Modern Advanced Accounting in Canada, 10th Edition By Darrell Test Bank by QuentinAxel

Student name:__________ 1) In which of the following situations would professional judgment NOT be required in decision making?

A) Recognition of revenue. B) The making of accounting estimates. C) Disclosure of information in the notes to the financial statements. D) Use of IFRS or ASPE for publicly traded companies in Canada.

2) Which of the following statements pertaining to generally accepted accounting principles (GAAP) is INCORRECT?

A) The process of developing GAAP is political. B) If a proposal for a new financial reporting is not accepted by users, it is unlikely to become part of GAAP. C) If an entity that follows GAAP encounters transactions that are not addressed by the CPA Canada Handbook, it is permitted to adopt accounting practices that are consistent with industry practice. D) Publicly traded companies are required to submit financial statements that comply with GAAP to the securities commissions under which they are registered.

3) Which of the following examples does NOT demonstrate the interrelationships of financial statement elements?

A) A sale on account will increase assets and equity. B) Depreciation of equipment will decrease assets and decrease equity. C) The payment of a payable will decrease liabilities and increase assets. D) The contribution of capital will increase an asset and increase equity.

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4) Which of the following statements pertaining to GAAP for publicly accountable enterprises (PAEs) is correct?

A) PAEs include not-for-profit organizations. B) Commencing in 2011, most Canadian PAEs are required to elect to report under either IFRS or ASPE on a prospective basis. C) PAEs include an entity, that as one of its primary businesses, holds assets in a fiduciary capacity for a broad group of outsiders. D) CPA Canada and the Financial Accounting Standards Board (FASB) harmonized the accounting standards of the United States and Canada for PAEs beginning in 1998.

5) Which of the following statements pertaining to private enterprises (PEs) is INCORRECT?

A) PEs may adopt either ASPE or IFRS but once a set of standards is adopted, the PEs are not permitted to apply some standards from ASPE and others from IFRS. B) The accounting standards for a PE are included in a separate part of the CPA Canada Handbook. C) PEs with annual revenues over $10,000,000, are required to report under IFRS. D) A PE is a profit-oriented enterprise that has none of its issued and outstanding financial instruments traded in a public market and does not hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.

6) Which of the following organizations are required to use only the IFRS (Part I) in Canada?

A) All corporations, government agencies and private companies. B) Public companies and private companies whose shareholders' equity is in excess of $500,000,000 at any particular year-end. C) Public companies, private companies and not-for-profit organizations. D) Government business enterprises.

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7) Which of the following statements pertaining to Not-for-Profit-Organizations (NFPO) is INCORRECT?

A) A government NFPO has the choice to follow either the 4200 series of the CPA Canada Public Sector Accounting (PSA) Handbook or the PSA Handbook without the 4200 series. B) A non-government NFPO has a choice to follow Part I (IFRS) or Part III of the CPA Canada Handbook. C) A government NFPO has a choice to follow Part I (IFRS) of the CPA Canada Handbook or the CPA Canada Public Sector Accounting Handbook. D) A non-government NFPO that applies Part III of the CPA Canada Handbook will also apply relevant sections from Part II (ASPE) of the CPA Canada Handbook.

8) For which of the following types of organizations does the CPA Canada Handbook NOT provide specific accounting standards?

A) Publicly accountable enterprises. B) Private enterprises. C) Not-for-profit organizations. D) Proprietorships.

9) Which of the following is NOT a reason why a Canadian private company would elect to report under IFRS?

A) The company is planning to go public in the near future. B) The company seeks comparability with public companies of a similar size. C) It is likely to be less expensive than reporting under ASPE. D) The company is a subsidiary of a Canadian public company.

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10)

The current ratio measures:

A) liquidity. B) solvency. C) profitability of assets. D) profitability of owners' investment.

11)

The formula for the current ratio is:

A) current assets - current liabilities B) current assets/current liabilities C) total debt/shareholders' equity D) net income/shareholders' equity

12)

The debt-to-equity ratio measures:

A) liquidity. B) solvency. C) profitability of assets. D) profitability of owners' investment.

13)

Which three major skills must be demonstrated to be successful as an accountant?

A) Knowledge, creativity and organization. B) Creativity, mathematical skills and adaptability. C) Knowledge, critical thinking and organization. D) Creativity, professionalism and interpersonal skills.

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14) A generic framework for case analysis is recommended not only for integration and analysis cases in an academic setting but can also be applied to business decision-making situations. Which of the following steps in a case analysis would NOT be appropriate?

A) Identifying the needs of the users. B) Identifying and ranking the issues that must be addressed. C) Creating a list of alternatives that are relevant and viable to the situation. D) Providing all identified alternatives to the users in the final report.

15) Explain the purpose or use of "The Conceptual Framework for Financial Reporting" ( Conceptual Framework) in relation to International Financial Reporting Standards (IFRS).

16) X Inc. and Y Inc. are virtually identical companies with identical cost structures and very similar business practices operating in the same lines of business. X Inc. and Y Inc. are both public companies based in Canada and follow IFRS. The following are the condensed income statements for both companies: X Inc. Sales:

Y Inc.

$1,000,000

$2,000,000

Cost of Goods Sold

500,000

1,600,000

Gross Margin

$500,000

$400,000

Administrative Expenses

200,000

300,000

Net Income

$300,000

$100,000

Less:

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Required: Given the information provided, what are some possible causes for the differing results of these companies?

17)

Briefly discuss the external users need for high-quality financial information.

18)

Explain ways that management can mispresent the financial situation of a company.

19) Provide the procedures used to analyze a company's financial statements to determine its future prospects.

20) Rate-regulated companies are permitted to use U.S. GAAP because IASB has not yet developed its own standards.

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⊚ ⊚

true false

21) ASPE is often different than IFRS due to the cost of preparing financial statements to comply with complex standards being greater than the benefit received by users of those statements. ⊚ ⊚

true false

22) IAS 1 has a mandatory requirement that Canadian companies use the titles balance sheet or income statement for their financial statements. ⊚ ⊚

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true false

Answer Key Test name: ch 1 1) D 2) C 3) C 4) C 5) C 6) D 7) C 8) D 9) C 10) A 11) B 12) B 13) A 14) D 20) TRUE 21) TRUE 22) FALSE

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Student name:__________ 1) Beginning on or after January 1, 2018, IFRS 9 requires all non-strategic investments to be reported using which of the following methods?

A) Fair value B) Cost C) Historical D) Impaired value

An investment in an associate is an investment in a corporation that

A) allows the investor to exercise significant influence over the strategic operating and financing policies of the investee. B) allows the investor to exercise significant influence over only the financing policies of the investee. C) allows the investor to exercise significant influence over only the operating policies of the investee. D) allows the investor to exercise significant influence over all decision making for the investee.

3) Which of the following is the primary factor used to distinguish between non-strategic investments and strategic investments?

A) The rate of return. B) The amount paid for the investment. C) The level of influence over the strategic decisions of the investee company. D) The length of time the investment is held by the investor.

Which of the following statements is TRUE under IFRS 9?

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A) All unrealized gains and losses on equity investments flow through other comprehensive income (OCI). B) Unrealized gains and losses on fair value through profit and loss (FVTPL) investments are included in other comprehensive income (OCI). C) Unrealized gains and losses on equity investments may be included in other comprehensive income (OCI) only if management irrevocably elects to do so on initial acquisition. D) Cumulative gains or losses in accumulated other comprehensive income (AOCI) are transferred to net income when the equity investment is sold.

Gains and losses on fair value through profit or loss (FVTPL) investments:

A) are included in net income, regardless of whether they are realized or not. B) are included in net income only when the investment has become permanently impaired. C) are included in net income only when realized. D) are not recorded until the securities are sold.

6) How are realized gains from the sale of fair value through other comprehensive income (FVTOCI) equity investments accounted for under IFRS 9?

A) They are recycled to net income from accumulated other comprehensive income. B) They remain in accumulated other comprehensive income. C) They are transferred from accumulated other comprehensive income directly to retained earnings. D) They are transferred from net income to contributed surplus.

Which of the following statements is TRUE regarding the equity method?

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A) The equity method is used for reporting gains or losses for non-strategic investments. B) The investor's share of the associate's dividends declared is reported in net income. C) The investor's investment in the associate changes in direct relation to the changes taking place in the associate's equity accounts. D) The equity method reports unrealized gains and losses on revaluations to fair value in net income.

8) What percentage of ownership is used as a guideline to determine that significant influence exists under IAS 28 Investments in Associates and Joint Ventures?

A) 25% or more B) 1% to 20% C) 20% to 50% D) 50% or more

9) Which of the following methods uses procedures closest to those used in preparing consolidated financial statements?

A) The fair value through profit or loss (FVTPL) approach B) The cost method C) The fair value through other comprehensive income (FVTOCI) approach D) The equity method

10)

Which of the following is NOT a possible indicator of significant influence?

A) The investor can elect members to the Board of Directors. B) The investor has the right to participate in the policy-making process. C) The investor has engaged in numerous intercompany transactions with the associate. D) The associate's new CEO was previously CEO of the investor company.

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11)

Which of the following statements is CORRECT?

A) Significant influence is only possible if the investor owns more than 50% of the voting shares of the associate. B) An ownership interest between 20% and 50% always implies significant influence. C) An ownership interest of greater than 0% but less than 10% can never imply significant influence. D) Significant influence is possible even if the investor owns less than 20% of the voting shares of the associate.

12) The difference between the investor's cost and the investor's percentage of the carrying value of the net identifiable assets of the associate is known as:

A) goodwill. B) the acquisition differential. C) the fair value increment. D) the excess book value.

13)

Any unallocated positive acquisition differential is normally:

A) pro-rated across the associate's identifiable net assets. B) charged to retained earnings. C) recorded as goodwill. D) expensed during the year following the acquisition.

14) When are gains on intercompany transfers of assets between an investor and an associate recognized as part of investment income that is accounted for by the investor under the equity method?

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A) In the period when the intercompany transfer takes place. B) In the period(s) when the assets are sold to outside entities or consumed by the purchaser. C) They are never recognized. D) They are recognized only when the investment in the associate is sold.

15) ___________ Investments are classified as current if they are actively traded and intended by management to be sold within one year.

A) fair value through profit or loss (FVTPL) B) cost method C) equity method D) fair value through other comprehensive income (FVTOCI)

16) When analyzing and interpreting financial statements, although the reporting methods show different values for liquidity, solvency and profitability, the real economic situation is ________ for the four different methods.

A) completely different B) identical C) almost similar except for the equity method D) almost similar except for the fair value methods

17) Which of the following reporting requirements under Accounting Standards for Private Enterprises (ASPE) is NOT permitted for non-strategic investments in equity instruments?

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A) If the equity instruments are quoted in an active market, they are reported at fair value. B) If the equity instruments are quoted in an active market, they are reported using either the equity method or cost method. C) If the equity instruments are not quoted in an active market, they are reported at cost less any reduction for impairment. D) An irrevocable election may be made to measure any equity investment at fair value.

18) When reporting under the Accounting Standards for Private Enterprises (ASPE), which of the following statements is true where the investor has significant influence over the investee?

A) If the investee's equity securities are traded in an active market, the investor is permitted to use the cost method, equity method or elect to use fair value. B) The investor is permitted to use either the cost method or equity method regardless of whether the investee's equity shares are traded in an active market or not. C) If the investee's equity securities are not traded in an active market, the investor is permitted to use the cost method. D) The investor may irrevocably elect to account for such investments at fair value with all fair value changes reported in other comprehensive income.

19) Which of the following statements is correct when an investment changes from significant influence to FVTPL?

A) The equity method will continue to be used until the entire investment is sold. B) On the date of change, the investor is required to remeasure at fair value any investment the investor retains in the former associate. C) When the investor loses significant influence, the change in reporting method is accounted for retrospectively. D) The investor will, on a prospective basis, account for its remaining investment using the cost method.

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20) Using the cost method, which of the following entries would have to be made to record X's acquisition of Y's shares on January 1, 2022?

A) Debit Investment in Y

Credit

100,000

Cash

100,000

B) Debit Investment in Y

Credit

12,000

Cash

12,000

C) Debit Investment in Y

Credit

112,000

Cash

112,000

D) No entry required.

21) Using the cost method, which of the following entries would have to be made to record X's share of Y's net income for 2022?

A) Debit Investment in Y

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Credit

6,000

Investment income

6,000

B) Debit Investment in Y

Credit

50,000

Investment income

50,000

C) Debit Investment in Y

Credit

12,000

Investment income

12,000

D) No entry required.

22) Using the cost method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2022?

A) Debit Dividend income receivable

Credit

2,400

Dividend income

2,400

B) Debit Dividend income receivable

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Credit

2,400

Investment in Y

2,400

C) Debit Investment in Y

Credit

2,400

Dividend income

2,400

D) No entry required.

23) Using the cost method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2023?

A) Debit Dividend income receivable

Credit

9,600

Dividend income

9,600

B) Debit Dividend income receivable

Credit

9,600

Investment in Y

9,600

C) Debit Dividend income receivable

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Credit

9,600

Dividend income

8,400

Investment in Y

1,200

D) No entry required.

24) Using the cost method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2024?

A) Debit Investment in Y

Credit

7,200

Dividend income

7,200

B) Debit Dividend income receivable

Credit

7,200

Investment in Y

7,200

C) Debit Dividend income receivable Dividend income

Credit

7,200 7,200

D) No entry required.

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25) Using the cost method, what would be the carrying value of X's Investment in Y at the end of 2024?

A) $100,000 B) $98,800 C) $90,000 D) $91,200

26) Using the equity method, which of the following entries would have to be made to report X's acquisition of Y's shares?

A) Debit Investment in Y

Credit

100,000

Cash

100,000

B) Debit Investment in Y

Credit

12,000

Cash

12,000

C) Debit Investment in Y Goodwill

Credit

112,000 112,000

D) No entry required.

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27) Using the equity method, which of the following entries would have to be made to record X's share of Y's net income for 2022?

A) Debit Investment in Y

Credit

6,000

Equity method income

6,000

B) Debit Investment in Y

Credit

8,400

Equity method income

8,400

C) Debit Investment in Y

Credit

2,400

Equity method income

2,400

D) No entry required.

28) Using the equity method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2022? A) Debit

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Credit

Dividend income receivable

2,400

Dividend income

2,400

B) Debit Dividend income receivable

Credit

2,400

Investment in Y

2,400

C) Debit Investment in Y

Credit

6,000

Dividend income

6,000

D) No entry required.

