Hilton7e Sm Ch06 Final Revised

8/15/2019 Hilton7e Sm Ch06 Final Revised

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Chapter 6

Intercompany Inventory and Land Profits

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A "rie# description o# the ma$or points co ered in each case and pro"lem.

CA%&%

Case 6-1

'n this case( st)dents are as*ed to ill)strate the impact o# intercompany sales and )nreali+ed

pro#its in in entory on the separate entity and consolidated #inancial statements. %t)dents are

also as*ed to e,plain how "asic acco)nting principles are applied when acco)nting #or these

intercompany transactions.

Case 6-2

his case( adapted #rom a CA e,am( in ol es a change #rom e )ity method to #air al)e

method #or an in estment in a company that has e,perienced s)"stantial losses d)ring theperiod.

Case 6-3his is a m)lti-s)"$ect case #rom a CA e,am. %t)dents are as*ed to resol e a n)m"er o#

acco)nting iss)es incl)ding re en)e recognition( go ernment grants( contingency and

intercompany transactions.

Case 6-4

'n this case( adapted #rom a CA e,am( st)dents are as*ed to identi#y acco)nting iss)es related

to the preparation o# consolidated #inancial statements #or an /0 -owned s)"sidiary and a

0 -owned in estee company. 'ntercompany transactions and ac )isition di##erential ha e

not "een properly acco)nted #or.

Case 6-5

'n this case( adapted #rom a CA e,am( management appears to "e manip)lating income to

minimi+e the "on)s paid to )nion employees. %t)dents are re )ired to analy+e contro ersial

acco)nting iss)es incl)ding the al)ation o# in entory( p)rchase ret)rns and goodwill.

Case 6-6

his is a m)lti-s)"$ect case #rom a CA e,am. %t)dents are as*ed to resol e a n)m"er o#

acco)nting iss)es incl)ding re en)e and e,pense recognition( contri")tions to a partnership(

contingent consideration and o##setting o# assets against lia"ilities.

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R 4L&M%Problem 6-1 526 min.7

A short pro"lem re )iring calc)lation o# selected acco)nts #or consolidated statements whenthere are )nreali+ed pro#its in in entory and an e,planation o# impact o# intercompany

transactions on non-controlling interest.

Problem 6-2 520 min.7

his pro"lem consists o# a consolidated income statement that has "een incorrectly prepared

and re )ires correcting. 'ntercompany transactions and )nreali+ed pro#its in opening and

closing in entory ha e "een o erloo*ed.


A short pro"lem re )iring calc)lation o# selected acco)nts related to land #or separate entity

and consolidated #inancial statements #or three years when there are )nreali+ed pro#its in and

an ac )isition di##erential pertaining to land.

Problem 6-4 5 0 min.7

A parent has )sed the cost method to acco)nt #or its in estments in its two s)"sidiaries. here

are )nreali+ed pro#its in the in entory o# all three companies. he pro"lem re )ires the

preparation o# a consolidated income statement( a calc)lation o# consolidated retained

earnings( a calc)lation o# in estment income )nder the e )ity method and an e,planation o#

how the re en)e recognition principle is applied when ad$)sting #or )nreali+ed pro#its.

Problem 6-5 5 0 min.7

8nreali+ed in entory and land pro#its are in ol ed o er a two-year period. he pro"lem calls #or

e )ity method $o)rnal entries as well as the calc)lation o# consolidated net income each year(

a statement showing changes in non-controlling interest( and a calc)lation o# the "alance in

the in estment acco)nt )nder the e )ity method.


hree related companies are in ol ed in selling goods to each other. he pro"lem re )ires a

calc)lation o# consolidated pro#it and consolidated retained earnings when the parent )sed the

cost method.



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A comprehensi e pro"lem re )iring an ac )isition di##erential calc)lation( amorti+ation

sched)le( and a consolidated "alance sheet and statement o# changes in e )ity )nder the

entity theory pl)s an e,planation o# how the de"t to e )ity ratio wo)ld change )nder the parentcompany e,tension theory. he s)"sidiary was ac )ired se en years ago: there are

intercompany pro#its 5and losses7 in land and in entory: and the parent has )sed the cost

method to acco)nt #or its in estment.

Problem 6- 530 min.7

A parent has three s)"sidiaries that cond)ct intercompany transactions with each other and

the pro"lem re )ires the parent;s e )ity method $o)rnal entries and calc)lations o#

consolidated net income and consolidated retained earnings.

Problem 6-! 526 min.7

A parent has )sed the cost method to acco)nt #or its in estment and the pro"lem re )ires the

calc)lation o# consolidated net income attri")ta"le to the parent


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his comprehensi e pro"lem co ers e erything ill)strated to date and re )ires the preparation

o# a consolidated income statement and consolidated statement o# #inancial position when the

parent has )sed the e )ity method pl)s the calc)lation o# goodwill and non-controlling interest

)nder the parent company e,tension theory.

Problem 6-14 590 min.7 5 repared "y eter %ecord( %aint Mary&4-4A%&? R 4L&M%#eb Problem 6-1

he st)dent answers a series o# )estions "ased on the 2011 #inancial statements o# R =A

inc.( a Canadian company. he )estions deal with intercompany transactions in in entory and

land and the impact o# changes in acco)nting policies #or in entory and land on certain ratios.

#eb Problem 6-2

he st)dent answers a series o# )estions "ased on the 2011 #inancial statements o# Ceno )s

&nergy 'nc.( a Canadian company. he )estions deal with intercompany transactions inin entory and land and the impact o# changes in acco)nting policies #or in entory and land on

certain ratios.

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$%L&'I%($ '% )*+I*# ,&*$'I%($1 he pants are similar to a single economic entity composed o# a parent company and its

three s)"sidiaries. he trans#er o# economic reso)rces "etween the poc*ets in these

pants simply changes the location o# the reso)rces ")t does not represent re en)e or

e,pense( or pro#it or loss( to the com"ined entity.

2 he types o# intercompany re en)e and e,penses eliminated in the preparation o# the

consolidated income statement incl)de sales and p)rchases( rentals( interest( and

management #ees. hese eliminations ha e no e##ect on the amo)nt o# consolidated net

income or the net income attri")ta"le to non-controlling interest.

3 'ntercompany sales when collected and paid( intercompany cash sales( and intercompany

"orrowings do not alter the total cash o# the consolidated entity. 't is the same concept as

an indi id)al trans#erring cash among his@her "an* acco)nts( or #rom one poc*et to

another.

4 he intercompany pro#it recorded in eriod one is considered to "e reali+ed when the

partic)lar asset is sold o)tside the consolidated entity "y the p)rchasing a##iliate.

5 Re en)e sho)ld "e recogni+ed when it is earned with a transaction o)tside o# the

reporting entity. he reporting entity #or consolidated #inancial statements encompassesthe parent and all o# its s)"sidiaries. %ince intercompany transactions are transactions

within the reporting entity 5not o)tside o# the reporting entity7( they m)st "e eliminated

when preparing consolidated #inancial statements.

6 his statement is tr)e i# the selling a##iliate has an income ta, rate o# 0 . he 1(000

red)ction #rom ending in entory red)ces the consolidated entity;s net income. A

corresponding red)ction o# 00 in income ta, e,pense trans#ers the ta, #rom an

e,pense to an asset on the consolidated "alance sheet. >hen the 1(000 pro#it iss)"se )ently reali+ed( the 00 is trans#erred #rom the consolidated "alance sheet to the

consolidated income statement in order to achie e a proper matching o# e,pense to

re en)e.



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7 he matching principle re )ires that e,penses "e matched to re en)es. >hen

intercompany pro#its are eliminated #rom the consolidated #inancial statements( the

income ta, e,pense related to those pro#its m)st also "e eliminated. >hen the

pre io)sly )nrecogni+ed intercompany pro#its are recogni+ed in a later period( the income

ta, on these pro#its m)st "e e,pensed.

here is no ad$)stment to income ta, e,pense corresponding to the elimination o#

intercompany re en)e and e,penses "eca)se there is no change to the income "e#ore

ta, #or the consolidated entity: there#ore( there sho)ld "e no change to the ta, e,pense

#or the consolidated entity. >hate er ta, was paid or sa ed #or the two entities will not

change #or the consolidated entity since the income "e#ore ta, did not change. 'ncome

ta, e,pense is ad$)sted on consolidation when consolidated pro#its are changed d)e to

ad$)stments #or )nreali+ed pro#its.

! 'deally( intercompany losses sho)ld "e eliminated in the same manner as intercompany

gains. 'n t)rn( an impairment test wo)ld "e carried o)t. '# the reco era"le amo)nt were

less than the carrying amo)nt( an impairment loss wo)ld "e reported. >hen the

impairment loss is greater than the intercompany loss( one can get to the same res)lt "y

not re ersing the intercompany loss and simply reporting an impairment loss to "ring the

carrying amo)nt down to the reco era"le amo)nt.

