Herauf10e SM Ch04 FINAL

Chapter 4
Consolidation of Nonwholly Owned

Subsidiaries
Copyright  2022 McGraw-Hill Ltd. All rights reserved.

Solutions Manual, Chapter 4 1
A brief description of the major points covered in each case and problem.
CASES
Case 4-1
The CFO asks for an explanation of how the acquisition price for an 80% owned subsidiary
should be measured and allocated and how the noncontrolling interest should be measured and
presented on the financial statements.
Case 4-2 (prepared by J. C. (Jan) Thatcher, Lakehead University, and Margaret Forbes,
University of Saskatchewan).
This case requires students to analyze the clauses of a franchise agreement to determine if
control exists because of the agreement.
Case 4-3 (prepared by Peter Secord, Saint Mary’s University)

In this real-life business combination, students are directed to identify all the intangible assets
acquired and to discuss the valuation problems associated with them.
Case 4-4
Management of the parent company wants to compare goodwill and noncontrolling interest
under three methods of reporting a 70%-owned subsidiary and wants to know whether the
subsidiary must be remeasured to fair value annually and which method best reflects the
economic reality of the business combination.
Case 4-5
This case, adapted from a past UFE, questions the allocation of the acquisition cost, involves
contingent consideration, loss carryforwards and a noncompetition clause.
Case 4-6
This case, adapted from a past UFE, involves a company operating an amusement park and
golf course. It buys a sport franchise, builds a new arena and acquires the net assets of another
amusement park. The student must assess a variety of capitalize versus expense issues,
revenue recognition issues and how to account for the business combinations.

2 Modern Advanced Accounting in Canada, Tenth Edition
PROBLEMS
Problem 4-1 (20 min.)

Preparation of the journal entries and balance sheets on the date of acquisition for both the
purchaser and seller and a consolidated balance sheet for a 60% owned subsidiary with no
acquisition differential.

Calculate noncontrolling interest using the implied value method for a 70% owned subsidiary.
Calculate and allocate the acquisition differential.

Calculate and allocate the acquisition differential using the trading price for the shares of the
subsidiary. Calculate goodwill and noncontrolling interest for an 80% owned subsidiary under
the identifiable net assets method.

A parent acquires 70% of the common shares of a subsidiary. The preparation of a
consolidated balance sheet is required using the trading price of the subsidiary’s shares to value
the noncontrolling interest. Part of the acquisition cost needs to be allocated to an unrecorded
taxi license.

Journal entries are to be prepared for the acquisition of an 80%-owned subsidiary and other
direct costs involved with the acquisition. A consolidated balance sheet is to be prepared. Part
of the acquisition cost needs to be allocated to unrecorded in-process research and
development.
Problem 4-6 (35 min)

This problem requires the preparation of a consolidated statement of financial position under the
fair value enterprise method subsequent to the acquisition of a 70% interest in a subsidiary, and
the calculation of goodwill and NCI under the identifiable net assets method.

Calculation and interpretation of the return on equity, current ratio and debt-to-equity ratio for
the parent’s, subsidiary’s and consolidated financial statements for an 80%-owned subsidiary.

A parent has a 90% owned subsidiary. Unconsolidated and consolidated balance sheets are
presented, and the problem requires the preparation of the subsidiary’s balance sheet.

The preparation of a consolidated balance sheet under two methods of consolidation
immediately after a parent company issues shares for a 70% interest in a subsidiary. Other
acquisition costs and share issue costs are involved as well as negative goodwill.

This problem involves preparing a consolidated statement of financial position using two
methods of consolidation and stating which method is required under IFRS.
Problem 4-11(30 min.)

The parent’s and subsidiary’s statements of financial position are presented along with the
consolidated statement of financial position. The ownership percentage should be determined
along with fair values of the subsidiary’s assets and liabilities.

Selected account balances for the consolidated balance sheet are required to be calculated for
a 90%-owned subsidiary.

In this problem, a parent purchases 80% of the common shares of a subsidiary whose balance
sheet contains the asset goodwill. The student is required to prepare a consolidated balance
sheet.

Journal entries are to be prepared to record contingent consideration pertaining to an earnout
and a guarantee valued for share price in one year’s time both at the date of acquisition and at
the end of the first year.

This problem involves a series of questions based on the 2020 financial statements of BCE Inc.,
a Canadian company. The questions deal with different methods of consolidation, the
significance of noncontrolling interests and the impact of consolidation method on certain ratios.

This problem involves preparing a consolidated statement of financial position using two
methods of consolidation. The student must also calculate and interpret the current ratio and
debt-to-equity ratio and calculate goodwill under the proportionate consolidation method.

Five separate cases are presented requiring the preparation of a consolidated balance sheet
involving the same parent and subsidiary company. The cases vary as to the percentage of
voting shares acquired and the price paid. Cases 1 and 2 are proportional and can be used as a
classroom illustration to show that if the goodwill for a 100% owned subsidiary is $15,000, then
the goodwill for an 80% owned subsidiary should be $12,000. The remaining cases involve
goodwill of zero or negative goodwill.

This problem requires the preparation of the parent’s separate entity balance sheet and a
consolidated balance sheet of a parent and its 90%-owned subsidiary in which the allocation of
the acquisition differential results in negative goodwill. Part of the acquisition cost needs to be
allocated to an unrecorded customer supply contract.

A consolidated balance sheet and the parent’s separate entity balance sheet are to be prepared
after an 80%-owned subsidiary has been acquired. Part of the acquisition cost needs to be
allocated to unrecorded Internet domain names.

SOLUTIONS TO REVIEW QUESTIONS
1. Noncontrolling interest represents the equity interest of the noncontrolling shareholders in

the fair value of the subsidiary. IFRS 10 requires that it be shown in shareholders' equity in
the consolidated balance sheet under both the identifiable net assets and fair value
enterprise methods.
2. The consolidated balance sheet typically includes 100 percent of the subsidiary’s assets and
liabilities. When the parent holds less than 100 percent ownership of the subsidiary, the
noncontrolling interest’s claim on those net assets must be reported. The balance sheet will
not balance without this additional amount.
3. Consolidated retained earnings includes only amounts attributable to the shareholders of the
parent company. Thus, none of the retained earnings is assigned to the noncontrolling
interest.
4. If 80% of a subsidiary cost $80,000, it is inferred that 100% would have cost $100,000. The
fair value of 100% of the subsidiary's net assets is subtracted from this implied acquisition
cost and the difference is goodwill. The amount of the noncontrolling interest is determined
based on the subsidiary's fair values and goodwill arising from the purchase. With a small
ownership percentage (e.g., 52%), or when majority ownership is reached through a series
of small step acquisitions, this inference as to what 100% would cost is significantly less
reliable than at higher ownership percentages.
5. Deferred charges do not meet the definition of an asset. Therefore, the deferred charge
should not be reported on the consolidation balance sheet. In other words, the deferred
charge should be measured at zero and would appear as a fair value deficiency on the
schedule of acquisition differential.
6. The proportionate consolidation method requires consolidation of the parent's share of the
subsidiary's net assets, therefore giving no recognition to the noncontrolling interest at all.
Fair value enterprise method views the consolidated entity as being owned by two groups of
shareholders, the parent and the noncontrolling interest, and views the purchase transaction
to have revalued both parties' ownership. Thus, the fair value enterprise method requires the
noncontrolling interest to be recorded at its percentage share of the fair value of the
subsidiary's net assets (including goodwill) at the date that the parent acquired its controlling
interest. Identifiable net assets method also gives attention to NCI as one of the
shareholders groups; Under this method, noncontrolling interest is to be recorded at its

percentage share of the fair value of the subsidiary's identifiable net assets (excluding
goodwill).
7. Goodwill and noncontrolling interest differ under the two consolidation methods. Under the
identifiable net assets method, only the parent’s share of the subsidiary’s goodwill is
reported because it is too difficult or subjective to measure the total goodwill of the
subsidiary. Since the noncontrolling interest’s share of the subsidiary’s goodwill is not
included on the consolidated balance sheet, the value for noncontrolling does not include a
share of the subsidiary’s goodwill. Therefore, both goodwill and noncontrolling interest are
smaller amounts under the identifiable net assets method in comparison to the fair value
enterprise method.
8. Negative goodwill exists if the implied acquisition cost for a 100% investment is less than the
fair value of the subsidiary's identifiable net assets. Negative goodwill is reported on the
consolidated income statement as a gain on purchase.
9. No, it is not the same. A negative acquisition differential exists if the implied value for a
100% acquisition is less than the carrying amount of the subsidiary's net assets. Negative
goodwill exists if the implied acquisition cost is less than the fair value of the subsidiary's
identifiable net assets. It is possible to have a negative acquisition differential and end up
with positive goodwill.
10. No, the historical cost principle is not applied when accounting for negative goodwill. In fact,
it is violated. The subsidiary’s identifiable net assets are reported at fair value on the
consolidated balance sheet at the date of acquisition regardless of the amount paid by the
parent. The negative goodwill is reported as a gain on purchase, which is not consistent with
the historical cost principle.
11. Goodwill of this nature is treated as if it does not exist at the date of acquisition. A new
goodwill figure is calculated based on the acquisition cost at the date of acquisition. When
preparing the schedule to allocate the acquisition differential, we assume that the goodwill
had been written off by the subsidiary just before the parent acquired its controlling interest
in the subsidiary. When calculating goodwill and goodwill impairment in subsequent years,
we must adjust on consolidation based on the goodwill calculated at the date of acquisition.
12. Contingent consideration is the additional consideration that may be payable for the
acquisition of a business. The additional consideration is dependent upon whether certain
future events occur (or do not occur). For example, a further payment may be required if
future net income reaches (or fails to reach) a certain level. The contingent consideration
should be measured at fair value at the date of acquisition. To do so, the parent should