29) Using the equity method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2023?

A) Debit Dividend income receivable

Credit

9,600

Dividend income

9,600

B) Debit

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Credit

Dividend income receivable

9,600

Investment in Y

9,600

C) Debit Dividend income receivable

Credit

9,600

Dividend income

7,200

Investment in Y

2,400

D) No entry required.

30) Using the equity method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2024?

A) Debit Dividend income receivable

Credit

7,200

Dividend income

7,200

B) Debit Dividend income receivable Investment in Y

Credit

7,200 7,200

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Debit Dividend income receivable

Credit

7,200

Dividend income

6,000

Investment in Y

1,200

D) No entry required.

31) Using the equity method, what would be the carrying value of X's Investment in Y at the end of 2024?

A) $100,000 B) $98,800 C) $118,000 D) $80,800

32) When an investment is accounted for using the equity method, how are the investor's share of the investee's income from non-operating sources (such as gains or losses from discontinued operations) to be accounted for by the investor?

A) Any such gains or losses are to be charged directly to retained earnings net of tax. B) Any such gains or losses are included with the revenue and expenses from operations. The investor's pro- rata share of these after-tax gains and losses is added to or deducted from the investment account. C) Any such gains or losses are shown separately, net of tax, below income from operations on the investor's income statement. The investor's pro- rata share of these after-tax gains and losses is added to or deducted from the investment account. D) No specific accounting treatment is required. These items are only required to be disclosed in notes to the financial statements.

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33) If the investor sells part of its investment in an associate reported by the equity method, which of the following is used to calculate the gain or loss on the sale of these shares?

A) The average carrying amount of the investment B) The FIFO method C) The LIFO method D) The specific identification method

34) If an investment reported by the equity method suffers an impairment loss and the value in use of the investment subsequently recovers, which of the following is the appropriate treatment?

A) It may be revalued to fair value with the revaluation gain going to other comprehensive income, even if the recorded gain will exceed the original impairment loss. B) If the recoverable amount increases in subsequent periods, the impairment loss can be reversed. C) It may be revalued to fair value with the revaluation gain going to net income, even if the recorded gain will exceed the original impairment loss. D) None; once an investment has been written down, it cannot subsequently be written up.

35) If an investor is reporting in compliance with the International Financial Reporting Standards (IFRS) and has an investment with significant influence over the investee, what are the disclosure requirements for the investor if the investment is in shares which are actively traded on an exchange?

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A) The investment must be reported at fair value through profit and loss (FVTPL). B) The investment must be reported at fair value through other comprehensive income (FVTOCI). C) The investment must be reported using the equity method with the fair value disclosed in the notes to the financial statements. D) The investment must be reported using the cost method. No additional disclosure is required.

36) How does the accounting for other comprehensive income differ between the International Financial Reporting Standards (IFRS) and the Accounting Standards for Private Enterprises (ASPE)?

A) Under IFRS, realized gains are transferred from other comprehensive income to net income when realized; under ASPE, realized gains are transferred from other comprehensive income directly to retained earnings. B) Under ASPE, realized gains are transferred from other comprehensive income to net income when realized; under IFRS, realized gains are transferred from other comprehensive income directly to retained earnings. C) There is no difference between accounting for other comprehensive income under IFRS and under ASPE. D) Other comprehensive income does not exist under ASPE.

37) Which of the following statements is true regarding an investment in associate that meets the criteria to be classified as held for sale?

A) The investment in associate is to be reported as a non-current asset. B) The intention of management is to recover the carrying value of the investment through continued operations. C) The sale of the investment in associate must be highly probable. D) The investment in associate is to be measured at fair value.

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38) In the situation where an investor's share of an associate's losses exceeds the carrying amount of the investment, which of the following is a true statement?

A) After the investor's interest is reduced to zero, any additional losses will, on a pro-rata basis, reduce the value of other investments the investor may have in the associate. B) After the investor's interest is reduced to zero, any additional losses will be recognized as a gain in the computation of net income. C) After the investor's interest is reduced to zero, any additional losses will reduce any existing trade receivables, trade payables or any long-term receivables for which adequate collateral exists. D) After the investor's interest is reduced to zero, any additional losses will be recognized as a liability to the extent the investor has legal obligations on behalf of the associate.

39) Post Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2022, for cash consideration of $200,000. During 2022, Stamp Company had net income of $120,000 and paid dividends of $80,000. Post Corporation has a December 31st year end. At the end of 2022, shares of Stamp Company were trading for $11 each.

39.1) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through profit or loss (FVTPL). What entry will the company make to record the dividends received from Stamp Company for 2022?

A) Debit Cash Dividend income

Credit

16,000 16,000

B) Version 1

Debit Cash

Credit

16,000

Investment in Stamp Company

16,000

C) Debit Cash

Credit

16,000

OCI-unrealized gain

16,000

D) No entry required.

39.2) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through profit or loss (FVTPL). What entry will the company make at December 31, 2022, to record the revaluation of the investment?

A) Debit Investment in Stamp Company

Credit

20,000

Unrealized gain (net income)

20,000

B) Debit Investment in Stamp Company Unrealized gain (OCI)

Credit

20,000 20,000

C) Version 1

Debit Unrealized loss (net income)

Credit

20,000

Investment in Stamp Company

20,000

D) No entry required.

39.3) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through profit or loss (FVTPL). What will the balance in the Investment in Stamp Company be as at December 31, 2022?

A) $200,000 B) $208,000 C) $220,000 D) $240,000

39.4) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through other comprehensive income (FVTOCI). What entry will the company make at December 31, 2022, to record the revaluation of the investment?

A) Debit Investment in Stamp Company

Credit

20,000

Unrealized gain (net income)

20,000

B) Debit

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Credit

Investment in Stamp Company

20,000

OCI-Unrealized gain

20,000

C) Debit Unrealized loss (net income)

Credit

20,000

Investment in Stamp Company

20,000

D) No entry required.

39.5) Assume Post Corporation does not have significant influence and reports its nonstrategic investment in Stamp Company at fair value through other comprehensive income (FVTOCI). What entry will the company make to record the dividends received from Stamp Company for 2022?

A) Debit Cash

Credit

16,000

Dividend income

16,000

B) Debit Cash Investment in Stamp Company

Credit

16,000 16,000

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Debit Cash

Credit

16,000

OCI-Unrealized Gain

16,000

D) No entry required.

39.6) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through other comprehensive income (FVTOCI). What will the balance in the Investment in Stamp Company be as at December 31, 2022?

A) $200,000 B) $208,000 C) $220,000 D) $240,000

39.7) Assume Post Corporation has significant influence and accounts for its investment in Stamp Company using the equity method. What entry will the company make to record the dividends received from Stamp Company for 2022?

A) Debit Cash

Credit

16,000

Dividend income

16,000

B) Debit

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Credit

Cash

16,000

Investment in Stamp Company

16,000

C) Debit Cash

Credit

16,000

OCI-Unrealized gain

16,000

D) No entry required.

39.8) Assume Post Corporation has significant influence and accounts for its investment in Stamp Company using the equity method. What entry will the company make to record the revaluation of the investment at December 31, 2022?

A) Debit Investment in Stamp Company

Credit

20,000

Unrealized gain (net income)

20,000

B) Debit Investment in Stamp Company

Credit

20,000

OCI-Unrealized gain

20,000

C) Debit

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Credit

Unrealized loss (net income)

20,000

Investment in Stamp Company

20,000

D) Debit Investment in Stamp Company

Credit

24,000

Equity method income

24,000

39.9) Assume both Post Corporation and Stamp Company are private companies (i.e., shares are not traded in an active market). Post Corporation accounts for its investment in Stamp Company using the cost method. What will the balance in the Investment in Stamp Company be at December 31, 2022?

A) $200,000 B) $208,000 C) $220,000 D) $240,000

39.10) Assume both Post Corporation and Stamp Company are private companies (i.e., shares are not traded in an active market). Post Corporation accounts for its investment in Stamp Company using the cost method. What entry will the company make to record the dividends received from Stamp Company for 2022?

A) Debit Cash Dividend Income

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Credit

16,000 16,000

B) Debit Cash

Credit

16,000

OCI-Unrealized gain

16,000

C) Debit Cash

Credit

16,000

Investment in Stamp Company

16,000

D) No entry required.

39.11) Assume both Post Corporation and Stamp Company are private companies (i.e., shares are not traded in an active market). Post Corporation accounts for its investment in Stamp Company using the cost method. What entry will the company make to record the revaluation of the investment at December 31, 2022?

A) Debit Investment in Stamp Company

Credit

20,000

Unrealized gain (net income)

20,000

B) Debit Investment in Stamp Company

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Credit

20,000

OCI-Unrealized gain

20,000

C) Debit Unrealized loss (net income) Investment in Stamp Company

Credit

20,000 20,000

D) No entry required.

39.12) Assume Post Corporation has significant influence and accounts for its investment in Stamp Company using the equity method. What will the balance in the Investment in Stamp Company be at December 31, 2022?

A) $200,000 B) $208,000 C) $220,000 D) $240,000

40) Ocean Enterprises Inc. (Ocean) acquired 15% of the 100,000 outstanding common shares of Whale Ltd. (Whale) on January 1, 2022, for a cash consideration of $180,000 and a further 10% of the company's common shares a year later for $130,000. On July 1, 2023, Ocean sold half of its holding in Whale for proceeds of $175,000. Whale earned income of $150,000 in 2022 and $180,000 in 2023 (evenly over both years) and paid a regular semi-annual dividend of $40,000 on June 30th and December 31st of each year. Ocean does not have significant influence over Whale. The company's shares were trading for $13 at the end of 2022 and $11.75 at the end of 2023.

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40.1) Assume Whale has classified the investment as fair value through profit and loss (FVTPL). Prepare dated journal entries for Ocean for 2022 to account for its investment in Whale and any related income therefrom.

40.2) Assume Whale has classified the investment as fair value through profit and loss (FVTPL). Prepare dated journal entries for Ocean for 2023 to account for its investment in Whale and any related income therefrom.

40.3) Assume Whale has classified the investment as fair value through other comprehensive income (FVTOCI). Prepare dated journal entries for Ocean for 2023 to account for its investment in Whale and any related income therefrom.

41) On January 1, 2022, Joyce Inc. paid $600,000 to purchase 25% of Mark Inc.'s outstanding voting shares. Joyce has significant influence over Mark and reports the investment using the equity method. Mark's earnings for 2022 and 2023 were $100,000 and $200,000, respectively. Mark declared and paid dividends in the amount of $20,000 and $10,000 during 2022 and 2023, respectively. Required: Calculate the balance in the Investment in Mark Inc. account as at December 31, 2023.

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42) X Ltd. (X) purchased 40% of Y Ltd. (Y) on January 1, 2022, for $400,000. Y paid dividends of $50,000 in each year. Y's income statements for 2022 and 2023 showed the following. 2022

2023

Income (loss) before income taxes

$100,000

($60,000)

Income tax expense (recovery)

40,000

(15,000)

Net income (loss)

$60,000

($45,000)

Other comprehensive income (net of tax)

20,000

25,000

Comprehensive income (loss)

$80,000

($20,000)

At December 31, 2022, the fair value of the investment was $440,000 and at December 31, 2023, the fair value of the investment was $420,000. Required: Prepare X's journal entries for 2022 and 2023, assuming that this is a non-strategic investment and is accounted for at fair value through profit and loss (FVTPL).

43) X Ltd. (X) purchased 40% of Y Ltd. (Y) on January 1, 2022, for $400,000. Y paid dividends of $50,000 in each year. Y's income statements for 2022 and 2023 showed the following. 2022

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2023

Income (loss) before income taxes

$100,000

($60,000)

Income tax expense (recovery)

40,000

(15,000)

Net income (loss)

$60,000

($45,000)

Other comprehensive income (net of tax)

20,000

25,000

Comprehensive income (loss)

$80,000

($20,000)

At December 31, 2022, the fair value of the investment was $440,000, and at December 31, 2023, the fair value of the investment was $420,000 Required: Prepare X's journal entries for 2022 and 2023, assuming that this is a significant influence investment and will be reported using the equity method.

44) Abbot Corporation (Abbot) has made a series of investments in Pine Corp. (Pine), one of its major customers. Abbot has a December 31 year end. The management of Abbot has been impressed by the products produced and sold by Pine and its market success. These investments are only going to be held for a short period of time. The market price of Pine stock on December 31, 2022 and 2023, was $200 and $250, respectively, per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the share purchases and sales that Abbot entered in 2022 and 2023: Date

No. of Shares

Total

Cost (per share)

March 31, 2022

1,000

$75

June 30, 2022

1,000

2,000

$125

September 30, 2022

1,000

3,000

$175

September 30, 2023

(3,000)

$240

Assume that Abbot accounts for its investment in Pine at fair value through profit and loss (FVTPL). Required: a) Prepare the journal entries to record the transactions in 2022 and 2023 with respect to Abbot's investment in Pine. b) How would Abbot disclose the investment in Pine on its balance sheet?

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45) Abbot Corporation (Abbot) has made a series of investments in Pine Corp. (Pine), one of its major customers. Abbot has a December 31 year end. The management of Abbot has been impressed by the products produced and sold by Pine and its market success. These investments are only going to be held for a short period of time. The market price of Pine stock on December 31, 2022 and 2023, was $200 and $250, respectively, per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the share purchases and sales that Abbot entered in 2022 and 2023: Date

No. of Shares

Total

Cost (per share)

March 31, 2022

1,000

$75

June 30, 2022

1,000

2,000

$125

September 30, 2022

1,000

3,000

$175

September 30, 2023

(3,000)

$240

Assume that Abbot accounts for its investment in Pine at fair value through other comprehensive income (FVTOCI). Required: a) Prepare the journal entries to record the transactions in 2022 and 2023 with respect to Abbot's investment in Pine. b) How would Abbot disclose the investment in Pine on its balance sheet?

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46) Pry Corporation (Pry) acquired 20,000 of the 100,000 outstanding common shares of Syrt Company (Syrt) on January 1, 2022, for cash consideration of $200,000. During 2022, Syrt had net income of $120,000 and paid dividends of $80,000. At the end of 2022, shares of Syrt were trading for $11 each. Pry has a December 31 year end for all years. During 2023, Syrt had a net loss of $60,000 and paid dividends of $40,000. Net income for the first half of the year was $80,000 and the net loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2023, Pry sold 5,000 shares of Syrt for a consideration of $12 per share. At the end of 2023, the share price of Syrt had fallen to $6 per share. The average of market analysts' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.) Required: Provide journal entries for Pry for all transactions relating to its investment in Syrt for the year 2023 if it accounts for its investment in Syrt as a fair value through profit and loss (FVTPL) investment.

