On January 1, 2020 Hexel Inc. acquired 6,000 shares (with a par value of 500 per share) of Notter Corporation. The consideration transferred for these shares exists of two parts:

• Hexel issues 3,000 new shares that have a par value of 250 per share. On that date the total book value per share of Hexel is 1,250 and the fair value per share is 1,850;
• Hexel pays an additional amount of 800 in cash for each purchased share of Notter.

On January 1, 2020 the balance sheet of Notter shows the following accounts:

Balance sheet Notter, January 1, 2020 (x 1.000)

Land and buildings	30,000	Common stock		10,000
Equipment	10,000	Additional paid-in capital		5,000
Inventory	4,500	Retained earnings		12,000
Accounts receivable	3,500	Long-term liabilities	6,000
Cash	2,000	Current liabilities		17,000
	50,000			50,000

At January 1, 2020, the fair value of the buildings is 6,000,000 higher than the book value. The remaining life of those buildings is 15 years. The fair value of the accounts receivable of Notter is assessed to be 300,000 lower than the book value. All of the other book values represent the fair values of the assets and liabilities.

Notter generated net income of 4,500,000 in 2020 and it paid a cash dividend of 10% of its common stock to its stockholders. By the end of 2020, from the point of view of Hexel, the accounts receivable of Notter are worth 100,000 less than their book value. This lower value is taken into account for calculating the equity value of the investment in Notter.

During 2020 Notter sold inventory with an original cost of 520,000 to Hexel for 600,000. Of this inventory 150,000 (transfer price) was unsold to outsiders in 2020.

Question 1

Is it likely that Hexel has significant influence over Notter? Explain your answer.

Q2

Significant influence can be obtained in several ways. Give one of the ways that allow Hexel to have significant influence over Notter.

Question 3

For January 1, 2020 compute the amount of goodwill that Hexel has paid for the investment in Notter.

Question 4

Give the journal entry that Hexel has made on January 1, 2020 of the investment in Notter in its single accounts.

Question 5

For 2020 compute the amount that Hexel should report as income from its investment in Notter in its external financial statements under the equity method.

Question 6

For 2020 compute the amount that Hexel should report as income from its investment in Notter in its external financial statements if Hexel applies the initial value met