sold
(10,000
)
Grape press amortization (800)
Unrealized profit on upstream sales [$60,000 × $200,000 ÷ $300,000]**
(40,000
)
Less preferred dividends for 20X5 (1,200)
Adjusted earnings of Ombre Wines $12,400
Le Gourmand's share @ 50% $6,200
Less unrealized gain on sale of office equipment - downstream
Debt forgiven of $5,000 ($20,000 – $15,000) less carrying value of
equipment of $1,000*** (4,000)
Le Gourmand's equity in earnings of Ombre 2,200
Net income of Le Gourmand under equity method/net income attributable
to owners of Le Gourmand on consolidation
$27,20
0
Notes:
* Since the company recently sold one of two identical pieces of land for $2,000 less than its historical
cost, the value of the land still held is questionable and should be written down. However, there is a fair
value increment of $20,000 on the land. Since one piece of land has been sold, $10,000 should be
included in the loss on sale and the other $10,000 should be written down as it is impaired.
** There is no adjustment for the unrealized profit at the beginning of the year as the parties were at arm's
length at that time.
*** As the office equipment was transferred at year-end, amortization for 20X5 would have been charged.

Case 6-4: Constructive Inspirations Inc.
Overview
Accounting Experts LLP (AE) has been engaged by Jennifer and Johnnie to provide advice on the accounting
alternatives available under IFRS for valuing CI. Specifically, such choices will be used to prepare CI’s
financial statements, which will be used to value CI in relation to Jennifer's and Johnnie's divorce settlement.
While Jennifer will continue to own CI, assets equal to the value of CI will be transferred to Johnnie as part
of the divorce settlement. The value of CI will be equal to six times the net income of CI in 20X9 or equal to
the ending owners’ equity of CI in 20X9, whichever amount is higher.
CI appears to have been in existence for quite some time. Forty percent of the shares of CEDS were also
purchased by CI three years ago on Jan. 1 20X7. Therefore, general purpose financial statements must have
been generated in the past aimed at providing financial information about CI and its investments to various
users, including employees and the bank. The bank in any case will want to look at the separate entity
financial statements of CI. The investors in CEDS will mainly focus on the FS of CEDS, not those of CI.
Accounting Experts has not been engaged to provide advice relating to these general purpose statements.
Rather, the advice is specific to the calculation of net income and owners’ equity to be used to value CI for
the purpose of the divorce settlement between Jennifer and Johnnie.
Therefore, the present report will focus only on the accounting alternatives to be used for preparing the
special purpose financial statements needed for valuing CI. These financial statements will not be available to
other users of CI’s general purpose financial statements. Such users and their objectives are irrelevant for the
purpose of this report and thus will not be considered here.
Constraints
Jennifer and Johnnie have agreed that IFRS for public entities have to be used as long as the end results are
logical. Thus, for the purpose of this report IFRS is a constraint unless the results therefrom are not logical.
Critical Success Factor
Critical success factors that affect the long-run success of CI are irrelevant here since this report is not being
provided for preparing the general purpose financial statements of CI.
However, it is critical to us that our advice is found acceptable by both Jennifer and Johnnie. Both of them
are long-term clients of AE, and we would like to keep both as our clients in the future as well. However,
this factor is not a CSF that applies to CI, rather it is critical to AE in maintaining its long-term relationship
between it and Jennifer and Johnnie respectively.

Users’ Objectives
Jennifer:
Everything else being equal, Jennifer would like those accounting choices that will reduce both the
net income of CI in 20X9 and the owners’ equity of CI at the end of 20X9. This will reduce the
value of CI and therefore the value of the assets that will be transferred to Johnnie.
Johnnie:
Everything else being equal, Johnnie will have objectives that are exactly the opposite of Jennifer's.
He would prefer those accounting alternatives and choices that will increase both the net income of
CI in 20X9 and the owners’ equity of CI at the end of 20X9. At worst, he would like a fair
evaluation of NI of 20X9 and OE at end of 20X9, such that he obtains a fair value of CI.
Ranking of Users and Objectives
The divorce settlement has been amicable so far. Therefore, it is reasonable to assume that both
Jennifer and Johnnie would like to continue to keep it that way. Thus, neither party would want to
be unfair or appear unfair to the other party. However, as pointed out above, everything else being
equal, each would like those accounting alternatives that cater to their objectives.
Both Jennifer and Johnnie are important and long-term clients of AE. Therefore, it appears prudent
for AE not to be seen to be biased towards one over the other while providing their advice. Further,
AE has a fiduciary duty to both of them.
Given the above, it appears reasonable to provide advice that fairly reflects the economic situation
of CI. Towards this end, the most appropriate alternative under IFRS for public entities will be
provided for each relevant accounting issue. Non-IFRS alternatives will be considered only when all
IFRS alternatives are found to be unsuitable.
Accounting Issues and Alternatives
Net Income versus Owners’ Equity
A fair value for CI can be based on either an income or cash-flow approach, wherein, the future
income or cash-flow is discounted to present value terms, or based on the fair value of the existing
assets and liabilities of CI as at the end of 20X9. Jennifer and Johnnie have agreed to value CI based
on six times the NI of 20X9 or the ending owners’ equity of CI. Thus, while the former measure
appears to be roughly approximating the income approach of valuation, the latter, based on owners’
equity, appears to be approximating the financial position basis of valuation. However, both figures
are historical cost based and do not necessarily reflect the impact of present values or of future
operations. For example, on the SCI, amortization and depreciation values are historical cost based.
Similarly, on the SFP, the assets and liabilities are valued at their historical cost. Further, the assets
and liabilities on the SFP of CI at the end of 20X9 may not accurately represent the income
generating potential of CI in the future. One glaring example is the value of Jennifer to CI. Some of
these problems can be mitigated by using the replacement model for measuring the assets and
liabilities of CI. This is discussed in further detail in the next section.
Cost versus Revaluation Model of Valuing Assets of CI and CEDS