47) On January 1, 2022, Black Corporation (Black) purchased 15,000 of the 100,000 (15%) outstanding shares of White Corporation (White) for cash consideration of $498,000. From Black's perspective, White has a fair value through profit or loss (FVTPL) investment. The fair value of Black's investment was $520,000 at December 31, 2022. On January 1, 2023, Black purchased an additional 30% of White's shares for cash consideration of $1,040,000. The second share purchase allowed Black to exert significant influence over White. During the two years, White reported the following results: Net Income

Dividends Declared and Paid

2022

$400,000

$240,000

2023

$540,000

$250,000

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Required: With respect to this investment, prepare Black's journal entries for both 2022 and 2023.

48) Dragon Corporation (Dragon) acquired a 7% interest in the outstanding shares of Slayer Inc. (Slayer) on January 1, 2022, at a cost of $200,000. Dragon was a private company and reported in compliance with the Accounting Standards for Private Enterprises (ASPE). Dragon accounted for Slayer, whose shares are not publicly traded, using the cost method. Slayer reported net income and made dividend payments to its shareholders as noted below. On December 31, 2024, Slayer declared bankruptcy because of a series of losses as noted. Income

Dividends—Declared and Paid on June 30th

2022

50,000

20,000

2023

(10,000)

20,000

2024

(40,000)

20,000

Required: (a) Prepare the journal entries that Dragon would make in 2022, 2023 and 2024. (b) Prepare the general ledger account for Dragon's investment in Slayer at all relevant dates.

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49) Ronen Corporation owns 35% of the outstanding voting shares of Western Communications Inc. over which it exerts significant influence. The carrying value of its investment as at October 31, 2022 was $3,750,000. Ronen has now designated its investment in Western as fair value through profit or loss (FVTPL) because of the open market purchase of a 55% interest in Western by Overhaul Corp. Western is in financial distress. The market value of Ronen's 35% interest is now $2,000,000. Required: a) What is the accounting result of a change from the equity method of accounting to FVTPL? b) Do any journal entries need to be recorded by Ronen because of this change? If so, what is the entry?

50) Past Corporation (Past) acquired 22,000 of the 100,000 outstanding common shares of Stomp Company (Stomp) on January 1, 2022, for cash consideration of $240,000. Both Past and Stomp have December 31 year ends. During 2022, Stomp had net income of $160,000 and paid dividends of $55,000. At the end of 2022, shares of Stamp Company were trading for $14 each. During 2023, Stomp Company had a net loss of $60,000 and paid dividends of $40,000. Net income for the first half of the year was $80,000 and the net loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2023, Past sold 5,000 shares of Stomp for a consideration of $16 per share. At the end of 2023, the share price of Stomp had fallen to $6 per share. The average of market analysts' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.) Required: Provide journal entries for Past for all transactions relating to its investment in Stomp for the year 2023 if it accounts for its investment in Stomp using the equity method. Round all calculations to nearest dollar.

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51) One of the changes introduced in IFRS 9 Financial Instruments was that realized gains on investments valued at fair value with revaluations through other comprehensive income were to be taken to retained earnings without being recycled through net income. Briefly explain how this eliminated one possible method of earnings management that previously allowed companies' discretion in managing net income.

52) If an investor's ownership interest in a significant influence investment increases or decreases, all changes from accounting at fair value to the use of the equity method (or viceversa) are to be handled prospectively. ⊚ ⊚

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true false

Answer Key Test name: ch 2 1) A 2) A 3) C 4) C 5) A 6) C 7) C 8) C 9) D 10) D 11) D 12) B 13) C 14) B 15) A 16) B 17) B 18) C 19) B 20) C 21) D 22) A 23) A 24) C 25) A 26) A Version 1

27) A 28) B 29) A 30) B 31) B 32) C 33) A 34) B 35) C 36) D 37) C 38) D 39) Section Break 39.1) A 39.2) A 39.3) C 39.4) B 39.5) A 39.6) C 39.7) B 39.8) D 39.9) A 39.10) A 39.11) D 39.12) B 40) Section Break 52) TRUE

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Student name:__________ 1) The Board of Directors of Company B is aware of a potential takeover bid from Company A. The assets of Company B that are of primary interest to Company A are transferred to other companies. Which of the following tactics were employed by Company B to prevent Company A from acquiring control of Company B?

A) Pac-man defence B) Selling the crown jewels C) Poison pill D) White knight

2) On January 1, 2022, A Company issued 6,000 new common shares to the shareholders of B Corporation to acquire 100% of their shares in B Corporation. Prior to the new share issuance by A Company, it had 5,000 common shares issued and outstanding. The former shareholders of B Corporation would now own 55% (6,000/11,000) of the outstanding shares. What is the outcome of this transaction?

A) The legal parent, A Company, is treated as the subsidiary and the legal subsidiary, B Corporation, is treated as the parent for reporting purposes. Therefore, the consolidated balance sheet would incorporate B Corporation's net assets at carrying value and A Company's net assets at fair value. B) Since A Company shares were issued to the shareholders of B Company for the purchase, A Company will be the parent company and B Corporation, the subsidiary for reporting purposes. Therefore, the consolidated balance sheet would incorporate A Company's net assets at carrying value and B Corporation's net assets at fair value. C) Since neither A Company nor B Corporation can be identified as the acquirer, the consolidated balance sheet would incorporate A Company's net assets at carrying value and B Corporation's net assets at carrying value. D) Since neither A Company nor B Corporation can be identified as the acquirer, consolidated financial statements are not required. Each entity is only required to prepare separate-entity financial statements.

Which of the following would NOT be included in the acquisition cost?

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A) Share issue costs B) Fair value of any shares issued C) Fair value of contingent consideration D) Fair value of assets transferred

4) How should the total consideration given to acquire control through a share purchase be allocated prior to preparing consolidated financial statements?

A) The total consideration given should be allocated to the carrying amount of the acquired company's identifiable net assets. B) The total consideration given should be allocated to the fair value of the acquired company's identifiable net assets and goodwill. C) The total consideration given should be allocated to the acquisition differential. D) The total consideration given should be reflected as an increase in the acquirer's investment (in the subsidiary) account.

5) Which of the following statements pertaining to the preparation of consolidated financial statements is correct?

A) Consolidation entries are made in the accounting records of both the parent and subsidiary. B) The acquisition differential appears on the consolidated balance sheet as an asset. C) The parent company's investment in subsidiary account is eliminated and does not appear on the consolidated balance sheet. D) The subsidiary's shareholders' equity accounts are combined with the parent's shareholders' equity accounts.

6) According to IFRS 10, there are conditions, that if met, a parent company will not be required to present consolidated financial statements for external reporting purposes. Which of the following is NOT one of the conditions?

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A) The parent company's ultimate parent issued consolidated financial statements that comply with IFRS for public use. B) The parent company is a wholly owned subsidiary. C) The parent company's shareholders unanimously agreed that consolidated financial statements are not required. D) The parent company shares are not traded in a public market.

7) Company Y purchases a controlling interest in Company Z on January 1, 2022. Which of the following would appear as the shareholders' equity amount on Company Y's consolidated balance sheet on the date of acquisition?

A) Company Y's shareholders' equity. B) The combined shareholders' equity of both companies. C) Company Y's shareholders' equity as well as Company Y's proportional share of Company Z's net assets at book value. D) Company Y's shareholders' equity as well as Company Y's proportional share of Company Z's net assets at fair market value.

8) The process of preparing consolidated financial statements involves the elimination of intercompany transactions between a parent company and its subsidiary. Where would these entries be recorded?

A) On the parent's books only. B) On the subsidiary's books. C) The entries are not recorded in the books of either company. The entries are only made on the consolidated working papers. D) The elimination of any intercompany transaction must be reflected on the books of both companies.

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9) IFRS 10 Consolidated Financial Statements outlines the requirements for identifying the company that is the acquirer in a business combination when it's not clear who that is. Which is NOT a consideration in determining which company is the acquirer?

A) The ability to direct relevant activities that most significantly affect returns of the investee. B) The shareholder group that holds the largest number of voting shares. C) The company that is paying cash for the business. D) Any by-laws or provisions of the incorporation acts of each company that set out how a business combination will occur in law.

10) How should the acquirer in a business combination account for intangible assets which are readily identifiable but difficult to measure at fair value?

A) They should be ignored since the cost of determining the fair value outweighs the benefit. B) The fair value should be determined using one of the techniques described in Appendix B of IFRS 13. C) They should be included in goodwill. D) They should be accounted for at an amount deemed reasonable by management.

11) Which of the following regarding the preparation of consolidated financial statement is correct?

A) Once the parent company prepares consolidated financial statements, it no longer needs to prepare separate-entity financial statements. B) Only the subsidiary is required to prepare separate-entity financial statements. C) Consolidated financial statements are required by the parent company for reporting purposes only; each company must continue to prepare its own separate-entity financial statements. D) Consolidated financial statements are only required when both the parent and subsidiary companies are publicly traded.

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12) Assume that two companies wish to engage in a business combination involving a share exchange. Once the share exchange is consummated, each shareholder group will have an equal number of voting shares. Which of the following statements best describes the course of action that must be taken under these circumstances?

A) Other factors must be examined to determine which shareholder group has control. B) The company with the largest net assets (at fair market value) is deemed to be the acquirer. C) No acquirer can be identified since no shareholder group has majority voting control, so the share exchange must be annulled. D) The Boards of Directors of both companies must enter into discussions to agree on which party will be the acquirer.

13) Company A makes a hostile take-over bid for control of Company B. In response, Company B makes a counter-offer to purchase shares from Company A's shareholders. Which of the following best describes Company B's response?

A) Pac-man defence B) Selling the crown jewels C) Poison pill D) Hostile defence

14) One company is considering entering into a business combination with another. The potential acquirer wishes to acquire the subsidiary's assets and liabilities but wishes to prepare consolidated financial statements using the fair market values of its own assets and liabilities as well of those of its potential subsidiary. Can this be accomplished? (Assume that each of the methods is currently allowable under GAAP)

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A) Yes, this is permissible under the acquisition method. B) Yes, this is permissible under the equity method. C) Yes, this is permissible under the new-entity method. D) No, this would not be possible under any circumstances.

15) 1234567 Inc. is contemplating a business combination with 7654321 Inc. One company is incorporated under the Canada Business Corporations Act and the other under the Business Corporations Act for Ontario. Is a statutory amalgamation permissible under these circumstances?

A) Yes, provided the combination is accounted for using the Acquisition Method. B) Yes, provided the surviving corporation continues the businesses of the predecessor corporations. C) No, a statutory amalgamation would not be possible, since one company is incorporated under federal law and the other under provincial law. D) Cannot be determined from the information given.

16) Company A wishes to acquire control of Company B's business. A consultant recommended that Company A can do this through a purchase of assets rather than a purchase of shares. Which of the following statements regarding the above scenario is INCORRECT?

A) Company A needs to purchase Company B's nets assets. B) Company A only needs to acquire the assets of Company B that it needs to strategically enhance its own business operations. C) Company A needs to acquire the assets that constitute Company B's business. D) Company A needs to purchase all the assets of Company B and assume all of its liabilities.

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17) A Inc. purchased 100% of B Inc.'s voting shares for cash. The assets and liabilities reported in the consolidated balance sheet of A Inc. prepared on the date of acquisition will include which of the following?

A) The book value of A's assets and liabilities plus the book value of B's assets and liabilities. B) The fair market value of A's assets and liabilities plus the book value of B's assets and liabilities. C) The book value of A's assets and liabilities plus the fair market value of B's assets and liabilities. D) The fair market value of A's assets and liabilities plus the fair market value of B's assets and liabilities.

18)

Which of the following must be possible in order for a business combination to exist?

A) Control of another company's net assets that constitute a business. B) A contract with another company to lease the assets that will be used in a business. C) Acquisition of shares of another company. D) Ownership of all another company's operating assets.

19) Company A (A) purchased 100% of the voting shares of Company B (B) for $100,000 cash on January 1, 2022. Immediately before the acquisition, A and B reported cash balances of $300,000 and $150,000 respectively. If consolidated financial statements were prepared immediately following the acquisition, how much cash would be reported on A's consolidated balance sheet?

A) $250,000 B) $350,000 C) $450,000 D) $550,000

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20) A Inc. is contemplating a business combination with B Inc. A Inc.'s management is considering the acquisition of a majority of B's voting shares. The fair market values of B's assets far exceed their book values. Which of the following statements pertaining to this situation is correct?

A) The purchase of B's shares would likely be the cheaper method of acquiring control, but it would only be more advantageous to the shareholders of B Inc. from a tax perspective. B) The purchase of B's shares would likely be the cheaper method of acquiring control, and it would be more advantageous to the consolidated entity from a tax standpoint. C) The purchase of B's shares would be more expensive method of acquiring control due to the high fair value of B's assets. D) The purchase of B's shares would likely be a more expensive way of acquiring control, but it would be more advantageous to the consolidated entity from a tax standpoint.

21) IFRS 3 outlines the accounting requirements for business combinations. Which of the following statements is correct?

A) Companies may choose between the new entity method and the acquisition method when accounting for business combinations. B) The new-entity method can be used if management determines the users of the company's consolidated financial statements would benefit from the fair value reporting of both the parent and subsidiary on acquisition date. C) The only acceptable method of accounting for business combinations is the acquisition method. D) The new entity method can only be used when cash is the sole consideration offered by the acquirer in a business combination.

22) XYZ Inc. owns 55% of DEF Inc.'s 100,000 outstanding voting shares. Another company, GHI Inc., owns 40%, with the remaining shares being held by many individual investors. GHI Inc. also owns $25,000,000 worth of DEF Inc.'s $1,000 par value bonds, each of which is convertible to one voting share of DEF Inc. Which of the following statements regarding the control of DEF Inc. is correct?

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A) XYZ Inc. has control over DEF Inc. as it owns a majority of DEF Inc.'s currently outstanding voting shares. B) XYZ Inc. does not have control over DEF Inc. because GHI Inc. will have enough voting shares to control DEF Inc. if it exercised its conversion rights for the bonds. C) XYZ Inc. has de facto control over DEF Inc. D) As long as GHI Inc. does not exercise its option to convert its bonds to voting shares, XYZ Inc. has control over DEF Inc.