1" he elimination o# intercompany sales and p)rchases red)ces sales re en)e and cost o#

goods sold on the consolidated income statement. =o other items on the consolidated

statements are a##ected. he elimination o# intercompany pro#its in ending in entory

a##ects the #ollowing elements o# the consolidated statementsB cost o# goods sold is

increased: income ta, e,pense is decreased: net income is decreased: net income

attri")ta"le to the parent is decreased: net income attri")ta"le to the non-controlling

interest is decreased 5i# the s)"sidiary was the seller7: the asset in entory is decreased:

de#erred income ta, assets are increased: non-controlling interest in net assets is

decreased 5i# the s)"sidiary was the seller7: and consolidated retained earnings is

decreased.

11 or a downstream transaction( the ad$)stment #or )nreali+ed pro#its is applied to the

parent


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which is shared "etween the parent and non-controlling interest. 'n other words( the non-

controlling interest is a##ected "y elimination o# pro#it on )pstream transactions ")t is not

a##ected "y the elimination o# pro#it on downstream transactions.

12 At the end o# Dear 1( the )nreali+ed pro#it is remo ed #rom ending in entory and added tocost o# goods sold which decreases income. 'n Dear 2( the )nreali+ed pro#it is remo ed

#rom "eginning in entory( which decreases cost o# goods sold #or Dear 2 and increases

income #or Dear 2. Altho)gh Dear 1 and Dear 2 income "oth m)st "e ad$)sted( the

ad$)stments are o##setting. here#ore( the com"ined income #or the two years does not

change as a res)lt o# the ad$)stments.

13 't will not "e eliminated again on the consolidated income statement #or s)"se )ent

years. Howe er( i# the land remains within the consolidated entity( the )nreali+ed gain will"e eliminated in the preparation o# all s)"se )ent consolidated "alance sheets and

statements o# retained earnings )ntil s)ch time as the land is sold to o)tside parties.

14 Ad$)stments are re )ired on consolidation to "ring the consolidated "alances to the

amo)nts that wo)ld ha e "een on the s)"sidiary


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transactions "etween a parent and s)"sidiary( the entire amo)nt o# )nreali+ed pro#it is

eliminated and charged to the parent


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earnings impaired "y the poor per#ormance o# )een Limited 5 )een7. he #inancial

statements o# ing will "e widely distri")ted d)e to the share iss)e planned #or Dear 1/. he

a)ditor m)st "e aware o# management;s "ias and m)st ens)re that earnings and assets are

not o erstated.

he dr)g ind)stry is highly competiti e. he principal assets in this ind)stry are intangi"le d)e

to the large e,pendit)res on research and de elopment. he nat)re o# these assets creates

pro"lems. =ote disclos)re will "e ery important.

he relationship "etween ing and )een is )ncooperati e. 't will( there#ore( "e di##ic)lt to

o"tain s)##icient and appropriate a)dit e idence to s)pport the acco)nting method and al)es

)sed to record the )een in estment.

.cco/ntin for the investment

he choice o# the appropriate method to acco)nt #or the )een in estment depends primarily

on whether ing has signi#icant in#l)ence o er )een. he #ollowing #actors indicate that ing

does ha e signi#icant in#l)enceB

• ing;s ownership meets the 20 g)ideline:

• ing had mem"ership on the "oard o# directors( and ol)ntarily ga e it )p:

he #ollowing #actors indicate that ing does not ha e signi#icant in#l)enceB• inter-company transactions ha e declined and are no longer material:

• di idends ha e not "een paid recently( and perhaps earnings o# )een will not accr)e

to ing: and

• gi en the )ncooperati e nat)re o# )een and ing;s relationship( it does not appear

that ing has signi#icant in#l)ence o er )een.

(Students could have discussed other valid factors in determining whether King exerts

significant influence over Queen)

'# ing is a"le to e,ert signi#icant in#l)ence o er )een( then it will contin)e to )se the e )ity

method o# acco)nting #or the in estment. '# ing no longer has signi#icant in#l)ence( the

in estment in )een wo)ld "e reported at #air al)e. 't is di##ic)lt to determine whether

management o# ing manip)lated the change in in#l)ence "y ceasing to trade with )een and

remo ing the ing representati e #rom )een;s "oard o# directors. 'n any case( the change in



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method wo)ld "e acco)nted #or prospecti ely since the change was made d)e to a change in

circ)mstance. here#ore( the prior period ad$)stment reported in the dra#t #inancial statements

wo)ld not "e appropriate and sho)ld "e re ersed.

(Students should have reached a conclusion on the issue of significant influence and proceeded with their analysis of either the fair value method or the e uity method! "his

response discusses #oth methods! $owever, students were not expected to provide an

analysis of #oth the e uity and the fair value methods!)

* /ity method

ing m)st re#lect its share o# )een;s c)rrent loss. As shown in Appendi, '( the in estment

wo)ld "e written down #rom 29. million to +ero "eca)se ing


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Gi en that )een s)##ered h)ge losses and gi en that )een


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Re erse ad$)stment #or prior period ad$)stment 2( 00

Restated "alance )nder e )ity method( "eginning o# year 29( 00

&ntries #or year )nder e )ity methodB

Reali+ed pro#it in "eginning in entory 522 , 6(0007 1(1008nreali+ed pro#it in ending in entory 522 , 1(0007 52207

%hare o# )een


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• 4y e,cl)ding the go ernment grants #rom re en)es( MCL wo)ld "e in a loss position. '#

the year-to-date res)lts are typical( the long-term pro#ita"ility o# MCL may "e marginal.

Howe er( s)ch losses may( howe er( "e normal in a start-)p sit)ation.

• ?=? is the sole client and can cancel the contract i# the terms o# the contract are not

met. ?eli ery dates ha e "een missed: howe er( recent deli eries ha e "een made on

time.

• MCL;s wor*ing-capital position indicates potential insol ency i# go ernment grants are

not recei ed. MCL has not met the terms o# the $o"-creation grant( and this may e,plain

why the grant has not yet "een recei ed.

• he wor*ing-capital position has deteriorated #)rther "eca)se ?=? has not paid #or the

caissons recei ed to date. he metal caissons m)st meet high standards o# )ality( and

?=?;s inspection process may ha e slowed down appro als. Alternati ely( the #act that

?=? has not paid may mean that there are pro"lems that ha e not yet "een disclosed

to )s.

• here is nothing to indicate that the contract with ?=? will "e renewed at the end o#

#i e years or that the man)#act)ring process can "e changed to another prod)ct at that

time.

• he laws)it pending against MCL( i# s)ccess#)l( co)ld dri e the company into

"an*r)ptcy.

• Altho)gh there are many #actors that raise a concern a"o)t the a"ility o# MCL to

contin)e as a going concern( MCL contin)es to operate as a going concern. ?=? has

not yet cancelled the contract and the "an* has not called the loan. here#ore( MCL

sho)ld contin)e to report on a going-concern "asis. Howe er( they sho)ld disclose their

reliance on the ?=? contract and the signi#icant ris*s that may "ear on their a"ility to

contin)e as a going concern.

(Candidates were expected to address the going'concern issue! "he #etter responses presentedsome uantitative analysis! Most candidates failed to address this ma or issue in ade uate depth!)

overnment rants

At present( 9E o# MCL;s total wor*#orce is employed in the plant( which is "elow the /6

speci#ied in the $o"-creation grant. '# the conditions cannot "e met "y their d)e date( the grant

recei a"le will need to "e written o##.

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he recording o# the grants as re en)e is inappropriate )nder GAA since the grants pertain

to the cost o# the plant and cost o# employees. he grants do not pertain to the sale o# goods

or pro ision o# ser ices. he ")ilding grant sho)ld "e netted against the capitali+ed cost o# the

plant( or recorded as a de#erred credit and amorti+ed to income o er the li#e o# the plant. he

$o"-creation grant sho)ld "e de#erred and amorti+ed to income o er the three-year period o#the agreement. 't will "e necessary to disclose the terms o# the grants.

(Most candidates discussed the accounting implications of government grants in ade uate depth!)

Late delivery penalties

)rther re iew o# the contract with ?=? is re )ired. 't is apparent that the late deli ery

penalties 5 110(000 #or 66 days at 2(000 per day7 #or the #irst three caissons ha e not "een

accr)ed( and this iss)e m)st "e disc)ssed with management. ?=? sho)ld "e contacted to #ind

o)t whether the penalties will "e en#orced or wai ed and whether speci#ications ha e "een met

on all the caissons deli ered to date. '# the penalty is not wai ed( an accr)al #or the amo)nt o#

the penalty will "e re )ired.

Clari#ication is needed on the proced)res to "e #ollowed i# a caisson pro es )naccepta"le. o

date no caissons ha e "een ret)rned: howe er( the amo)nt o# the penalties may increase with

each day that the speci#ications contin)e not to "e met. Related disclos)res #or the contracts(

incl)ding the penalties( will "e re )ired.

(Most candidates did not uantify the amount of the possi#le penalty payment!)

Investment in $I

>ith a !0 ownership interest( MCL li*ely has control o er M%'. 8nder A% &( the in estment

in M%' can "e reported on a consolidated "asis or )sing the cost method or e )ity method.

