Question

Northwest Paperboard Company, a paper and allied products manufacturer, was seeking to gain a foothold in...

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, 2018, 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 2018.

Vancouver reported net income of $170 million for the year ended December 31, 2018. Vancouver paid a cash dividend of $40 million.

Required:
1. Prepare all appropriate journal entries related to the investment during 2018.
2. What amount should Northwest report as its income from its investment in Vancouver for the year ended December 31, 2018?
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?

Business   Accounting   
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Answer #1

1.

(In million)

No.

Account Titles and Explanation

Debit

Credit

1

Investment in Vancouver T&M shares

$430

Cash

$430

2

Investment in Vancouver T&M shares

68

Investment revenue (170*40%)

68

3

Cash (40*40%)

 16

Investment in Vancouver T&M shares

16

4

Investment revenue (10*40%)

4

Investment in Vancouver T&M shares

4

5.

Investment revenue [(15*40%)/12]

0.5

Investment in Vancouver T&M shares

0.5

2. Income from its investment = (share income – inventory adjustment – depreciation) = 68 - 4 - 0.5 = $63.5 million

3. Investment in Vancouver = Cost + share of income – inventory adjustment – depreciation – dividends

= 430+68-4-0.5-16 = $477.5

4. Investment in Vancouver:

Operating cash flow $63.5-(477.5-430) = 16 inflow

Investing cash flow $430 outflow

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