23) A Inc. purchased 100% of the voting shares of B Inc. on July 1, 2022. Which of the following statements is TRUE?

A) The 2022 consolidated income statement will include only the income of A Inc. from January 1, 2022 to June 30, 2022 and income for both A Inc. and B Inc. from July 1, 2022 to December 31, 2022. B) The 2022 consolidated income statement will include income for both A Inc. and B Inc. for the entire year. C) The 2021 income statement (i.e., the comparative year), will retroactively include income for both A Inc. and B Inc. D) The 2022 consolidated income statement will only include income from A Inc.

24) Company A owns 80% of the voting shares of Company B, which in turn owns 70% of the shares of Company C. There are no outstanding conversion rights, warrants or options which would enable holders of other instruments to acquire additional voting shares of any of these companies. In this scenario, which of the following statements is TRUE?

A) Company A has no control over Company C because it does not own any shares of Company C. B) Company A has direct control over Company C. C) Company A has indirect control over Company C. D) Company A does not have control over Company C's net assets.

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25) Yurt Inc. (Yurt) owns 42% of North Inc.'s (North) voting shares. Yurt is the largest single shareholder of North's voting shares, with the rest of North's shares being widely held by individual investors. There was a very poor turnout at North's recent annual meeting, enabling Yurt to easily elect the majority of North's Board of Directors. Which of the following statements accurately describes this situation?

A) Yurt cannot control North because it cannot exercise control over North without the cooperation of North's other shareholders. B) Yurt controls North because it is North's single largest shareholder group. C) Yurt is deemed to control North because it has elected the majority of North's Board members and the other shareholders are not organized in such a way to actively cooperate when they vote. D) At this point, Yurt has significant influence and would only be able to control North if it acquires more than 50% of North's voting shares.

26)

Which of the following statements is correct?

A) Under the new-entity method, both the parent and subsidiary company's net assets are recorded at their fair market values at the date of acquisition. B) Under the acquisition method, the acquirer company's net assets are revalued to fair value to reflect the substance of the transaction which, in essence is, a new company has been formed. C) As of January 1st, 2011, the new-entity method must be used to account for business combinations where an acquirer can be identified. D) The acquisition method is consistent with the historical cost principle while the newentity method is not.

27)

How is negative goodwill treated under the acquisition method?

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A) The acquiring company could potentially report a gain on acquisition. B) The acquiring company will report a loss on acquisition. C) The negative goodwill will be included in other comprehensive income, as it is an unrealized gain. D) The negative goodwill is prorated and allocated to the fair value of the identifiable net assets of the acquired company.

28)

Under the new-entity method, which of the following statements is TRUE?

A) The net assets of the acquiring company remain at book value while those of the acquired company are reported at fair value. B) The net assets of the acquiring company are reported at fair value while those of the acquired company are reported at book value. C) The net assets of both companies are reported at fair market value. D) The net assets of both companies are reported at book value.

29) Appendix B of IFRS 3 provides an extensive list of what must be disclosed for each business combination. Which of the following items is NOT included in that list?

A) The acquisition-date fair value of the total consideration given. B) The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree. C) The percentage of voting equity interests acquired. D) The net assets of both companies at book value as disclosed in the financial statements of each company prior to the business combination.

30) When is a parent company allowed to comprehensively revalue the assets and liabilities of a subsidiary to its fair values at the acquisition date using push-down accounting, following a business combination?

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A) When reporting under ASPE and there is a significant non-controlling interest B) When reporting under ASPE and there is an insignificant (or no) non-controlling interest C) When reporting under IFRS and there is a significant non-controlling interest D) When reporting under IFRS and there is an insignificant (or no) non-controlling interest

31) Which of the following is required when preparing a consolidated balance sheet on the date of the formation of a subsidiary by its parent company?

A) The assets and liabilities of the subsidiary must be revalued to fair value. B) The goodwill from the business combination must be calculated. C) The parent's investment account must be eliminated against the subsidiary's share capital. D) The parent's investment account must be eliminated against the subsidiary's retained earnings.

32) Company A currently owns 70% of the voting shares of Company B. Which of the following would result in the loss of control of Company B?

A) The Receiver has taken control of the assets of Company B and will continue to operate the business to maximize the sale's value of Company B's assets. B) The Receiver has seized a specific asset of Company B to satisfy the terms of a loan agreement, but the seizure does not affect the ability of Company B to continue in business under Company A's direction. C) The Canadian government has imposed restrictions over Company B's ability to sell its merchandise in certain markets. D) The non-controlling shareholder of Company B has the right to approve capital expenditures exceeding $5,000,000.

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33) Which of the following is NOT one of the elements that must exist for an investor to have control over an investee?

A) The investor has existing rights to currently direct activities that significantly affect the investee's returns. B) The investor must have exposure to returns that vary resulting from the investee's performance. C) The investor must be able to use its power to affect the amount of its returns from its involvement. D) The investor must currently own more than 50% of the voting shares to have control over the investee.

34) In general, which of the following statements about the income tax implications for the following forms of business combinations is true?

A) An acquisition of shares is generally better for the acquirer but worse for the vendor. B) An acquisition of net assets is generally better for the acquirer but worse for the vendor. C) An acquisition of shares is generally worse for both the acquirer and the vendor. D) An acquisition of net assets is generally better for both the acquirer and the vendor.

35) Which of the following is NOT considered to be part of the acquisition cost of a subsidiary?

A) Any cash paid to the seller. B) The fair value of contingent consideration. C) Present value of any promises by the acquirer to pay cash in the future. D) The cost of issuing shares as part of the consideration.

36)

Which of the following is part of the acquisition cost of a subsidiary?

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A) Due diligence fees paid to lawyers. B) The fair value of assets transferred by the acquirer. C) The costs of issuing debt or shares. D) Amounts paid to accountants for advice.

37) On December 31, 2022, A Company (A) has capital assets with a cost of $250,000 and accumulated depreciation of $150,000 and B Company (B) has capital assets with a cost of $180,000 and accumulated depreciation of $80,000. B's capital assets have a fair value of $200,000 on that date. If A acquires B on January 1, 2023, and prepares a consolidated balance sheet on that date, at what values should the capital assets appear on that balance sheet (using the net method)?

A) Cost of $430,000 and accumulated depreciation of $230,000. B) Cost of $450,000 and accumulated depreciation of $150,000. C) Cost of $450,000 and accumulated depreciation of $230,000. D) Cost of $680,000 and accumulated depreciation of $230,000.

38) IFRS 3 outlines the accounting requirements for business combinations. Which of the following statements pertaining to the accounting requirements is INCORRECT?

A) All business combinations should be accounted for using the acquisition method. B) The acquisition date is the date the acquirer obtains control of the acquiree. C) The acquirer is required to measure 100% of the fair value of the acquiree on acquisition date even if the acquirer only purchases 70% of the voting shares. D) The acquirer should only recognize and measure identifiable assets that are presented on the acquiree's balance sheet at acquisition date.

39) Which method under ASPE is a private company permitted to use to report its subsidiaries?

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A) The private company is only permitted to use the consolidation method. B) The private company can use the consolidation method, equity method or cost method. C) The private company is only permitted to use the equity method. D) The private company is permitted to choose between the equity method or cost method.

40) IOU Inc. (IOU) purchased 100% of the outstanding common shares of UNI Inc. (UNI) for cash of $900,000. On the date of acquisition, UNI's assets included $2,000,000 of inventory, and land with a book value of $120,000. UNI also had $1,400,000 in liabilities on that date. UNI's book values were equal to their fair market values, except for the company's land, which was estimated to have a fair market value of $170,000.

40.1)

How much goodwill will be created by IOU's acquisition of UNI?

A) $130,000 B) $50,000 C) $180,000 D) Can't be measured with the information provided.

40.2) Assuming that the purchase of the common shares of UNI Inc. was properly recorded at cost, which of the following journal entries is required to prepare consolidated financial statements the day following the acquisition?

A) Debit Investment in UNI

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Credit

900,000

Cash

900,000

B) Debit

Credit

Inventory

2,000,000

Land

170,000

Goodwill

130,000

Liabilities

1,400,000

Investments in UNI

900,000

C) Debit Net Assets

720,000

Acquisition differential

180,000

Cash

Credit

900,000

D) No entry.

40.3) UNI?

Which of the following is the correct journal entry to record IOU's acquisition of

A) Debit Investment in UNI Cash

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Credit

900,000 900,000

B) Debit Inventory

2,000,000

Land

170,000

Goodwill

130,000

Credit

Liabilities

1,400,000

Cash

900,000

C) Debit Net Assets

720,000

Acquisition differential

180,000

Cash

Credit

900,000

D) No journal entry required by IOU. The journal entry is recorded by UNI.

40.4) UNI also had patent rights with a fair market value on acquisition date of $20,000 that were not shown on its balance sheet because the rights had been developed internally. How much goodwill would be created by IOU's acquisition of UNI?

A) $130,000 B) $110,000 C) $70,000 D) $180,000

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41) Parent Inc. (Parent) and Sub Inc. (Sub) had the following balance sheets on December 31, 2022: Parent

Sub

Current Assets

$60,000

$10,000

Fixed Assets (net)

100,000

60,000

Total Assets

$160,000

$70,000

Current Liabilities

$42,000

$35,000

Bonds Payable

20,000

12,000

Common Shares

90,000

12,000

Retained Earnings

8,000

11,000

$160,000

$70,000

Total Liabilities and Equity

On January 1, 2023, Parent purchased all of Sub's common shares for $50,000 in cash. On that date, Sub's current assets and fixed assets had a fair value of $18,000 and $48,000, respectively. Consolidated financial statements were prepared on that date.

41.1) Which of the following is the correct amount for current assets on the consolidated balance sheet?

A) $70,000 B) $28,000 C) $78,000 D) $120,000

41.2) Which of the following is the correct amount for fixed assets on the consolidated balance sheet?

A) $172,000 B) $100,000 C) $148,000 D) $160,000

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41.3) Which of the following is the correct amount for the goodwill arising from this business combination?

A) No goodwill acquired B) $23,000 C) $27,000 D) $31,000

41.4) Which of the following is the correct amount for the shareholders' equity section of the consolidated balance sheet?

A) $102,000 B) $90,000 C) $98,000 D) $121,000

42) A Corporation had net income of $50,000 in 2022 and $60,000 in 2023, excluding any income from its investment in B Company. B Company had net income of $30,000 in 2022 and $40,000 in 2023. On January 1, 2023, A Corporation acquired all of the outstanding common shares of B Company for a cash payment of $300,000. Assume that there was no acquisition differential on this business combination.

42.1) What net income would A Corporation report for 2022 in its comparative consolidated financial statements at the end of 2023?

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A) $30,000 B) $50,000 C) $80,000 D) $100,000

42.2) What net income would A Corporation report for 2023 in its comparative consolidated financial statements at the end of 2023?

A) $40,000 B) $60,000 C) $80,000 D) $100,000

43)

On April 1, 2022, the balance sheets of Optimum Inc. and Electra Inc. were as follows: Optimum Inc

Electra Inc

Cash and short-term securities

$380,000

$20,000

Inventory

50,000

10,000

Plant and equipment (net)

320,000

120,000

Total Assets

$750,000

$150,000

Current liabilities

$75,000

$15,000

Bonds payable

100,000

30,000

Common shares

150,000

55,000

Retained earnings

425,000

50,000

Total Liabilities and Equity

$750,000

$150,000

On that date, the fair values of Electra's assets and liabilities were as follows:

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Cash and short-term securities

$32,000

Inventory

$12,000

Plant and equipment (net)

$150,000

Current liabilities

$15,000

Bonds payable

$32,000 20

On April 1, 2022, Optimum issued 5,000 new common shares with a market value of $60.00 per share as consideration for Electra's net assets. Prior to the issue, Optimum had 10,000 outstanding common shares. Required: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Optimum's acquisition of Electra's assets. c) Prepare Optimum's balance sheet immediately following its acquisition of Electra's assets. d) Prepare Electra's balance sheet following the acquisition.

44) Sonic Enterprises Inc has decided to purchase 100% of the voting shares of Jackson Inc. for $325,000 in cash on May 1, 2022. On that date, just prior to the acquisition, the balance sheets of each of these companies were as follows: Sonic Inc

Jackson Inc

Cash and short-term securities

$750,000

$30,000

Inventory

60,000

20,000

Plant and equipment (net)

280,000

140,000

Total assets

$1,090,000

$190,000

Current liabilities

$150,000

$25,000

Bonds payable

120,000

30,000

Common shares

120,000

70,000

Retained earnings

700,000

65,000

Total liabilities and equity

$1,090,000

$190,000

On that date, the fair values of Jackson's assets and liabilities were as follows:

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Cash and short-term securities

$28,000

Inventory

$22,000

Plant and equipment (net)

$180,000

Current liabilities

$25,000

Bonds payable

$15,000

Sonic's book values approximated their fair values on that date. Required: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Sonic's acquisition of Jackson's shares. c) Prepare Sonic's consolidated balance sheet immediately following its acquisition of Jackson's assets.

45) Park Place Inc. has decided to purchase 100% of the voting shares of Baltic Ltd. for $825,000 in cash on July 1, 2022. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows: Park Place Inc.

Baltic Ltd.

Cash and short-term securities

$900,000

$200,000

Inventory

50,000

120,000

Plant and equipment (net)

350,000

150,000

Goodwill

------------

80,000

Total assets

$1,300,000

$550,000

Current liabilities

$180,000

$160,000

Bonds payable

400,000

100,000

Common shares

500,000

200,000

Retained earnings

220,000

90,000

Total liabilities and equity

$1,300,000

$550,000

On that date, the fair values of Baltic Ltd. assets and liabilities were as follows:

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Cash and short-term securities

$350,000

Inventory

$70,000

Plant and equipment (net)

$300,000

Current liabilities

$160,000

Bonds payable

$105,000

In addition to the above, an independent appraiser determined that Baltic Ltd. had trademarks with a fair market value of $180,000 which had not been reported on its balance sheet. In addition, Park Place Inc.'s fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Based on the information provided: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Park Place Inc.'s acquisition of Baltic Ltd. shares. c) Prepare Park Place Inc.'s consolidated balance sheet immediately following its acquisition of Baltic Ltd.'s voting shares.