%ince M%' is reporting pro#it in e,cess o# di idends paid( the consolidated statements or the

e )ity method wo)ld increase pro#its #or MCL. %ince consolidated statements are generally

iewed as more )se#)l( ' will ass)me that MCL will choose to report its in estment on a

consolidated "asis. %ince M%' reported a pro#it o# 0(000( the consolidated net income

attri")ta"le to MCL


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goods sold "y 30(000. %ince the pro#it o# 30(000 was initially reported "y M%'( "oth the

shareholders o# MCL and the non-controlling interests in M%' will "e a##ected when the pro#it is

eliminated. he portion attri")ta"le to the shareholders o# MCL is 1/(000 5!0 , 30(0007.

here#ore( the consolidated net income attri")ta"le to MCL


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iscellaneo/s iss/es

he #ollowing iss)es m)st also "e consideredB

1. >e m)st disc)ss with management whether there are plans to man)#act)re prod)cts #or

c)stomers other than the ?=?. MCL is economically dependent on the ?=? contract( andthis relationship m)st "e disclosed.

2. A#ter re iewing the go ernment contract and a#ter disc)ssions with management and the

?=?( we sho)ld consider whether the present method o# recording re en)e at the time the

prod)ct is shipped is appropriate. erhaps( re en)e sho)ld not "e recogni+ed )ntil the

client con#irms that the detailed speci#ications ha e "een met.

3. MCL;s lawyers will "e contacted to assess the progress o# the ?e)tsch rod)ction laws)it.

&ither the amo)nt o# the potential damages m)st "e accr)ed or the appropriate disclos)re

made a"o)t the contingent lia"ility depending on the certainty with respect to the o)tcome

o# the laws)it. his is a critical iss)e considering the materiality o# the amo)nt and its

impact on MCL as a going concern.

. >e m)st #ind o)t why no principal payments o# long-term de"t ha e "een recorded on the

#inancial statements. '# re )ired payments ha e not "een made( MCL co)ld "e in de#a)lt(

and this wo)ld "e yet another consideration in the assessment o# whether MCL is a going

concern. rincipal payments may also ha e "een erroneo)sly charged as interest e,pense.

6. he c)rrent portion o# the long-term de"t sho)ld "e classi#ied separately and disclos)re

made o# the de"t agreement and the principal payments to "e made o er the ne,t #i e

years.

!. 'nterest can "e capitali+ed d)ring the constr)ction period only )ntil prod)ction commences.

't appears that interest has "een capitali+ed "eyond this period and an ad$)stment sho)ld

"e made. nce properly calc)lated( the amo)nt sho)ld "e disclosed in the notes to the

#inancial statements.

Copyright © 2013 McGraw-Hill Ryerson Limited. All rights reser ed.Solutions Manual, Chapter ! 1E


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9. ?epreciation has "een calc)lated on plant e )ipment at what appears to "e a low rate.

he appropriateness o# the rate will ha e to "e assessed gi ing regard to the )se#)l li#e o#

the related assets "eing depreciated.

Case 6-4

Memo toB A)dit artner

romB A)dit %enior

ReB ? Ltd. J Consolidated inancial %tatements

As re )ested( ' ha e prepared the #ollowing memorand)m( which o)tlines the important

#inancial acco)nting iss)es o# ? and =( its s)"sidiary( and ( its in estee company.

1. he shares iss)ed "y ? to p)rchase = and sho)ld "e meas)red at their #air al)e at the

date o# ac )isition. or now( ' will ass)me that the #air al)e o# 1!0(000 common shares

was 2(000(000 when ? p)rchased its in estments in = and .

2. 't appears that there has "een no allocation o# the ! 0(000 ac )isition cost e,cess #or =

in the consolidated #inancial statements. he e,cess sho)ld "e #irst "e allocated to

identi#ia"le assets. Any remaining e,cess sho)ld "e allocated to goodwill. he goodwill

sho)ld "e chec*ed #or impairment at the end o# each year and written down i# there is an

impairment loss.

3. Gi en that = had capitali+ed some research and de elopment e,pendit)res( there may "esome al)e in what they were de eloping. he pro$ects that met the conditions #or

capitali+ation sho)ld "e meas)red at #air al)e at the date o# ac )isition ass)ming that the

assets can "e separately identi#ied and relia"ly meas)red. 'n t)rn( these assets sho)ld "e

amorti+ed o er their )se#)l li es. Amorti+ation sho)ld commence once the assets are "eing

)sed in operations and are generating re en)e #or the company.

. ? can )se either the entity theory or parent company e,tension theory in preparing the

consolidated #inancial statements. 8nder these theories( =


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Ac )isition cost #or /0 interest in = (000(000

'mplied al)e #or 100 interest in = 5 (000(000 @ ./7 6(000(000

=C'


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10. 4ased on the disc)ssion a"o e( ' ha e recalc)lated the #ollowing acco)nt "alances #or

the consolidated #inancial statements in the sched)les "elowB

Goodwill

'n estment in 5)nder e )ity method7=on-controlling interest on "alance sheet

ro#it

.llocation and amorti8ation of ac /isition cost for investment in (

Cost o# /0 in estment( %eptem"er( Dear 1 (000(000

'mplied al)e o# 100 in estment 5 (000(000 @ ./7 6(000(000

Carrying amo)nts o# =


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Retained earnings o# ( A)g. 31( Dear 2 1(910(000

Retained earnings o# ( at ac )isition 1(9!0(000

Change - 60(000

LessB pro#it in ending in entory 5200(000 , 1 - . 7 - 120(000

Ad$)sted increase - 190(000?


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%hareholders o# ? 60( 00

=on-controlling interests 520 , E/(0007 1E(!00

90(000

Case 6-5)*P%)' %( .CC%&('I( P%LICI*$ &$* I( '>* I(.(CI.L $'.'* *('$ % %%

,&.LI'; .&'% P.)'$ LI I'* %) '>* ;*.) *( * *:)&.); 2 ? ;ear 11

o the mem"ers o# the )nion( Good )ality A)to arts LimitedB

' ha e "een engaged to analy+e the #inancial statements o# Good )ality A)to arts Limited

5G 7 #or the year ended e"r)ary 2/( Dear 11 and determine whether there are any

contro ersial acco)nting iss)es. or the p)rposes o# this report( Ocontro ersial acco)nting

iss)esO will "e de#ined as acco)nting policies that ha e the e##ect o# red)cing payments )nder

the pro#it-sharing plan to the )nion mem"ers.

he e,istence o# the pro#it-sharing contract creates incenti es #or the management o# G to

ma*e acco)nting choices that red)ce net income and there"y red)ce the payments that m)st

"e made to the )nion mem"ers. Acco)nting standards #or pri ate enterprises 5A% &7 allow

considera"le #le,i"ility and $)dgment "y the preparers o# #inancial statements in selecting

acco)nting policies. %ince the company is pri ately owned( the costs 5real or percei ed7 o#

reporting lower income may "e small relati e to the sa ings generated. or e,ample( the

e##ect o# lower income on new or e,isting lenders may "e considered less important than the

sa ings deri ed #rom red)ced pro#it sharing. 'n addition since the term o# the contract is only

three years( some o# the income de#erral may yield permanent sa ings i# the pro#it-sharing

component is not renewed in s)"se )ent contracts.

'n analy+ing the acco)nting policies( ' will "e ta*ing as strong a position as can "e $)sti#ied to

s)pport the )nion;s o"$ecti e o# ma*ing net income as large as possi"le. his is in con#lict with

the o"$ecti e o# management( which is to red)ce net income.

Inventory 0rite-do0n

Acco)nting practice re )ires that in entory "e meas)red at the lower o# cost and net reali+a"le

al)e. h)s( i# the in entory cannot "e sold( management can $)sti#y its write-o##. Howe er(

since m)ch o# the in entory has "een on hand #or se eral years( the decision to write it o## this



25/82

year raises a )estion as to the moti ation #or the write-o##. Management co)ld "e writing o##

the in entory solely to red)ce income( there"y red)cing the payments re )ired )nder the

pro#it-sharing plan. he pro"lem m)st "e considered #rom two points o# iew. irst( is the

in entory gen)inely )nsalea"leP '# not( then the entry to write down the in entory m)st "e

re ersed( res)lting in a higher net income #ig)re. Ass)ming that the in entory is )nsalea"le(the ne,t )estion is whether the write-o## legitimately "elongs in the c)rrent period. '# the

in entory "ecame )nsalea"le in the c)rrent year( then the write "elongs in the c)rrent period.

'# the in entory was )nsalea"le in prior years( it sho)ld ha e "een written down in prior years.

'n that case( the #inancial statements sho)ld "e retroacti ely restated to correct the error in the

appropriate period.

.llo0ance for ret/rns

he ret)rn estimate represents a legitimate cost o# doing ")siness d)ring the period. >hat isin )estion is whether the more conser ati e estimate represents a gen)ine re#lection o# a

change in economic conditions or an opport)nistic )se o# acco)nting $)dgment to red)ce net

income. G ;s a)ditor wo)ld pro"a"ly not o"$ect to the increased e,pense since conser atism

is a *ey acco)nting principle. Howe er( the )nion;s interests are not ser ed "y conser atism.

