Question

Northwest Paperboard Company, a paper and allied products manufacturer, was seeking to gain a foothold in Canada. Toward that end, the company bought 40% of the outstanding common shares of Vancouver Timber and Milling, Inc., on January 2, 2021, for $430 million.

At the date of purchase, the book value of Vancouver's net assets was $790 million. The book values and fair values for all balance sheet items were the same except for inventory and plant facilities. The fair value exceeded book value by $10 million for the inventory and by $15 million for the plant facilities.

The estimated useful life of the plant facilities is 12 years. All inventory acquired was sold during 2021.

Vancouver reported net income of $170 million for the year ended December 31, 2021. Vancouver paid a cash dividend of $40 million.

Required:
1. Prepare all appropriate journal entries related to the investment during 2021.
2. What amount should Northwest report as its income from its investment in Vancouver for the year ended December 31, 2021?
3. What amount should Northwest report in its balance sheet as its investment in Vancouver?
4. What should Northwest report in its statement of cash flows regarding its investment in Vancouver?

Answer 1

1.)				$ Millions
	S.No.	Account Titles	Debit	Credit
	1	Investment in Vancouver Timber & Milling, Inc.	430.00
		Cash		430.00
	2	Cash ( 40 x 40% )	16.00
		Investment in Vancouver Timber & Milling, Inc.		16.00
	3	Investment in Vancouver Timber & Milling, Inc.	68.00
		Investment Revenue ( 170 x 40% )		68.00
	4	Investment Revenue	4.50
		Investment in Vancouver Timber & Milling, Inc.		4.50
		{ 10 + ( 15/12) } x 40%
	2.)	Income from its investment in Vancouver	$ 63.50 Millions	=68-4.5
	3.)	Investment in Vancouver	$ 477.50 Millions	=430-16+68-4.5
	4.)	Statement of cash flow	$ Millions
		Cash flow from Operating activities
		Dividend Received	16.00
		Cash flow from Investing activities
		Investment in Vancouver	- 430.00