46) On July 1, 2022, Park Place Inc. issued shares with a fair value of $825,0000 to the shareholders of Baltic Ltd for all of their shares. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows: Park Place Inc.

Baltic Ltd.

Cash and short-term securities

$900,000

$200,000

Inventory

50,000

120,000

Plant and equipment (net)

350,000

150,000

Goodwill

80,000

Total assets

$1,300,000

$550,000

Current liabilities

$180,000

$160,000

Bonds payable

400,000

100,000

Common shares

500,000

200,000

Retained earnings

220,000

90,000

Total liabilities and equity

$1,300,000

$550,000

On that date, the fair values of Baltic Ltd. assets and liabilities were as follows:

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Cash and short-term securities

$350,000

Inventory

$70,000

Plant and equipment (net)

$300,000

Current liabilities

$160,000

Bonds payable

$105,000

47) Park Place Inc. has decided to purchase 100% of the voting shares of Baltic Ltd. for $825,000 in cash on July 1, 2022. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows: Park Place Inc.

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Baltic Ltd.

Cash and short-term securities

$900,000

$200,000

Inventory

50,000

120,000

Plant and equipment (net)

350,000

150,000

Goodwill

80,000

Total assets

$1,300,000

$550,000

Current liabilities

$180,000

$160,000

Bonds payable

400,000

100,000

Common shares

500,000

200,000

Retained earnings

220,000

90,000

Total liabilities and equity

$1,300,000

$550,000

On that date, the fair values of Baltic Ltd. assets and liabilities were as follows: Cash and short-term securities

$350,000

Inventory

$70,000

Plant and equipment (net)

$300,000

Current liabilities

$160,000

Bonds payable

$105,000

In addition to the above, an independent appraiser determined that Baltic Ltd. had trademarks with a fair market value of $180,000 which had not been reported on its balance sheet. In addition, Park Place Inc.'s fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Prepare any disclosure required for Park Place Inc. under IFRS. Assume Baltic Ltd. has a reliable and specialized workforce that produces high-end loudspeakers for touring musicians and that Park Place Inc. manufactures stage equipment needed for live music performances.

48) Park Place Inc. has decided to purchase 100% of the voting shares of Baltic Ltd. for $825,000 in cash on July 1, 2022. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows: Park Place Inc.

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Baltic Ltd.

Cash and short-term securities

$900,000

$200,000

Inventory

50,000

120,000

Plant and equipment (net)

350,000

150,000

Goodwill

80,000

Total assets

$1,300,000

$550,000

Current liabilities

$180,000

$160,000

Bonds payable

400,000

100,000

Common shares

500,000

200,000

Retained earnings

220,000

90,000

Total liabilities and equity

$1,300,000

$550,000

On that date, the fair values of Baltic Ltd. assets and liabilities were as follows: Cash and short-term securities

$350,000

Inventory

$70,000

Plant and equipment (net)

$525,000

Current liabilities

$160,000

Bonds payable

$105,000

In addition to the above, an independent appraiser deemed that Baltic Ltd. had trademarks with a fair market value of $480,000 which had not been accounted for. In turn, Park Place Inc. fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Calculate the goodwill arising from this business combination and state how it would be shown in the consolidated balance sheet on the acquisition date.

49) Assume that X Inc. wishes to enter into a business combination with Y Inc. on January 1, 2022. X is unsure whether it should purchase Y's assets or liabilities or whether it should purchase all of Y's outstanding voting shares. X and Y are incorporated in different jurisdictions. On January 1, 2022, Y Inc. was estimated to have various intangibles estimated to be worth a total of $1,000,000. Of this amount, $250,000 can be attributable to a trademark owned by Y. Required: In the absence of any other figures, prepare a brief report explaining anything that would be of interest the Board of Directors of X Inc.

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50) Company Inc. owns all of the outstanding voting shares of Firm Inc. On January 1st, 2022, Firm Inc. would like to purchase all of the voting shares of its main competitor, N-CORP Inc. Briefly discuss the purported accounting implications of this transaction.

51) Telecom Inc has decided to purchase the shares of Intron Inc. for $300,000 in cash on July 1, 2022. On the date, the balance sheets of each of these companies were as follows: Telecom Inc

Intron Inc

Cash and short-term securities

$920,000

$200,000

Inventory

150,000

20,000

Plant and equipment (net)

330,000

180,000

Total assets

$1,400,000

$400,000

Current liabilities

$420,000

$90,000

Bonds payable

700,000

200,000

Common shares

180,000

60,000

Retained earnings

100,000

50,000

Total liabilities and equity

$1,400,000

$400,000

On that date, the fair values of Intron's assets and liabilities were as follows:

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Cash and short-term securities

$200,000

Inventory

$15,000

Plant and equipment (net)

$250,000

Current liabilities

$90,000

Bonds payable

$210,000

Required: Based on the information provided, answer the following: a) Prepare the journal entry to record the purchase of Intron's shares. b) Prepare the consolidation entries (eliminating entries) that are required to prepare the consolidated financial statements.

52) Telecom Inc has decided to purchase the shares of Intron Inc. for $300,000 in cash on July 1, 2022. On the date, the balance sheets of each of these companies were as follows: Telecom Inc

Intron Inc

Cash and short-term securities

$920,000

$200,000

Inventory

150,000

20,000

Plant and equipment (net)

330,000

180,000

Total assets

$1,400,000

$400,000

Current liabilities

$420,000

$90,000

Bonds payable

700,000

200,000

Common shares

180,000

60,000

Retained earnings

100,000

50,000

Total liabilities and equity

$1,400,000

$400,000

On that date, the fair values of Intron's assets and liabilities were as follows:

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Cash and short-term securities

$200,000

Inventory

$15,000

Plant and equipment (net)

$400,000

Current liabilities

$90,000

Bonds payable

$210,000

Required: Prepare the consolidated balance sheet on date of acquisition.

53) Great Western Manufacturing Inc. ("GWM") was acquired by Great Eastern Holding Ltd) ("GEH") in 2022. The Vice President, Finance of GWM has asked you, the manager in charge of this year's audit, whether GWM must prepare consolidated financial statements for the year ended December 31, 2022. GWM has about fifteen wholly owned subsidiaries and has in the past prepared consolidated financial statements. Required: Prepare a discussion around the need to prepare consolidated financial statements.

54) George Inc. acquired all of the outstanding shares of Martha Limited by paying $200,000 in cash, issuing a debenture for $300,000 and issuing 10,000 common shares with a fair value of $50 each. George Inc. incurred costs of $60,000 in investigation, accounting and legal fees directly related to the acquisition. In addition, the company incurred costs of $10,000 for the issue of the debenture and another $10,000 for the issue of the additional shares. Required: Prepare the journal entries necessary to record the acquisition and related costs on the books of George Inc.

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55) Arthur Ltd. and Blaine Ltd. formed a corporation, Weather Ltd., to develop a new technology to monitor changes in weather patterns. Each of the investor's own 50% of the voting shares of Weather Ltd. Arthur Ltd. is unilaterally responsible for all decisions regarding developing and obtaining regulatory approval for the technology, whereas Blaine Ltd. is unilaterally responsible for all decisions regarding the manufacturing and marketing of the technology. Explain how you would determine which of the two investor's control Weather Ltd.

56) Alpha Company (Alpha) owns 42% of the voting shares of Bet Ltd. (Bet). Another individual shareholder, Joe, owns 15% of the voting shares of Bet and the remaining voting shares are owned by Number Corp. Alpha can control Bet if Joe and Alpha enter an irrevocable agreement to have Joe convey his voting rights to Alpha. ⊚ ⊚

true false

57) IFRS 3 defines a business combination as a transaction or event in which an acquiror obtains ownership of the assets of another company. ⊚ ⊚

58)

true false

Consolidated financial statements are not required for all business combinations. ⊚ ⊚

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true false

59) Consolidated financial statements are required to be prepared even though no shares are acquired in the business combination as long as a contractual arrangement is signed by the acquiring company and the acquiree ‘s shareholders to give it control. ⊚ ⊚

true false

60) Goodwill exists where assets that were previously used in the vendor's business are now used in the acquirer's business. ⊚ ⊚

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true false

Answer Key Test name: ch 3 1) B 2) A 3) A 4) B 5) C 6) C 7) A 8) C 9) D 10) B 11) C 12) A 13) A 14) C 15) C 16) B 17) C 18) A 19) B 20) A 21) C 22) B 23) A 24) C 25) C 26) A Version 1

27) A 28) C 29) D 30) B 31) C 32) A 33) D 34) B 35) D 36) B 37) B 38) D 39) B 40) Section Break 40.1) A 40.2) D 40.3) A 40.4) B 41) Section Break 41.1) B 41.2) C 41.3) D 41.4) C 42) Section Break 42.1) B 42.2) D 56) TRUE 57) FALSE 58) TRUE 59) TRUE Version 1

60) FALSE

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Student name:__________ 1) Which of the following is the best approach to determine the fair value of the noncontrolling interest under the fair value enterprise method?

A) Use the trading price of shares of a comparable company in an active market. B) Use the market trading prices of the outstanding subsidiary shares (not owned by the parent) a few weeks before and after the acquisition. C) Use a valuation model based on the subsidiary's residual income projections. D) Use the share price paid by the parent.

2) On the date of acquisition, consolidated retained earnings and consolidated common shares in shareholders' equity are equal to:

A) the sum of the parent and subsidiary's shareholders' equity. B) the sum of the parent's shareholders' equity plus its pro-rata share of the subsidiary's shareholders' equity. C) the parent's shareholders' equity. D) the subsidiary's shareholders' equity.

3) A Co. has acquired an 80% controlling interest in B Co. If using the proportionate consolidation method, the consolidated balance sheet on the date of acquisition, will contain:

A) the parent's pro-rata share of the assets and liabilities of the subsidiary at book value. B) 100% of the assets and liabilities of the subsidiary at fair market value. C) 100% of the assets and liabilities of the subsidiary at book value. D) the parent's pro-rata share of the assets and liabilities of the subsidiary at fair market value.

In which of the following situations will there be an acquisition differential?

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A) The total consideration given and the carrying amount of the net assets of the acquired company at the date of acquisition are the same amount. B) The total consideration given exceeds the carrying amount of net assets of the acquired company at the date of acquisition. C) When the parent company establishes a new company as a subsidiary. D) The carrying amount of the net assets of the acquired company are equal to their fair value and no goodwill is acquired in the business combination.

5) Which of the following is the correct journal entry to record the gain of $5,000 resulting from a bargain purchase (i.e., negative goodwill) if the parent company uses the equity method to account for its investment in the subsidiary?

A) Debit Investment in subsidiary

Credit

5,000

Gain on bargain purchase of subsidiary

5,000

B) Debit Investment in subsidiary

Credit

5,000

Goodwill

5,000

C) Debit Goodwill Gain on bargain purchase of subsidiary

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Credit

5,000 5,000

D) No entry required.

6) Horne Enterprises Inc. (Horne) purchases 80% of the outstanding voting shares of Belle Inc. (Belle) on January 1, 2022. Horne is using the fair value enterprise (FVE) consolidation method. On that date, which of the following statements pertaining to the non-controlling interest (NCI) is true?

A) Horne's non-controlling interest (NCI) account will include 20% of the carrying amount of Belle's net assets, 20% of the fair value excess and 20% of the goodwill. B) Horne's non-controlling interest (NCI) account will include 20% of the carrying amount of Belle's net assets. C) Horne's non-controlling interest (NCI) account will include 20% of the acquisition differential on the date of acquisition. D) Horne's non-controlling interest (NCI) account will include 20% of the carrying amount of Belle's net assets and 20% of the fair value excess.

Which of the following is a TRUE statement pertaining to a bargain purchase?

A) A bargain purchase occurs when the total consideration is less than the net book value of the subsidiary's identifiable net assets. B) A bargain purchase occurs when the total consideration is less than the fair market value of the subsidiary's identifiable net assets. C) A bargain purchase occurs when the total consideration is greater than the fair market value of the subsidiary's identifiable net assets. D) A bargain purchase occurs when the total consideration is greater than the net book value of the subsidiary's identifiable net assets.

8) Which of the following statements pertaining to the non-controlling interest (NCI) when using the identifiable net assets (INA) method is TRUE?

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A) The NCI value is based on the full fair value of the subsidiary including goodwill. B) The NCI value is based on the book value of the net identifiable assets of the subsidiary excluding any value pertaining to goodwill. C) The NCI value is based on the book value of the net identifiable assets of the subsidiary including goodwill. D) The NCI value is based on the fair value of the net identifiable assets of the subsidiary but excludes any value pertaining to goodwill.

One weakness associated with the fair value enterprise method is that:

A) it is inconsistent with the historical cost principle. B) non-controlling interest (NCI) is computed using the fair market values of the subsidiary's net assets. C) non-controlling interest (NCI) is computed using the book values of the subsidiary's net assets. D) the value assigned to the non-controlling interest (NCI) will affect the goodwill valuation for the subsidiary.

10) Under the parent company method, which of the following statements pertaining to consolidated financial statements is TRUE?

A) The consolidated balance sheet is prepared by adding the carrying amounts of both the parent and its subsidiary. B) The consolidated balance sheet is prepared by adding the carrying amounts of both the parent and its subsidiary, as well as the parent's share of the fair value excess and goodwill. C) The consolidated balance sheet is prepared by adding the fair market values of both the parent and its subsidiary as well as the parent's share of the fair value excess and goodwill. D) The consolidated balance sheet is prepared by adding together the fair market values of both the parent and its subsidiary.

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11) Under which of the following consolidation methods is the non-controlling interest reported as a liability in the consolidated balance sheet?

A) Proportionate consolidation method. B) Parent company method. C) Identifiable net assets method. D) Fair value enterprise method.

12)

Contingent consideration should be valued at:

A) the fair value of the consideration on the date of acquisition. B) the book value of the consideration at the date of acquisition. C) the acquirer's pro-rata share of the subsidiary's net assets at book value at the date of acquisition. D) the acquirer's pro-rata share of the subsidiary's net assets at fair value at the date of acquisition.

13)

Contingent consideration will be classified as a liability when:

A) it will be paid in the form of a fixed number of shares. B) it will be paid in the form of cash, another asset, or a variable number of shares to produce a fixed dollar amount. C) the amount to be paid is determined at the future date pending the outcome of the future event. D) the fair market value of the consideration is determined.

14) Which consolidation method should be used in preparing consolidated financial statements in accordance with IFRS?