&se of accelerated depreciation

here is no re )irement that all assets owned "y a #irm "e depreciated in the same way.

h)s( G can arg)e that the )se o# an accelerated method on the new e )ipment "etterre#lects the pattern in which the asset


26/82


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red)ction o# e,penses7 or as a red)ction in the capital cost o# the comple, 5"alance sheet7.

'# C inc)rred additional costs "eca)se o# the delay in opening the new comple,( and the

penalty was compensation #or those additional costs inc)rred( then the penalty sho)ld "e )sed

to o##set those costs inc)rred. '# the additional costs inc)rred related to the capital cost o# thecomple,( then the penalty sho)ld "e )sed to red)ce the capital cost o# the comple,. Analogies

might "e drawn with the ' R% standard on go ernment grants 5'A% 207. his section

recommends that payments s)ch as grants sho)ld "e treated as cost red)ctions. he parallel

here is that the penalty payment is li*e a grant and there#ore sho)ld "e treated as a red)ction

in the capital cost o# the comple, or in costs e,pensed as inc)rred.

n the other hand( i# the penalty payment was compensation #or lost re en)e( then an

arg)ment might "e made #or treating the penalty as re en)e. '# the penalty is treated asre en)e( then we m)st consider whether it sho)ld "e disclosed separately. %ince the penalty

payment is non-rec)rring( #inancial statement )sers wo)ld #ind separate disclos)re in#ormati e

"eca)se the portion o# re en)e and income that is non-rec)rring can "e al)ed di##erently "y

the mar*et and "y indi id)al in estors and in#l)ence the e al)ation o# management.

here#ore( i# material( the penalty sho)ld "e disclosed as a separate re en)e item either on

the #ace o# the income statement or in the notes.

@)/e $t Aac /esB

ic*et proceeds

C wo)ld pre#er to recogni+e re en)e as early as possi"le with the earliest date "eing the

sale o# the tic*ets. Howe er( the most appropriate treatment #or recogni+ing re en)e #or QR)e

%t. Fac )es is when the show is per#ormed.

*AS + , paragraph +-' Admission fees,re )ires Qre en)e #rom artistic per#ormances( "an )ets

and other special e ents is recogni+ed when the e ent ta*es place. >hen a s)"scription to a

n)m"er o# e ents is sold( the #ee is allocated to each e ent on a "asis which re#lects the e,tent

to which ser ices are per#ormed at each e ent.

er#ormance is the critical e ent in the earnings process( and there#ore re en)e is not earned

)ntil the show is p)t on. here is no ass)rance that the prod)ction will "e completed( or that

Copyright © 2013 McGraw-Hill Ryerson Limited. All rights reser ed.2/ Modern Advanced Accounting in Canada, %e enh &dition


29/82

any per#ormance #or which tic*ets are sold will ta*e place 5#or e,ample( the show co)ld "e

closed down "e#ore it "egins its r)n or e en a#ter it "egins its r)n7. 'n that case( it will "e

necessary to re#)nd the ac )isition cost o# tic*ets to ")yers.

'nterest on tic*et proceeds

C earns a signi#icant amo)nt o# interest "y holding the money paid in ad ance "y tic*et

p)rchasers. he interest re en)e co)ld "e treated as either income or de#erred re en)e

depending on the #acts and circ)mstances. Management


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'# C chooses to capitali+e the pre-prod)ction costs( they m)st "e amorti+ed o er a

reasona"le period o# time. ne method is to e,pense costs against net re en)es dollar #or

dollar )ntil the pre-prod)ction costs are co ered 5i.e. cost reco ery #irst method7. >ith this

method the show will generate no income )ntil the pre-prod)ction costs ha e "een reco ered. A second alternati e is to amorti+e o er the estimated li#e o# the show.

# co)rse( once the show opens( ongoing prod)ction costs sho)ld "e e,pensed as inc)rred.

.dvertisin and promotion

C paid 12 million #or ad ertising and promotion costs a large part o# which related to the

QR)e %t. Fac )es show. hese costs sho)ld "e e,pensed as inc)rred "eca)se it is di##ic)lt toassess the e##ecti eness o# ad ertising costs i.e. to determine whether they pro ide #)t)re

"ene#it.

ebt defeasance

C has str)ct)red the de"t-retirement transaction as an in-s)"stance de#easance o# de"t.

he e##ect o# the transaction is to remo e de"t #rom the "alance sheet and there"y red)ce the

amo)nt o# de"t reported 5th)s( #or e,ample( decreasing the de"t-to-e )ity ratio7.8n#ort)nately( ' R%s do not allow the )se o# this type o# arrangement.

'A% 1( paragraph 32 states QAn entity shall not o##set assets and lia"ilities or income and

e,penses( )nless re )ired or permitted "y an ' R%. aragraph 33 states QAn entity reports

separately "oth assets and lia"ilities( and income and e,penses. ##setting in the statements

o# comprehensi e income or #inancial position or in the separate income statement 5i#

presented7( e,cept when o##setting re#lects the s)"stance o# the transaction or other e ent(

detracts #rom the a"ility o# )sers "oth to )nderstand the transactions( other e ents and

conditions that ha e occ)rred and to assess the entity


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a. c)rrently has a legally en#orcea"le right to set o## the recogni+ed amo)nts: and

". intends either to settle on a net "asis( or to reali+e the asset and settle the lia"ility

sim)ltaneo)sly.

4oth o# these conditions m)st "e met in order to o##set a #inancial asset and a #inancial lia"ility.

Howe er( the #acts indicate that the holders o# the company


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4ased on the in#ormation a aila"le( it is not possi"le to concl)de whether these sales do

represent part o# ongoing operations. >e sho)ld re iew the sale agreements and "oard

min)tes to con#irm that these sales are indeed Qongoing. '# the sales are ongoing( the theatres

wo)ld ha e to "e reported as a c)rrent asset similar to in entory. '# the theatres contin)e to "e

reported as part o# property( plant and e )ipment( then it wo)ld "e inappropriate to report thesales thro)gh re en)e: the sales sho)ld "e reported as gains on sale.

'# the sales can "e considered part o# ongoing operations( consideration sho)ld "e gi en to

whether there sho)ld "e separate disclos)re o# the re en)e #rom theatre sales. 4)rying the

re en)es #rom theatre sales will ma*e it more di##ic)lt #or )sers and the capital mar*ets to

al)e the company "eca)se re en)e #rom sales o# theatres may not "e as reg)lar or

predicta"le as re en)es #rom other so)rces. '# s)ch sales are material( separate disclos)re o#

re en)e sho)ld "e made either on the #ace o# the income statement or in the notes.

%elling o## a signi#icant n)m"er o# theatres raises the )estion o# whether the n)m"er "eing

sold is large eno)gh to "e considered a discontin)ed operation( re )iring separate disclos)re

o# in#ormation. or the theatre sales to )ali#y as a discontin)ed operation( they m)st

represent a separate ma$or line o# ")siness or geographical area o# operations. My

assessment is that the sale o# theatres sho)ld not "e considered a discontin)ed operation

"eca)se C is contin)ing in the theatre ")siness. '#( #or e,ample( C were ceasing to

operate all o# its mo ie theatres to #oc)s on li e theatre( an arg)ment #or discontin)ed

operations might "e made. 'n this case( the sale o# theatres appears to "e part o# a contin)ingreassessment o# its port#olio o# theatres.

he sales #or pro#it are consistent with management


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#or sale7 are presented separately on the "alance sheet.

Partnership a reement

C #ormed a partnership with an )nrelated company where"y the other company contri")tedcash and C contri")ted tele ision prod)ction e )ipment. As part o# the deal( C withdrew

the cash contri")ted "y the other company #or its own )se. he s)"stance o# the transaction

appears to "e the sale 5rather than contri")tion7 o# assets to the partnership and the recording

o# the gain on sale. 4y )sing this approach( management may "e attempting to increase

income arti#icially "y recogni+ing the #)ll gain.

he #acts s)ggest that this transaction is a partial sale o# assets. '# this is the case( the #)ll

gain sho)ld not "e recogni+ed. he #acts s)pporting this assertion are as #ollows. irst( cashcan "e withdrawn immediately: th)s the partnership acted as a cond)it #or selling o# the

assets. %econd( the deal is "ased on #)t)re pro#its: that is( the al)e o# Ce can then #orm an opinion on the appropriate method o#

acco)nting.

he acco)nting #or the in estment in the partnership depends on Cith a 66 interest( C may "e a"le



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to determine these policies and wo)ld ha e control o er the partnership. '# so( they wo)ld

consolidate the partnership #inancial statements with their own #inancial statements.

'# "oth parties to the partnership ha e e )al say o er the policies o# the partnership( then the

partnership wo)ld "e deemed to "e a $oint ent)re. 8nder ' R% 11( C co)ld report itsin estment )sing the e )ity method.