assess the amount expected to be paid in the future under different scenarios, assign
probabilities as to the likelihood of the scenarios occurring, derive an expected value of the
likely amount to be paid, and use a discount rate to derive the value of the expected
payment in today’s dollars.
13. Changes in the fair value of contingent consideration that will be payable in cash should be
recognized in net income at each reporting date with a corresponding adjustment to the
contingent liability.
14. A private company may choose not to consolidate its subsidiaries and instead can report its
investment in subsidiaries using the equity method or the cost method. All subsidiaries
should be reported using the same method. However, if the entity would otherwise choose
to use the cost method and the security is traded in an active market, it must report the
investment at fair value.
15. The fair value enterprise method would typically report the lowest and proportionate
consolidation the highest debt-to equity ratio because of the value reported for
noncontrolling interest, which is reported as a part of shareholders’ equity. Under
proportionate consolidation, no value is included for NCI. Under the fair value enterprise
method, NCI reports the highest amount because it includes the NCI’s share of the
subsidiary’s goodwill. The higher the shareholders’ equity, the lower the debt-to-equity ratio
and vice versa.
16. The consolidation elimination entries are not recorded in the accounting records of either the
parent or subsidiary unless the subsidiary applies push down accounting. The elimination
entries are recorded on a consolidated working paper or consolidated worksheet, which is
used to facilitate the consolidation process.
SOLUTIONS TO CASES
Case 4-1
This report presents the analysis and recommendations pertaining to Bar Ltd.’s acquisition of an
80% interest in Down Corp.
IFRS 3 requires that the fair value as of the date of acquisition should be used when
determining the values to be used on the consolidated balance sheet at the date of acquisition.
The fair value of $4.2 million for the noncontrolling interest was determined by Bar based on
discounted cash flows and selling prices of other comparable firms. The fair value of Down
Corp., as a whole, at the date of acquisition is $22.2 million determined as follows (in 000s):
Cash paid by Bar $ 10,000
Value of common shares issued by Bar (1,000 x $8) 8,000

Value of 20% owned by noncontrolling interest 4,200
Total acquisition-date fair value $ 22,200
The noncontrolling interest will be presented on the consolidated balance sheet in the
shareholders’ equity section right after retained earnings.
The acquisition cost should be allocated to individual assets and liabilities based on their fair
value as determined by independent appraisers. The allocation of the $22.2 million acquisition
cost is as follows (in 000s):
In-process R& D $5,500
Other identifiable assets 27,000
Liabilities (12,000)
Goodwill 1,700
Total $ 22,200
Case 4-2
Factory Optical Distributors, Teaching Note*

Purpose of the case
The purpose of this case is to provide students with an opportunity to work with IFRS 10
Consolidated Financial Statements. The requirement is very directive, asking students to
examine the specific clauses of a franchise agreement to determine if control exists. The
answer is not immediately obvious, since ownership by the parent is much less than 50%, and
there are no convertible preferred shares outstanding or signed shareholder agreements in
place. Students must look further to decide whether the details of the franchise agreement give
FOD (Burnaby) control over the franchisee. Control has the following three elements:
(a) the investor has power over the investee to direct the relevant activities.
(b) the investor has exposure, or rights, to variable returns from its involvement with the
* © 1995 J.C. (Jan) Thatcher, Lakehead University, Faculty of Business Administration and Margaret
Forbes. Used with permission. Adapted by Darrell Herauf.
investee and
(c) the investor has the ability to use its power over the investee to affect the amount of the
investor’s returns.
All three elements must be met for the investor to have control.
Objectives and constraints

Since FOD is a public company, audited financial statements are required. Thus, IFRS must be
used in reporting the franchise investments.
Discussion
Factory Optical Distributors (FOD) (Burnaby) owns 35% of the franchise operation’s outstanding
common shares. No other equity instruments can be issued. Thus, control does not exist based
on share ownership or ownership of convertible rights, options, or warrants. As well, there is no
evidence of an irrevocable shareholder agreement conferring control to either party.
IFRS 10 requires consolidation of all subsidiaries. A subsidiary is defined as an entity that is

controlled by another entity. The following specifics of the franchise agreement between FOD
(Burnaby) and its franchise operations suggest that the franchisee may be controlled by FOD
(Burnaby):
 FOD is the only supplier of the lenses to the franchisees and approves the suppliers of
frames. Thus, FOD has control over the supply of the primary products offered by the
franchise (while the franchisee controls the services offered).
 FOD maintains control over advertising, requires a minimum amount to be spent on
advertising and promotion, and dictates special sales and promotions. These points,
coupled with FOD's control over the supply of frames and lenses, indicate that FOD is
highly involved in many of the day-to-day decisions that must be made for the
franchises to succeed.
 The franchise agreement sets a maximum on the salary of the franchisee, limiting the
rights of the franchisee to withdraw funds from the corporation without involving the
other shareholders.
 The franchise fee is not a flat fee, but is variable based on revenue. Thus, FOD benefits
from the returns earned by the franchises.

 FOD guarantees the financing for new franchise locations or for renovations to existing
locations and, thus, is exposed to the same financial risk as the franchises.
The following specifics of the franchise agreement suggest that the franchisee may not be
controlled by FOD (Burnaby):
 The franchisee has clear voting control based on common share ownership. The
franchisee oversees day-to-day operations and thereby determines the following:
o quality of services provided to the customer
o other products and services to be offered to the public
o selling price of products and services
The decision as to if the franchisees are controlled by FOD is one of professional judgment.
Some students may feel that given FOD's control of financing and operating policies, and
exposure to similar business risks, a subsidiary does exist. Others may feel that the factors
discussed in the case do not provide sufficient evidence, and a subsidiary does not exist. In the
opinion of the authors, a subsidiary does exist, and consolidation would be appropriate.
There is no right or wrong answer to this case. A good classroom discussion will raise all the
issues and will allow students to formulate their own opinions based on professional judgment.
Case 4-3
Valero - Ultramar Diamond Shamrock - Teaching Note
This case is concerned with the nature of the various intangible assets acquired in a business
combination, and their valuation in the consolidated financial statements pursuant to the
combination. The student is directed to devote attention to a variety of unrecorded intangible
assets, and should address their identification and then their valuation issues. Even though this
is an American Company, students are directed to basically treat it as a Canadian company as
far as financial reporting is concerned. Students should recognize that IFRS and US GAAP are
almost identical in the accounting for business combinations.
The case mentions that the acquisition includes the extensive UDS refining, logistics, and retail
network operating under several brands, including Ultramar, Diamond Shamrock, Beacon, and
Total. The retail network is large, with 2,500 company-owned sites and supplying 2,500 further
sites. There are extensive brand support programs, and a large home heating oil business
(250,000 households).
IFRS 3.18 requires that the cost of the acquisition be allocated to identifiable assets acquired
and liabilities assumed in a business combination, if recognized in the financial statements of
the acquired enterprise based on their fair values at the date of acquisition. An intangible asset
is identifiable and should be recognized apart from goodwill when:
 the asset results from contractual or other legal rights (regardless of whether those rights
are transferable or separable from the acquired enterprise or from other rights and
obligations); or
 the asset is capable of being separated or divided from the acquired enterprise and sold,
transferred, licensed, rented, or exchanged (regardless of whether there is an intent to do
so). [IAS 38.12]
A sample memorandum follows:
To: CFO, Valero Energy Corp.

