Chapter 4

Case 4-3
Purpose of the case
The purpose of this case is to provide you with an opportunity to work with IFRS 10
Consolidated Financial Statements. The requirement is very directive, asking you 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. You 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
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):

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Solutions Manual, Chapter 4 1
  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 control
the franchisees:
 The franchisee has clear voting control based on common share ownership. The
franchisee is in charge of 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 whether or not the franchisees are controlled by FOD is one of professional
judgment. Some of you 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. As
supported by above discussion, a subsidiary does exist and consolidation would be appropriate.

Note: There is no right or wrong answer to this case. A good discussion will raise all of the
issues, and will allow you to formulate your own opinions based on professional judgment.

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2 Modern Advanced Accounting in Canada, Eighth Edition
Problem 4-2
Case 1

Cost of investment (100% shares purchased) $95,000

Carrying amount of Sub Ltd.’s net assets
Assets $88,000
Liabilities 30,000
58,000
Acquisition differential 37,000

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.
Consolidated Balance Sheet
January 1, Year 2

Cash (100,000 – 95,000 + 2,000) $7,000

Accounts receivable (25,000 + 7,000) 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
Goodwill (0 + 0 + 15,000) 15,000
$359,000

Current liabilities (50,000 + 10,000) $60,000

Long-term debt (80,000 + 20,000 – 1,000) 99,000
Common shares 110,000

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Solutions Manual, Chapter 4 3
Retained earnings 90,000
$359,000

Case 2

Cost of 80% investment $76,000

Implied value of 100% $95,000
Carrying amount of Sub Ltd.’s net assets
Assets $88,000
Liabilities 30,000
58,000
Acquisition differential 37,000

Allocated: FV – CA
Inventory $5,000
Plant 9,000
Trademarks 7,000
21,000
Long-term debt 1,000 22,000
Goodwill $15,000

Non-controlling interest (20%  95,000) $19,000

Par Ltd.
Consolidated Balance Sheet
January 1, Year 2

Cash (100,000 – 76,000 + 2,000) $26,000

Accounts receivable (25,000 + 7,000) 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
Goodwill (0 + 0 + 15,000) 15,000
$378,000
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4 Modern Advanced Accounting in Canada, Eighth Edition
Current liabilities (50,000 + 10,000) $60,000
Long-term debt (80,000 + 20,000 – 1,000) 99,000
Common shares 110,000
Retained earnings 90,000
Non-controlling interest 19,000
$378,000

Case 3

Cost of investment (100% shares purchased) $80,000

Carrying amount of Sub Ltd.’s net assets
Assets $88,000
Liabilities 30,000
58,000
Acquisition differential 22,000

Allocated: FV – CA
Inventory $5,000
Plant 9,000
Trademarks 7,000
21,000
Long-term debt 1,000 22,000
Goodwill $ –0–

Par Ltd.
Consolidated Balance Sheet
January 1, Year 2

Cash (100,000 –80,000 + 2,000) $22,000

Accounts receivable (25,000 + 7,000) 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
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Solutions Manual, Chapter 4 5
 $359,000

Current liabilities (50,000 + 10,000) $60,000

Long-term debt (80,000 + 20,000 – 1,000) 99,000
Common shares 110,000
Retained earnings 90,000
$359,000

Case 4

Cost of investment (100% of shares purchased) $70,000

Carrying amount of Sub Ltd.’s net assets
Assets $88,000
Liabilities 30,000
58,000
Acquisition differential 12,000

Allocated: FV – CA
Inventory $5,000
Plant 9,000
Trademarks 7,000
21,000
Long-term debt 1,000 22,000
Negative goodwill (10,000)
Recognized in income – gain on bargain purchase 10,000
Goodwill $–0–
Par Ltd.
Consolidated Balance Sheet
January 1, Year 2
Cash (100,000 – 70,000 + 2,000) $32,000
Accounts receivable (25,000 + 7,000) 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
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6 Modern Advanced Accounting in Canada, Eighth Edition
 $369,000

Current liabilities (50,000 + 10,000) $60,000

Long-term debt (80,000 + 20,000 – 1,000) 99,000
Common shares 110,000
Retained earnings (90,000 + 10,000) 100,000
$369,000

Case 5
There is -ive GW if the implied value, 70,000, is less than FV of net assets, 80,000.
Cost of 90% investment $63,000
Carrying amount of Sub Ltd.’s net assets
Assets $88,000
Liabilities 30,000
Controlling interest 90% x 58,000 52,200
Acquisition differential 10,800
Allocated: FV - CA
Inventory $5,000
Plant 9,000
Trademarks 7,000
21,000
Long-term debt 1,000
Controlling interest 90% x 22,000 19,800
Negative goodwill – calculated using PCET (9,000)
Recognized in income 9,000
Goodwill $ –0–

Non-controlling interest 10%  80,000 (FV of subs net assets) $8,000

Par Ltd.
Consolidated Balance Sheet
January 1, Year 2

Cash (100,000 – 63,000 + 2,000) $39,000

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Solutions Manual, Chapter 4 7
Accounts receivable (25,000 + 7,000) 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
$376,000