Concl/sion

As indicated in Appendi, '( income wo)ld decrease i# the pre-prod)ction costs and@or

ad ertising costs ha e "een capitali+ed and sho)ld ha e "een e,pensed. As indicated in

Appendi, ''( income sho)ld "e red)ced #or the )nreali+ed gain on the trans#er o# assets to the

partnership and de"t sho)ld "e increased to re erse the de"t de#easance transaction. A#ter

ad$)stment( the ret)rn on e )ity on an ann)ali+ed "asis is only 1/./ ( which is "elow thecompany


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- capitali8e and later e9pense

- e9pense as inc/rred 15D 15D I

Ad ertising K promotion costs- capitali8e and later e9pense

- e9pense as inc/rred 12D 12D I

?e"t de#easance- if loss 0as previo/sly recorded 5 5 I

- if deferred char e 0as recorded

%ale o# theatres as re en)e

'n estment in partnership- if f/ll consolidation I I

- if proportionate consolidation I I

F (otationsE' I increase? I decrease= H'=G = &? I no change



36/82

.PP*( I II

I P.C' % .CC%&('I( C>.( *$ %(


37/82

Consolidated acco/nt balances

'n entory 5600(000 T 300(000 J 5d7 21(0007 99E(000

Acco)nts paya"le 5!00(000 T 320(000 J 5"7 0(0007 //0(000

Retained earnings( "eginning o# year

A 2( 00(000 %A R@&( "eginning o# year 1(100(000

%A R@&( date o# ac )isition E00(000

Change since ac )isition 200(000

LessB )nreali+ed pro#it in "eginning in entory 5c7 - 10(/00

1/E(200

A


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5100(000 , .60 , .307 16(000 !(000 E(000 5e7

Calc/lation of non-controllin interestE

'ncome o# s)"sidiary 5E(000 @ 10 7 E0(000

AddB opening in entory pro#it 5d7 3(000 Ad$)sted E3(000

10

E(300 5#7

Parent Company

Consolidated Income $tatement

for the C/rrent ;ear

%ales 5600(000 J 5a7 1/0(0007 320(000

Rental re en)e 52 (000 J 5"7 2 (0007

'nterest re en)e 560(000 J 5c7 36(0007 16(000

otal re en)e 336(000

Cost o# goods sold

5360(000 J 5a7 1/0(000 J 5d7 6(000 T 5e7 16(0007 1/0(000

Rent e,pense 52 (000 J 5"7 2 (0007

'nterest e,pense 536(000 J 5c7 36(0007

Administration e,penses 6(000

'ncome ta, e,pense 5 2(000 T 5d7 2(000 J 5e7 !(0007 3/(000

otal e,pense 2!3(000

ro#it 92(000

Attri")ta"le toB

%hareholders o# parent !2(900

=on-controlling interests 5#7 E(300

92(000Proof:

ro#it pre io)sly reported !E(000

AddB opening in entory pro#it 53(000 , E0 7 2(900

91(900

LessB closing in entory pro#it E(000

Consolidated pro#it attri")ta"le to shareholders o# parent !2(900

Copyright © 2013 McGraw-Hill Ryerson Limited. All rights reser ed.3/ Modern Advanced Accounting in Canada, %e enh &dition


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Dears J 6 1E(000 5c7

Dear ! J0J

Intercompany )even/es and *9penses

%ales 5E0(000 T 190(000 T 160(0007 10(000 5d7

Rent 526(000 T 1 (0007 3E(000 5e7

'nterest 10(000 5#7

?i idend 'ncomeB All intercompany #rom >aste K 4aste 3(960 5g7Intercompany Profits

:efore ta9 4"H ta9 .fter ta9

pening in entory J >aste selling

516(000 , .307 (600 1(/00 2(900 5h7

&nding in entory J 4aste selling

5!0(000 , .307 1/(000 9(200 10(/00 5i7

J aste selling522(000 , .307 !(!00 2(! 0 3(E!0 5$7

J >aste selling

5!0(000 , .307 1/(000 9(200 10(/00 5*7

2(!00 19(0 0 26(6!07 5l7

Paste Company


for the ;ear *nded ecember 31? ;ear 6

%ales 5 60(000 T 290(000 T 1E0(000 J 5d7 10(0007 600(000

?i idends 5 3(960 J 5g7 3(9607

'nterest 510(000 J 5#7 10(0007

Rent 5130(000 J 5e7 3E(0007 E1(000

otal income 6E1(000



41/82

Cost o# sales 5300(000 T 1!3(000 T 1 6(000 J 5d7 10(000

J 5h7 (600 T 5l7 2(!00 T 5"7 1(/967 239(E96

General K administrati e 5E3(000 T /(000 T 2E(000 J 5e7 3E(0007 131(000

'nterest 510(000 J 5#7 10(0007

'ncome ta, 529(000 T 96(000 T 9(000 T 5h7 1(/00 J 5l7 19(0 07 E3(9!0otal e,penses !2(936

ro#it 12/(2!6

Attri")ta"le toB

%hareholders o# aste 10E(E10

=on-controlling interests 520 , E (026U T 26 , -1(/00U7 1/(366

12/(2!6

U see part 5c7 #or calc)lation o# E (026 and J1(/00

bD

Calc/lation of consolidated retained earnin s = ecember 31? ;ear 6

Retained earnings o# aste ?ecem"er 31( Dear ! 903(960

ro#it in ending in entory 5$7 53(E!07

Retained earnings o# >aste ?ecem"er 31( Dear ! 1 !(000

Retained earnings o# >aste J ac )isition 0(000'ncrease 10!(000

LessB pro#it in ending in entory 5*7 10(/00

amorti+ation o# ac )isition di##erential 5a7 E(396 T 5"7 1(/96 11(260

Ad$)sted increase /3(E60

aste;s ownership /0 !9(1!0

Retained earnings o# 4aste ?ecem"er 31( Dear ! 9E(000

Retained earnings o# 4aste J ac )isition /0(000

?ecrease 51(0007

LessB amorti+ation o# ac )isition di##erential #or 4aste 5c7 1E(000

pro#it in ending in entory 5i7 10(/00

530(/007

aste;s ownership 96 523(1007

Consolidated retained earnings ?ecem"er 31( Dear ! 9 3(/60



42/82

5c7

ro#it o# >aste 10 (000

AddB pro#it in opening in entory 5h7 2(90010!(900

LessB pro#it in ending in entory 5*7 10(/00

amorti+ation o# ac )isition di##erential 5"7 1(/96

E (026

aste


43/82

Cash 1/(960

'n estment in D Co. 1/(960

96 , 26(000 di idends.

'n estment in D Co. E9(600'n estment income E9(600

96 , 130(000 net income.

'n estment income 13(600

'n estment in D Co. 13(600

o hold "ac* 96 o# the 1/(000 a#ter-ta,

in entory pro#it J D selling

5!0 , 30(000 I 1/(0007.



o hold "ac* the a#ter-ta, land pro#it J

V selling 5!0 , 39(000 I 22(2007.


'n estment in D Co. 9(260 Ac )isition di##erential amorti+ation J Dear 1

'n entory !0(000

& )ipment 6(000@16 I 3(000

!3(000

, Co.


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96 , 1!(000 net loss.


'n estment in D Co. 2(260 Ac )isition di##erential 5e )ipment7 amorti+ation. 53(000 , 96 7



o reali+e opening in entory pro#it J D selling.


'n estment income 22(200o reali+e land pro#it J V %elling



o hold "ac* a#ter-ta, in entory pro#it J V selling

5!0 , 12(0007

(oteE Dear 2 in estment income is 1 (260 5J12(000 J 2(260 T 13(600 T 22(200 J 9(2007

bD Calc/lation of consolidated net income = ;ear 1

=et income o# V 00(000

LessB Land pro#it 22(200

Ad$)sted 399(/00

=et income o# D 130(000

LessB closing in entory pro#it 51/(0007

ac )isition di##erential amorti+ation 5!3(0007

Ad$)sted E(000

Consolidated net income 2!(/00

Attri")ta"le toB

%hareholders o# V 1 (660

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45/82

=on-controlling interests 526 , E(0007 12(260

2!(/00

Calc/lation of Consolidated (et income = ;ear 2

=et income o# V 92(000

LessB closing in entory pro#it 9(200

! (/00

AddB land pro#it reali+ed 22(200

Ad$)sted net income /9(000

=et income 5loss7 o# D 51!(0007

AddB opening in entory pro#it reali+ed 1/(000

LessB ac )isition di##erential amorti+ation 53(0007 Ad$)sted net income 51(0007

Consolidated net income /!(000

Attri")ta"le toB

%hareholders o# V /!(260

=on-controlling interests 526 , -1(0007 52607

/!(000

cD

Chan es in (on-controllin Interest ;ears 1 and 2

4alance Fan. 1 Dear 1 26 , 5190(000 T 106(0007 !/(960

Allocation o# D Co.


