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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 $400 million.

At the date of purchase, the book value of Vancouver's net assets was $775 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 $5 million for the inventory and by $20 million for the plant facilities.

The estimated useful life of the plant facilities is 16 years. All inventory acquired was sold during 2018.

Vancouver reported net income of $140 million for the year ended December 31, 2018. Vancouver paid a cash dividend of $30 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?

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Answer #1
Amount in million
1
1 Investment in Vancouver 400
Cash 400
Investment made
2 Investment in Vancouver 56 (140*40%)
Investment Revenue 56
3 Cash 12 (30*40%)
Investment in Vancouver 12
Dividend received
4 Investment Revenue 2 (5*40%)
Investment in Vancouver 2
Inventory Adjustmrnt)
5 Investment Revenue 0.5 (20*40%)/16
Investment in Vancouver 0.5
(depreciation adjustment)
2 Investment revenue 53.5 (56-2-0.5)
3 Investment value 441.5 (400+56-12-2-0.5)
4 Casflow
Investment made -400 Outflow
Dividend received 12 Inflow
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