Current liabilities (50,000 + 10,000) $60,000

Long-term debt (80,000 + 20,000 – 1,000) 99,000
Common shares 110,000
Retained earnings (90,000 + 9,000) 99,000
Non-controlling interest 8,000
$376,000

Problem 4-3
(a)
Cost of 90% investment – use PCET to calculate -ive GW. $52,200
Implied value of 100% investment (52,200/0.9) 58,000
Carrying amount of Seeview Co.’s net assets
Assets $94,650
Liabilities 67,700
26,950
Acquisition differential 31,050

Allocated: FV – CA
Inventory $1,900
Plant assets 10,050
Intangible assets 3,800
Contract with Bardier (FV of identifiable asset) 23,000
38,750
Long-term debt 6,300 45,050
Negative goodwill (14,000)
Gain on bargain purchase – To RE on consol. BS 14,000
Goodwill $–0–

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8 Modern Advanced Accounting in Canada, Eighth Edition
Since GW is negative under entity method, we will use PCET method to calculate the
actual gain/negative GW that is recognized by the parent based on their 90% interest in
sub:
Cost of 90% investment $52,200
Carrying amount of Seeview Co.’s net assets
Assets $94,650
Liabilities 67,700
26,950
Controlling interest 90% 24,255

Acquisition differential 27,945

Allocated: FV – CA
Inventory $1,900
Plant assets 10,050
Intangible assets 3,800
Contract with Bardier (FV of identifiable asset) 23,000
38,750
Long-term debt 6,300
45,050
Controlling interest 90% 40,545

Negative goodwill (12,600)

Gain on bargain purchase – To RE on consol. BS 12,600
Goodwill $–0–

Non-controlling interest = NCI% x FV of subs net assets

= 10% x 72,000
= 7,200

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Solutions Manual, Chapter 4 9
 Petron Co.
Consolidated Balance Sheet
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

Current liabilities (65,500 + 27,600) $93,100

Long-term debt (94,250 + 40,100 – 6,300) 128,050
Common shares 140,500
Retained earnings (89,250 + 12,600 – 2,300) 99,550
Non-controlling interest 7,200
$468,400
(c)
See below for summary of journal entries.

CONSOLIDATED FINANCIAL STATEMENT WORKING PAPER

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

Cash and receivables $ 93,000 $ 20,150 1 $ 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
Investment in Seeview 0 0 1 52,200 4 59,400 0
3 7,200
Acquisition differential 4 32,450 5 32,450 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

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10 Modern Advanced Accounting in Canada, Eighth Edition
Common shares 140,500 40,050 4 40,050 140,500
Retained earnings 89,250 (13,100) 1 2,300 99,550
4 13,100
5 12,600
Non-controlling interest 4 7,200 7,200
229,750 26,950 247,250
$ 389,500 $ 94,650 $ 468,400
Total $ 179,250 $ 179,250

JOURNAL ENTRIES

1 Investment in Seeview $ 52,200

Cash $ 52,200
To record investment in Seeview

2 Retained earnings - legal fees 2,300

Cash 2,300
To record legal fees related to acquisition

3 Investment in Seeview 7,200

Non-controlling interest 7,200
To establish non-controlling interest

4 Common shares 40,050

Retained earnings 13,100
Acquisition differential 32,450
Investment in Seeview 59,400
To eliminate investment account and set up acquisition differential

5 Inventory 1,900
Plant assets 10,050
Intangible assets 3,800
Customer contract 23,000
Long-term debt 6,300
Gain on bargain purchase 12,600
Acquisition differential 32,450
To allocate the acquisition differential

Total $ 179,250 $ 179,250

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Solutions Manual, Chapter 4 11
Problem 4-4
Cost of investment (288,000 + 40,000 for contingent consideration) $328,000
Implied value of 100% investment $410,000
Carrying amount of McGraw Ltd.’s net assets
Assets $728,000
Liabilities 390,000
338,000
Less: goodwill 39,000
299,000
Acquisition differential 111,000
Allocated: FV – CA
Inventory $6,500
Land 39,000
Plant and equipment (13,000) 32,500
Goodwill $78,500
NCI = 20% x $410,000 = $82,000
Hill Corp.
Consolidated Balance Sheet
December 31, Year 4
Cash (13,000 + 6,500) $19,500
Accounts receivable (181,300 + 45,500) 226,800
Inventory (117,000 + 208,000 + 6,500) 331,500
Land (91,000 + 52,000 + 39,000) 182,000
Plant and equipment (468,000 + 377,000 - 13,000) 832,000
Goodwill (117,000 + 0 + 78,500) 195,500
$1,787,300
Current liabilities (156,000 + 104,000) $260,000
Contingent consideration payable 40,000
Long-term debt (416,000 + 286,000) 702,000
Common shares 520,000
Retained earnings 183,300
Non-controlling interest 82,000
$1,787,300

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12 Modern Advanced Accounting in Canada, Eighth Edition
Problem 4-5
(a)
Investment in Joy Corp. $456,000
Non-controlling interest 114,000
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 4-6
(a) Parent company extension theory
Cost of 70% investment (350 shares × $40) $14,000
Carrying amount of J’s net assets
Assets 105,000
Liabilities (75,000)
E’s share 70% x 30,000 21,000