46/82

Proof:

D - Common shares 100(000

- Retained earnings 590(000 T 130(000 − 26(000 − 1!(000 − 6(0007 16 (000

- %hareholders; e )ity ?ec. 31( Dear 2 26 (000- 8namorti+ed ac )isition di##erential 3E(000

2E3(000

26

93(260

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dD Calc/lation of Investment in ; Co * /ity ethodD

.s at ecember 31? ;ear 2

%hareholders; e )ity o# D Fan. 1( Dear 1 190(000

Ac )isition di##erential106(000

296(000

V;s ownership 96

Cost o# 96 in estment in D Fan. 1( Dear 1 20!(260

'n estment income J Dear 1 1 (660

Dear 2 1 (260 2/(/00

236(060

LessB ?i idends recei edDear 1 596 , 26(0007 1/(960

Dear 2 596 , 6(0007 3(960 22(600

'n estment in D ?ec. 31( Dear 2 212(660

Proof:

%hareholders; e )ity o# D 26 (000

4alance( )namorti+ed e )ipment 5 6(000 − !(0007 3E(0002E3(000

V;s ownership 96

21E(960

LessB Hold"ac* o# in entory pro#it J V selling 9(200

'n estment in D( ?ecem"er 31( Dear 2 212(660

Problem 6-6

Intercompany profits


pening in entory selling /0(000 32(000 /(000 5a7

L selling 62(000 20(/00 31(200 5"7


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&nding in entory selling 36(000 1 (000 21(000 5c7

L selling 11/(000 9(200 90(/00 5d7

aD Calc/lation of consolidated profit

ro#it o# L 6/0(000

LessB ?i idends

rom M 5/0 , 200(0007 1!0(000

rom 590 , 160(0007 106(000

&nding in entory pro#it 5d7 90(/00 336(/00

2 (200

AddB opening in entory pro#it 5"7 31(200

Ad$)sted pro#it 296( 00

ro#it o# M 3!0(000

ro#it o# 2 0(000

LessB ending in entory pro#it 5c7 21(000

21E(000

AddB opening in entory pro#it 5a7 /(000

2!9(000Consolidated pro#it E02( 00

Attri")ta"le toB

%hareholders o# L 960(300

=on-controlling interests 520 , 3!0(000 T 30 , 2!9(0007 162(100

E02( 00

bD

Calc/lation of consolidated retained earnin s = be innin of c/rrent year

Retained earnings o# L E9!(000

LessB opening in entory pro#it 5"7 31(200

Ad$)sted E (/00

Retained earnings o# M / 3(000

Ac )isition retained earnings 600(000


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'ncrease 3 3(000

L;s ownership /0 29 ( 00

Retained earnings o# !/2(000

Ac )isition retained earnings 60(000'ncrease !32(000

LessB opening in entory pro#it 5a7 /(000

Ad$)sted increase 6/ (000

L;s ownership 90 0/(/00

Consolidated retained earnings J "eginning o# year 1(!2/(000

Problem 6-7

Calc/lation? allocation? and amorti8ation of ac /isition differential

Cost o# /0 in estment( Fan. 1( Dear 3 1(!00(000

'mplied al)e o# 100 in estment 2(000(000

Carrying amo)nts o# Least;s net assetsB

Assets 3(000(000

Lia"ilities 1(600(000

otal shareholders; e )ity 1(600(000

Ac )isition di##erential 600(000 AllocationB N - CA

Acco)nts recei a"le - 20(000

'n entories - 60(000

lant and e )ipment 5net7 36(000

Long-term lia"ilities 100(000 !6(000

4alance J goodwill 36(000

:alance .morti8ation :alanceAan 1 ec 31

;ear 3 ;ears 3 to ;ear ! ;ear !

Acco)nts recei a"le - 20(000 - 20(000

'n entories - 60(000 - 60(000

lant and e )ipment 5net7 36(000 2!(260 (396 (396 5a7

Long-term lia"ilities 100(000 100(000


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Goodwill 36(000 62(200 /(900 39 (100 5"7

600(000 10/( 60 5c7 13(096 5d7 39/( 96

Intercompany reven/es and e9penses

%ales and p)rchases 52(000(000 T 1(600(0007 3(600(000 5e7



Loss on land( F)ly 1( Dear 9

reali+ed in Dear E J Most selling 60(000 20(000 30(000 5#7

pening in entory J Most selling

5312(600 , 0.207 !2(600 26(000 39(600 5g7

J Least selling

5/69(1 0 , 0.307 269(1 2 102(/69 16 (2/6 5h7

31E(! 2 129(/69 1E1(9/6 5i7

&nding in entory J Most selling

5600(000 , 0.207 100(000 0(000 !0(000 5$7

J Least selling

591 (2/0 , 0.307 21 (2/ /6(91 12/(690 5*7

31 (2/ 5l7 126(91 1//(690

'ntercompany di idends declared ")t not paid 5/0 , 100(0007 /0(000 5m7

?e#erred income ta,es J ending in entory 5 0(000 T /6(91 7 126(91 5n7

Calc/lation of consolidated retained earnin s = Aan 1 ;ear !

Retained earnings o# Most( Fan. 1( Dear E

510( 00(000 J 1(000(000 T 360(0007 E(960(000


51/82

LessB ro#it in opening in entory 5g7 39(600

E(912(600

AddB land loss 5#7 30(000

Ad$)sted retained earnings E(9 2(600

Retained earnings o# Least( Fan. 1( Dear E52(300(000 J 00(000 T 100(0007 2(000(000

Retained earnings o# Least at ac )isition 1(000(000

'ncrease 1(000(000

LessB pro#it in opening in entory 5h7 16 (2/6

amorti+ation o# ac )isition di##erential 5c7 10/( 60

Ad$)sted increase 939(2!6 5o7

Most;s ownership /0 6/E(/12

Consolidated retained earnings( Fan. 1( Dear E 10(332(312

Calc/lation of consolidated net income = ;ear !

=et income o# Most 1(000(000

LessB ?i idends #rom Least 5100(000 , /0 7 /0(000

ro#it in closing in entory 5$7 !0(000

Land loss 5#7 30(000 190(000

/30(000

AddB pro#it in opening in entory 5g7 39(600 Ad$)sted net income /!9(600

=et income o# Least 00(000

AddB pro#it in opening in entory 5h7 16 (2/6

66 (2/6

LessB pro#it in closing in entory 5*7 12/(690

amorti+ation o# ac )isition di##erential 5d7 13(096

Ad$)sted net income 12(! 0

Consolidated net income 1(2/0(1 0

Attri")ta"le toB

%hareholders o# Most 1(1E9(!12

=on-controlling interests 520 , 12(! 07 /2(62/

1(2/0(1 0


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Calc/lation of consolidated non-controllin interests = Aan 1 ;ear ! ethod 1D

Least


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LessB pro#it in ending in entory 5*7 12/(690

amorti+ation o# ac )isition di##erential

55c7 10/( 60 T 5d7 13(0967 121(626

Ad$)sted increase 1(0 E(E06 5p7

Most;s ownership /0 /3E(E2Consolidated retained earnings( ?ec. 31( Dear E 11(19E(E2

Proof of non-controllin interest? end of ;ear ! ethod 1D

Retained earnings o# Least 2(300(000

Common shares o# Least 600(000

otal shareholders; e )ity 2(/00(000

LessB pro#it in ending in entory 5*7 12/(690

Ad$)sted shareholders; e )ity 2(!91( 30 AddB )namorti+ed ac )isition di##erential 39/( 96

3(0 E(E06

20

=on-controlling interest( ?ec. 31( Dear E !0E(E/1

Calc/lation of consolidated non-controllin interests = end of ;ear ! ethod 2D

=on-controlling interests at date o# ac )isition 520 , 1(!00(000 @ ./ 7 00(000

Least


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'n estment in Co. 530(000 , /6 7 26(600

'n estment in F Co. 56(000 , E0 7 (600


o record share o# s)"sidiaries; pro#it

'n estment 'ncome 1(230

'n estment in L Co. 53(000 , .E67 2(/60

'n estment in Co. 5 (/00 , ./67 (0/0

o hold "ac* a#ter-ta, in entory pro#it in ending in entory 5 Co.7 and add "ac* a#ter-ta,

in entory

pro#it in "eginning in entory 5L. Co.7

'n estment 'ncome is 0(000 − 1(230 I 3/(990.

bD Calc/lation of consolidated profit attrib/table to shareholders of > Co = ;ear 5

ro#it o# L 20(000

AddB pro#it in opening in entory 5a7 3(000

Ad$)sted pro#it 23(000

H Co.;s ownership E6 21(/60

ro#it o# F 56(0007

H Co.;s ownership E0 5 (6007

ro#it o# 30(000

LessB pro#it in ending in entory 5"7 (/00

Ad$)sted pro#it 26(200

H Co.;s ownership /6 21( 20

Consolidated pro#it attri")ta"le to shareholders o# H Co. J Dear 6 3/(990

cD > Company

Consolidated )etained *arnin s $tatement


Retained earnings( Fan)ary 1 12(000


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AddB pro#it 3/(990

60(990

LessB di idends 10(000

Retained earnings( ?ecem"er 31 0(990

Problem 6-!