IFRS allows the use of either the cost or the revaluation model to value the assets of an entity.
Potentially a more accurate value of CI can be obtained by using the revaluation model to measure
assets such as property, plant and equipment and intangible assets. While such revaluation can
increase owners’ equity (assuming asset values are increasing), thereby increasing the value of CI, it
will also lead to higher amortization expenses on the SCI. Revaluation gains are not taken to net
income except to the extent of revaluation losses taken to net income in prior periods. On the
whole, however, following the revaluation model will lead to a higher valuation of CI, since such
value is based on the higher of six times NI or owners’ equity.
Since revaluation amounts are not available at this time, the discussion in the latter sections assumes
the use of the cost model.
CEDS
CI owns 40% of the shares of CEDS and one of its employees is on the BOD of CEDS. However,
the other 15 owners of CEDS, who are friends of Jennifer, have, via a written agreement, given CI
the authority to make operating and investing decisions in relation to CEDS. Further, CEDS also
appears to be a supplier of supplies to CI. CI’s employees are also working for CEDS. Finally, CI
did not charge a management fee to CEDS.
All of the above indicate that under IFRS, CI has control over the operating and investment
decisions of CEDS. Therefore, the investment is CEDS has to be accounted for as a business
combination. Consequently, the financial statements of CEDS have to be consolidated with those of
CI using the acquisition method. Under the acquisition method, both CI’s share as well as the share
of the other 15 owners (NCI) has to be accounted at their fair value at the time of acquisition.
However, we do not presently have sufficient information to carry out a full consolidation of
CEDS’ FS with those of CI. In fact, such consolidation may not be required for the purpose of this
report since the issue of importance is the impact of the accounting alternatives on the net income
of CI in 20X9 and the owners’ equity of CI in 20X9. Therefore, the following discussion will
restrict itself to the consolidation-related accounting adjustments required under IFRS for the
various issues relating to CEDS.
Fair Value of CEDS and Fair Value Increments at the Time of Acquisition
The balance of the FVI of $100,000 has been allocated to goodwill. This indicates that there is no
gain on bargain purchase. Consequently, the initial accounting for CEDS will not impact the net
income of CI nor its owners’ equity. The acquisition method allows for the use of either the entity
method or the parent-company extension method. The difference between the two methods affects
valuation of goodwill and valuation of NCI. Neither will affect the NI for 20X9 or owners’ equity at
the end of that year.
Furthermore, the FVI allocated to inventory and patent will also not affect either net income or
owners’ equity at the time of acquisition. However, post-acquisition, both amounts will have the
following impact on net income of 20X9 and owners’ equity:
FVI allocated to inventory
There is a fair value decrement of $50,000 in relation to inventory. Inventories are assumed to be
sold in the very next year after acquisition. From the consolidated perspective the true cost of the

inventory is less by the FVD of $50,000, compared to the cost shown on the separate entity FS of
CEDS.
Therefore, the consolidated COGS would have been reduced by the $50,000 FVD in 20X7. This
would have increased the net income of that year by $50,000. 40% of the $50,000 increase, i.e.,
$20,000 is attributable to CI, while the remaining 60% or $30,000 is attributable to the NCI. Since
consolidation related adjustments do no carryover to later periods, suitable consolidation related
adjustments have to be made in later years to capture the cumulative impact of previous years’
consolidation adjustments. Therefore, in 20X9, focusing just on CI’s portion, an adjustment to
increase beginning owners’ equity of CI by $20,000 will have to be made. This adjustment will
carry over to ending owners’ equity, increasing it by $20,000. Thus, the value of CI for the purpose
of the divorce settlement will go up by $20,000 consequent to this adjustment.
FVI allocated to patent
The FVI allocated to patent is equal to $100,000. The patent had a further useful life of 10 years at
the time of the acquisition of CEDS by CI. Therefore, in its consolidated statements CI will make
consolidation adjustments to amortize the FVI of $100,000 over this 10-year period. Therefore, the
FVI amortization in 20X7 and 20X8 would have been $10,000 per year. A further $10,000
amortization of this FVI will be made in 20X9 as well.
While the $10,000 amortization of FVI in 20X9 will decrease the CI’s consolidated net income by
$10,000, CI’s share is only $4,000. Therefore, this will decrease the ending owners’ equity of CI in
20X9 by that amount. In addition, the cumulative impact of the adjustments relating to the
amortization of the FVI in previous years on CI’s ending retained earnings in 20X9 will be a
negative $8,000. Therefore, in total, the amortization of the FVI relating to the patent over the
three-year 20X7-20X9 period will have a negative impact of $12,000 on ending owners’ equity in
20X9. Therefore, for the purpose of the divorce settlement the cumulative impact of the FVI
amortization over the three-year period will be to decrease the value of CI by $12,000. In contrast,
the impact of the FVI amortization in 20X9 on the value of CI (using net income) for the purpose
of the divorce settlement will be greater, decreasing it by 6 × $4,000 or $24,000.
Impairment of Goodwill
It is assumed that the $100,000 FVI allocated to goodwill represents 100% of the value of
goodwill. Therefore, of the impairment loss of $20,000 relating to goodwill in 20X8, only $8,000 is
attributable to CI. Therefore, the related cumulative adjustment in 20X9 will reduce the beginning
and thus the ending retained earnings of 20X9 by $8,000 and as a consequence the value of CI for
the purpose of the divorce settlement by $8,000.
Management Fees
CI did not charge management fees to CEDS since 20X7. IFRS require all intercompany
transactions be eliminated while preparing consolidated statements, since these statements represent
the financial status of all the entities forming part of the consolidated group as one single economic
entity. Therefore, even if CI had originally charged management fees to CEDS, such management
fees would have been eliminated at the consolidated level for 20X9. No elimination is required for
the management fees in earlier years. Therefore, failure of CI to charge management fees to CEDS
does not have any impact on either the 20X9 net income attributable to CI or to the owners’ equity
of CI.