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A) Proportionate consolidation method. B) Parent company method. C) New-entity method. D) Either identifiable net assets or fair value enterprise method.

15)

A negative acquisition differential:

A) is always equal to negative goodwill. B) occurs when the total consideration given is less than the carrying value of the subsidiary's net assets. C) implies that the parent company may have overpaid for its acquisition. D) cannot occur under the acquisition method.

16)

Any goodwill on the subsidiary company's books on the date of acquisition:

A) must be revalued to fair value on acquisition date. B) must be eliminated in preparing consolidated financial statements. C) must be recorded as a loss on acquisition. D) must be subject to an annual impairment test.

17) When the non-controlling interest's share of the subsidiary's goodwill cannot be reliably determined, the method used to prepare consolidated financial statements is:

A) the fair value enterprise method. B) the proportionate consolidation method. C) the parent company method. D) the identifiable net assets method.

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18) The focus of the consolidated financial statements on the shareholders of the parent company is characteristic of:

A) the fair value enterprise method. B) the proportionate consolidation method. C) the parent company method. D) both the parent company method and the proportionate consolidation method.

19) Which method presents the non-controlling interest (NCI) in the shareholders' equity section of the balance sheet?

A) Identifiable net assets method. B) Proportionate consolidation method. C) Parent company method. D) Acquisition method.

20) When a contingent consideration arising from a business combination is classified as a liability, how is any difference between the original estimate of the amount to be paid and the actual amount paid accounted for if the difference arises due to a change in circumstances?

A) As an adjustment to the consideration paid for the subsidiary. B) As an adjustment to an estimate included in the determination of net income. C) As a direct adjustment to consolidated retained earnings. D) As an adjustment to consolidated contributed surplus.

21) When a contingent consideration arising from a business combination is classified as a liability, how is any change in its fair value as a result of new information about the facts and circumstances that existed at the acquisition date accounted for if identified and measured within one year subsequent to the acquisition date? Version 1

A) As an adjustment to the acquisition cost of the subsidiary. B) As an adjustment to an estimate included in the determination of net income. C) As a direct adjustment to consolidated retained earnings. D) As an adjustment to consolidated contributed surplus.

22) When a contingent consideration arising from a business combination is classified as equity, how is any change in its fair value accounted for if the difference arises due to a change in circumstances?

A) As an adjustment to the acquisition cost of the subsidiary. B) As an adjustment to an estimate included in the determination of net income. C) After initial recognition there is no remeasurement. D) As an adjustment to consolidated contributed surplus.

23) Which statement about the differences between consolidation methods permitted under ASPE and IFRS is true?

A) IFRS and ASPE both require the use of the fair value enterprise method or the identifiable net assets method. B) IFRS and ASPE both require the use of the identifiable net assets method. C) IFRS permits either the fair value enterprise method or identifiable net assets method; ASPE requires the fair value enterprise method. D) IFRS permits either the fair value enterprise method or the identifiable net assets method; ASPE requires the identifiable net assets method.

24) IFRS permits several methods to be used to determine the fair value of the noncontrolling interest in a subsidiary at the acquisition date. Which of the following is NOT an appropriate method to determine the fair value of the non-controlling interest (NCI)?

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A) The NCI may be valued at the market value of the subsidiary's shares. B) The NCI may be valued by determining the fair value of the subsidiary by means of an independent business valuation and then deducting the fair value of the controlling interest. C) The NCI may be valued proportionately to the price paid by the parent for its controlling interest. D) The NCI can't be valued objectively, so a nominal value of one dollar is assigned to the NCI.

25) Which accounts differ on the consolidated balance sheet when using the fair value enterprise method compared to the identifiable net assets method?

A) The investment in subsidiary balance and the consolidated retained earnings balance. B) The goodwill balance and the consolidated retained earnings balance. C) The goodwill balance and the non-controlling interest balance. D) The investment in subsidiary balance and the non-controlling interest balance.

26) If the non-controlling interest at acquisition is based on the carrying value of the subsidiary's identifiable net assets, which consolidation method is being applied?

A) Proportionate consolidation method B) Parent company method C) Fair value enterprise method D) Identifiable net assets method.

27) In the event of a negative acquisition differential, under what circumstances is it still possible to have positive goodwill?

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A) It is not possible; once there is a negative acquisition differential, the result is negative goodwill. B) If the fair values of the subsidiary's net assets are less than their carrying amounts and if the total consideration is greater than the fair value of the subsidiary's identifiable nets assets, there will be positive goodwill. C) If the total consideration exceeds the carrying value of the subsidiary's identifiable nets assets, there will be positive goodwill. D) If the carrying values of the subsidiary's net assets are less than their fair values and if the total consideration is greater than the carrying amount of the subsidiary's identifiable nets assets, there will be positive goodwill.

28) A business combination involves a contingent consideration. It is considered 80% probable that a payment of $700,000 will become payable three years after the acquisition date. Using a 5% discount rate, what liability should be recorded for the contingent consideration on the acquisition date?

A) $483,749 B) $604,686 C) $560,000 D) $700,000

29) A business combination involves a contingent consideration. It is considered 80% probable that a payment of $700,000 will become payable three years after the acquisition date. Using a 5% discount rate, how much interest expense should be recorded on the liability for the first year after acquisition?

A) $19,999 B) $24,187 C) $35,000 D) None; there is no effect on net income.

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30) A business combination involves a contingent consideration. As a result, two years after the acquisition date, the acquirer was required to issue an additional 40,000 common shares at a time when the fair value of the common shares was $4 per share. What effect would this transaction have on the balance in the common shares account in the consolidated financial statements on the date of acquisition?

A) It would increase by $160,000. B) It would not change. C) It would decrease by $160,000. D) It is not possible to determine the effect from the information provided.

31) In an inflationary economy, under which consolidation method would total assets in the consolidated balance sheet at the acquisition date be greatest?

A) Proportionate consolidation method. B) Parent company method. C) Fair value enterprise method. D) Identifiable net assets method.

32) What value should be recorded as the fair value of a contingent consideration arising from a business acquisition when it is classified as a liability?

A) The undiscounted maximum amount that could be paid. B) The discounted present value of the maximum amount that could be paid. C) The undiscounted probabilistic estimate of the amount to be paid. D) The discounted probabilistic estimate of the amount to be paid.

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33) If a business combination occurs and the consideration paid exceeds the fair value of the identifiable net assets of the subsidiary on the acquisition date and the parent acquires less than 100% of the outstanding common shares of the subsidiary, which consolidation method will result in the highest value for non-controlling interest on the acquisition date?

A) Proportionate consolidation method. B) Parent company method. C) Fair value enterprise method. D) Identifiable net assets method.

34)

Under which consolidation method is the non-controlling interest NOT recognized?

A) Proportionate consolidation method. B) Parent company method. C) Fair value enterprise method. D) Identifiable net assets method.

35) To determine the full value of the subsidiary under the fair value enterprise method, it is necessary to combine the fair values of both the controlling interest and non-controlling interest (NCI). In which of the following situations is it inappropriate to value the NCI by using the price paid by the parent on a per-share basis for the acquiree's shares.

A) The parent has paid a large premium per share to induce enough shareholders to sell their shares. B) The parent has acquired a large controlling interest. C) The trading prices of the acquiree's shares just before and just after the business combination are similar to the price paid by the parent. D) The noncontrolling shareholders are able to exercise their minority rights to demand the same price per share that was paid to the other shareholders.

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36) PayNet Inc. (PayNet) and Shale Ltd. (Shale) had the following balance sheets on July 31, 2022: PayNet Inc

Shale Ltd.

(carrying value)

(fair value)

Cash

$280,000

$36,000

Accounts receivable

100,000

40,000

45,000

Inventory

60,000

24,000

20,000

Plant and equipment (net)

200,000

80,000

75,000

Goodwill

8,000

Trademark

12,000

Total assets

$640,000

$200,000

Current liabilities

$120,000

$50,000

50,000

Bonds payable

330,000

20,000

30,000

Common shares

90,000

80,000

Retained earnings

100,000

50,000

Total liabilities and equity

$640,000

$200,000

24,000

36.1) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what amount would appear in the non-controlling interest (NCI) account on the consolidated balance sheet on the date of acquisition if the proportionate consolidation method was used?

A) Nil B) $46,380 C) $36,000 D) $102,857

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36.2) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, What is the amount of the total assets on PayNet's consolidated balance sheet at the date of acquisition if the proportionate consolidation method was used?

A) $696,000 B) $599,200 C) $651,000 D) $780,000

36.3) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what is the amount of goodwill on PayNet's consolidated balance sheet at the date of acquisition if the proportionate consolidation method was used?

A) $150,400 B) $136,400 C) $112,000 D) Nil

36.4) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what is the amount of the non-controlling interest (NCI) on PayNet's consolidated balance sheet at the date of acquisition if the identifiable net assets (INA) method was used?

A) $36,000 B) $27,400 C) $39,000 D) Nil

36.5) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what is the amount of goodwill on PayNet's consolidated balance sheet at the date of acquisition if the identifiable net assets (INA) method was used? Version 1

A) $76,000 B) $120,000 C) $112,000 D) Nil

36.6) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what is the amount of the shareholders' equity section on PayNet's consolidated balance sheet at the date of acquisition if the identifiable net assets (INA) method was used?

A) $226,000 B) $190,000 C) $320,000 D) $167,400

36.7) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what is the amount of the non-controlling interest (NCI) on PayNet's consolidated balance sheet at the date of acquisition if the fair value enterprise (FVE) method was used?

A) $45,000 B) $84,000 C) $36,000 D) Nil

36.8) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what is the amount of goodwill on PayNet's consolidated balance sheet at the date of acquisition if the fair value enterprise (FVE) method was used?

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A) $160,000 B) $88,000 C) $112,000 D) Nil

36.9) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what is the amount of the shareholders' equity section on PayNet's consolidated balance sheet at the date of acquisition if the fair value enterprise (FVE) method was used?

A) $274,000 B) $185,000 C) $190,000 D) $270,000

36.10) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what is the total amount of the assets section on PayNet's consolidated balance sheet at the date of acquisition if the fair value enterprise (FVE) method was used?

A) $840,000 B) $1,000,000 C) $804,000 D) $659,000

36.11) Assuming that PayNet acquires 70% of Shale on August 1, 2022, for cash of $196,000, what is the total amount of the liabilities section on PayNet's consolidated balance sheet at the date of acquisition if the fair value enterprise (FVE) method was used?

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A) $530,000 B) $474,000 C) $520,000 D) $499,000

37) Keen Inc (Keen) and Lax Inc (Lax) had the following balance sheets on October 31, 2022: Keen Inc

Lax Inc

(carrying value)

(fair value)

Cash

$300,000

$80,000

Accounts receivable

60,000

24,000

Inventory

30,000

54,000

56,000

Plant and equipment (net)

310,000

280,000

300,000

12,000

8,000

Trademark Total assets

$700,000

$450,000

Accounts payable

150,000

$200,000

200,000

Bonds payable

400,000

120,000

100,000

Common shares

100,000

60,000

Retained earnings

50,000

70,000

Total liabilities and equity

$700,000

$450,000

37.1) Assume Keen purchases 100% of Lax for cash consideration of $150,000 on November 1, 2022. Keen records its investment using the cost method and prepares its consolidated financial statements using the fair value enterprise (FVE) method. Prepare the following: a) the journal entry that Keen Inc. would make to record the acquisition; and b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date. Version 1

37.2) Assume Keen purchases 80% of Lax for cash consideration of $160,000 on November 1, 2022. Keen records its investment using the cost method and prepares its consolidated financial statements using the fair value enterprise (FVE) method. Prepare the following:

a) the journal entry that Keen Inc. would make to record the acquisition; b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date.

37.3) Assuming that Keen Inc. purchases 100% of Lax Inc. for cash of $150,000 on November 1, 2022, prepare the consolidated balance sheet on the date of acquisition under the fair value enterprise method.

37.4) Assuming that Keen Inc. purchases 80% of Lax Inc. for cash of $160,000 on November 1, 2022, prepare the consolidated balance sheet on the date of acquisition under the fair value enterprise (FVE) method.

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37.5) On November 1, 2022, Keen acquired 80% of Lax Inc. for cash consideration of $240,000. Assume that the following draft balance sheet was prepared by a co-worker on the date of acquisition. Assuming this balance sheet is devoid of technical errors, what can be concluded about the balance sheet below? Keen Inc. Consolidated Balance Sheet, as at November 1, 2022

38)

Cash

$124,000

Accounts receivable

79,200

Inventory

70,000

Plant and equipment (net)

550,000

Trademark

12,800

Goodwill

104,000

Total assets

$940,000

Accounts payable

$310,000

Bonds payable

480,000

Common hares

100,000

Retained earnings

50,000

Total liabilities and equity

$940,000

Jean Inc and John Inc had the following balance sheets on August 31, 2022: Jean Inc.

John Inc.

(carrying value)

(fair value)

Cash

$1,200,000

$300,000

Accounts receivable

400,000

64,000

Inventory

240,000

80,000

60,000

Plant and equipment (net)

860,000

256,000

300,000

Trademark

----------

20,000

36,000

Total assets

$2,700,000

$720,000

Accounts payable

$1,500,000

300,000

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300,000

Bonds payable

600,000

240,000

Common shares

500,000

60,000

Retained earnings

100,000

120,000

Total liabilities and equity

$2,700,000

$720,000

210,000

On August 31, 2022, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for cash consideration of $378,000. Assuming the above balance sheets were prepared immediately before the acquisition, prepare Jean Inc's consolidated balance sheet on the date of acquisition using the proportionate consolidation method.

39)

Jean Inc. and John Inc. had the following balance sheets on August 31, 2022: Jean Inc.

John Inc.

(carrying value)

(fair value)

Cash

$1,200,000

$300,000

Accounts receivable

400,000

64,000

Inventory

240,000

80,000

60,000

Plant and equipment (net)

860,000

256,000

300,000

Trademark

----------

20,000

36,000

Total assets

$2,700,000

$720,000

Accounts payable

$1,500,000

300,000

Bonds payable

600,000

240,000

210,000

Common shares

500,000

60,000

Retained earnings

100,000

120,000

Total liabilities and equity

$2,700,000

$720,000

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A) On August 31, 2022, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for cash consideration of $378,000. Assuming the above balance sheets were prepared immediately before the acquisition, prepare Jean Inc's consolidated balance sheet on the date of acquisition using the fair value enterprise (FVE) method. B) On August 31, 2022, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for cash consideration of $420,000. Assuming the above balance sheets were prepared immediately before the acquisition, calculate the non-controlling interest (NCI) for the consolidated balance sheet on the date of acquisition using the identifiable net assets (INA) method.