From: Advanced Accounting Student
Re: Intangible assets, UDS acquisition
This acquisition includes a variety of intangible assets, some of which should be segregated
from goodwill under the provisions of IFRS 3.
The overall amount to be allocated to intangible assets is determined in two stages. First, fair
values of the various tangible assets and liabilities, and those intangible assets which can be
ascertained separately from goodwill, should be determined. After these amounts have been
provided for, the remainder of the acquisition cost will be recognized as goodwill.
It is necessary to carefully identify and determine the value of intangible assets, which can be
recognized apart from goodwill. Although no separate value can be assigned to the workforce or
management team, intangible assets that can be recognized include:
 Intangible assets that arise from contractual or other legal rights, regardless of whether
the asset is transferable or separable from the acquired enterprise or from other rights
and obligations. This category of asset would include the legal rights associated with
leases, licences, and other items of that nature, as well as legally protected trademarks
and brand names.
 Intangible assets that are not legal or contractual rights, but which are capable of being
separated or divided from the acquired enterprise and sold, transferred, licensed, rented,
or exchanged, if it was the intent of management to perform any of these actions and
even when these assets are linked to tangible assets. This category would include the
network of dealerships, where individual locations or territories could be sold separately.
It would also include the customer lists such as the proprietary credit cards and the
home heating business household addresses, as well as the related customer contracts
and service agreements.
Estimates of fair value for these items should be based on the best information available,
including prices for similar items, independent appraisals, and the results of other valuation
techniques. Valuation techniques used would be consistent with the objective of measuring fair
value and may include such approaches as earnings or revenues multiples and present value
techniques. Individual values for many of these intangible assets (such as individual retail
locations) may be difficult to determine and would not be necessary for financial reporting
purposes. However, if the disposition of any part of any assets were contemplated, an allocation
of cost to this level of detail would be required to determine the gain or loss on disposition.
[IFRS 13]
The amount to be assigned to goodwill is the residual value of all items which cannot be
separately identified and measured under the criteria suggested above, including the value of
the human resources of the acquired company. In short, the amount assigned to goodwill is the
total value of the acquisition, less all amounts that can be assigned to identifiable tangible and
intangible assets and liabilities, after those values have been objectively determined based on
the best information available. Goodwill cannot be independently determined. [IFRS 3.32]
Subsequent to the date of acquisition, the intangible assets should be accounted for as follows:
 An intangible asset is not written down or written off in the period of acquisition, unless it
becomes impaired during this period. [IAS 38]
 A recognized intangible asset should be amortized over its useful life to an enterprise,
unless the life is determined to be indefinite. When an intangible asset is determined to
have an indefinite useful life, it should not be amortized until its life is determined to be
no longer indefinite. [IAS 38]
 The amortization method and estimate of the useful life of an intangible asset should be
reviewed annually. An intangible asset that is subject to amortization should be tested
for impairment in accordance with IAS 36. (That is, when the carrying amount exceeds
its recoverable amount, the excess should be charged to income.)
 An intangible asset that is not subject to amortization should be tested for impairment
annually or more frequently if events or changes in circumstances indicate that the asset
might be impaired. The impairment test should consist of a comparison of the asset’s
recoverable amount with its carrying amount. When the carrying amount of the intangible
asset exceeds its recoverable amount, an impairment loss should be recognized in an
amount equal to the excess. [IAS 36]
 Goodwill should be recognized on an enterprise's balance sheet at the amount initially
recognized, less any subsequent write-down for impairment. [IAS 36]
Case 4-4
Under all methods of consolidation except for the fair value enterprise (FVE) method, only the
portion of Leafs’ goodwill purchased by Maple is reported on the consolidated balance sheet.
Given an acquisition cost of $1,400,000, Maple paid $528,000 for its share of Leafs’ goodwill as
shown in the first column of Exhibit I. Putting a value on 100% of Leafs’ goodwill is not an easy
matter as there are different ways of determining this value.
First, one could assume a linear relationship between the amount paid for 60% and the value of
100% of the subsidiary. In this case, if 60% of the shares were worth $1,200,000, then 100% of
the shares should have been worth $2,000,000. In turn, 100% of goodwill would be measured at
$880,000 as indicated in the second column of Exhibit I. (See below.)
Secondly, one could listen to the argument made by the management of Maple and assume
that there was not a linear relationship between the amount paid for 60% and the value of 100%
of the subsidiary. Management stated that it was willing to pay a premium of $240,000 over and
above the market price of the shares to gain control over Maple and the premium would be
$240,000 regardless of the percentage of shares acquired. If this were the case, the total value
of Leafs would be $1,840,000 of which $720,000 would be allocated to goodwill as indicated in

the third column of Exhibit I.
The value assigned to goodwill will affect the value reported for noncontrolling interest under the
fair value enterprise method. [IFRS 3.19] When goodwill is measured at $880,000,
noncontrolling interest is reported at $800,000 as indicated in the third column in Exhibit II.
When goodwill is measured at $720,000, noncontrolling interest is reported at $640,000 as
indicated in the fifth column in Exhibit II.
The subsidiary’s assets and liabilities are brought on to the consolidated balance sheet at fair
values only at the date of acquisition. These fair values become the historical values for
reporting purposes subsequent to the date of acquisition. That is, the subsidiary’s assets and
liabilities are not remeasured to fair value on each reporting date subsequent to the date of
acquisition.
The fair value enterprise method presents the fair value of the net assets of the subsidiary
including goodwill at the date of acquisition. The fair value enterprise method probably best
reflects the economic reality of the business combination since fair value is often a better
reflection of economic reality. Since the fair value enterprise method presents the highest values
for assets, it will produce the lowest percentage return on assets in subsequent periods
because these assets need to be depreciated, expensed or written off at some point. For this
reason, the management of Maple may probably prefer to not use the fair value enterprise
method when preparing the consolidated financial statements.
EXHIBIT I
ALLOCATION OF ACQUISITION COST
(In 000s)
70% 100% 100%
Cost of 70% of Leafs $1,400
Implied value of 100% of Leafs (Note 1) $2,000
Implied value of 100% of Leafs (Note 2) $1,880
Carrying amount of Leafs’ net assets 600 600
(70% x [2,100 –1,500]) 420 . .
Acquisition differential 980 1,400 1,280
Allocated :

Fair value excess for identifiable assets 490 700 700
Fair value excess for liabilities (56) (80) (80)
Goodwill $546 $780 $660
Notes:
1. The implied value is calculated assuming a linear relationship between the value for 70%
and the value of 100% i.e., if 70% is worth $1,400,000 then 100% is worth $1,400,000 /
0.7 = $2,000,000
2. The implied value is calculated assuming a nonlinear relationship and assuming that
each share is worth $40 and that a control premium of $280,000 is paid regardless of the
number of shares purchased. Given that the total shares outstanding is 28,000 / 0.7 =
40,000, the total value of Leafs would be 40,000 shares x $40 + $280,000 = $1,880,000
EXHIBIT II
Maple Company
Consolidated Balance Sheet
At December 31, Year 7
(In 000s)
(See notes)
Proportionate INA FVE FVE

(a) (b) (c1) (c2)
Identifiable assets $5,960 $6,800 $6,800 $6,800
Goodwill 546 546 780
$6,506 $7,346 $7,580 $7,460
Liabilities $ 3,606 $4,080 $4,080 $4,080

Shareholders’ equity
Controlling interest (1,500 + 1,400) 2,900 2,900 2,900 2,900
Noncontrolling interest . 366 600
$6,506 $7,346 $7,580 $7,460
Notes:
1. The assets and liabilities are calculated as follows:
(a) Carrying amounts for Maple and 70% of fair values for Leafs
(b) Carrying amounts for Maple and carrying amounts for Leafs plus 100% of fair value
excess for Leafs’ identifiable assets and liabilities plus 70% of the value of Leafs’
goodwill
(c1) Carrying amounts for Maple and carrying amounts for Leafs plus 100% of fair value
goodwill assuming a linear relationship between the value of 70% and the value of 100%
(c2) Carrying amounts for Maple and carrying amounts for Leafs plus 100% of fair value
goodwill assuming a nonlinear relationship and a control premium of $280,000
2. The noncontrolling interest is calculated as follows:

(b) 30% x fair value of Leafs’ identifiable assets and liabilities
(c1) 30% x fair value of Leafs’ identifiable assets, liabilities, and goodwill
(c2) 30% x fair value of Leafs’ identifiable assets and liabilities and Leafs’ goodwill in total
less goodwill purchased by Maple i.e., 30% x (2,800,000 –1,580,000) + (660,000 –
546,000)
Case 4-5
Memo
To: Partner
From: CPA
Subject: Eternal Rest Engagement
As requested, I have reviewed the files and notes prepared for the Eternal Rest Limited (ERL)
engagement. Below is my analysis and disposition of outstanding accounting issues.

Overview
Management has an income-based bonus plan which creates incentives for them to increase
ERL's income.
Tranquil acquisition
The value of the shares issued in the Tranquil acquisition was set as the closing market price on
the day before the signing of the sale agreement. However, the shares must be held in escrow
and cannot be sold for a year. This restriction reduces the market value of the shares.
Therefore, a discount from the market price should be applied when calculating the cost of the
investment in Tranquil. Similarly, the first mortgage bonds that were issued are noninterest-
bearing and recording them at face value ignores implicit interest. Using the face value of the
bonds to determine the acquisition cost of Tranquil overstates the price and therefore overstates
the amount of goodwill recorded on acquisition. [IFRS 3.37]
The information provided indicates that Tranquil likely receives funds in advance for services to
be provided (such as prepaid funerals). However, no unearned revenue is reported on the
balance sheet. It is unclear what revenue recognition policy Tranquil uses for prepaid services,
and the policy needs to be identified so that the reason for the absence of unearned revenue
can be evaluated. [IFRS 15]
The use of historical cost as an estimate of fair value does not seem very realistic since it is
unlikely that values for land, buildings and equipment will remain unchanged over time. By
reporting the assets at historical cost, any fair value excess related to these assets would end
up in goodwill. Since goodwill is not amortized whereas the fair value excess related to
buildings and equipment would be amortized, net income would be overstated in the current
year. Also, understating the value of land permits immediate recognition of the increase in the
value if some of it was sold (as was done) thereby increasing income. Since ERL's
management has a bonus plan based on income before taxes, historical cost may have been
used as an estimate of fair value to increase their bonuses.
I have concerns about the reliance that was placed on management's estimates of the fair value
of Tranquil's land, buildings and equipment. It is not clear from the files that other evidence
supporting the fair value estimates (such as appraisals) were obtained. Indeed, the fact that
ERL sold some of the land acquired in the purchase of Tranquil at a gain supports the

contention that historical cost is a poor basis for estimating the fair value of the acquired assets.
[IFRS 3.18]
The $702,000 included in working capital and held in trust for cemetery maintenance should be
segregated on the balance sheet, classified as a long-term asset on the balance sheet or
disclosed in the notes to the financial statements since its use is restricted. [IAS 1.16]
The contingent payment for meeting the three-year revenue target is an additional cost of
acquiring the Tranquil business. If the revenue target is met over the first three years, it
indicates that the prospects for future revenues are promising. The probability adjusted present
value of $2.5 million should be added to the acquisition cost. Since this payment is not
conditional on the four owners staying on as employees, this payment would not be
compensation for services rendered after the date of acquisition. [IFRS 3.39]
The profit-sharing component of the employment contract appears to be compensation for

services to be rendered. It will not be paid if the owners do not work as employees. It should be
expensed when the bonus is earned. It is not an additional cost of buying the business. [IFRS:
Conceptual framework for financial reporting]
Peaceful acquisition
As with Tranquil, the goodwill recorded regarding Peaceful may be overstated. The loss carry-
forwards have not been recorded, so their value is included in goodwill, thereby overstating
goodwill. IFRS require that the tax benefit be set up if there is reasonable assurance that the
benefits will be realized during the carryforward period. It appears that there is reasonable
assurance since use of the carryforwards was one of the reasons for the purchase by ERL and
some of the carryforward benefits have already been used. ERL has incorrectly treated the
benefit from utilization of the carryforwards as a gain in Year 5. If the loss carryforward benefit is
recognized as an asset at the date of acquisition, it should be drawn down as the benefit of the
loss carryforwards are utilized. If no benefit was recognized at the date of acquisition, then a
credit to income tax expense should be recognized when the benefit of the loss carryforwards is
utilized. Also, since the allocation of the acquisition cost for Peaceful to the acquired assets and
liabilities was done in the same manner as for the Tranquil acquisition, I am also concerned
about the amount reported for goodwill. [IFRS 3.25]

