Question 2: Equity Investment and Inventory (15 marks)

Part One:

On October 1, 2017 Dairfax Financial Holdings made a bid to take-over Blueberry. The price of Blueberry shares at that point in time was $8. Due to insufficient capital, the deal did not close. On December 31, 2017 Dairfax instead chose to purchase 20% of the company at fair market value.

Blueberry information as of December 31, 2017

- Share price: $12

- # of shares outstanding: 560,000,000

Required:

Using the equity method, record the journal entry for Dairfaxs purchase on December 31, 2017.

Part Two:

It is now December 31, 2018 and Blueberry completes an inventory count. All inventory is valued at their retail prices. The breakdown of product inventory is below:

Product	Retail Inventory Value	Markup (or discount)
Q10	$750M	150% (of cost)
Z10	$525M	100% (of cost)
Q10 Discount	$150M	40% discount off of normal Q10 retail price

Required:

Assume that Blueberry uses retail inventory method. Please use the tables below to calculate ending inventory on December 31, 2018.

Product	Retail Inventory Value	Cost to Retail Ratio	Ending Inventory (at cost)
Q10
Z10
Q10 Discount
			Total

Part Three:

On December 31, 2018, Blueberry reports $238 million Net Income for the fiscal year of 2018, and pays cash dividends worth 50% of the 2018 Net Income.

Required:

1. Using the equity method, provide journal entries to record the changes to Dairfaxs 20% holding in Blueberry and determine the balance sheet value for this investment on December 31, 2018. Assume the share price of Blueberry on Dec 31, 2018 is now $15.

2. BONUS: Ignore your answer to part 1). Assume that Dairfax had instead classified its investment in Blueberry as Held for Trading, provide journal entries to record the changes to Dairfaxs 20% holding in Blueberry and determine the balance sheet value for this investment on December 31, 2018. Assume the share price of Blueberry on Dec 31, 2018 is now $15.