John Thronen is an analyst in the research department of an international securities firm. He is preparing a research report on Topmaker, Inc., a publicly traded company that complies with IFRS.

On January 1, 2018, Topmaker invested $11 million in Blanca Co. debt securities (with a 5.0% stated coupon on par value, and interest payable each December 31). The par value of the securities is $10 million, and the market interest rate in effect when the bonds were purchased was 4.0%. Topmaker designates the investment as amortized cost. As of December 31, 2018, the fair value of the securities is $12 million.

Blanca Co. wants to raise $40 million in capital by borrowing against its financial receivables. Blanca plans to create a special-purpose entity (SPE), invest $10 million in the SPE, have the SPE borrow $40 million, and then use the funds to purchase $50 million of receivables from Blanca. Blanca meets the definition of control and plans to consolidate the SPE. Blanca's balance sheet is presented in Exhibit 1.

Exhibit 1Blanca Co. Balance Sheet at December 31, 2018 ($ millions)

Cash		20		Current liabilities		25
Accounts receivable		50		Noncurrent liabilities		30
Other assets		30		Shareholders' equity		45
Total assets		100		Total liabilities and equity		100

Also on January 1, 2018, Topmaker acquired a 15% equity interest with voting power in Rainer Co. for $300 million. Topmaker has representation on Rainer's board of directors and participates in Rainer's policymaking process.Thronen believes that Topmaker underestimated the goodwill and balance sheet value of its investment account in Rainer. To estimate these figures, Thronen gathers selected financial information for Rainer as of December 31, 2018 in Exhibit 2.The plant and equipment are depreciated on a straight-line basis and have 10 years of remaining life.

Exhibit 2Selected Financial Data for Rainer Co., Year Ending December 31, 2018 ($ millions)

		Book Value		Fair Value
Revenue		1,740		N/A
Net income		360		N/A
Dividends paid		220		N/A
Plant and equipment		2,900		3,160
Total assets		3,170		3,430
Liabilities		1,830		1,830
Net assets		1,340		1,600

During 2018, Rainer sold $60 million in inventory to Topmaker for $80 million. In 2019, Topmaker resold the entire inventory to a third party.

Thronen is concerned about possible goodwill impairment resulting from expected changes in the industry effective at the end of 2019. He calculates the impairment loss based on the projected consolidated balance sheet data shown in Exhibit 3, assuming that the cash-generating unit and reporting unit of Topmaker are the same.

Exhibit 3Selected Financial Data for Topmaker, Inc., Estimated Year Ending December 31, 2019 ($ millions)

Carrying value of cash-generating unit/reporting unit		15,200
Recoverable amount of cash-generating unit/reporting unit		14,900
Fair value of reporting unit		14,800
Identifiable net assets		14,400
Goodwill		520

Finally, Topmaker announces its plan to increase its ownership interest in Rainer to 80% effective January 1, 2020. It will account for the investment in Rainer using the partial goodwill method. Thronen estimates that the fair market value of the Rainer's shares on the expected date of exchange is $2 billion, with the identifiable assets valued at $1.5 billion.

Question 16 (1 point)

Which of the following statements regarding the sale of inventory by Rainer to Topmaker is correct?

(HINT: Consider who is the parent and who is the sub)

Question 16 options:

	The sale represents a downstream sale.
	Profits will decline on Topmaker's 2018 income statement.
	Topmaker's unrealized profits are initially deferred.

Question 17 (1 point)

Based on Exhibit 3, Topmaker's impairment loss under IFRS is:

Question 17 options:

	$120 million.
	$400 million.
	$300 million.

Question 18 (1 point)

The value of the minority interest at the acquisition date of January 1, 2020 is:

(HINT: using the partial goodwill method)

Question 18 options:

	$300 million.
	$400 million.
	$500 million.