There is no indication that the $4 million attributed to the noncompetition agreements signed as
part of the Peaceful acquisition is being amortized. Since the agreements are for five years, it is
appropriate to amortize the amount over that period. [IFRS: Conceptual framework for financial
reporting]
Environmental issue
The Sunset Hill land is subject to a government order related to environmental concerns. An
employee estimates that clearing up the concerns would cost about $500,000. No accrual has
been made. The potential cost should be recognized as a liability at the date of acquisition at
fair value i.e. the probability adjusted present value of expected costs to clear up the problem.
[IFRS 3.23]
Case 4-6
REPORT TO PARTNER
Fabio & O’Sullivan, Chartered Professional Accountants

For The Year Ending September 30, Year 8
As requested, I have prepared a report that can be used for your next meeting with Leo Titan,
Chief Executive Officer of Lauder Adventures Limited (“LAL”). The report deals with the
accounting implications of the matters discussed with Leo. Over the past year, the business of
LAL has changed: it now owns a sports franchise and is currently building a sports arena.
Several transactions have taken place relating to the construction of the arena. You have asked
me to comment on the various issues related to these transactions.
There are multiple users of LAL’s financial statements, and they may have differing objectives.
Before selecting the accounting policy for each transaction, we must consider the different users
and decide who the primary user of the financial statements is.
Users of LAL’s financial statements
There are many users of LAL’s financial statements and, as noted, the objectives of each user
may conflict. The users include LAL’s:

Creditors. LAL’s creditors look to the financial statements to predict future cash flows and
determine whether their loans will be repaid. Further, they look to the financial statements to
ensure that the loan covenants are not violated and assist in determining the value of their
security. The financial statements may not be appropriate for this use.
Noncontrolling shareholders. The noncontrolling shareholders are not active in the business and
need the financial statements to assess and monitor their investment and to assess Leo’s
performance. They are also interested in being able to predict cash flow and in minimizing cash
outflows in the form of taxes and unwarranted bonus payments.
Management. Management bases its bonus on the financial statements and uses them to report
the financial results of the company to shareholders. As a result, management may have a bias
towards selecting accounting policies that tend to increase income and delay recognition of
expenses, thus maximizing bonuses.
Other users of the financial statements include Revenue Canada for income tax purposes.
However, our engagement is with the directors of LAL and its management, and they must be
our primary concern. As a result, the recommendations presented below must be consistent with
their objectives, must fairly disclose the financial results of LAL, and must enable all users to
monitor their investment.
As noted, the company uses International Financial Reporting Standards (“IFRS”). Some
flexibility may exist in the choice of accounting policies. New policies can be selected to reflect
the changing business.
Overall, the accounting policies recommended must balance management’s objective of

maximizing its bonus and the shareholders’ and creditors’ need to predict future cash flows
using financial statements they can rely on.
The accounting implications for each issue identified are discussed below. The alternative
accounting treatments available are explained and an accounting policy is recommended where
possible. The policies recommended ensure that the financial statements are not materially
misleading and enable the users of the financial statements to predict the future cash flows of

the company.
Land revaluation ($100 million) [IAS 16]
The land currently owned and recorded in the financial statements is worth considerably more
than $5.4 million if the sale of the excess land is used as a basis for calculating its value.
Management would like to recognize a fair value increment to increase the value of the land to
$100 million. The alternative is disclosing the potential increased value of the land in a note to
the financial statements. However, neither approach is reasonable nor justifiable based on the
information provided. All land is not identical or of equal value and, as a result, reporting an
increment in the Year 8 financial statements based on the selling price of the excess land sold to
developers would be misleading.
It would be possible, however, for the company to choose to move to a revaluation model to
account for its investment in land. IAS 16 provides an option with regards to accounting for
property, plant and equipment – either a cost or revaluation model may be used. This would
permit the company to revalue land to its fair value. However, it would be required to apply such
a revaluation policy to all land held by LAL as the revaluation model is applied to an entire class
of property, plant and equipment. Further this policy must be applied on an ongoing basis.
Revaluation increases are credited to equity (as opposed to the income statement) except to the
extent that they reverse a revaluation decrease of the same asset previously recognized in the
income statement. Therefore, if the company expects that the value of the land has increased,
such revaluation increase would impact equity and not the operating results for the current
period, so changing to a revaluation model would not achieve the company’s objective of
maximizing its earnings. It should also be noted that adopting a revaluation policy may be more
onerous than using the cost method and may involve more complex record keeping. For
example, values need to be tracked at the asset level as revaluation increases and decreases
are only offset at the asset level and not the asset class level. Revaluations would need to be
made with sufficient regularity that the carrying amount of the asset does not differ materially
from that which would be determined using fair value at the balance sheet date.
Given the objectives of the users of the financial statements as noted previously, and the fact
that moving to a revaluation model would not increase earnings or be reflective of current cash

flows, as well as the increased complexity associated with applying the revaluation model, I
would initially recommend that the company maintain its accounting policy for land at historical
cost.
As noted above, recognizing fair value increments in the income statement for this type of asset
is not in accordance with IFRS.
Sale of land ($24 million)
Management intends to report the sale of the excess land in fiscal Year 8. We must decide
whether it should be reported in the Year 8 or the Year 9 fiscal period. The sale has been
agreed to, the sales contract has been signed, and a 25% deposit has been received. These
facts support recognition in fiscal Year 8. However, the sale does not close until the Year 9 fiscal
period and, although the deposit has been paid, the collectability of the balance may not be
assured.
The sale has not closed and therefore the gain on sale should be reported in Year 9. The gain
on sale could be presented as a separate line item on the income statement if such presentation
is relevant to an understanding of the company’s financial performance. Note disclosure of the
sale will help provide all users of the financial statements with the relevant information. [IAS
16.69]
One possibility to be considered is whether this excess land could have been classified as
investment property up to and including the date of the sale. We do not have sufficient
information to make that assessment. Paragraph 5 of IAS 40 provides the definition of
investment property. “It is property (land or a building—or part of a building—or both) held (by
the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or
both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.”
If it were possible to consider the excess land as investment property, LAL would have the
option of using either the cost model or the fair value option. If the fair value option were chosen,
in effect the sale price would be recognized in Year 8 regardless of conditions surrounding the

sale, as fair value changes are recognized in the income statement. Note that the use of the fair
value option may in effect recognize a portion of the contingent profit element of the sale if this
type of compensation would generally be offered on comparable transactions (i.e., – fair value
determined based on a market model not using entity specific values). More information is
needed.
When the gain on sale is recognized in Year 9, the cash payment to be received on March 1,
Year 10 should be discounted using the company’s incremental borrowing rate. This will reduce
in gain in Year 9 and will increase interest revenue for Years 9 and 10.
NSL start-up costs ($20 million)
We must determine whether the start-up costs related to NSL should be capitalized or should be
expensed as an operating cost. Their treatment will become an important issue to management
if NSL is consolidated with LAL. Generally, start-up costs should be expensed as incurred under
IFRS unless such costs can be considered a tangible or intangible asset. If a future benefit
results from having incurred them, they qualify as an asset and can be capitalized. It is therefore
necessary to consider the nature of the start-up costs incurred.
According to IAS 38 (paragraph 69), “In some cases, expenditure is incurred to provide future
economic benefits to an entity, but no intangible asset or other asset is acquired or created that
can be recognized. In these cases, the expenditure is recognized as an expense when it is
incurred… Other examples of expenditure that are recognized as an expense when they are
incurred include: expenditure on start-up activities (i.e., start-up costs), unless this expenditure is
included in the cost of an item of property, plant and equipment in accordance with IAS 16.
Start-up costs may consist of establishment costs such as legal and secretarial costs incurred in
establishing a legal entity, expenditure to open a new facility or business (i.e., pre-opening
costs) or expenditures for starting new operations or launching new products or processes (i.e.,
pre-operating costs).” Therefore, the equipment costs ($3.2 million) would likely qualify for
capitalization as property, plant and equipment. However, advertising and promotion costs ($1.5
million), wages, benefits and bonuses ($6.8 million), and other operating costs ($3.3 million) are
period costs and should be expensed as incurred.
We would need further information to determine if the costs related to the acquisition of the