40) X Company purchased a (100%) controlling interest in Y Company by issuing $2,000,000 worth of common shares. The business combination agreement has an earnout clause that states the following: X Company would pay 10% of any earnings in excess of $750,000 to Y's shareholders in the first year following the acquisition. On acquisition date, X's shares had a market value of $80 per share. Required: a) Assuming that Y's net income in the first year following the acquisition was $950,000, prepare any journal entries (for X Company) that are necessary to reflect Y's results under IFRS 3 Business Combinations. b) Assuming that the agreement called for Y's shareholders to be compensated with 1,250 shares for any decline in X's share price, what journal entries would be required under IFRS 3, if the market value of X's shares dropped to $64 within the year?

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41) Major Corporation issues 1,000,000 common shares for all of the outstanding common shares of Minor Corporation on August 1, 2022. The shares issued have a fair market value of $40. In addition, the merger agreement provides that if the market price of Major's shares is below $60 two years from the date of the merger, Major will issue additional shares to the former shareholders of Minor Corporation in an amount that will compensate them for their loss of value. Major predicts that there is a 25% probability that Major's shares will be trading at $59 per share and a 75% probability that they will be trading at greater than $60 per share two years from the date of the merger. Assume a discount rate of 7%. Required: Prepare the journal entry to record the issuance of the shares.

42) Various methods have been proposed as solutions to preparing consolidated financial statements for non-wholly owned subsidiaries. Provide the methods and include your reasoning to support the method(s) that is/are being adopted under IFRS.

43)

Provide the disclosure requirements for the non-controlling interest (NCI).

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44) After the introduction of the fair value enterprise (FVE) method in Canada, many companies opted to use the identifiable net assets (INA) method rather than the FVE method when preparing consolidated financial statements. What motivation might preparers of consolidated financial statements have that would cause them to have this preference?

45) Why might the fair value of the non-controlling interest in a subsidiary on the daklte that it is acquired in a business combination not be proportionate to the price per share paid by the parent company to acquire control? How do the IFRS recognize this?

46) There is no difference between the consolidation methods if the subsidiary is wholly owned by the parent. ⊚ ⊚

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true false

Answer Key Test name: ch 4 1) B 2) C 3) D 4) B 5) A 6) A 7) B 8) D 9) D 10) B 11) B 12) A 13) B 14) D 15) B 16) B 17) D 18) D 19) A 20) B 21) A 22) C 23) A 24) D 25) C 26) B Version 1

27) B 28) A 29) B 30) B 31) C 32) D 33) C 34) A 35) A 36) Section Break 36.1) A 36.2) A 36.3) C 36.4) A 36.5) C 36.6) A 36.7) B 36.8) A 36.9) A 36.10) C 36.11) A 37) Section Break 46) TRUE

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Student name:__________ 1) The acquisition differential related to long-term assets with definite useful lives are amortized:

A) over their useful lives. B) over the time periods provided under IAS 36 Impairment of Assets which prescribes amortization periods for different classes of assets. C) under the applicable capital cost allowance rates provided by the Canada Revenue Agency. D) over two years.

2) Which of the following statements pertaining to the preparation of consolidated financial statements is FALSE?

A) The parent's investment in the subsidiary does not appear on the consolidated balance sheet. B) The parent's investment income from the subsidiary does not appear on the consolidated statement of comprehensive income. C) The depletion of the acquisition differential is reflected on the subsidiary's financial statements. D) Consolidated retained earnings reflects only the parent's shareholders' share of the combined operations.

The acquisition differential allocated to land is:

A) ignored. B) is amortized over 40 years. C) written down when the land is impaired or sold. D) carried forward indefinitely.

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4) Which of the following statements pertaining to the accounting treatment of intangible assets with indefinite lives is correct?

A) Intangible assets with indefinite lives are only assessed for impairment if internal factors, such as evidence of poor economic performance, are present. B) Intangible assets are written down when their carrying value is less than the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). C) Impairment losses on intangible assets with indefinite lives are reported in other comprehensive income. D) The recoverable amount is determined and compared to the carrying amount. If the recoverable amount is greater than the carrying amount, there is no impairment, and the intangible assets with indefinite lives are reported at the carrying amount.

5) Which of the following statements pertaining to the reversal of an impairment loss is correct?

A) An impairment loss recognized for goodwill can be reversed as long as the recoverable amount in a subsequent period is greater than the goodwill's carrying value. B) Assets (with the exception of goodwill) can be written up to the greater of the recoverable amount and the carrying amount prior to the recognition of any impairment losses. C) The reversal of an impairment loss is reported in retained earnings. D) An impairment loss, except for goodwill, can be reversed only if there has been a change in the estimates used to determine the asset's recoverable amount.

Under the cost method, which of the following statements is TRUE?

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A) The parent's investment in the subsidiary is recorded at cost, and only changed thereafter if there has been an impairment loss on the investment. B) The parent's investment in the subsidiary is recorded at cost and adjusted for changes in the parent's proportionate interest in the subsidiary's other comprehensive income. C) The parent records its pro rata share of the subsidiary's post-acquisition earnings as an increase to the investment account and reduces the investment account with its share of changes to the acquisition differential. D) The parent's investment in the subsidiary is recorded at cost and reduced by its pro rata share of liquidating dividends received from the subsidiary.

Under the equity method, which of the following statements is TRUE?

A) The parent's investment in the subsidiary is initially recorded at cost, and only changed subsequently if there has been a permanent impairment in the value of the investment. B) The parent's investment in the subsidiary is initially recorded at cost and subsequently adjusted for the parent's pro rata share of the post -acquisition change in the net assets of the subsidiary. C) The parent records its pro rata share of the subsidiary's cumulative earnings as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary. D) The parent's investment in the subsidiary is recorded at cost and reduced by distributions from the subsidiary.

Consolidated net income would be:

A) higher if the parent chooses to use equity method rather than the cost method. B) higher if the parent chooses to use the equity method rather than the cost method, provided that the subsidiary showed a profit. C) lower if the parent chooses to use equity method rather than the cost method. D) the same regardless of whether the parent used the cost method or the equity method in its internal records.

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Consolidated net income is equal to:

A) the parent's net income excluding any income arising from its investment in the subsidiary, plus the net income of the subsidiary adjusted for changes in the acquisition differential., excluding goodwill B) the sum of the net incomes of both the parent and its subsidiaries less any intercompany dividends. C) the parent's net income excluding any income arising from its investment in the subsidiary. D) the parent's net income excluding any income arising from its investment in the subsidiary, plus the net income of the subsidiary adjusted for changes in the acquisition differential, including goodwill.

10) Which of the following statements pertaining to consolidated retained earnings is FALSE?

A) Consolidated retained earnings on date of acquisition are the same as the parent's retained earnings. B) Consolidated retained earnings reflect only the parent's share of the combined company's retained earnings. C) Consolidated retained earnings subsequent to acquisition are equal to the parent's retained earnings plus the subsidiary's retained earnings. D) Consolidated retained earnings subsequent to acquisition are equal to the parent's share of consolidated net income less any dividends declared by the parent and changes to acquisition differential.

11) If the parent company uses the equity method to account for its investment in a nonwholly owned subsidiary in its internal accounting records, which of the following statements is FALSE?

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A) The parent's net income equals net income of parent and net income of subsidiary, adjusted for dividends. B) The parent's retained earnings will be equal to consolidated retained earnings. C) Only the parent's share of the subsidiary's income, dividends and changes in the acquisition differential are recorded in the investor's records. D) The parent's net income equals consolidated net income attributable to the shareholders of the parent.

12) Which of the following adjustments (if any) to retained earnings is necessary for the preparation of the consolidated balance sheet?

A) Under both the cost and equity methods, the parent must record its pro rata share of the subsidiary's net income. B) Under both the cost and equity methods, the parent must record its pro rata share of its subsidiary's income less any dividends received from the subsidiary. C) No adjustment is required under either the cost or the equity methods. D) No adjustment is required if the parent has been using the equity method.

13) Any excess of fair value over book value attributable to inventory on the date of acquisition is to be:

A) allocated to other identifiable assets. B) amortized. C) charged to consolidated retained earnings when it is sold. D) reflected on the consolidated income statement as cost of goods sold expense when it is sold.

14) Which of the following statements pertaining to the consolidated financial statements is TRUE?

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A) The consolidated financial statements do not include any noncontrolling interest if the parent uses the cost method to account for the investment in the subsidiary. B) The investment in subsidiary line on the balance sheet and investment income from subsidiary line on the income statement are eliminated and replaced by the underlying assets, liabilities, revenues, and expenses of the subsidiary, plus or minus the acquisition differential when preparing consolidated financial statements. C) The elimination of the investment in subsidiary line on the balance sheet and investment income from subsidiary line on the income statement when preparing consolidated financial statements is only required if the parent uses the equity method to account for the investment in the subsidiary. D) The consolidated financial statements are affected by the method used by the parent to account for the investment in the subsidiary.

15) If the parent company used the equity method to account for its investment and the subsidiary company showed a profit for the past year, the consolidation elimination entry required to remove a subsidiary's income from the parent's books prior to the preparation of consolidated financial statements would be:

A) Debit Equity method income—Parent

Credit

$$$

Retained earnings—Parent

$$$

B) Debit Equity method income—Parent Investment in Subsidiary

Credit

$$$ $$$

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Debit Equity method income—Parent

Credit

$$$

Acquisition differential

$$$

D) Debit Investment Income—Subsidiary

Credit

$$$

Equity method income—Parent

$$$

16) The consolidation elimination entry required to remove any dividends received from a subsidiary prior to the preparation of consolidated financial statements (assuming that the parent uses the cost method to record its investment in the subsidiary) would be:

A) Debit Equity method income—Parent

Credit

$$$

Retained earnings—Parent

$$$

B) Debit Dividend Income—Subsidiary

Credit

$$$

Investment in Subsidiary

$$$

C) Debit

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Credit

Dividend Income—Parent

$$$

Dividends—Subsidiary

$$$

D) Debit Equity method income—Subsidiary Equity method income—Parent

Credit

$$$ $$$

17) Pleasant Corporation (Pleasant) acquired 80% of the voting shares of Sad Ltd. (Sad) on January 1, 2022. On Pleasant's December 31, 2022 year-end, its accounts receivable contained a receivable of $20,000 from Sad. Which of the following statements pertaining to the intercompany receivable is correct?

A) The intercompany receivables and payables are both reduced by $16,000 [(80%)($20,000)] in the consolidation process. B) It is not necessary to eliminate the $20,000 intercompany receivable and payable during the consolidation process because the overall effect on consolidated net assets is nil. C) The noncontrolling interest (balance sheet) is reduced by $4,000 [(20%)($20,000)] D) The entry to eliminate the intercompany receivables and payables on the consolidated worksheet is a debit to "Accounts payable - Sad" for $20,000 and credit to "Accounts receivable - Pleasant" for $20,000.

18) Planet Inc. (Planet) purchased 100% of the outstanding voting shares of Sol Company (Sol) for $420,000 on January 1, 2022. On that date, Sol had common shares and retained earnings worth $100,000 and $233,000, respectively. On acquisition date, the plant assets and patent had a remaining useful life of 8 years and 10 years, respectively. Both the plant assets and patent are amortized on a straight-line basis. The bonds payable mature on December 31, 2030, pay interest annually, and are amortized using the effective interest rate method. The market rate of interest for similar bonds is 8%. The balance sheets of both companies, as well as Sol's fair market values on the date of acquisition are disclosed below: Version 1

Planet Inc.

Sol Company

(carrying value)

(fair value)

Cash

$150,000

$84,000

Accounts receivable

85,000

65,000

Inventory

55,000

34,000

45,000

Plant assets (net)

850,000

220,000

240,000

Patent

------------

70,000

84,000

Total assets

$1,140,000

$473,000

Current liabilities

$220,000

$80,000

80,000

Bonds payable, 10%

400,000

60,000

67,496

Common shares

200,000

100,000

Retained earnings

320,000

233,000

Total liabilities and equity

$1,140,000

$473,000

Otherinformation: • The net incomes for Planet and Sol for the year ended December 31, 2022, were $180,000 and $120,000, respectively. • Sol declared and paid $12,000 in dividends to Planet during the year. There were no other intercompany transactions during 2022. • A goodwill impairment test conducted on December 31, 2022, revealed that the goodwill associated with Planet's acquisition of Sol had a recoverable amount of $40,000. • Both companies use a FIFO inventory system, and all of Sol 's inventory on the date of acquisition was sold during the year. • Planet did not declare any dividends during the 2022.

18.1) Which of the following is the correct amount of goodwill arising from this business combination?

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A) Nil B) $124,504 C) $34,504 D) $49,496

18.2) Which of the following is the correct amount of goodwill to be reported on Sol's balance sheet on December 31, 2022?

A) Nil B) $124,504 C) $34,504 D) $49,496

18.3) Assuming Planet uses the equity method to account for its investment in Sol, which of the following is the correct journal entry to record the impairment of the goodwill on December 31, 2022?

A) No entry is required.

B) Debit Equity method income

Credit

9,496

Investment in Sol

9,496

C) Debit Investment in Sol

Version 1

Credit

9.496

Equity method income

9,496

D) Debit Goodwill impairment loss

Credit

9,496

Goodwill

9,496

18.4) Assuming Planet uses the equity method to account for its investment in Sol, which of the following is the correct journal entry to record the dividends received by Planet from Sol in 2022?

A) Debit Cash

Credit

12,000

Investment in Sol

12,000

B) Debit Cash

Credit

12,000

Equity method income

12,000

C) Debit Cash Acquisition differential

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Credit

12,000 12,000

D) Debit Cash

Credit

12,000

Goodwill

12,000

18.5) Assuming Planet uses the cost method to account for its investment in Sol, which of the following is the correct journal entry to record the dividends received by Planet from Sol in 2022?

A) Debit Cash

Credit

12,000

Investment in Sol

12,000

B) Debit Cash

Credit

12,000

Equity method income

12,000

C) Debit Cash Acquisition differential

Credit

12,000 12,000

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Debit Cash

Credit

12,000

Dividend income

12,000

18.6) Assuming Planet uses the equity method to account for its investment in Sol, which of the following is the correct journal entry to record the changes to the acquisition differential for 2022?