Interest on the 10% $100,000 Interest Bearing Note
CEDS would have paid $5,000 interest in 20X8 and $10,000 interest in 20X9 to CI. While such
interest would have been accounted for as an expense by CEDS, CI would have included such
amounts as income in its statement of comprehensive income for 20X8 and 20X9 respectively.
However, again, at the consolidated level, such intercompany interest payments and receipts made
in 20X9 have to be eliminated. Since both income and expense of $10,000 for 20X9 are eliminated,
the net impact on OE and NI will be zero. There is no need to adjust for the interest income and
expense of 20X8 since the net impact on the consolidation retained earnings of these amounts is
zero.
Sale of Equipment by CEDS to CI
The calculations underlying the various adjustments that need to be made in relation to the sale of
the depreciable asset by CEDS to CI on Jan. 1 20X8 are provided below:
Original cost to CEDS $300,000
Depreciation by CEDS (75,000)
Carrying value at time of sale to CI 225,000
Price at which sold to CI 270,000
Gain on sale on Jan. 1. 20X8 45,000
Remaining useful life on Jan 1. 20X8 3 years
Excess depreciation per year 15,000
Excess depreciation in 20X8 15,000
Excess depreciation in 20X9 15,000
Unrealized gains by beginning of 20X9 30,000
CEDS would have recognized a gain of $45,000 on the sale of the equipment to CI on Jan. 1,
20X8. CI in turn would have recorded the equipment at the price paid by it of $270,000 and started
depreciating it over three years at $90,000 per year. This is $15,000 higher per year than the
$75,000 depreciation that CEDS would have charged on its books if the sale had not occurred.
From a consolidated perspective no sale has actually occurred. Therefore, the adjustment in 20X9
to capture the cumulative impact of the consolidation-related adjustments made in 20X8 would be
to eliminate the remaining unrealized gain of $30,000 ($45,000 – $15,000) at the beginning of
20X9. Specifically, the equipment account would be decreased by $30,000 while reducing
beginning retained earnings by 40% of that amount, i.e. $12,000 and reducing NCI by the remaining
60% or $18,000. Another adjustment is also required to eliminate the excess depreciation of
$15,000 in 20X9. This adjustment will increase the net income attributable to CI by $15,000 × 40%
or $6,000, while increasing the net income attributable to NCI by the remaining amount of $9,000.
Thus, the cumulative impact on the ending retained earnings of CI would be to decrease it by
$12,000 – $6,000 or $6,000. Consequently, for the purpose of the divorce settlement the value of
CI will be reduced by $6,000. In contrast, if the net income of 20X9 is used to value CI, the value
of CI will in fact increase by $6,000 × 6 or $36,000. Clearly, in this case, diametrically different
results will ensue depending on which amount is used to value CI, net income of CI in 20X9 or

ending retained earnings of CI in 20X9.
Inter-company Sale of Inventory
Under IFRS, gains on inter-company sales of inventory are deemed to be unrealized as long as the
inventory remains within the consolidated group. Therefore, such unrealized gains are required to
be eliminated while preparing consolidated financial statements.
Unrealized gains exist in both the beginning as well as the ending inventory of CI in 20X9.
Beginning inventories are assumed to have been sold during the year, and therefore are assumed to
have been realized during the year. The following calculations provide the amount of unrealized
gains present in the opening and closing inventories respectively, and CI’s share of such gains:
Beginning Inventory Ending Inventory
Inter-company sale 80,000 90,000
Proportion remaining unsold 0.2 0.3
Inventory remaining unsold 16,000 27,000
Profit proportion 0.4 0.4
Unrealized profit 6,400 10,800
CI’s ownership proportion 0.4 0.4
CI’s share of unrealized profit 2,560 4,320
Impact on 20X9 Ending RE None (4,320)
Impact on 20X9 CI NI share 2,560 (4,320)
Of the unrealized gains present in the opening inventory, $2,560 is attributable to CI. Since this
unrealized gain would have been eliminated in 20X8, to capture the impact of that adjustment the
corresponding cumulative adjustment in 20X9 will reduce opening retained earnings by that
amount. However, to reflect the fact that the gain was realized in 20X9 the COGS of 20X9 will
also be reduced by that amount. The overall impact on ending retained earnings will therefore be
zero. Therefore, while ending owners’ equity remains unaffected by these changes and thus does
not affect the value of CI, the increase in profit in 20X9 will mean that the value of CI based on the
net income amount will increase by 6 × $2,560 or $15,360.
The consolidation-related adjustment relating to the unrealized gain in the ending inventory will
decrease profit by $4,320 and therefore the ending retained earnings. The impact on the value of CI
for the divorce settlement will therefore be (1) if based on net income, a decrease of 6 × $4,320 or
$25,920, or (2) if based on ending owners’ equity, a decrease of $4,320.
No dividends have been declared by CEDS from the time of its acquisition by CI. That means that
the separate entity FS of CI would not have included any portion of the operating results of CEDS
in any of the three years 20X7-20X9. However, the consolidated FS of CI should not only include
the results from the operations of CI but also the operating results of CEDS as well. This difference
will affect both the ending owners’ equity as well as the net income of 20X9.
Since the impact of the other consolidation-related adjustments were discussed previously, we can
now focus solely on the impact of the consolidation-related adjustment relating to CEDS’

