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CHAPTER 8
INVESTING ACTIVITIES
Solutions to Questions, Exercises, Problems, and Teaching Notes to Cases
8.1 Capitalization versus Expensing Decision.
b. This error does not affect cash flows, but it does affect classification within the
8.2 Self-Constructed Assets. The company should capitalize the full costs of
8.3 Natural Resources. All costs are capitalized except for exploration costs associated
8.4 Research and Development Costs. Standard setters require R&D costs to be
8-2
8.5 Capitalization of Software Development Costs. Adobe capitalizes software
8.6 Testing for Goodwill Impairment. The tests for goodwill impairment are similar
under U.S. GAAP and IFRS. Goodwill is not considered a separable asset; therefore,
8.7 Earnings Management and Depreciation Measurement.
a. Depreciation is a process of allocating historical cost of depreciable assets to the
b. Many illustrations involve altering one or more of the factors to manage
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
manage earnings accelerates expense recognition relative to capitalization.
Short useful lives (factor 2 above) accelerate expenses relative to long useful
lives. Transparency demands that firms disclose a change in policy for any of
these factors, and, as such, analysts can judge whether the change makes sense
from a business perspective or whether it appears to be a means for managing
earnings. For example, an airline that extends the useful life of aircraft because
of the implementation of more stringent maintenance and inspection schedules
might be understandable. On the other hand, a change in the useful lives of
aircraft that positions the firm as an outlier relative to other airlines would
appear to be a means of managing earnings. A firm may change from one
acceptable depreciation method to another to manage earnings. For example, an
accelerated depreciation method could be chosen to write-down book value too
quickly so that the firm creates a cookie jar reserve to allow the timing of gains
from asset sales in later periods. Because more firms in the United States use
the straight-line method, however, the change would position the firm as an
outlier and generate questions about the motivation for the change.
8.8 Corporate Acquisitions and Goodwill. The acquirer records the intercorporate
investment in the common stock of the acquired company at the fair value of the
8.9 Corporate Acquisitions and Acquisition Reserves. “Acquisition reserves” may
be recorded at the time one company acquires another company because the
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8.10 Accounting for Available-for-Sale and Trading Marketable Equity Securities.
Firms report both available-for-sale and trading marketable equity securities at fair
Note to instructor: New rules are in effect for fiscal years beginning after December
8.11 Equity Method for Minority, Active Investments.
a. Equity income of $35.14 million (0.35 × $100.4 million) will be reported by
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8.12 Consolidation of Variable-Interest Entities. Often the structure of a VIE is such
that effective control is not captured by simply applying the rule of greater than
8.13 Choice of a Functional Currency. The following discussion applies the five criteria
Cash Flows of Foreign Entity. No information is provided about cash flows,
Sales Prices. The fact that 50% of revenues are generated by sales to Qing Corpo-
Cost Factors. All material contracts are denominated in the peso, also indicating
Financing. Financing for manufacturing plants is denominated in U.S. dollars, with
Relations between Parent and Foreign Unit. Senior management of the subsidi-
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Investing Activities
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8.14 Foreign Currency as Functional Currency. The text provides a description of the
8.15 Analyzing Disclosures Regarding Fixed Assets.
a. NewMarket Monsanto Olin
Corporation Company Corporation
b. Accumulated depreciation, Year-end … $ 611 $ 2,517 $ 1,348
c. Depreciation—straight-line method ….. $ 27 $ 328 $ 72
d. Net income as reported ……………………. $ 33 $ 267 $ 55
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e. NewMarket Monsanto Olin
Corporation Company Corporation
f. NewMarket Corporation and Olin Corporation might have a higher proportion
g. Note that the depreciable assets for NewMarket Corporation and Olin Corpora-
8.16 Asset Impairments.
a. U.S. GAAP Treatment: Because total undiscounted future cash flows of
IFRS Treatment: Under IFRS, first identify the greater of the asset’s value in use
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
of $1,200,000 to justify a $109,809 impairment charge. The company would
report the impairment loss in income from continuing operations, and the press
would be reduced to the “new” carrying value of $1,090,191.
