ACCT451 Assignment 1

QUESTION 1
QUESTION 1A) Cost method

March 1 20X0

Investment in Hoi 40,000

Cash 40,000
To record investment in Hoi Co

Nov 30 20X0

Cash 5,250
Dividend Income 5.250
To record dividend received from Hoi Co. (35000*15%)

April 15 20X1

Cash 75,000
Investment 40,000
Gain on sale 35,000
To record sale of investment in Hoi Co

QUESTION 1B) FVTPL

March 1 20X0

Investment 40,000
Cash 40,000
To record investment in Hoi Co

Nov 30 20X0

Cash 3,500
Dividend Income 3,500
To record dividend received from Hoi Co. (35000*10%)

Feb 28 20X1

Share value * shares owned = 40*1000 = 40,000

Investment does not need to be adjusted to fair value – no journal entry necessary
April 15 20X1

Cash 75,000
Investment 40,000
Gain on sale 35,000
To record sale of investment in Hoi Co

QUESTION 1C) FVOCI

March 1 20X0

Investment 40,000
Cash 40,000
To record investment in Hoi Co

Nov 30 20X0

Cash 5,250
Dividend Income 5,250
To record dividend received from Hoi Co. (35000*15%)

Feb 28 20X1

Investment 20,000
OCI (unrealized gain) 20,000
To record investment in Hoi at fair value (40*1500-40000)

April 15 20X1

Cash 75,000
Investment 60,000
OCI (gain on sale) 15,000
To record sale of investment in Hoi Co

OCI 35,000
Retained Earnings 35,000
To clear OCI to retained earnings
QUESTION 1D) Significant influence

March 1 20X0

Investment in Hoi 70,000

Cash 70,000
To record acquisition of Hoi’s shares

Nov 30 20X0

Cash 10,500
Investment 10,500
To record dividend received from Hoi Co. (35000*30%)

Feb 28 20X1

Cash 45,000
Equity method income 45,000
To record 30% of Hoi’s 20X0 income

Investment 10,000
Goodwill 10,000
To record investment in Hoi at fair value (40*2000-70000)

April 15 20X1

Cash 116,000
Investment 69,500
Gain on sale 46,500
To record sale of Hoi’s shares

QUESTION 2
QUESTION 2A) Consolidated Financial Statement at the date of acquisition

Workings:

Victory’s entry at the date of acquisition:

Investment 1,500,000
Common shares 1,500,000
To record acquisition of Sauce’s shares and issuance of common s
Calculate Acquisition Differential:

Cost of 60% 1,500,000

Implied cost of 100% 2,500,000 (1500000/0.6)
Less: CA of Sauce’s Net Assets
Total Assets 2,550,000
Total Liabilities 900,000
Net Assets, carrying Amt 1,650,000
Acquisition Differential: 850,000
Allocated (FV-CA)
Total Assets 250,000 (2800000-2550000)
Total Liability 0 250,000 (900000-900000)
Goodwill 600,000

Working Paper:

Victory Sauce Adjustment Consolidated

Assets 5,250,000 2,550,000 250,000 8,050,000
Investment 1,500,000 (1,500,000)
Acq. Diff. 850,000, (850,000)
Goodwill 600,000 600,000
Total 6,750,000 2,550,000 8,650,000

Liabilities 800,000 900,000 1,700,000

Common Shares 3,700,000 1,000,000 4,700,000
Retained Earnings 2,250,000 650,000 (650,000) 2,250,000
Total 6,750,000 2,550,000 8,650,000

Consolidated Statement of Financial Position January 2 20X2:

Noncurrent Assets Noncurrent Liabilities

Land 800,000 Long term debt 500,000
Building 4,400,000 Current Liabilities
Acc Dep (900,000) AP 1,200,000
Machinery 2,650,000 Total Liabilities 1,700,000
Acc Dep (1,500,000)
Goodwill 600,000 Shareholder’s Equity
Total Noncurrent 6.050,000 Common Shares 4,700,000
Current Retained Earnings 2,250,000
Inventory 1,100,000 Total Shareholder’s Eq 6,950,000
AR 900,000
Cash 600,000 Total Liabilities & SH Eq 8,650,000
Total Current 2,600,000
Total Assets 8,650,000
QUESTION 2B) Consolidated Financial Statements at the end of 20X2

Part 1: Victory lends to Sauce

500,000*0.1

Victory entry:

Note Receivable 500,000

Cash 500,000
To record note receivable to Sauce
No interest was received

Sauce entry:

Cash 500,000
Note Payable 500,000
To record note payable from Victory
No interest was paid

Create elimination on working papers: -500,000 asset and -500,000 liabilities

Since no interest was paid or received, nothing else needs to be done.