player contracts ($12 million) can be capitalized as costs of acquiring an intangible asset (IAS
38). If they do not qualify for recognition as intangible assets, the costs should be expensed as
incurred. The amount of control and whether there are future economic benefits would have to
be assessed to determine if the costs meet the criteria for capitalization as an intangible asset
(IAS 38.15). Note that if capitalizing, impairment should be reviewed upon indicators of
impairment. Due to the nature of this asset, impairment reviews are likely required on a regular
basis and may introduce more volatility to reported earnings.
Purchase of amusement park ($4.25 million)
Since the asset is acquired as part of a business combination, IFRS 3 applies. This means that
the assets acquired are recorded at their fair values at the date of acquisition. Any other costs
incurred to acquire those assets are expensed. While the specific costs in question here are not
addressed in IFRS 3, the Basis for Conclusions to IFRS 3 at BC365 and BC369 seems to
support that the assets should be recorded at their fair values and should not include other
costs. If the acquirer must move the assets or prepare a site etc. those are not costs related to
the business combination itself but to separate activities of the acquirer. As such, given that the
assets are already recorded at their fair value on acquisition, any other costs to relocate, install,
prepare site etc. should be expensed.
Therefore, under IFRS, the costs incurred to set up, or move, the amusement park assets to the
new location must be expensed for accounting purposes. This would include the $350,000
incurred to transport the amusement park assets to their new location, the $400,000 spent to get
the assets in operating order, and the $500,000 spent to install the assets in their new location
(i.e., the amount spent on site preparation and foundations).
The list of net assets being acquired includes $700,000 for the present value of a loss carry
forward. Since the company is being wound up, the loss carry forward has no value because it
can only be used to offset taxable income earned by the company that incurred the losses. This
would decrease the negative acquisition cost differential, thereby decreasing the credit to the
income statement (refer below).
The negative acquisition cost differential (or “excess”) reflects a bargain purchase. In
accordance with IFRS 3.36, before recognizing a gain on a bargain purchase, the company

would first need to reassess whether it has correctly identified all the assets acquired and all the
liabilities assumed and recognize any additional assets or liabilities that are identified in that
review. To the extent that excess remains after such review, the company would recognize a
gain in the income statement reflecting the bargain purchase.
Insurance on construction ($1.4 million)
Management wants to capitalize the cost of insurance related to the construction activity in the
current period. One argument is that this amount relates to the cost of constructing the building
and would not otherwise have been incurred. According to IAS 16, paragraph 16, the cost of the
building should include any costs directly attributable to bringing it to the location and condition
necessary for the building to be capable of operating in the manner intended.
The issue is whether the cost is “directly attributable” to the asset being constructed. Given that
it could be argued that this insurance cost is a necessary cost of the construction activity, this
amount could be capitalized, which would maximize income. On the other hand, one might
argue that insurance is an overhead cost and is generally incurred every year and should
therefore be expensed as incurred (IAS 16, paragraph 19 (d)).
I recommend that the amount be capitalized to the asset under construction and that the asset
value be monitored to ensure there is no impairment to the value.
Ride relocation ($540,000)
Again, we must decide whether the costs should be capitalized or expensed for accounting
purposes. Does the expenditure represent a “betterment” to the rides and increase their useful
life, or is the amount strictly a moving cost or repair-type expenditure?
To capitalize this amount, we must argue that the cost improves the useful life of the rides or
increases the amount of future income that can be earned from the rides. The support for
expensing these costs in the current period includes the fact that it is a moving cost and does
not improve or lengthen the useful life of the rides relocated.
Another possibility might potentially be to say that the dismantling is a preparation costs for the

new arena to be built- i.e., part of capital cost related to arena. However, although IAS 16, para.
16(c) refers to dismantling costs, these dismantling costs must relate to the item acquired, i.e., if
a machine was acquired, and the machine had to be dismantled to relocate to the acquirer’s
place of business, then such dismantling costs would be included in the cost of the asset. It
does not appear that costs to dismantle a different asset (i.e., rides) could be included in the
cost of the arena. IAS 16, para. 20 in fact suggests that costs to redeploy an item (i.e., in this
case, to move the rides from one location to another) should not be included in the carrying
amount of that item.
Based on the above discussion, the amount should be expensed in the current period. It is
difficult to argue that the useful life of the rides has been increased. Without strong support for
this position, capitalizing the cost is not reasonable. This treatment allows for better predictability
of cash flows given that the amount was incurred in the current period.
Arranging fees ($500,000)
A $500,000 fee was paid to a mortgage broker to arrange financing for LAL. This amount has
been recorded as “Other assets.” No financing has been arranged to date. The accounting for
the fee paid to the mortgage broker depends on the nature of the fee and the classification of
the resulting financial liability. We don’t have a lot of information as to the nature of the fees. If
the fee is like a commission, it could be considered a transaction cost. However, if the fee is
payment for services of researching alternatives, then the fee should be expensed as the
services are received. If the arranging fee is not refundable if financing is not arranged, then the
fee should be expensed as incurred since it would not be a transaction cost related to a financial
liability.
If the arranging fee meets the definition of a transaction cost, then the classification of the
related financial liability must be considered as described below. Until the related financing was
drawn down, transaction costs would be deferred on the balance sheet. Upon drawdown of the
related financing:
Transaction costs would be expensed if they relate to financial liabilities that are accounted
for at fair value through the profit and loss.
Transaction costs related to financial liabilities not at fair value through the profit and loss
would be netted against the financial liability. [FRS 9.5.1.1]

Consolidation of NSL ($500,000)
NSL must be consolidated for accounting purposes because LAL controls the company by
owning 75% of the voting shares. [IFRS 3]
Golf membership fees
We must determine whether the revenue from the nonrefundable golf membership fees can be
recognized in income immediately or deferred and recognized in income over time—as
members use the course. The accounting depends on the nature of the services provided and
the performance obligations to the customer. [IFRS 9.22]
The justification for recognizing the amount in income is that the fee is nonrefundable and there
is no future service that must be provided. This can only be supported if the separate monthly
fee of $100 is sufficient to cover the performance obligations on a monthly basis. If the
membership fee is a prepayment for services to be provided during the membership period, or
to purchase goods or services at prices lower than those charged to nonmembers, it is
recognized on a basis that reflects the timing, nature and value of the benefits provided.
The support available for deferring the income is that the amount has not yet been earned, that
is, the member would not have paid the $2,000 entrance fee in absence of the right it provides
for membership over the subsequent membership period. If deferred, the income should be
recognized over a 5-year period —the length of the contract. [IFRS 9.B48-49]
Contingent profit on the sale of excess land
Management wants to disclose the probability that a contingent gain will be earned on the sale
of the excess land in a note to the financial statements. Disclosure is possible. However, it is
important that disclosures for contingent assets avoid giving misleading indications of the
likelihood of income arising. If the likelihood that a future benefit will be received is probable,
then disclosure should be made in a note to the financial statements, including a brief
description of the nature of the contingent asset and, where practicable, an estimate of its
financial effect. [IAS 37.34]

When the payment is received, management should consider whether it should be disclosed
separately on the face of the income statement or in the notes when such presentation is
relevant to an understanding of LAL’s financial performance.
Golf course preparation costs ($168,000)
We must decide whether the golf-course preparation costs should be capitalized as part of the
golf course lands or whether they should be expensed for accounting purposes. Generally, the
decision depends on whether the expenditure represents a betterment or improvement to the
course or a repair to the current property.
The argument that the preparation cost improves the course and potentially increases the future
revenue that LAL could earn suggests that the amount should be capitalized. However, any
capitalized costs of the existing two holes would have to be written off.
On the other hand, one could argue that the cost does not increase the value of the course or
the potential for increased revenues in the future in that these costs serve only to relocate an
existing asset. Note that IAS 16, paragraph 20 c) specifically prohibits capitalization of costs
associated with relocating an asset.
I recommend that the golf course preparation costs be expensed because of the future benefit
has probably not increased by much, if anything.
Private boxes ($36,000)
We must determine whether the revenue from leasing private boxes should be recognized for
accounting purposes or deferred. To recognize the deposits received as income, the deposits
received would have to be nonrefundable with no requirement of providing service in the future.
However, each deposit is a prepayment on a five-year lease of a box. Therefore, the support for
deferring recognition of the income is that future revenue will be earned from use of the boxes,
i.e., that revenue has not yet been earned and therefore should not be recorded in the financial
statements. Therefore, since there is an element of future service involved by the lease
arrangement, the deposit should be recognized as income over the period of the lease. [IFRS

15.22]
Bonus accrual
Overall, the bonus system appears to be determining the accounting policies selected, and poor
decisions may be made as a result. The bonuses must be accrued for in the year in which they
are earned, based on net income, and not when they are paid. [IFRS: Conceptual framework for
financial reporting]
Conclusion
The recommendations made above are based on the analysis provided and the users and their
objectives. Overall, management’s selected policies are misleading, given the significant
expenses and short-term cash requirements of LAL. The accounting treatments selected must
be presented fairly so that the various users with their differing objectives can properly interpret
the financial statements.
SOLUTIONS TO PROBLEMS
Problem 4-1
(a)
Journal entry on Kim’s books
Investment in Steinbach 135,600

Cash 135,600
There would be no journal entry on Steinbach’s books because the transaction was with the
shareholders of Steinbach and not with Steinbach Co.
(b)
Kim Steinbach

Cash and receivables (351,000 – 135,600) $ 215,400 $ 75,000
Inventory 146,000 122,000
Property and equipment (net) 179,000 264,000
Investment in Steinbach 135,600 0
$676,000 $461,000
Current liabilities $ 124,000 $ 110,000

Long-term debt 303,000 125,000
Common shares 100,000 150,000
Retained earnings 149,000 76,000
$676,000 $461,000
(c)
Kim’s cost for 60% of shares 135,600

Implied value of 100% of shares 226,000
NCI’s 40% interest 90,400
Kim
Cash and receivables $ 290,400
Inventory 268,000
Property and equipment (net) 443,000
$1,001,400
Current liabilities $ 234,000

