MC12 MATCHA CREATIONS

Mei-ling has been approached by Ken Thornton, a shareholder in The

Beanery Coffee. Ken wants to retire and would like to sell his 1,000 shares in
The Beanery Coffee, which represent 30% of all shares issued. The Beanery
is currently operated by Ken’s twin daughters, each of whom owns 35% of
the common shares. The Beanery not only operates a coffee shop but also
roasts and sells beans to retailers, under the name “Rocky Mountain
Beanery.”
Ken has met with Curtis and Mei-ling to discuss the business operation.
They have concluded that there would be many advantages for Matcha &
Coffee Creations. to acquire an interest in The Beanery Coffee. One of the
major advantages would be volume discounts for purchases of the coffee
bean inventory.
Despite the apparent advantages, Mei-ling and Curtis are still not
convinced that they should participate in this business venture. They come
to you with the following questions.
1. “We are a little concerned about how much influence we would have
in the decision-making process for The Beanery Coffee. Would the
amount of influence we have affect how we would account for this
investment?”
2. “Can you think of other advantages of going ahead with this
investment?”
3. “Can you think of any disadvantages of going ahead with this
investment?”

Instructions
(a) Answer Mei-ling and Curtis’s questions.
(b) Assume that Ken wants to sell his 1,000 shares of The Beanery Coffee
for NT$15,000. Prepare the journal entry required if Matcha & Coffee
Creations. buys Ken’s shares.

______________________________________________________________________________
Copyright © 2016 John Wiley & Sons, Inc.    Weygandt Financial Accounting IFRS 3e Matcha Creations
(For Instructor Use Only)
MC12 (Continued)

(c) Assume that Matcha & Coffee Creations Inc. buys the shares and in the
following year, The Beanery Coffee earns NT$50,000 net income and
pays NT$25,000 in dividends. Prepare the journal entries required under
both the cost method and the equity method of accounting for this
investment.
(d) Identify where this investment would be classified on the balance sheet
of Matcha & Coffee Creations Inc. and explain why. What amount would
appear on the balance sheet under each of the methods of accounting
for the investment?

______________________________________________________________________________
Copyright © 2016 John Wiley & Sons, Inc.    Weygandt Financial Accounting IFRS 3e Matcha Creations
(For Instructor Use Only)