Part 2: Sauce sells to Victory (upstream)

Find Sauce’s markup: sales/COGS = 10,000,000/6,000,000 = 1.66667 = 66.67% mark up

Sauce sold 4,000,000 to Victory at 66.67% markup = 2,400,000 COGS purchased from outsiders

Find Victory’s markup: Sales/COGS = 20,000,000/10,000,000 = 2 = 100% markup

Victory sold intercompany purchases of 3,000,000 @ 100% markup = 6,000,000 sales to outsiders

Victory Sauce Adjustment Consolidated

Sales 6,000,000 4,000,000 -4,000,000 6,000,000
Costs:
Beg inventory 0 0
Purchases 4,000,000 2,400,000 -4,000,000 2,400,000
Available 4,000,000 2,400,000 2,400,000
End Inventory 1,000,000 0 -600,000 400,000
Costs: 3,000,000 2,400,000 2,000,000
Margin 3,000,000 1,600,000 400,000
Taxes ? ? ?
Net Income 3,000,000 1,600,000 400,000
Note: the tax rate was not obvious to me based on the information in the Case however I have
included a line for it here to demonstrate my understanding of its necessity
Part 3: Victory sells to Sauce (downstream)

Victory sells 2,000,000 therefore COGS were 1,000,000 (100% markup)

Sauce has 400,000 remaining so has sold 600,000 to outsiders at a 66.67% markup = 1,000,000

Victory Sauce Adjustment Consolidated

Sales 2,000,000 1,000,000 -2,000,000 1,000,000
Costs:
Beg inventory 0 0
Purchases 1,000,000 2,000,000 -2,000,000 1,000,000
Available 1,000,000 2,000,000 1,000,000
End Inventory 0 400,000 -666,666 -266,666
Costs: 1,000,000 1,600,000 733,333
Margin 1,000,000 -600,000 266,666
Taxes ? ? ?
Net Income 1,000,000 -600,000 266,666
Note: the tax rate was not obvious to me based on the information in the Case however I have
included a line for it here to demonstrate my understanding of its necessity

Intercompany Sales/Purchases

Sales/Purchases 6,000,000 (4000000+2000000)

Unrealized profits/losses 1,266,666 (600000+666666)

Net Income – Victory 1,430,000

Net Income – Sauce 1,100,000
Less: Ending Inv Profit 600,000 Upstream
Less: Ending Inv Profit 666,666 Downstream
(166,666)
Adj Net Income 1,263,334
Attributable:
Shareholders of Victory 60% 758,000 To consolidated R/E
NCI 40% 505,333 To NCI
Consolidated Statement of Comprehensive Income, December 31 20X2

Sales 24,000,000
Dividend Income 240,000
Other Income 70,000
24,310,000
Costs of Sales 10,000,000
Other operating expense 11,660,000
Interest Expense 120,000
Total Expense 21,780,000

Net Income 21,780,000

Consolidated Statement of Financial Position, December 31 20X2

Noncurrent Assets Noncurrent Liabilities

Land 1,350,000 Long term debt 1,150,000
Building 4,400,000 Current Liabilities
Acc Dep (1,050,000) AP 700,000
Machinery 2,650,000 Total Liabilities 1,850,000
Acc Dep (1,700,000)
Goodwill 600,000 Shareholder’s Equity
Total Noncurrent 6,250,000 Common Shares 4,700,000
Current Retained Earnings 1,913,333
Inventory 933,333 Total Shareholder’s Eq 6,613,333
AR 900,000
Cash 380,000 Total Liabilities & SH Eq 8,463,333
Total Current 2,213,333
Total Assets 8,463,333