Intercompany profits :efore 4"H .fter

ta9 ta9 ta9

pening in entoryU J )rple selling E6(63/ 3/(216 69(323

&nding in entory J )rple selling 1E (000 99(!00 11!( 00

Land J )rple selling

52!0(000 J 203(6007 6!(600 22(!00 33(E00

U 'n entory at selling price 5!E0(000 , !0 7 1 (000

'n entory at cost 5 1 (000 @ 1.307 31/( !2

ro#it E6(63/

Calc/lation of consolidated net income attrib/table to P/rple s shareholders = c/rrent

year

=et income o# )rple 6!/(100

AddB opening in entory pro#it 69(323

!26( 23

LessB &nding in entory pro#it 11!( 00

Land pro#it 33(E00 160(300 Ad$)sted pro#it 96(123

=et income o# %and 2 /(!90

)rple


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he intercompany rentals and interest re en)e@e,pense cancel each other o)t when %and;s

net income is added to )rple;s.


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Calc/lation of consolidated net income = ;ear 5

=et income o# Company !0(000

LessB ?i idends #rom % 510(000 , E0 7 E(000

ro#it in ending in entory 5g7 1(200 10(200E(/00

AddB pro#it in opening in entory 5d7 920

Ad$)sted net income 60(620

=et income o# % Company /(000

LessB pro#it in ending in entory 5#7 (/00

patent amorti+ation 5"7 (000

3E(200

AddB pro#it in opening in entory 5c7 1(!/00(//0

Consolidated net income E1( 00

Attri")ta"le toB

%hareholders o# Co. /9(312

=on-controlling interests 510 , 0(//07 (0//

E1( 00

Calc/lation of consolidated retained earnin s = Aan 1? ;ear 5

Retained earnings o# ( Fan. 1( Dear 6

5101(000 T 12(0007 113(000

LessB pro#it in opening in entory 5d7 920

Ad$)sted retained earnings 112(2/0

Retained earnings o# % 53 (000 T 10(0007 (000

Retained earnings o# % at ac )isition 20(000

'ncrease since ac )isition 2 (000

LessB Amorti+ation o# patents 5a7 1!(000

Land gain 5i7 !(000

ro#it in opening in entory 5c7 1(!/0 23(!/0

Ad$)sted increase 320 5$7

;s ownership E0 2//

Consolidated retained earnings( Fan. 1( Dear 6 112(6!/


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Calc/lation of consolidated non-controllin interests? be innin of ;ear 5 ethod 1D

Company % shareholders; e )ity

Common shares !0(000

Retained earnings (000

10 (000LessB Land gain 5i7 !(000

ro#it in "eginning in entory 5c7 1(!/0 9(!/0

Ad$)sted shareholders; e )ity E!(320

8namorti+ed ac )isition di##erential (000

100(320

10

=on-controlling interest( Fan 1( Dear 6 10(032

Calc/lation of consolidated non-controllin interests = Aan 1 ;ear 5 ethod 2D

=on-controlling interests at date o# ac )isition 510 , E0(000 @ .E7 10(000

% Co.


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5101(000 T !0(0007 1!1(000

LessB ro#it in ending in entory 5g7 1(200

Ad$)sted retained earnings 16E(/00

Retained earnings o# %( ?ec. 31( Dear 6

53 (000 T /(0007 /2(000Retained earnings o# % at ac )isition 20(000

'ncrease since ac )isition !2(000

LessB Amorti+ation o# the patents

55a71!(000 T 5"7 (0007 20(000

Land gain 5i7 !(000

ro#it in ending in entory 5#7 (/00 30(/00

Ad$)sted increase 31(200 5*7

;s ownership E0 2/(0/0Consolidated retained earnings( ?ec.( 31( Dear 6 1/9(//0

Calc/lation of consolidated non-controllin interests = ec 31 ;ear 5 ethod 1D

Company % shareholders; e )ity

Common shares !0(000

Retained earnings /2(000

1 2(000

LessB Land gain 5i7 !(000ro#it in ending in entory 5#7 (/00 10(/00

Ad$)sted shareholders; e )ity 131(200

8namorti+ed ac )isition di##erential 0

131(200

10

=on-controlling interests( ?ec. 31( Dear 6 13(120

Calc/lation of consolidated non-controllin interests = ec 31 ;ear 5 ethod 2D

=on-controlling interests at date o# ac )isition 510 , E0(000 @ .E7 10(000

% Co.


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Problem 6-12.c /isition differential amorti8ation = ;ear 5

lant and e )ipment depreciation 5!0(000 @ 67 12(000 5a7

atent amorti+ation 5 0(000 @ /7 6(000 5"7

Goodwill impairment loss 3(000 5c7

20(000 5d7

Intercompany reven/es and e9penses

%ales J R)nner to Road 20(000 5e7

Rental J R)nner to Road 36(000 5#7



pening in entory J R)nner selling 96(000 30(000 6(000 5g7

&nding in entory J R)nner selling 0(000 1!(000 2 (000 5h7

aD )oad Ltd



%ales 5 (000(000 T 2(100(000 - 5e7 20(0007 6(!/0(000

Rental re en)e 590(000 - 5#736(0007 36(000

otal income 6(916(000

Materials )sed in man)#act)ring

52(000(000 T /00(000 - 5e7 20(0007 2(3/0(000

Change in wor*-in-progress K #inished goods in entory

5 6(000 - 20(000 - 5g796(000 T 5h7 0(0007 510(0007

&mployee "ene#its 5660(000 T /0(0007 1(030(000

Copyright © 200/ McGraw-Hill Ryerson Limited. All rights reser ed.! Modern Advanced Accounting in Canada, i#th &dition


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'nterest e,pense 5260(000 T 1 0(0007 3E0(000

?epreciation 5 06(000 T 2 6(000 T 5a712(0007 !!2(000

atent amorti+ation 526(000 T 5"76(0007 30(000

Goodwill impairment loss 5c7 3(000

'ncome ta, 5300(000 T 200(000 T 5g730(000 - 5h71!(0007 61 (000otal e,penses (EEE(000

ro#it 91!(000

Attri")ta"le toB

%hareholders o# Road !26(900

=on-controlling interests

530 , 300(000 J 5d720(000 T 5g7 6(000 - 5h72 (000 7 E0(300

91!(000

bD

%ince Road )ses the e )ity method o# acco)nting #or its in estment in R)nner( consolidated

retained earnings at ?ecem"er 31( Dear 6 wo)ld "e 2(626(900( which is e )al to Road


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51/(000 , 0.267 (600 1(/00 2(900 5l7

11(600 (!00 !(E00 5m7

eferred income ta9es = ecember 31? ;ear 3

'n entory (!00Land 12(000

1!(!00 5n7

Acc)m)lated depreciation at date o# ac )isition #or %age 10(000 5o7

Calc/lation of consolidated profit

ro#it o# ost 109(E9E

LessB 'n estment income #rom %age1( 9E

ro#it in ending in entory 5l7 2(900 (19E

Ad$)sted pro#it 103(/00ro#it o# %age 2 (000

AddB pro#it in opening in entory 5$7 2(100

2!(100

AddB Amorti+ation o# ac )isition di##erential 5d7 2(090

LessB ro#it in ending in entory 5*7 (200

Land gain 5i7 1/(000 -22(200

Ad$)sted pro#it 6(E90

ro#it 10E(990 Attri")ta"le toB

%hareholders o# ost 109(E9E

=on-controlling interests 530 , 6(E907 1(9E1

10E(990

aD 5i7 Post Corporation

Consolidated $tatement of Profit

or the ;ear *nded? ecember 31? ;ear 3

%ales 5E00(000 T 2 0(000 J 5g7216(0007 E26(000

'nterest re en)e 5!(/00 J 5h73(3007 3(600

otal re en)e E2/(600

Cost o# goods sold

56 0(000 T 1!2(000 J 5g7216(000 - 5$73(600 T 5m711(6007 E6(000


68/82

'nterest e,pense 520(000 J 5h73(3007 1!(900

ther e,pense

51/0(000 T 9 (/00 J 5#72!(600 - 5a73(!007 22 (900

Goodwill impairment loss 5"7 1(630

'ncome ta, e,pense5/0(000 T 1!(000 T5$7 1( 00 J 5m7 (!00 J 5i7 12(0007 /0(/00

otal e,penses /1/(930

ro#it 10E(990

Attri")ta"le toB

%hareholders o# ost 109(E9E

=on-controlling interests 530 , 6(E907 1(9E1

10E(990

Calc/lation of non-controllin interests = ecember 31? ;ear 3

rdinary shares 60(000

Retained earnings /1(000

otal shareholders; e )ity 131(000

LessB ro#it in ending in entory 5*7 (200

Land gain 5i7 1/(000 - 22(200

AddB )namorti+ed ac )isition di##erential 3(210 Ad$)sted shareholders; e )ity 162(010

=on-controlling interest


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?e#erred income ta,es 5n7 1!(!00

'n entory 53 (000 T 29(000 J 5m711(6007 E(600

Acco)nts recei a"le 519(200 T E(1007 2!(300

Cash 512(200 T 12(E007 26(100

otal assets !90(610

rdinary shares 100(000

Retained earnings 2!6(909

=on-controlling interests 6(!03

11(310

8n#a o)ra"le lease agreement 9(200

Acco)nts paya"le 5212(000 T 0(0007 262(000

otal shareholders< e )ity K lia"ilities !90(610

bD

Goodwill impairment loss J entity theory 1(630

LessB =C'