b. Compare the carrying amount of the unit to the unit’s fair value:
If the fair value of the unit exceeds the carrying amount, goodwill is deemed not
to be impaired. However, in this case, the carrying value exceeds the fair value
of the unit, so Sterling must measure the amount of goodwill impairment by
simulating a reacquisition. The fair value of the unit is compared to the fair
value of the identifiable assets to yield an implied goodwill, as follows:
c. Goodwill is written down from $400,000 to $300,000 and a $100,000 impair-
8.17 Upward Revaluations under IFRS.
a. Fair value increases above original acquisition cost in 2016, causing a €10,000
upward revaluation of the land and an increase in other comprehensive income
b. [Note: This concept was not covered in the text.] The company will record
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8.18 Application of Statement No. 115 for Investments in Marketable Equity
Securities.
a. (1) The change in the market value of Suntrust’s investment in Coke’s com–
(2) As described above, the 2006 unrealized holding “gain” of $379,204,000
b. The $379,204,000 unrealized holding gain would appear in net income and
8.19 Effect of an Acquisition on the Date of Acquisition Balance Sheet (amounts in
millions).
a. Fair value of Chalfont ………………………………………………………………. $ 504
b. Cash……………………………………………………………………………………….. $ 130
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Accounts payable and accruals ($240 + $80 + $30) ……………………… $ 350
Long-term debt………………………………………………………………………… 580
Deferred tax liability ………………………………………………………………… 160
Other noncurrent liabilities ……………………………………………………….. 120
Common stock ($320 + $504) …………………………………………………… 824
Retained earnings …………………………………………………………………….. 60
Total equities ………………………………………………………………………. $2,094
8.20 Effect on an Acquisition on the Postacquisition Balance Sheet Income Statement.
a. Date of Acquisition Consolidated Ormond Daytona Elimina- Consoli-
Worksheet (January 1, 2017) Company Company tions dated
Balance Sheet (amounts in millions)
Cash………………………………………………….. $ 25 $ 15 $ 40
Revenues, gains, and net income are in parentheses to indicate that their signs
are opposite those of expenses and losses; that is, they are credits for those in-
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b. Consolidation Worksheet for Ormond Company and Daytona Company 2017
(amounts in millions)
Ormond Daytona Elimina- Consoli-
Consolidated Worksheet Company Company tions dated
Income Statement (2017)
Balance Sheet (12/31/17)
Equity in Daytona Company earnings = $18 million Daytona Company earnings
+ $12 million amortizations (see schedule below) = $30 million.
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ing the worksheet from the accountant’s traditional debit/credit approach. Lia-
bilities and shareholders’ equity accounts are in parentheses to indicate that they
are claims against assets; again, they are credits in the traditional debit/credit
framework.
Date of Acquisition
Differences
Charged (Credited) to Expense or Loss
Balance One Year Later
The balance of adjustments to net assets (that is, assets minus liabilities) is greater one
year later because the liabilities have been satisfied faster than the assets have been
amortized.
8.21 Variable-Interest Entities.
a. RMBC is a joint venture with Owens-Brockway Glass Container, Inc. in which
Molson Coors holds a 50% interest. RMBC produces glass bottles at a glass
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b. An investing firm consolidates the VIE when it absorbs the majority of the
c. Cost of goods sold for Molson Coors includes all costs that the firm incurred for
d. The parent does not always own 100% of the voting stock of a consolidated
subsidiary. Accountants refer to the owners of the remaining shares of voting
lating consolidated net income.
e. If RMBC, RMMC, and Grolsch did not qualify as VIEs, GAAP would require
them to account for minority, active investments (generally those in which
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f. Molson Coors consolidated the financial statements of RMBC, RMMC, and
8.22 Accounting for a Merger under the Acquisition Method.
Solution a Solution b
a. Financial Statement Effects of a Merger
CC AOCI RE
Assets = Liabilities +
Shareholders’ Equity
Journal Entries
Legal and Management Costs
Shareholders’ Equity
+LiabilitiesAssets =
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
b. If the cash consideration is only $2,000,000, Pace records a gain from a bargain
acquisition of $250,000, and no goodwill is reported.
8.23 Consolidation Subsequent to the Date of Acquisition (Noncontrolling Interests).
a. Allocations of Fair Value
(in millions)
Charged Balance
Allocation (Credited) on
of Fair Estimated to Expense Dec. 31,
Values Life Each Year 2018
b. Investor Interests in Booking, Inc.
(in millions)
Prestige Properties
(80% Controlling Interest)
Noncontrolling
Interest (20%)
Acquisition date fair value (1/1/17) =
$292.5