operations, without any adjustments. CEDS’ change in retained earnings since its acquisition by CI
until the beginning of 20X9 will be added to that of CI to the extent of CI’s ownership of CEDS.
The remaining 60% will be adjusted against the NCI balance. The impact will either be negative or
positive depending on the nature of the change in retained earnings of CEDS during the period.
The individual items of the statement of comprehensive income of CEDS are also included line-by-
line in the consolidated statement of comprehensive income of CI. The result will be the same as
adding the net income of CEDS to the net income of CI. Thus, the consolidated income will either
increase or decrease depending on whether CEDS had a net loss or net income during 20X9. CI’s
portion will be apportioned to CI, and will suitably increase or decrease ending retained earnings.
Thus, the operations of CEDS will influence the value of CI either through its influence on the net
income of CI in 20X9 or through its impact on the ending retained earnings of CI. We will need to
obtain these details from Jennifer to be able to quantify the impact.
The table below summarizes the impact of the various known adjustments relating to CEDS on the
value of CI calculated based on (1) net income in 20X9 and (2) the ending owners’ equity at the
end of 20X9:
Net Income
Owners'
Equity
FVI allocated to inventory 0 20,000
FVI allocated to patent (24,000) (12,000)
Impairment of goodwill 0 (8,000)
Inter-company sale of equipment 36,000 (6,000)
Unrealized gains in opening inventory 15,360 0
Unrealized gains in ending inventory (25,920) (4,320)
Net income of CEDS Unknown Unknown
Sum of known amounts 1,440 (10,320)
It is clear that the adjustments will have a negative impact on the value of CI if ending owners’
equity in 20X9 is used for such valuation. As opposed to this, the impact of using NI is marginally
positive. However, we do not have full details on the net income and owner's equity amounts
related to CEDS. Therefore, we are unable at this time to conclude which of the two figures will
lead to either a lower or higher value for CI.
Fairness of Using IFRS-based Financial Statements to Value CI
IFRS has, over the years, been moving more towards a fair-value basis of accounting and away
from the historical basis of accounting. While monetary assets and liabilities are reported at their fair
values on the SFP, many non-monetary assets like inventories are also reported at fair values. In
addition, IFRS also allows the use of the revaluation model of valuating assets such as property,
plant and equipment and intangible assets. Thus, the impact of the historical basis of accounting,
which does not appropriately reflect fair values, is reduced. Nonetheless, accounting is backward
looking and may not appropriately reflect the future operations of CI. It may be argued that CI
should be valued based on its future potential and not on its past performance.

Further, under IFRS, the results of the operations of CEDS have to be included in the financial
statements of CI either by including CI’s equity in the earnings of CEDS or by consolidation. It is
not clear what Jennifer and Johnnie mean by the fair value of CI. Do they intend for CI’s value to
include the value of CEDS as well? If not, CEDS will form part of the other assets which Johnnie
will get. Excluding CEDS from the value of CI most probably will decrease the amount which
Johnnie will get as part of the divorce settlement.
Finally, the criterion of fairness is a bit nebulous. Should the value of CI also include the value of
Jennifer to it? Under IFRS, the value of Jennifer to CI cannot be recognized as an identifiable
intangible asset. In any case, it is not clear that CI’s value should be based on its future operations.
Maybe the value of CI should be based only on the fair values of the existing assets and liabilities of
CI and that of CEDS attributable to CI.
SOLUTIONS TO PROBLEMS
P6-1
The various adjustments (rounded to the nearest dollar) are being provided in journal entry format
below:
20X2:
Gain on sale of fixtures $45,000
Fixtures $45,000
Depreciation expense 8,000
The net impact of the above adjustments on net income will be to decrease it by $40,000. Of
this amount, 30%, i.e. $12,000 is attributable to the NCI, while the rest belongs to the
owners of the parent.
20X3:
Retained earnings, opening 28,000
NCI 12,000
Fixtures 48,000
The decrease in the depreciation expense of $8,000 will increase net income by that amount.

Of this amount, $2,400 is attributable to the NCI, while the rest is attributable to the owners
of the parent.
20X4:
NCI 9,600
Fixtures 48,000
Again, the decrease in depreciation expense of $8,000 will increase net income by that
amount. Of this amount, $2,400 is attributable to the NCI, while the rest is attributable to
the owners of the parent.
20X5:
NCI 7,200
Fixtures 48,000
Accumulated depreciation 667
Depreciation expense 667
(assuming 1 month’s depreciation is taken)
Fixtures 48,000
Gain on sale of fixtures 23,333
The overall impact of the above entries on net income will be to increase it by $22,666.
30%, i.e. $6,800 is attributable to the NCI, while the rest is attributable to the owners of the
parent.
P6-2
a. 20X3:
Gain on sale of building $1,740,000
Accumulated depreciation $560,000
Buildings
1,180,00
0
(Eliminates the gain, reduces the building to its cost to Sub, and restores the accumulated
depreciation.)
The elimination of the gain on sale of building amount of $1,740,000 will decrease net income by

that amount. Therefore, 20% of that amount, or $348,000, should be attributed to the NCI.
NCI (SFP) 348,000
NCI in earnings of Sub (SCI) 348,000
(20% of the unrealized gain of $1,560,000.)
[($1,980,000/6) – (800,000/20)]
The decrease in depreciation expense of $290,000 will increase net income by that amount.
Therefore, 20% or $58,000 should be attributed to the NCI:
NCI (SFP) 58,000
(20% of depreciation adjustment.)
b. 20X5:
Accumulated depreciation (3 × 290,000) 870,000
Retained earnings 0.80[1,740,000 – (2 × 290,000)] 928,000
NCI (SFP) 0.20 × [1,740,000 – (2 × 290,000)] 232,000
Buildings
1,180,00
0
The decrease in depreciation expense of $290,000 will increase net income by that amount.
Therefore, 20% or $58,000 should be attributed to the NCI.
NCI (SFP) 58,000
(20% of depreciation adjustment.)
P6-3
1. Eliminating entries, 20X4:
Sales $800,000
Cost of goods sold $800,000
Cost of goods sold 80,000
Inventory 80,000