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Problem 6-14

aD .c /isition cost .llocation Ac )isition Fan)ary 1( Dear 1

Cost

5!0(000 , /07

(/00(000

'mplied al)e o# 100 in estment 5/0(000 shares , /07

!( 00(000

CAB rdinary %hares 3(600(000

Retained &arnings 2(100(000

6(!00(000

Ac )isition di##erential

/00(000

Allocati

onB

Li#e

Copyright © 200/ McGraw-Hill Ryerson Limited. All rights reser ed.90 Modern Advanced Accounting in Canada, i#th &dition


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atents

00(0

00 ?r

6

L. . Lia"ility

100(0

00 Cr

%)"total

200(000 ?r

4alanceB Goodwill

!00(000 ?r

/00(000 ?r

=on-controlling interest 520(000 shares W /07 1(!00(000

.morti8ation 'ableE

Allocation Li#e

Amorti+ation 4alance

DR 1 J DR DR 6 ?ec. 3( DR 6

'n entory 100(000 Cr 1Copyright © 200/ McGraw-Hill Ryerson Limited. All rights reser ed.92 Modern Advanced Accounting in Canada, i#th &dition


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100(000Cr

0

0

Land 200(000 ?r

200(000 ?r

& )ipment 200(000 Cr 10

/0(000Cr

20(000 Cr

100(000 Cr

atents 00(000 ?r 6

320(000?r /0(000?r

0

L. . Lia"ility 100(000 Cr

100(000Cr

0

Goodwill !00(000 ?r

!00(000 ?r /00(000 ?r 0(000 ?r

!0(000 ?r

900(000 ?r

?e ine


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4 a, A LandB 8pstream Gain %ept 1( DR 6 00(000

1!0(0002 0(000

8nreali+ed ro#itsB

4

a,

A

pening8pstream 100

W 00(000 1!(000 2 (000

?ownstream300

W 33 1@3

100(0000(000

!0(000

&nding 8pstream600

W 0

200(000/0(000

120(000

?ownstream !00 W 331@3200(000

/0(000

Copyright © 200/ McGraw-Hill Ryerson Limited. All rights reser ed.9 Modern Advanced Accounting in Canada, i#th &dition


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120(000

bD Consolidated Income $tatement for the year endin ecember 31? ;ear 5

%ales 511.! M T 3 M J 3.2 M711( 00(000

?i idend( 'n estment 'ncome( and Gains 5 00 T 1(000 J 396 J 00 7

!26(000

12(026(000

Cost o# Goods %old5/M T 1.6 M J 3.2 M - 0 J 100 T 200 T 200 7 !(6!0(000

ther &,penses 5600 T 300 J 20 5& )ip7 T /0 5 atent7 /!0(000

a,es 5600 T 200 J 1!0 T 1! T 0 J/0 J /0 7 3!(000

otal e,penses 9(/6!(000

ro#it (1!E(000

Attri")ta"le toB

%hareholders o# Nine 3(9!/(000

=on-controlling interests 52M J 2 0 J120 T 2 J !0 7 , .26 01(000

(1!E(000

)econciliationE

Nine ro#itB

3(000(000

?i idends #rom ?e ine 'ncl)ded 5396(0007

& )ity in &arnings o# ?e ine 1(1 3(000

Consolidated ro#it Attri")ta"le to Nine


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arent retained earnings at ?ecem"er 31( Dear 6

12(000(000

%)" retained earnings at ?ecem"er 31( Dear 6 9(000(000

Retained earnings at ac )isition 2(100(000'ncrease since ac )isition (E00(000

LessB )nreali+ed pro#its( ending in entory 5120(0007

Land 52 0(0007

LessB c)m)lati e amorti+ation o# ac )isition di##erential 5100(0007

Reali+ed retained earnings since ac )isition ( 0(000

5a7

arent

96 3(330(000

LessB )nreali+ed pro#its( ending in entory 5120(0007

Consolidated retained earnings

16(210(000

dDConsolidated $tatement of inancial Position

ecember 31? ;ear 5

.ssetsLand 5!M T 2.6 M T 200 J 00 7 /(300(000

lant and & )ipment 51/./M T 11./M J 200 J 600 7 2E(E00(000

Acc)m)lated depreciation 56./M T 6.0M J 100 J 600 7 510(200(0007

Goodwill !00(000

?e#erred 'ncome a, 51!0 T /0 T /0 7 320(000

'n entories 5 .! M T 2. M J 200 J 200!(!00(000

Cash and C)rrent Recei a"les 5E00 T 300 71(200(000

3!(920(000Copyright © 200/ McGraw-Hill Ryerson Limited. All rights reser ed.9! Modern Advanced Accounting in Canada, i#th &dition


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* /ities and Liabilities

rdinary shares

10(000(000

Retained &arnings 5%ee part c7

16(210(000

=on-controlling interests 5%ee 4elow7 2(910(000

Long erm Lia"ilities 5!.! M T 1.1 M7 9(900(000

?e#erred 'ncome a,es 5200 T100 7 300(000

C)rrent Lia"ilities 5900 T 300 J 200 ad ances7 /00(000

3!(920(000

(on-controllin InterestsE ethod 1D

?e ine J Carrying amo)nt ?ecem"er 31( Dear 6 10(600(000

8nreali+ed ro#its J 8pstreamB

Land 52 0(0007

'n entory 5120(0007

8namorti+ed ac )isition di##erential 900(000

10(/ 0(000

26

=on-controlling interest 2(910(000

Calc/lation of non-controllin interests = ecember 31? ;ear 5 ethod 2D

=on-controlling interests at date o# ac )isition 526 , (/00(000 @ .967 1(!00(000

?e ine


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?ecrease in non-controlling interest 100(000=on-controlling interest( ?ecem"er 31( Dear 3- as pre io)sly calc)lated 2(910(000- as per new calc)lation 2(!10(000

Goodwill at ?ecem"er 31( Dear 3- as pre io)sly calc)lated !00(000- decrease d)e to change in non-controlling interest 100(000- as per new calc)lation 600(000

Problem 6-15

aD

Cost o# 90 in estment( Fan)ary 1( Dear 2 / (000

'mplied al)e o# 100 in estment 120(000

Carrying amo)nt o# %and


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%ales 5 9E/(000 T 300(000 J 100(000 27 EE/(000

'n estment and interest income 5 1(600 T 3(!00 J 1600 J 2( 00 37 1(200

otal re en)e EEE(200

Cost o# goods sold 5 /0(000 T 200(000 J 100(000 2 T 10(600 ! 7 6E0(600'nterest e,pense 5 10(000 J 2( 00 37 9(!00

Research K de elopment e,penses 5 0(000 T 12(000 T 5a7 (0007 6!(000

Miscellaneo)s e,pense 5 10!(000 T 31(!00 T 5"7 21(600 J 2 (000 17 136(100

'ncome ta,es 5 /0(000 T 32(000 J (200 ! J /(000 67 EE(/00

otal e,penses //E(000

=et income 110(200

Attri")ta"le toB

%hareholders o# aper 109(060 =on-controlling interest 5 /(000 J 12(000 J 26(6007 530 7 3(160

110(200

(otesE1 Management #ee 5 2(000 X 127 2 (0002 ?ownstream sales 100(0003 'nterest 5 0(000 X / X E@127 2( 00

'n estment income #rom %and 1600


:efore ta9 4"H ta9 .fter ta96 Land S )pstream 20(000 /(000 12(000! &nding in entory S downstream5 30(000 X 36 7 10(600 (200 !(300

cD

i7 'n entory 5 !!(000 T (000 J 10(600 ! 7 EE(600

ii7 Land 5 160(000 T 30(000 J 20(000 67 1!0(000

iii7 =otes paya"leB he notes paya"le wo)ld not "e shown on the consolidated "alance sheet.

i 7 =on-controlling interest 5 60(000T 120(000J 12(000T5c7 11(6007 530 7 60(/60

7 Common shares 160(000


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dD

=on-controlling interest J at date o# ac )isition- )nder implied al)e approach 530 , 120(0007 3!(000- )sing independent appraisal 30(000?ecrease in non-controlling interest and goodwill !(000

Goodwill impairment loss #or the year ended ?ecem"er 31( Dear 6- as pre io)sly calc)lated 21(600- decrease d)e to change in goodwill at ac )isition !(000- as per new calc)lation 16(600

ro#it attri")ta"le to non-controlling interest #or the year ended ?ecem"er 31( Dear 3- as pre io)sly calc)lated 3(160- increase d)e to red)ced goodwill impairment loss !(000- as per new calc)lation E(160

$%L&'I%($ '% #*:-:.$* P)%:L* $#eb Problem 6-1he #ollowing answers are "ased on the 2011 consolidated #inancial statements #or R =A 'nc.B

5a7 R =A )ses the weighted a erage cost method to cost its in entory. his is

disclosed in the in entory al)ation acco)nting policy as descri"ed in note 35d7 to

the consolidated #inancial statements.

5"7 At the end o# 2011( in entory represented 30.2 5/ 0(2/9 @ 2(9/0(39/7 o# R =A


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net income wo)ld stay the same and e )ity wo)ld increase.

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Hilton7e Sm Ch06 Final Revised

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