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10/14/2016

Group Case Study #1


Advanced Accounting
By: Lisa Stanley 5845680
Christina Bunghardt 6500870

Group Case Study #1 Advanced Accounting


1) Thompson Incorporated is not purchasing enough shares to have any control over Panna
Corporation, therefore, this would make it a non-strategic investment. We will assume this
investment is a held-for-trading investment and use the fair value method. Additionally,
Thompson Incorporated must report the gains and losses through net income.
Debit

Credit

January 1, 2013
Investment in Panna Corp. - FVTPL
Cash

$1,100
$1,100

2) Although Thompson Incorporated uses ASPE, which allows for the use of the cost method,
they must use the equity method for this significate influence investment. ASPE only allows the
use of the cost method if the investments are not publicly traded and in this case Panna
Corporations shares are traded on the active market. Thus, Thompson Incorporated must use
the equity method.

ADVANCED ACCOUNTING

LISA STANLEY AND CHRISTINA BUNGHARDT

Debit

Credit

January 1, 2013
Investment in Panna Corp. - Equity Method
Cash

$4,500
$4,500

1) Thompson Incorporated will have significant influence, therefore, the appropriate


accounting method, under IFRS, will be to use the equity method to account for the
investment in Panna Corporation.
2) We believe this to be a purchasing net assets of another company because Panna
Corporation is a fully operational business. Although, Thompson Incorporated is not buying
the cash or goodwill of Panna Corporation seems to be irrelevant here since they are
purchasing all of the other assets and all of the liabilities. Additionally, the goodwill of
Panna Corporation would be computed at a fair value of $0 anyways. Leaving the cash
($10,000) the only other asset not being purchased. The $10,000 in cash appears to not be
material enough to not constitute this as a business combination. Since this transaction
took place after January 1, 2011, IFRS 3 requires that the acquisition method be used to
account for the combination. Using this method Thompson Incorporated will record the
acquired net assets at fair value and prepare consolidated Financial Statements.

Goodwill Calculation
Purchase Price
Fair Value of Net Assets
Goodwill

$210,000
-197,000
$13,000
Debit

Credit

January 1, 2013
Accounts Receivable
Inventory
Plant
Patents
Trademarks
Goodwill
Current Liabilities
Long Term Liabilities
Cash

ADVANCED ACCOUNTING

$22,000
$75,000
$175,000
$25,000
$20,000
$13,000
$60,000
$60,000
$210,000

LISA STANLEY AND CHRISTINA BUNGHARDT

Thompson Incorporated
Consolidated Statement of Financial Position
As At January 1, 2013
Assets:
Cash
Accounts Receivable
Inventory
Plant
Patents
Trademarks
Goodwill
Total Assets

$ 190,000
102,000
175,000
675,000
125,000
20,000
133,000
$ 1,420,000

Liabilities and Shareholders Equity:


Current Liabilities
Long Term Liabilities
Common Shares
Retained Earnings
Total Liabilities and Shareholders Equity

$ 220,000
160,000
1,000,000
40,000
$ 1,420,000

3) This business combination is acquiring enough voting shares to control the other
company. Since this transaction took place after January 1, 2011, IFRS 3 requires that the
acquisition method be used to account for the combination. Using this method Thompson
Incorporated will record the acquired net assets at fair value and prepare consolidated
Financial Statements.
Debit

Credit

January 1, 2013
Investment in Panna Corporation
Cash

$100,000

Investment in Panna Corporation


Common Shares

$125,000

Common Shares
Cash

ADVANCED ACCOUNTING

$100,000

$125,000
$5,000
$5,000

LISA STANLEY AND CHRISTINA BUNGHARDT

Goodwill Calculation
Acquisition Cost
Fair Value of Net Assets
Less: Goodwill of Panna Corp.
Adjusted Fair Value of Net Assets
Goodwill

$225,000
$217,000
-10,000
$207,000
$18,000

Thompson Incorporated
Consolidated Statement of Financial Position
As At January 1, 2013
Assets:
Cash
Accounts Receivable
Inventory
Plant
Patents
Trademarks
Goodwill
Total Assets

$ 305,000
102,000
175,000
675,000
125,000
20,000
138,000
$ 1,540,000

Liabilities and Shareholders Equity:


Current Liabilities
Long Term Liabilities
Common Shares
Retained Earnings
Total Liabilities and Shareholders Equity

$ 220,000
160,000
1,120,000
40,000
$ 1,540,000

4)
Debit

Credit

January 1, 2013
Investment in Panna Corporation
Legal Fees Expense
Cash

Goodwill Calculation
Acquisition Cost
Fair Value of Net Assets
Less: Goodwill of Panna Corp.
Adjusted Fair Value of Net Assets
Gain on Acquisition

ADVANCED ACCOUNTING

$200,000
$5,000
$205,000

$200,000
$217,000
-10,000
$207,000
$7,000

LISA STANLEY AND CHRISTINA BUNGHARDT

Thompson Incorporated
Consolidated Statement of Financial Position
As At January 1, 2013
Assets:
Cash
Accounts Receivable
Inventory
Plant
Patents
Trademarks
Goodwill
Total Assets

$ 205,000
102,000
175,000
675,000
125,000
20,000
120,000
$ 1,422,000

Liabilities and Shareholders Equity:


Current Liabilities
Long Term Liabilities
Common Shares
Retained Earnings
Total Liabilities and Shareholders Equity

$ 220,000
160,000
1,000,000
42,000
$ 1,422,000

5) The appropriate accounting method for this transaction would be to use the Parent
Company Extension Theory because we are required to use this method in situations
involving negative goodwill. Only the parent can recognize the gain on bargain purchase.
Additionally, NCI must be measured at its share of fair value of the identifiable net assets.
Goodwill Calculation
Purchase Price
Implied Value (120,000 * 0.6)
Carrying Amount of Net Assets
Less: Goodwill of Panna Corp.
Adjusted Carrying Amount
Acquisition Differential
Fair Value Change
Accounts Receivable
Inventory
Plant
Trademarks
Current Liabilities
Long Term Liabilities
Gain on Bargain Purchase
NCI (40% )
ADVANCED ACCOUNTING

$120,000
$200,000
$185,000
-10,000
175,000
$25,000
FV-CA
-$3,000
5,000
10,000
20,000
-5,000
5,000

-32,000
-$7,000
$80,000
LISA STANLEY AND CHRISTINA BUNGHARDT

Thompson Incorporated
Consolidated Statement of Financial Position
As At January 1, 2013
Assets:
Cash
Accounts Receivable
Inventory
Plant
Patents
Trademarks
Goodwill
Total Assets

$ 290,000
102,000
175,000
675,000
125,000
20,000
120,000
$ 1,507,000

Liabilities and Shareholders Equity:


Current Liabilities
Long Term Liabilities
Common Shares
Retained Earnings
NCI
Total Liabilities and Shareholders Equity

$ 220,000
160,000
1,000,000
47,000
80,000
$ 1,507,000

ADVANCED ACCOUNTING

LISA STANLEY AND CHRISTINA BUNGHARDT