Accounts payable 500,000
Accounts receivable 500,000
Gain on sale of land 80,000
Land 80,000
Interest revenue 13,000
Interest expense 13,000
Note payable 273,000
Note receivable 273,000
Eliminating entries 2005:
NCI 24,000
Cost of goods sold 80,000
NCI 24,000
Land 80,000
Note payable 273,000
Note receivable 273,000
2. Non-controlling interest share of earnings, 20X4:
30% of Sub Ltd. reported net income 204,000
Unrealized profit in inventory:
$400,000 × 20% × 30% (24,000)
Unrealized profit on sale of land:
$80,000 × 30% (24,000)
156,000
Non-controlling interest share of earnings, 20X5:
30% of Sub Ltd. reported net income 264,000
Realized profit from opening inventory:
$300,000 × 20% × 30% 18,000
282,000
P6-4
1. Eliminations

a. Sales from Adam to Bob (downstream):
Sales $800,000
Cost of sales $740,000
Inventory (20% × $300,000) 60,000
The entry above is a combination of two entries, the first entry reducing sales and cost of
sales by $800,000 for the inter-company sale, and the second entry increasing cost of sales
and decreasing ending inventory by $60,000, the unrealized gain in the ending inventory
remaining unsold from the intercompany sale.
b. Sales from Xena to Adam (upstream):
Sales 600,000
Cost of sales 460,000
Inventory (70% × $200,000) 140,000
The elimination of the unrealized gain on the intercompany sale of $140,000 above will
reduce net income by that amount. Since the unrealized gain relates to an upstream sale of
inventory, 30% of the reduction in net income or $42,000 needs to be allocated to the NCI.
c. Sale of land from Adam to Bob (downstream):
Land 40,000
Loss on sale of land 40,000
d. Sale of land and building from Xena to Adam:
Gain on sale of capital assets 243,000
Land 80,000
Building 130,000
The elimination of the gain on the sale of capital assets will reduce net income by a similar
amount, i.e. $243,000. Since this is an upstream sale, 30% of the reduction in net income,
i.e. $72,900 should be allocated to NCI.
(depreciation elimination for three months)
The reduction in depreciation expense by $8,150 will increase net income by that amount.
Therefore, the NCI’s share of such a reduction is $2,445.
e. Intercompany balances (assuming both companies have
accrued the interest):

Due to Xena Ltd. 410,000
Receivable from Adam Ltd. 410,000
2. Non-controlling interest
Bob Ltd.: Intercompany sales between Adam and Bob were downstream, therefore there is
no unrealized profit in the earnings of Bob and non-controlling interest is not affected.
Xena Ltd.:
Unrealized profit in inventory (upstream):
70% × ($600,000 - $400,000) = $140,000
NCI interest share at 30% $ 42,000
Unrealized profit from sale of land:
40% ($400,000) - $80,000 = $80,000
NCI interest share at 30% 24,000
Unrealized profit from sale of building:
60% ($400,000) - (70%) ($110,000) = $163,000
NCI interest share at 30% 48,900
Realized profit from depreciation:
1/4 ($163,000) (1/5) = $8,150
NCI interest share at 30% (2,445)
Decrease in earnings attributed to NCI interest $112,455
P6-5
Measure:
70% Purchase of Susan Limited, January 1, 20X2
Purchase price $147,000
100% fair value based on purchase price [$139,200 × (100%/70%)] $210,000
Less carrying value of Susan’s net identifiable assets (161,000)
= Fair Value Increment, allocated below $49,000
Fair value
Adjustment FVA
Allocated
Inventory $2,500 $2,500
Depreciable capital assets 7,500 7,500
Total fair value adjustment allocated to identifiable assets (10,000)

Balance of FVA allocated to goodwill @ 100% $39,000
NCI value = 30% of $210,000 $63,000
Amortize:
FVA
Allocate
d
Amort.
Period
Amort.
per year
Amort./
impairment
in previous
years 20X2-
20X4
Amort./
impair-
ment loss
during
20X5
Balance of
FVA
remaining
at the end
of 20X5
Inventory $2,500 $2,500 $0
Depreciable capital assets 7,500 10 $750 2,250 $750 4,500
Goodwill 39,000 39,000
Total $49,000 $4,750 $750 $43,500
1.
Non-controlling interest in adjusted earnings of Susan in 20X5:
30% of net income of Susan of $11,000 $3,300
Adjustments:
Less 30% of amortization of FVI attributed to capital assets of $750 225
NCI's share of Susan's adjusted income in 20X5 $3,075
2.
Non-controlling interest balance at Dec. 31, 20X5:
30% of Susan's net asset carrying value of $170,000 on Dec. 31, 20X5 $51,000
Add 30% of unamortized FVA of $43,500 at Dec. 31, 20X5 13,050
NCI balance at Dec. 31, 20X5 $64,050
Alternate:
NCI balance at time of acquisition on Jan. 1, 20X2 $63,000
Add 30% of change in carrying value of net assets of Susan ($170,000 - $161,000) 2,700
Less 30% of amortization of FVI till end of 20X5 ($4,750 + $750) (1,650)
$64,050
3.
Consolidated 20X5 net income:
Peter’s reported net income
$44,00
0
Less dividends received from Susan (700)
Susan’s reported net income 11,000
Less depreciation of FVA on capital assets:

$7,500 × 1/10 (750)
Consolidated net income and comprehensive income
$53,55
0
Net income attributable to:
Owners of the parent
$50,47
5
Non-controlling interests $ 3,075

P6-6
1. Consolidated net income:
Anita net income (cost basis) $550,000
Less dividends received from Brian
(160,000
)
Less dividends received from Gabriel (90,000)
Anita separate entity earnings 300,000
Brian net income 348,000
Gabriel net income 310,000
Unadjusted consolidated earnings 958,000
Plus unrealized profits, January 1:
Gabriel to Anita 70,000
Anita to Brian 60,000
Less unrealized profits, December 31:
Gabriel to Anita (50,000)
Anita to Brian (80,000)
Consolidated net income and comprehensive income $958,000
Net income attributable to:
Owners of the parent $756,400
Non-controlling interests $201,600
Consolidated net income and comprehensive income attributable to owners of Anita:
Anita net income (cost basis) $550,000
Less dividends received from Brian
(160,000
)
Less dividends received from Gabriel (90,000)
300,000
80% of Brian net income 278,400
60% of Gabriel net income 186,000
Unadjusted Anita earnings 764,400
Anita to Brian 60,000
Anita to Brian (80,000)
Consolidated net income and comprehensive income attributable to owners $756,400

Consolidated net income and comprehensive income attributable to NCI:
Brian net income
$348,00
0
20% of Brian adjusted net income attributable to NCI $69,600
Gabriel net income
$310,00
0
Gabriel adjusted net income
$330,00
0
40% of Gabriel adjusted net income attributable to NCI 132,000
Consolidated net income and comprehensive income attributable to NCI
$201,60
0
Note that the intercompany lease payment of $60,000 ($5,000 per month) requires no adjustment to
consolidated net income (even though it would be eliminated on unrealized consolidation) because
there is no unrealized profit.
2. Statement of consolidated retained earnings:
Consolidated retained earnings, January 1, 20X5* $1,053,800
Net income for 20X5 756,400
Dividends declared (250,000)
Retained earnings, December 31, 20X5 $1,560,200
*Anita retained earnings, January 1 $ 742,000
Brian retained earnings, January 1 $686,000
Less RE at date of acquisition 450,000
Change since acquisition 236,000
Anita share, 80% 188,800
Gabriel retained earnings, January 1 475,000
Less RE at date of acquisition 100,000
Change since acquisition 375,000
Anita share, 60% 225,000
1,155,800
Unrealized profits, January 1 ($60K + 60% of 70K) (102,000)
Consolidated retained earnings, Jan. 1, 20X5 $1,053,800

3.
If all transactions had been with unrelated parties, then consolidated net income would not have
been adjusted for the realized and unrealized gains relating to the intercompany sale of inventory.
Specifically, the consolidated net income would not have been increased by the sum of $70,000 and
$60,000, i.e. $130,000 since this amount would have been treated as having been realized in the
previous year itself. Similarly, the sum of $ (50,000) and $ (80,000), i.e. $ (130,000) would not
have been deducted from consolidated net income, since again, this amount would have been
considered realized in 20X5. Therefore, consolidated net income would have been $958,000, as
shown in part a as “unadjusted consolidated earnings”. In the present problem, the adjusted and
unadjusted consolidated net incomes are the same since the adjustments sum to zero.
P6-7
Measure:
70% Purchase of Slide Limited, June 30th, 20X1
Purchase price ($3,210,000 cash + $1,200,000 shares) $4,410,000
100% fair value based on purchase price [$4,410,000 × (100%/70%)] $6,300,000
Less carrying value of Slide’s net identifiable assets (3,440,000)
= Fair Value Adjustment, allocated below $2,860,000
Fair value
Adjustment
FVA Allocated
Inventory $225,000 $225,000
Capital assets $(1,000,000) $(1,000,000)
Total fair value adjustment allocated to identifiable assets 775,000
Balance of FVA allocated to goodwill @ 100% $3,635,000
NCI value = 30% of $6,300,000 $1,890,000
Eliminate intercompany balances:
Accounts receivables/accounts payables ($200,000)
Dividends receivable/payable ($480,000 × 0.70) ($336,000)
Eliminate unrealized gains and recognize realized gains:
Realized gain on upstream sale ($160,000 × 25%) $40,000
(no effect on SFP)
Unrealized gain on downstream sale ($200,000 × 30%) ($60,000)