Long-term debt 428,000
Common shares 100,000
Retained earnings 149,000
Noncontrolling interest 90,400
$1,001,400
Problem 4-2
(a)
Khan’s cost for 70% of shares 770,000
Implied value of 100% of shares 1,100,000
NCI’s 30% interest 330,000
(b)
Implied value of 100% of Winnipeg $1,100,000
Carrying amount of Winnipeg’s net assets
Assets $1,426,000
Liabilities 558,000
868,000
Acquisition differential 232,000
Allocated: FV – CA
Plant and equipment $ 149,000
Patents 120,000
Current assets 35,000
Long-term debt (23,000) 281,000
Goodwill ($49,000)
Problem 4-3
(a)
Wang’s cost for 80% of shares $1,560,000
Value of NCI’s 20% (10,000 shares x $33/share) 330,000
Total value of Brandon 1,890,000
Carrying amount of Brandon’s net assets
Assets $1,626,000
Liabilities 276,500
1,349,500
Accounts receivable $ 15,500
Inventory (18,800)
PP&E 188,500
Liability for warranties (32,600) 152,600

Goodwill $387,900
(b)
Wang’s cost for 80% of shares $1,560,000
Wang’s share of carrying amount of Brandon’s net assets (1,349,500 x 80%) (1,079,600)
Wang’s share of acquisition differential for identifiable net assets (INA)
(152,600 x 80%) (122,080)
Wang’s share of goodwill = goodwill under INA approach 358,320
Total goodwill from part a) $387,900

Less: Wang’ share of goodwill 358,320
NCI’s share of goodwill in part a), which is not recognized under INA approach 29,580
NCI under fair value enterprise approach in part a) 330,000
NCI under INA approach $300,420
Problem 4-4
Percy NCI
Cost of 70% interest in Saltz $175,000
Fair value of NCI’s interest in Saltz (20 x 3,000 shares) $60,000
Carrying amount of Saltz’s net assets
Assets $176,000
Liabilities 60,000
$116,000
Shareholders’ interest 81,200 34,800
Acquisition differential 93,800 25,200
Inventory $10,000
Plant 18,000
Trademarks 14,000
Taxi license 40,000
Long term debt 2,000
$84,000 58,800 25,200
Goodwill $35,000 $0
Percy Corp.
January 1, Year 1
Cash (200,000 – 175,000 + 4,000) $29,000

Accounts receivable (50,000 + 14,000) 64,000
Inventory (60,000 + 42,000 + 10,000) 112,000
Plant (350,000 + 102,000 + 18,000) 470,000
Trademarks (0 + 14,000 + 14,000) 28,000
Taxi license 40,000
Goodwill 35,000
$778,000
Current liabilities (100,000 + 20,000) $120,000

Long-term debt (160,000 + 40,000 –2,000) 198,000
Common shares $220,000
Noncontrolling interest 60,000 460,000
$778,000
Problem 4-5
(a)
Investment in Robin 1,040,000
Cash 1,040,000
Legal fees expense 25,000
Cash 25,000
(b)
Cost of 80% of Robin $1,040,000
Implied value of 100% of Robin $1,300,000
Carrying amount of Robin’s net assets
Assets $1,260,000
Liabilities 612,000
648,000
Current assets $48,000
Plant and equipment 132,000
Research project 100,000
Patents 72,000
Long-term debt (24,000) 328,000
Goodwill $324,000
The research project meets the requirement to be recognized as an identifiable asset. Robin
feels that it is within a year of developing a prototype for a state-of-the-art medical device.
Ravinder attributes a value of $100,000 to this technology and knowledge. This in-process
research is capable of being separated or divided from Robin’s other assets and could be sold,
transferred, licensed, rented, or exchanged (regardless of whether there is intent to do so).
(c)
RAVINDER CORP.
August 1, Year 3
Current assets (1,600,000 – 1,040,000 – 25,000 + 420,000 + 48,000) $1,003,000

Plant and equipment (1,330,000 + 1,340,000 – 500,000 + 132,000) 2,302,000
Accumulated depreciation (250,000 + 500,000 – 500,000) (250,000)
Patents – net (0 + 0 + 72,000) 72,000
Research project (0 + 0 + 100,000) 100,000
Goodwill (0 + 0 + 324,000) 324,000
$3,551,000
Current liabilities (1,360,000 + 252,000) $1,612,000
Long-term debt (480,000 + 360,000 + 24,000) 864,000
Retained earnings (120,000 –25,000) 95,000
Noncontrolling interest (1,300,000 – 1,040,000) 260,000
$3,551,000

Problem 4-6
(a)
Cost of 70% of Barrel $329,000
Implied value of 100% of Barrel 470,000 (a)
Carrying amount of Barrel’s net assets (480,000 - 180,000) 300,000
Allocated:
Plant and equipment (320,000 –270,000) 50,000 (b)
Goodwill $120,000 (c)
Pork Co.
Consolidated Statement of Financial Position
December 31, Year 2
Plant and equipment (400,000 + 270,000 + (b) 50,000) $720,000

Goodwill (c) 120,000
Inventory (120,000 + 102,000) 222,000
Cash (22,000+ 60,000) 82,000
$1,237,000
Ordinary shares $260,000

Noncontrolling interest (30%  (a) 470,000) 141,000
Long-term debt (240,000 + 108,000) 348,000
Current liabilities (216,000 + 72,000) 288,000
$1,237,000
(b) Goodwill under fair value enterprise method $120,000

Less: NCI’s share (30%) 36,000
Goodwill under identifiable net assets method $84,000

NCI under fair value enterprise method $141,000
Less: NCI’s share of goodwill (30%) 36,000
NCI under identifiable net assets method $105,000
Problem 4-7
(a)
The net income is the same for all methods because it was earned throughout the year and
before the acquisition of Calgary on the last day of the year.
(b)
Separate Entity Consolidated Consolidated
Cost method FVE method INA method
Return on equity 2,000 2,000 2,000
11,700+4,510 11,700+4,510+1,900 11,700+4,510+1,810
= 12.3% = 11.0% = 11.1%
Current ratio 15,810 / 12,300 = 1.29 26,860 / 17,200 = 1.56 26,860 / 17,200 = 1.56
Debt-to-equity 12,300+4,200 17,200+7,400 17,200+7,400
11,700+4,510 11,700+4,510+1,900 11,700+4,510+1,810
= 1.02 = 1.36 = 1.37
(c)
The separate entity statement shows the best profitability based on the highest return on equity.
The two consolidated statements show the best liquidity based on the highest current ratio. The
separate entity statement shows the best solvency based on the lowest debt-to-equity ratio.
Problem 4-8
Cost of 90% of Whyte $292,500

Implied value of 100% investment $325,000
Less: goodwill 50,000
Fair value of Whyte’s identifiable net assets 275,000
Fair value differences: FV – CA
Land $50,000
Buildings 20,000
Equipment (10,000)
60,000
Note payable (5,000) 55,000
Carrying amount of Whyte’s net assets
= Carrying amount of Whyte’s shareholders’ equity 220,000
Retained earnings (given in question) 140,000
Common shares $80,000
Whyte Inc.
Balance Sheet – January 1, Year 5
Cash (52,000 – 36,000) $16,000
Accounts receivable (168,000 – 116,000) 52,000
Inventory (234,000 – 144,000) 90,000
Land (280,000 – 210,000 – 50,000) 20,000
Buildings (net) (720,000 – 640,000 – 20,000) 60,000
Equipment (338,000 – 308,000 + 10,000) 40,000
$278,000
Accounts payable (96,000 – 88,000) $8,000

Notes payable (562,500 – 507,500 – 5,000) 50,000
$278,000
Problem 4-9
(a) Identifiable net assets method
Cost of 70% investment (497 shares × $40) $19,880

Carrying amount of J’s net assets
Assets 108,150
32,850 (a)
Acquisition differential (4,450)

Plant assets (5,950) (b)
Long-term debt 3,400 (2,550) (c)
Negative goodwill (1,900)
Less: noncontrolling interest’s share not recognized (30%) 570 (d)
Negative goodwill recognized on consolidation (1,330)
Recognized in income 1,330 (e)
Goodwill $ –0–
Noncontrolling interest [((a) 32,850 – (b) 5,950 + (c) 3,400) x 30%] $9,090
E Ltd.
December 31, Year 6
Cash and receivables (96,450 – 4,370* + 20,400) $112,480

Inventory (57,900 + 9,450) 67,350
Plant assets (229,800 + 71,400 – (b) 5,950) 295,250
Intangible assets (24,450 + 6,900) 31,350
$506,430

Long-term debt (98,400 + 45,200 – (c) 3,400) 140,200
Common shares (154,800 + 19,880 – 1,780*) 172,900
Retained earnings (91,500 + 1,330 – 2,590*) 90,240
$506,430
(b) Fair value enterprise method
Cost of 70% investment (497 shares × $40) $19,880

Implied value of 100% investment $28,400 (f)
Carrying amount of J’s net assets
Assets $108,150

32,850
Acquisition differential (4,450)
Plant assets $(5,950)
Long-term debt 3,400 (2,550)
Negative goodwill in total (1,900)
Recognized in parent’s income (1,900)
Goodwill $ –0–
Noncontrolling interest [(f) 28,400 x 30%] $8,520
E Ltd.
December 31, Year 6
Cash and receivables (96,450 – 4,370 + 20,400) $112,480

Inventory (57,900 + 9,450) 67,350
Plant assets (229,800 + 71,400 – 5,950) 295,250
Intangible assets (24,450 + 6,900) 31,350
$506,430

Long-term debt (98,400 + 45,200 – 3,400) 140,200
Common shares (154,800 + 19,880 – 1,780) 172,900
Retained earnings (91,500 + 1,900 – 2,590) 90,810
$506,430Problem 4-10
(a) (i) Identifiable net assets method