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Solutions Manual, Chapter 4 13
Acquisition differential (7,000)
Allocated: FV – CA
Plant assets (5,500)
Long-term debt 5,000
E’s share 70% x (500) (350)
Negative goodwill (6,650)
Negative GW recognized in income 6,650
Goodwill $ –0–
NCI = 30%% x (FV of J’s net assets)
Non-controlling interest = $8,850

E Ltd.
Consolidated Balance Sheet
December 31, Year 6

Cash and receivables (96,000 – 4,100* + 19,500) $111,400

Inventory (57,000 + 9,000) 66,000
Plant assets (228,000 + 70,500 – (b) 5,500) 293,000
Intangible assets (24,000 + 6,000) 30,000
$500,400

Current liabilities (63,000 + 30,000) $93,000

Long-term debt (97,500 + 45,000 – (c) 5,000) 137,500
Common shares (153,000 + 14,000 – 1,600*) 165,400
Retained earnings (91,500 + 6,650 – 2,500*) 95,650
Non-controlling interest 8,850
$500,400
(b) Entity theory

Cost of 70% investment (350 shares × $40) $14,000

Implied value of 100% investment $20,000 (a)
Carrying amount of J’s net assets
Assets $105,000
Liabilities (75,000)
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14 Modern Advanced Accounting in Canada, Eighth Edition
 30,000
Acquisition differential (10,000)
Allocated: FV – CA
Plant assets $(5,500)
Long-term debt 5,000 (500)
Negative goodwill in total (9,500)
Recognized in parent’s income 9,500
Goodwill $ –0–

Non-controlling interest [(a) 20,000 x 30%] $6,000

E Ltd.
Consolidated Balance Sheet
December 31, Year 6

Cash and receivables (96,000 – 4,100 + 19,500) $111,400

Inventory (57,000 + 9,000) 66,000
Plant assets (228,000 + 70,500 – 5,500) 293,000
Intangible assets (24,000 + 6,000) 30,000
$500,400

Current liabilities (63,000 + 30,000) $93,000

Long-term debt (97,500 + 45,000 – 5,000) 137,500
Common shares (153,000 + 14,000 – 1,600) 165,400
Retained earnings (91,500 + 9,500 – 2,500) 98,500
Non-controlling interest 6,000
$500,400

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Solutions Manual, Chapter 4 15
Problem 4-10

(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
Acquisition differential 214,400
Allocated: FV – CA
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

Non-controlling interest 20% x $410,000 $82,000

Prima Ltd
Consolidated Balance Sheet
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

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16 Modern Advanced Accounting in Canada, Eighth Edition
 $1,368,000

Current liabilities (164,000 + 36,000) $200,000

Long-term debt (260,000 + 66,000 + 8,000) 334,000
Common shares 356,000
Retained earnings 396,000
Non-controlling interest 82,000
$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.
(This is because FV of acquisition will be the consideration paid of $328,000 plus NCI $76,000,
which will change amount of GW calculated.)

(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

Long-term debt 260,000
Common shares 356,000
Retained earnings 396,000
$1,176,000
(c)
See below for summary of journal entries.

PRIMA LTD.
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Solutions Manual, Chapter 4 17
 CONSOLIDATED BALANCE SHEET
December 31, Year 5
Eliminations
PRIMA DONNA Dr. Cr. Consolidated

Cash $ 374,000 $ 10,400 1 328,000 56,400

Accounts receivable 84,000 26,400 4 4,400 106,000
Inventory 100,000 69,200 4 19,800 189,000
Plant 514,000 165,200 4 30,800 710,000
Trademarks 4 34,000 34,000
Patents 104,000 26,400 4 35,600 166,000
Investment in Donna 1 328,000 3 410,000
2 82,000
Acquisition differential 3 214,400 4 214,400
Domain names 4 54,000 54,000
Goodwill 4 52,600 52,600
$ 1,176,000 $ 297,600 $ 1,368,000
Liabilities:
Current liabilities $ 164,000 $ 36,000 $ 200,000
Long-term debt 260,000 66,000 4 8,000 334,000
424,000 102,000 534,000
Shareholders’ equity:
Common shares 356,000 100,000 3 100,000 356,000
Retained earnings 396,000 95,600 3 95,600 396,000

Non-controlling interest 2 82,000 82,000

752,000 195,600 834,000
$ 1,176,000 $ 297,600 $ 1,368,000

Total $1,046,800 $ 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

Non-controlling interest 82,000
To establish non-controlling interest

3 Common shares 100,000

Retained earnings 95,600
Acquisition differential 214,400
Investment in Seeview 410,000
To eliminate investment account and set up acquisition differential

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18 Modern Advanced Accounting in Canada, Eighth Edition
 4 Accounts receivable 4,400
Inventory 19,800
Plant 30,800
Trademarks 34,000
Patents 35,600
Long-term debt 8,000
Domain names 54,000
Goodwill 52,600
Acquisition differential 214,400
To allocate the acquisition differential

Total $ 1,046,800 $ 1,046,800

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Solutions Manual, Chapter 4 19