Amortize:
FVAI
Allocated
Amort.
Period
Amort.
per year
Amort./
impairment
in previous
years 20X2-
20X4
Amort./
impairment
loss during
20X5
Balance of
FVA
remaining
at the end
of 20X5
Inventory $ 225,000 $225,000 $0
Capital assets $ (1,000,000) 20 $(50,000) $(150,000) $(50,000) $(800,000)
Goodwill 3,635,000 3,635,000
Total $ 2,860,000 $75,000 $(50,000) $2,835,000
Consolidated Statement of Financial Position
Punt Corporation
Consolidated Statement of Financial Position
June 30, 20X5
Current assets:
Cash and marketable securities (4,548,000 + 321,000) $4,869,000
Accounts and other receivables (2,153,000 + 950,000 – 336,000 –
200,000) 2,567,000
Inventory (2,940,000 + 1,206,000 – 60,000) 4,086,000
11,522,000
Capital assets (net) [17,064,000 + 7,161,000 – 1,000,000 + (4 × 50,000) 23,425,000
Other assets:
Long-term investments (3,038,000 + 2,240,000) 5,278,000
Goodwill 3,635,000
Total assets $43,860,000
Liabilities:
Current liabilities (3,025,000 + 2,090,000 – 336,000 – 200,000) $4,579,000
Mortgage notes payable (12,135,000 + 4,000,000) 16,135,000
20,714,000
Shareholders’ equity:
Common shares 10,000,000
Retained earnings [8,993,000 + 0.70 × (2,888,000 – 540,000)
– 0.70 × 225,000 + 4 × 35,000 – 60,000] 10,559,100
NCI [0.30 × (5,788,000 + 2,835,000)] 2,586,900
Total 23,146,000
Total liabilities and shareholders’ equity $43,860,000
P6-8

Purchase price
$150,00
0
Carrying value of net assets
acquired
$80,000 × 90% 72,000
FVA- Land $10,000 × 90% 9,000
FVA- Building $20,000 × 90% 18,000
99,000
Goodwill $51,000
1. Investment account:
Purchase price
$150,00
0
Cumulative net income
$62,00
0
90% equity of ABC × .90 55,800
Cumulative cash
dividends
$64,00
0
90% received × .90 (57,600)
Amortization:
Building: $18,000 × 5/10 (9,000)
Balance, December 31, 20X5
$139,20
0
2. Cost method of recording:
20X4: no entry, as no cash dividends are received. Stock dividends do not represent income to
ABC.
20X5: Under the cost method of recording, ABC will recognize its 90% share of the dividend paid
by XYZ during 20X5 as dividend income:
Cash $46,800
Dividend income $46,800
ABC will have to make appropriate adjustments to eliminate the dividend income if it uses either the
equity method or the consolidation method to report its investment in XYZ.

P6-9
Purchase transaction
Carrying value of 40% of net assets
$7,200,00
0
Fair value adjustments (40%):
Land $1,200,000
Building (400,000)
Equipment 800,000 1,600,000
Fair value of 40% of net assets 8,800,000
Purchase price
12,400,00
0
Goodwill
$3,600,00
0
(1) Equity in earnings of Jasmine
40% of Jasmine net income $720,000
Amortization:
Building FVD, $400,000/10 40,000
Equipment FVI, $800,000/5 (160,000)
Curry’s equity in earnings of Jasmine $600,000
(2) Investment account
Purchase price
$12,400,00
0
Equity in earnings, per above 600,000
Dividends received (40% × 60% × $1,800,000) (432,000)
Balance, March 31,
20X5
$12,568,00
0

P6-10
Curry owns 40% of the voting shares of Jasmine and five of its nominees are on Jasmine’s board.
This suggests that Curry can exercise significant influence but not control over Jasmine. Curry had
to negotiate to get five of its nominees be nominated on Jasmine’s board. Therefore, the proprietary
theory has to be used when accounting for Curry’s investment in Jasmine under the equity method.
1. Investment income
40% of Jasmine net income $960,000
Amortization, per P6-9:
Building $40,000
Equipment (160,000)
(120,000
)
Unrealized profits:
Downstream (Curry to Cinammon):
$2,500,000 × 60% × 30% gross margin 450,000
Upstream (Jasmine to Curry):
Raw materials inventory:
$1,200,000 × 40% gross margin $480,000
Finished goods inventory:
$2,320,000 × 40% gross margin 928,000
Total unrealized profit $1,858,000
Curry share, 40%
(743,200
)
Curry equity in Jasmine earnings $96,800
(Note: the gross margin percentages are obtained from the condensed statements of comprehensive
income included in the problem.)
2. Investment account
Balance, March 31, 20X5, per P6-9 $12,568,000
Equity in 20X6 earnings, per above 96,800
Dividends received —
Balance, March 31, 20X6 $12,664,800
P6-11
Purchase price $1,600,000
30% of fair value of Rogan net assets, Jan. 1, 20X3 1,200,000
Excess of purchase price over share of fair value* $ 400,000
* Excess of purchase price over share of the fair value of the net identifiable assets is not allocated

to goodwill since the investment is in an associate and not in a controlled entity.
1. (a) Statement of comprehensive income for 20X5:
Slater Company
Statement of Comprehensive Income
Year ended December 31, 20X5
Sales $3,000,000
Equity in earnings of subsidiary 54,000
Other revenues 176,000* $3,230,000
Cost of goods sold 1,500,000
Other expenses 300,000 1,800,000
Net income $1,430,000
* Assuming dividends received were recorded here.
(b) Investment account, December 31, 20X5:
Purchase price, January 1, 20X3 $1,600,000
20X3 earnings (30% equity):
loss $(60,000)
dividends (15,000)
(75,000)
20X4 earnings (30%):
income 54,000
dividends (18,000)
36,000
20X05 earnings (30%):
income 54,000
dividends (24,000)
30,000
Balance, December 31, 20X5 $1,591,000
2. No significant influence, entry for 20X5:
Cash $24,000
Dividend income $24,000
If Slater is a publicly accountable enterprise, it has to report its investment in Rogan using the fair
value method. On the other hand, if Slater is a private enterprise, it can either use the fair value
method or the cost method to report its investment in Slater.
P6-12
1. The equity method assumes the investor can significantly influence the investee company. As a