Cost of 90% investment (6,300 shares × 5) $31,500
Implied value of 100% $35,000
Carrying amount of MES’s net assets
Assets $30,000

Liabilities 7,500
22,500
Plant assets $5,000
Current assets 1,200
Long-term debt (700) 5,500
Total goodwill 7,000
Less: noncontrolling interest’s share of goodwill (10%) (700)
Goodwill (parent’s share) $6,300
Noncontrolling interest (10% x [35,000 – 7,000]) $2,800
FLA Company
January 1, Year 5
Plant assets (60,000 + 20,000 + 5,000) $85,000

Goodwill 6,300
Current assets (40,000 + 10,000 + 1,200) 51,200
$142,500
Ordinary shares (30,000 + 31,500) $61,500

Long-term debt (15,000 + 2,500 + 700) 18,200
$142,500
(ii) Fair value enterprise method
Total FLA (90%) NCI (10%)
Cost of 90% interest in MES ($5 x 6,300 shares) $31,500 $31,500

Fair value of NCI’s interest in MES ($3 x 1,000 shares) 3,000 $3,000

Total value of MES 34,500
Carrying amount of MES’s net assets
Assets 30,000
Liabilities 7,500
22,500 20,250 2,250
Acquisition differential 12,000 11,250 750
Current assets $1,200
Plant assets 5,000
Long-term debt (700)
5,500 4,950 550
Total goodwill $6,500 $6,300 $200
FLA Company
January 1, Year 5
Plant assets (60,000 + 20,000 + 5,000) $85,000
Goodwill 6,500
Current assets (40,000 + 10,000 + 1,200) 51,200
$142,700
Ordinary shares (30,000 + 31,500) $61,500

Long-term debt (15,000 + 2,500 + 700) 18,200
$142,700
(b) IFRS 3 allows the fair value enterprise method or the identifiable net assets method.
Problem 4-11
(a)
Investment in Joy Corp. $456,000

Total value of Joy Corp. $570,000
Therefore, Blue’s ownership % (456,000 / 570,000) 80%
(b) The three consolidated accounts that are not equal to the sum of the carrying amounts of
the parent and the subsidiary are plant and equipment, goodwill and inventory.
Plant and equipment - net

Consolidated amount (1,072,000 – 204,000) $868,000
Blue’s carrying amount (648,000 – 204,000) 444,000
Fair value of Joy’s plant and equipment $424,000
Goodwill
Consolidated amount $183,000
Blue’s carrying amount 0
Fair value of Joy’s goodwill $183,000
Inventory
Consolidated amount $353,000
Blue’s carrying amount 109,000
Fair value of Joy’s inventory $244,000
Problem 4-12
Cost of 90% of ERS (($252,000 + (12,000 shares x $48)) $828,000
Implied value of 100% of ERS $920,000
Carrying amount of ERS’s net assets
Assets $1,216,000
Liabilities 422,000
794,000
Equipment $98,000
Patented technology (24,000) 74,000

Goodwill $52,000
(a) OIL’s income prior to the date of acquisition, $256,000, less $38,000 paid to broker =
$218,000
(b) OIL’s retained earnings, on January 1, Year 5 (given) = $808,000
(c) $708,000 + $608,000 + $98,000 = $1,414,000
(d) $908,000 + $312,000 – $24,000 = $1,196,000
(e) $52,000
(f) $608,000 + $422,000 + $252,000 = $1,282,000
(g) $538,000 + $576,000 – $40,000 = $1,074,000
(h) 10% x $920,000 = $92,000
Problem 4-13
Cost of investment (288,000 + 48,000 for contingent consideration) $336,000
Carrying amount of McGraw Ltd.’s net assets
Assets $728,000
Liabilities 390,000
338,000
Less: goodwill 35,000
303,000
Inventory $8,000
Land 35,000
Plant and equipment 13,000 56,000
Goodwill $61,000
Hill Corp.
December 31, Year 4
Cash (13,000 + 6,500) $19,500
Inventory (117,000 + 208,000 + 8,000) 333,000
Land (91,000 + 52,000 + 35,000) 178,000
Plant and equipment (468,000 + 381,000 + 13,000) 862,000
Goodwill (117,000 + 0 + 61,000) 178,000
$1,797,300

Contingent consideration payable 48,000
Long-term debt (416,000 + 286,000) 702,000
Noncontrolling interest (20% x $420,000) 84,000
$1,797,300
Problem 4-14
(a) To determine the fair values of the contingent consideration, Calof computes the present
value of the expected payments as follows:
 Cash contingency = $56,000 x 30% / (1 + .04) = $16,154
 Share contingency = $13,000 x 20% / (1 + .04) = $2,500
Calof then records in its accounting records the acquisition of Xiyu as follows:
Investment in Xiyu Company 733,654

Liability for contingent consideration for earnout 16,154
Liability for contingent consideration for stock price guarantee 2,500
(b)
Interest expense (16,154 x 4%) 646
Loss on contingent consideration for earnout 39,200
Liability for contingent consideration for earnout (56,000 – 16,154) 39,846
Interest expense (2,500 x 4%) 100

Loss on contingent consideration for stock price guarantee 4,420
Liability for contingent consideration for stock price guarantee (7,020 – 2,500) 4,520

(c)
The liability for contingent consideration for earnout will have a balance of $56,000 on
December 31, Year 4 and will be presented as a current liability. The liability for contingent
consideration for stock price guarantee will have a balance of $7,020 on December 31, Year 4
and will also be presented as a current liability.
Problem 4-15
The following answers are based on BCE’s consolidated financial statements as at December
31, 2020 and are in millions of dollars:
.
(a) BCE stated the following in Note 2M:
“Identifiable assets and liabilities, including intangible assets, of acquired businesses are
recorded at their fair values at the date of acquisition… The excess of the purchase
consideration and any previously-held equity interest over the fair value of identifiable net
assets acquired is recorded as Goodwill.” This implies that only the parent’s share of the
subsidiary’s goodwill is recorded. Therefore, BCE is using the identifiable net assets
method.
(b) As per Note 2M, acquisition-related transaction costs are expensed as incurred and
recorded in Severance, acquisition and other costs in the income statements.
(c) As per the consolidated income statement, 2.4% (65 / 2,699) of BCE’s net earnings was
attributed to the noncontrolling interests.
(d) As per note 35, the current ratio of BCE’s significant partly owned subsidiary was 2.25 (357 /
159).
(e) 0.1% (7 / [7 + 4,732]) of additions to property, plant, and equipment came from business
combinations and 99.9% came from direct purchases as per note 16 of the financial
statements.
(f) Noncontrolling interest is 1.6% (340 / 21,329) of shareholders’ equity as per the
consolidated statement of financial position.
(g) As per the consolidated income statement, Impairment of assets had the most significant
change from last year. It increased by 362.7% ([472 – 102] / 102).
(h) If BCE had used the fair value enterprise method, the debt-to-equity ratio would have
decreased; debt would stay the same, but equity would increase due to the increase in NCI,
which is a component of equity. NCI would increase because the NCI’s share of the
subsidiary’s goodwill would now be included in the measurement of NCI.
Problem 4-16
Online Assignment
Problem 4-17
Case 1
Cost of investment $95,000

Carrying amount of Sub Ltd.’s net assets
Assets $88,000
Liabilities 30,000
58,000
Allocated: FV - CA
Inventory (26,000 – 21,000) $5,000
Plant (60,000 – 51,000) 9,000
Trademarks (14,000 – 7,000) 7,000
21,000
Long-term debt (19,000 – 20,000) 1,000 22,000
Balance: goodwill $15,000
Par Ltd.
January 1, Year 2
Cash (100,000 – 95,000 + 2,000) $7,000

Inventory (30,000 + 21,000 + 5,000) 56,000
Plant (175,000 + 51,000 + 9,000) 235,000
Trademarks (0 + 7,000 + 7,000) 14,000
Goodwill (0 + 0 + 15,000) 15,000
$359,000

Long-term debt (80,000 + 20,000 – 1,000) 99,000
$359,000
Case 2
Cost of 80% investment $76,000

Implied value of 100% $95,000
Assets $88,000
Liabilities 30,000
58,000
Inventory $5,000
Plant 9,000
Trademarks 7,000
21,000
Goodwill $15,000
Noncontrolling interest (20%  95,000) $19,000
Par Ltd.
January 1, Year 2
Cash (100,000 – 76,000 + 2,000) $26,000

Inventory (30,000 + 21,000 + 5,000) 56,000
Plant (175,000 + 51,000 + 9,000) 235,000
Trademarks (0 + 7,000 + 7,000) 14,000
Goodwill (0 + 0 + 15,000) 15,000
$378,000

Long-term debt (80,000 + 20,000 – 1,000) 99,000
$378,000
Case 3

Assets $88,000
Liabilities 30,000
58,000
Inventory $5,000
Plant 9,000
Trademarks 7,000
21,000
Goodwill $ –0–
Par Ltd.
January 1, Year 2
Cash (100,000 –80,000 + 2,000) $22,000


Inventory (30,000 + 21,000 + 5,000) 56,000
Plant (175,000 + 51,000 + 9,000) 235,000
Trademarks (0 + 7,000 + 7,000) 14,000
$359,000

Long-term debt (80,000 + 20,000 – 1,000) 99,000
$359,000
Case 4

Assets $88,000
Liabilities 30,000
58,000
Inventory $5,000
Plant 9,000
Trademarks 7,000
21,000
Recognized in income 10,000
Goodwill $–0–
Par Ltd.
January 1, Year 2
Cash (100,000 – 70,000 + 2,000) $32,000