result, and to avoid income manipulation, all earnings of the investee (remitted and retained)
accruing to the investor are reported as earned via the investment account. Dividends received are
deducted from the investment account. The fair value or cost methods assume no significant
influence. Income from the investment is recognized only to the extent to which it has been remitted
as dividends. As the name denotes, the investment account is retained at cost under the cost
method. In contrast, under the fair value method, the investment is reported at its fair value on each
reporting date. Reporting must follow the following guidelines.
i. IFRS requires the use of the equity method when there is significant influence, and
the fair value method when there is no significant influence. Accounting standards
for private enterprises allows the cost method as an additional reporting choice for
reporting investments both when significant influence is present as well as when it is
absent. The equity reporting requirement pertains to both significantly-influenced
minority-owned investees and to unconsolidated subsidiaries.
ii. A quantitative guideline only is that ownership of less than 20% suggests the
absence of significant influence while ownership of greater than 20% and less than
51% suggests the presence of significant influence.
2. General journal entries:
Feb. 15: Investment in Lub Oil Co. (70%) $ 640,000
Cash $ 640,000
(Includes goodwill of $80,000)
Apr. 13: Investment in Richman Refineries (60%) 1,540,000
Cash 1,540,000
May 17: Investment in Discovery Co. Ltd. (2%) 250,000
Cash 250,000
June 30: Equity in earnings of Lub Oil 26,250
Investment in Lub Oil 26,250
(The investment was held for 4.5 of the 6 months; assuming the loss is
incurred evenly over the 6 month period leads to recognition of 75% of
the loss: $50,000 × 75% × 70% share.)
June 30: Investment in Richman Refineries 30,000
Equity in earnings of Richman 30,000
(Investment held for 2.5 months, or 5/12 of the period:
$120,000 × 5/12 × 60% share = $30,000.)
June 30: Dividends receivable 14,000
Investment in Richman Refineries 14,000
(140,000 shares @ $0.10)
Aug. 15: Cash 14,000
Dividends receivable 14,000

Oct. 11: Cash 2,500
Dividend income 2,500
(50,000 shares @ $0.05; see note below)
Dec. 31: Investment in Lub Oil 7,000
Equity in earnings of Lub Oil 7,000
($10,000 profit for last six months × 70% share)
Dec. 31: Investment in Richman Refineries 48,000
Equity in earnings of Richman 48,000
($80,000 profit for last six months × 60% share)
Note: The October 11 dividend by Discovery Co. was $0.05 per share. King Oil owns 50,000
shares for a 2% interest. Therefore Discovery must have 2,500,000 shares outstanding for a
total dividend of $125,000. As earnings since acquisition are only $50,000, 60% of the
dividend could be considered by King to be a return of investment, and would be recorded as
follows:
Oct. 11: Cash 2,500
Dividend income 1,000
Investment in Discovery Co. 1,500
In addition, since the investment in Discovery Co. is a passive investment, IFRS requires it to be
reported at fair value on the SFP on Dec. 31. No fair value has been calculated since the problem
does not provide us with the necessary information.

P6-13
Measure:
80% Purchase of Sloan Ltd., January 1, 20X2
Purchase price $3,000,000
100% fair value based on purchase price [$3,000,000 × (100%/80%)] $3,750,000
Less carrying value of Sloan’s net identifiable assets (3,300,000)
= Fair Value Increment, allocated below $450,000
Fair value
FVI Allocated
Increment
Accounts receivable $(75,000) $(75,000)
Capital assets $200,000 $200,000
Long-term liabilities $62,500 $62,500
Total fair value increment allocated to identifiable assets (187,500)
Balance of FVI allocated to goodwill @ 100% $262,500
NCI value = 20% of $3,750,000 $750,000
Amortize:
FVI
Allocated
Amort.
Period Amort.
Amort./
impairment in
previous years
20X2-20X4
Amort./
impairment
loss during
20X5
Balance of
FVI
remaining at
the end of
20X5
per year
Accounts receivable $(75,000) $(75,000) $0
Capital assets $200,000 20 $10,000 $30,000 $10,000 $160,000
Long-term liabilities $62,500 8.5 $7,353 $22,059 $7,353 $33,088
Goodwill $262,500 $262,500
Total $450,000 $(22,941) $17,353 $455,588
1. Consolidated SFP amounts, December 31, 20X5:
a. Patents:
(1) If the intercompany sale was at fair value,
then the loss should not be reversed and the
patents would remain at carrying value $263,000
(2) If the original carrying value of the sold patent
is unimpaired, then the unrealized loss can
be amortized: 263,000 + (20,000 × 2/5) or,
263,000 + 20,000 – 20,000 × 3/5 $271,000

b.
NCI value = 20% of $3,750,000 750,000
Sloan, change since acquisition
December 31, 20X5
1,409,00
0
January 1, 20X2
1,100,00
0
309,000
× 20% 61,800
Unrealized profits (ending inventory):
Unrealized gain in EI from upstream sale (2,500 ×
20%) (500)
Amortizations of FVI:
Accounts receivable 75,000
Capital assets: ($200,000/20) × 4 (40,000)
Long-term liabilities: ($62,500/8.5) × 4 (29,412)
5,588
× 20% 1,118
Non-controlling interest assuming (a)(1) $812,418
Plus 20% of remaining unrealized loss
20,000 × 3/5 2,400
Alternate calculation of NCI:
20% of Sloan equity on Dec. 31, 20X5 $721,800
Unamortized FVI on Dec. 31, 20X5 $455,588
× 20% 91,118
Unrealized gain in EI from upstream sale (2,500 ×
20%) (500)
$812,418
Plus 20% of remaining unrealized loss
20,000 × 3/5 2,400

Ch06 beechy ism

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