Inventory (30,000 + 21,000 + 5,000) 56,000
Plant (175,000 + 51,000 + 9,000) 235,000
Trademarks (0 + 7,000 + 7,000) 14,000
$369,000

Long-term debt (80,000 + 20,000 – 1,000) 99,000
Retained earnings (90,000 + 10,000) 100,000
$369,000
Case 5

Assets $88,000
Liabilities 30,000
58,000
Allocated: FV - CA
Inventory $5,000
Plant 9,000
Trademarks 7,000
21,000
Recognized in income 10,000
Goodwill $ –0–
Noncontrolling interest (10%  70,000) $7,000
Par Ltd.
January 1, Year 2
Cash (100,000 – 63,000 + 2,000) $39,000

Inventory (30,000 + 21,000 + 5,000) 56,000
Plant (175,000 + 51,000 + 9,000) 235,000
Trademarks (0 + 7,000 + 7,000) 14,000
$376,000

Long-term debt (80,000 + 20,000 – 1,000) 99,000
Retained earnings (90,000 + 10,000) 100,000
$376,000
Problem 4-18
(a)
Implied value of 100% investment 58,000
Carrying amount of Seeview Co.’s net assets
Assets $94,650
Liabilities 67,700
26,950
Inventory $1,900
Plant assets 10,050
Intangible assets 3,800
Contract with Bardier 23,000
38,750

Recognized in Petron’s income 14,000
Goodwill $–0–
Noncontrolling interest (10% x 58,000) $5,800
Petron Co.
June 30, Year 2
Cash and receivables (93,000 –52,200 – 2,300 + 20,150) $58,650

Inventory (60,500 + 8,150 + 1,900) 70,550
Plant assets (203,000 + 60,050 + 10,050) 273,100
Intangible assets (33,000 + 6,300 + 3,800) 43,100
Contract with Bardier 23,000
$468,400

Long-term debt (94,250 + 40,100 – 6,300) 128,050
Retained earnings (89,250 + 14,000 – 2,300) 100,950
$468,400
(b)
Petron Co.
Balance Sheet
June 30, Year 2
Cash and receivables (93,000 – 52,200 – 2,300) $38,500

Inventory 60,500
Investment in Seeview (52,200 + 14,000) 66,200
Plant assets (net) 203,000
$401,200
Current liabilities $65,500

Retained earnings (deficit) (89,250 + 14,000 – 2,300) 100,950
$401,200
(c)
See below for summary of journal entries.
CONSOLIDATED FINANCIAL STATEMENT WORKING PAPER

PETRON CO.
CONSOLIDATED BALANCE SHEET
June 30, Year 2
Eliminations
Consolidate
PETRON SEEVIEW Dr. Cr. d

$ $ 1 $ $
Cash and receivables 93,000 20,150 52,200 58,650
2
2,300
$
Inventory 60,500 8,150 5 1,900 70,550
Plant assets (net) 203,000 60,050 5 10,050 273,100
Intangible assets 33,000 6,300 5 3,800 43,100
4
Investment in Seeview 0 0 1 52,200 58,000 0
3 5,800
5
Acquisition differential 4 31,050 31,050 0
Customer contract 5 23,000 23,000
Goodwill 0
$ $ $
389,500 94,650 468,400
Liabilities:
$ $ $
Current liabilities 65,500 27,600 93,100
Long-term debt 94,250 40,100 5 6,300 128,050
159,750 67,700 221,150
Shareholders’ equity: 0
Common shares 140,500 40,050 4 40,050 140,500
Retained earnings 89,250 (13,100) 1 2,300 100,950
4
13,100
5
14,000
4
229,750 26,950 247,250
$ $ $
389,500 94,650 468,400
$ $
Total 176,450 176,450
JOURNAL ENTRIES
1 $
Investment in Seeview 52,200
$
Cash 52,200
To record investment in Seeview
Retained earnings - legal

2 fees 2,300
Cash 2,300
To record legal fees related to acquisition
3 Investment in Seeview 5,800

To establish noncontrolling interest
4 Common shares 40,050

To eliminate investment account and set up acquisition differential
5 Inventory 1,900
Plant assets 10,050
Customer contract 23,000
Gain on bargain purchase 14,000
To allocate the acquisition differential

$ $
Total 176,450 176,450
Problem 4-19
(a)
Cost of 80% of Donna $328,000
Implied value of 100% of Donna $410,000
Carrying amount of Donna’s net assets
Assets $297,600
Liabilities 102,000
195,600
Accounts receivable $(4,400)
Inventory 19,800
Plant 30,800
Trademarks 34,000
Patents 35,600
Domain names 54,000
Long-term debt (8,000) 161,800
Goodwill $52,600
Noncontrolling interest 20% x $410,000 $82,000
Prima Ltd
January 1, Year 6
Cash (374,000 – 328,000 + 10,400) $56,400

Accounts receivable (84,000 + 26,400 – 4,400) 106,000
Inventory (100,000 + 69,200 + 19,800) 189,000
Plant (514,000 + 165,200 + 30,800) 710,000
Trademarks 34,000
Patents (104,000 + 26,400 + 35,600) 166,000
Domain names (0 + 0 + 54,000) 54,000
Goodwill 52,600
$1,368,000

Long-term debt (260,000 + 66,000 + 8,000) 334,000
$1,368,000

(b)
If an independent business valuator valued the NCI at $76,000, NCI would be reported at
$76,000 rather than $82,000 and goodwill would be reported at $46,600 rather than $52,600.
(c)
PRIMA LTD.
Balance Sheet
January 1, Year 6
Cash (374,000 - 328,000) $ 46,000
Accounts receivable 84,000
Inventory 100,000
Investment in Donna Corp. 328,000
Plant 514,000
Patents 104,000
$1,176,000
Current liabilities $ 164,000

$1,176,000
(c)
See below for summary of journal entries.
PRIMA LTD.
CONSOLIDATED BALANCE SHEET
December 31, Year 5
Eliminations
Consolidate
PRIMA DONNA Dr. Cr. d

$ $ 1
Cash 374,000 10,400 328,000 56,400
4
Accounts receivable 84,000 26,400 4,400 106,000
4
Inventory 100,000 69,200 19,800 189,000
4
Plant 514,000 165,200 30,800 710,000
4
Trademarks 34,000 34,000
Patents 104,000 26,400 4 35,600 166,000

1 3
Investment in Donna 328,000 410,000
2
82,000
3 4
Acquisition differential 214,400 214,400
4
Domain names 54,000 54,000
4
Goodwill 52,600 52,600
$ $ $
1,176,000 297,600 1,368,000
Liabilities:
$ $ $
Current liabilities 164,000 36,000 200,000
4
Long-term debt 260,000 66,000 8,000 334,000
424,000 102,000 534,000
Shareholders’ equity:
3
Common shares 356,000 100,000 100,000 356,000
3
Retained earnings 396,000 95,600 95,600 396,000
2
752,000 195,600 834,000
$ $ $
1,176,000 297,600 1,368,000

$1,046,80 $
Total 0 1,046,800
JOURNAL ENTRIES
1 Investment in Donna $ 328,000

Cash $ 328,000
To record investment in Donna
2 Investment in NB Inc. 82,000

To establish noncontrolling interest
3 Common shares 100,000

To eliminate investment account and set up acquisition
differential
4 Accounts receivable 4,400

Inventory 19,800
Plant 30,800
Trademarks 34,000
Patents 35,600
Domain names 54,000
Goodwill 52,600
To allocate the acquisition differential

Tota
l $ 1,046,800 $ 1,046,800


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Chapter 4

Consolidation of Nonwholly Owned

Copyright  2022 McGraw-Hill Ltd. All rights reserved.

Case 4-3 (prepared by Peter Secord, Saint Mary’s University)

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Problem 4-1 (20 min.)

Problem 4-2 (20 min.)

Problem 4-3 (20 min.)

Problem 4-4 (35 min.)

Problem 4-5 (45 min.)

Problem 4-6 (35 min)

Problem 4-7 (25 min.)

Problem 4-8 (40 min.)

Problem 4-9 (40 min.)

Problem 4-10 (40 min.)

Problem 4-11(30 min.)

Problem 4-12 (30 min.)

Problem 4-13 (30 min.)

Problem 4-14 (45 min.)

Copyright  2022 McGraw-Hill Ltd. All rights reserved.

Problem 4-16 (50 min.)

Problem 4-17 (70 min.)

Problem 4-18 (80 min.)

Problem 4-19 (80 min.)

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1. Noncontrolling interest represents the equity interest of the noncontrolling shareholders in

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Value of common shares issued by Bar (1,000 x $8) 8,000

Total acquisition-date fair value $ 22,200

Factory Optical Distributors, Teaching Note*

Objectives and constraints

IFRS 10 requires consolidation of all subsidiaries. A subsidiary is defined as an entity that is

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A sample memorandum follows:

To: CFO, Valero Energy Corp.

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Proportionate INA FVE FVE

Liabilities $ 3,606 $4,080 $4,080 $4,080

2. The noncontrolling interest is calculated as follows:

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The profit-sharing component of the employment contract appears to be compensation for

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Fabio & O’Sullivan, Chartered Professional Accountants

Users of LAL’s financial statements

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Overall, the accounting policies recommended must balance management’s objective of

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Land revaluation ($100 million) [IAS 16]

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Sale of land ($24 million)

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NSL start-up costs ($20 million)

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Purchase of amusement park ($4.25 million)

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Insurance on construction ($1.4 million)

Ride relocation ($540,000)

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Arranging fees ($500,000)

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