A) Debit Equity method income

Credit

23,796

Investment in Sol

23,796

B) Debit Equity method income

Credit

23,563

Investment in Sol

23,563

C) Debit Investment in Sol

Credit

23,796

Equity method income

23,796

D) Debit

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Credit

Investment in Sol

23,563

Equity method income

23,563

18.7) Assuming Planet uses the equity method to account for its investment in Sol, which of the following is the correct journal entry to record Sol's net income for 2022?

A) Debit Investment in Sol

Credit

108,000

Equity method income

108,000

B) Debit Equity method income

Credit

120,000

Investment in Sol

120,000

C) Debit Investment in Sol Equity method income

Credit

120,000 120,000

D) No entry is required.

18.8) Assuming Planet uses the cost method to account for its investment in Sol, which of the following is the correct consolidated net income attributable to the shareholders of Planet for the year ended December 31, 2022?

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A) $264,204 B) $180,000 C) $276,204 D) $300,000

18.9) Assuming Planet uses the cost method to account for its investment in Sol, which of the following is the correct amount of retained earnings that would appear on the consolidated balance sheet as at January 1, 2022?

A) $553,000 B) $320,000 C) $420,000 D) $473,000

18.10) Assuming Planet uses the equity method to account for its investment in Sol and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Sol), what amount of consolidated retained earnings would appear on Planet's consolidated balance sheet as at December 31, 2022?

A) $600,000 B) $564,204 C) $480,000 D) $576,204

19) Great Inc. (Great) owns 100% of Max Ltd. (Max). During the year, Max earned a net income of $40,000 and declared and paid dividends of $10,000.

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19.1) Assuming that Great uses the equity method, what effect would the above information have on Great's Investment in Max account?

A) An increase of $10,000. B) An increase of $30,000. C) An increase of $40,000. D) No effect.

19.2) Assuming that Great uses the cost method, what effect would the above information have on Great's Investment in Max account?

A) An increase of $10,000 B) An increase of $30,000 C) An increase of $40,000 D) No effect.

19.3) What is the difference in comprehensive income if Great uses the equity method instead of the cost method to account for its investment in Max?

A) An increase of $30,000 B) An increase of $10,000 C) A decrease of $10,000 D) An increase of $40,000

20) Great Inc. (Great) owns 70 % of Max Ltd. (Max). During the year, Max earned a net income of $40,000 and declared and paid dividends of $10,000.

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20.1) Assuming that Great uses the equity method, what effect would the above information have on Great's Investment in Max account?

A) An increase of $21,000. B) An increase of $28,000. C) An increase of $30,000. D) No effect.

20.2) Assuming that Great uses the cost method, what effect would the above information have on Great's Investment in Max account?

A) An increase of $21,000 B) An increase of $28,000 C) An increase of $30,000 D) No effect

21) Big Guy Inc. (Big Guy) purchased 80% of the outstanding voting shares of Humble Corp. (Humble) for $360,000 on July 1, 2020. On that date, Humble had common shares and retained earnings worth $180,000 and $90,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Humble's bonds mature on July 1, 2030. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble's fair market values on the date of acquisition are disclosed below: Big Guy

Humble

(carrying value)

(fair value)

Cash

$800,000

$245,000

Accounts receivable

240,000

40,000

Inventory

60,000

45,000

50,000

Equipment (net)

900,000

80,000

72,000

Trademark

--------

90,000

193,000

Version 1

Total assets

$2,000,000

$500,000

Current liabilities

$200,000

$160,000

Bonds payable

260,000

70,000

40,000

Common shares

900,000

180,000

Retained earnings

640,000

90,000

Total liabilities and equity

$2,000,000

$500,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2023: Income Statements: Big Guy Sales

Humble

$640,000

Investment revenue

$240,000

8,480

Less: expenses: Cost of goods sold

300,000

160,000

Depreciation

81,000

34,000

Interest expense

34,000

26,000

Other expenses

5,000

8,000

$228,480

$12,000

Net income

Retained Earnings Statements Big Guy

Humble

Balance, July 1, 2022

$960,560

$48,000

Net income

228,480

12,000

Dividends

20,000

2,000

$1,169,040

$58,000

Balance, June 30, 2023

Balance Sheets

Version 1

Big Guy

Humble

Cash

$1,200,000

$365,000

Accounts receivable

270,000

55,000

Investment in Humble

319,040

Inventory

70,000

Equipment (net)

820,000

65,000

Trademark

85,000

Total assets

$2,679,040

$640,000

Current liabilities

$350,000

$332,000

Bonds payable

260,000

70,000

Common shares

900,000

180,000

Retained earnings

1,169,040

58,000

Total liabilities and equity

$2,679,040

$640,000

An impairment test conducted in September 2021 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded. Both companies use a FIFO system, and Humble's entire inventory on the date of acquisition was sold during the following year. During 2023, Humble borrowed $20,000 in cash from Big Guy interest free to finance its operations. As of June 30, 2023, the amount remained unpaid. Big Guy uses the equity method to account for its investment in Humble. Assume that the fair value enterprise (FVE) method applies.

21.1) Which of the following is the correct amount of goodwill arising from this business combination?

A) ($-40,000) B) $110,000 C) $50,000 D) $44,000

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21.2) Which of the following is the correct amount of non-controlling interest on Big Guy's consolidated balance sheet on July 1, 2020?

A) $0 B) $72,000 C) $90,000 D) $80,000

21.3) Which of the following is the correct amount of depreciation expense appearing on Big Guy's June 30, 2023 consolidated income statement?

A) $113,400 B) $113,720 C) $115,000 D) $116,280

21.4) Which of the following is the correct amount of interest expense appearing on Big Guy's June 30, 2023 consolidated income statement?

A) $36,000 B) $57,600 C) $62,400 D) $63,000

21.5) Which of the following is the correct amount of other expenses appearing on Big Guy's June 30, 2023 consolidated income statement?

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A) $11,600 B) $12,000 C) $13,000 D) $13,400

21.6) Which of the following is the correct amount of consolidated net income attributable to the shareholders of Big Guy appearing on Big Guy's consolidated income statement on June 30, 2023?

A) $216,080 B) $218,480 C) $228,480 D) $279,600

21.7) Which of the following is the correct amount of dividends that would appear on Big Guy's consolidated statement of retained earnings as at June 30, 2023?

A) $2,000 B) $20,000 C) $21,600 D) $22,000

21.8) Which of the following is the correct amount of non-controlling interest that would appear on Big Guy's June 30, 2023 consolidated income statement?

A) Nil B) $2,000 C) $2,120 D) $3,600

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21.9) Which of the following is the correct amount of Big Guy's consolidated retained earnings as at June 30, 2023?

A) $1,169,040 B) $1,486,400 C) $1,500,000 D) $1,508,000

21.10) Which of the following is the correct amount of non-controlling interest that would appear on Big Guy's consolidated balance sheet as at June 30, 2023?

A) $79,760 B) $83,600 C) $90,000 D) $226,400

21.11) Which of the following is the correct amount that would appear as Big Guy's investment in Humble Corp. on its June 30, 2023 consolidated balance sheet?

A) $9,600 B) $12,000 C) $360,000 D) The Investment in Humble account would not appear on the consolidated balance sheet.

21.12) Which of the following is the correct amount of goodwill that would appear on Big Guy's consolidated balance sheet as at June 30, 2023?

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A) Nil B) $30,000 C) $40,000 D) $50,000

21.13) Which of the following is the correct amount that would appear on Big Guy's consolidated balance sheet for equipment as at June 30, 2023?

A) $872,000 B) $878,600 C) $881,800 D) $885,000

21.14) Which of the following is the correct amount of current liabilities that would appear on Big Guy's consolidated balance sheet as at June 30, 2023?

A) $350,000 B) $630,000 C) $662,000 D) $682,000

21.15) Which of the following is the correct amount of accounts receivable that would appear on Big Guy's consolidated balance sheet as at June 30, 2023?

A) $270,000 B) $305,000 C) $314,000 D) $325,000

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21.16) Assume the non-controlling interest is measured using the identifiable net assets (INA) method, which of the following is the correct amount of non-controlling interest that would appear on Big Guy's consolidated balance sheet as at June 30, 2023?

A) Insufficient information to determine. B) $83,600 C) $71,760 D) $79,760

21.17) Which of the following is the correct amount of common shares that would appear on Big Guy's consolidated balance sheet on June 30, 2023?

A) $900,000 B) $1,044,000 C) $1,080,000 D) $1,800,000

21.18) Which of the following is the correct amount of bonds payable that would appear on Big Guy's consolidated balance sheet on June 30, 2023?

A) $309,000 B) $317,800 C) $318,000 D) $330,000

22) Brand X Inc. (Brand X) purchased a controlling interest in Brand Y Inc. (Brand Y) on January 1, 2023. On that date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000, respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y's assets and liabilities were assessed for fair value as follows: Version 1

Inventory

$5,000 less than book value

Equipment

$30,000 less than book value

Patent

$24,000 greater than book value

Bonds payable

$5,000 less than book value

The balance sheets of both companies, as at December 31, 2023 are disclosed below: Brand X

Brand Y

Cash

$200,000

$45,000

Accounts receivable

100,000

40,000

Inventory

80,000

55,000

Equipment (net)

220,000

100,000

Patent

---------

60,000

Investment in Brand Y

348,000

---------

Total assets

$948,000

$300,000

Current liabilities

$480,000

$53,000

Bonds payable

270,000

50,000

Common shares

100,000

180,000

Retained earnings

98,000

19,000

Total liabilities and equity

$948,000

$300,000

OtherInformation: • The net incomes for Brand X and Brand Y for the year ended December 31, 2023, were $1,000 and $50,000, respectively. Brand X did not declare any dividends during the year. However, Brand Y declared and paid $51,000 in dividends to make up for several years in which the company had never declared any dividends. • An impairment test conducted on December 31, 2023 revealed that the goodwill should actually have a value $2,000 lower than the amount calculated on the date of acquisition. • Both companies use a FIFO system, and Brand Y's inventory on the date of acquisition was sold during the year. • Brand Y's equipment and patent have useful lives of 10 years and 6 years, respectively from the date of acquisition. • All bonds payable mature on January 1, 2028. The discount on the bonds payable is amortized using the straight-line method.

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22.1) Prepare Brand X's consolidated balance sheet as at December 31, 2023, assuming that Brand X purchased 100% of Brand Y for $350,000 and accounts for its investment using the equity method.

22.2) Prepare Brand X's consolidated balance sheet as at December 31, 2023, assuming that Brand X purchased 80% of Brand Y for $350,000 and accounts for its investment using the equity method. The non-controlling interest is calculated using the fair value enterprise (FVE) method.

23) Par Inc. (Par) purchased 70% of the outstanding voting shares of Sub Inc. (Sub) for $700,000 on January 1, 2023. On that date, Sub had common shares and retained earnings worth $410,000 and $170,000, respectively. The equipment had a remaining useful life of 5 years from the date of acquisition. Sub's bonds mature on December 31, 2028. The inventory was sold in the year following the acquisition. Both companies use straight line amortization for the equipment, and no salvage value is assumed for assets. The effective interest rate method is used to amortize the bond discount. Par and Sub declared and paid $10,000 and $5,000 in dividends, respectively during the year. Par uses the fair value enterprise (FVE) method to value the non-controlling interest in Sub on the acquisition date. The balance sheets of both companies, as well as Sub's fair values immediately following the acquisition are shown below:

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Par Inc.

Sub Inc.

(carrying value)

(fair value)

Cash

$600,000

$515,000

Accounts receivable

140,000

85,000

Inventory

60,000

45,000

60,000

Investment in Sub Inc.

700,000

Equipment (net)

50,000

180,000

185,000

Land

------------

115,000

200,000

Total assets

$1,550,000

$940,000

Current liabilities

$100,000

$280,000

280,000

Bonds payable, 3%

160,000

80,000

71,879

Common shares

800,000

410,000

Retained earnings

490,000

170,000

Total liabilities and equity

$1,550,000

$940,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2024: Income Statements Sales

$800,000

Investment revenue

33,422

$300,000

Less: expenses: Cost of goods sold

240,000

180,000

Depreciation

10,000

20,000

Interest expense

12,000

40,000

Other expenses

8,000

10,000

$563,422

$50,000

Net income

Retained Earnings Statements

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Balance, January 1, 2024

$477,964

$170,000

Net income

563,422

50,000

Dividends

(10,000)

(5,000)

Balance, December 31, 2024

$1,031,386

$215,000

Balance Sheets Par Inc.

Sub Inc.

Cash

$647,500

$665,000

Accounts receivable

250,000

35,000

Investment in Sub

717,886

Inventory

90,000

45,000

Equipment (net)

750,000

170,000

Land

----------

115,000

Total assets

$2,455,386

$1,030,000

Current liabilities

$464,000

$325,000

Bonds payable

160,000

80,000

Common shares

800,000

410,000

Retained earnings

1,031,386

215,000

Total liabilities and equity

$2,455,386

$1,030,000

Other information: • During 2024, Sub borrowed $10,000 in cash from Par, interest free, to finance its operations. The amount remains unpaid as December 31, 2024. • Par uses the equity method to account for its investment in Sub. • The bonds pay interest on December 31 each year at a stated rate of 3%. The market rate of interest on January 1, 2023 was 5%.

23.1)

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Prepare Par's consolidated balance sheet as at the date of acquisition.

23.2) Prepare Par's consolidated income statement for the year ended December 31, 2024. Show the allocation of consolidated net income between the controlling and noncontrolling interests.

23.3) Prepare Par's statement of consolidated retained earnings for the year ended December 31, 2024.

23.4)

Prepare a consolidated balance sheet for Par Inc. as at December 31, 2024.

24) Remburn Inc. (Remburn) purchased 90% of the outstanding voting shares of Stanton Inc. (Stanton) for $90,000 on January 1, 2022. On that date, Stanton had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton's trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton's bonds mature on January 1, 2042. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn and Stanton declared and paid $12,000 and $4,000 in dividends, respectively during the year. The balance sheets of both companies, as well as Stanton's fair values on the date of acquisition are shown below:

Cash

Version 1

Remburn Inc.

Stanton Inc.

(carrying value)

(fair value)

$400,000

$5,000

Accounts receivable

240,000

30,000

Inventory

60,000

30,000

50,000

Investment in Stanton Inc.

90,000

Equipment (net)

160,000

25,000

20,000

Land

--------

20,000

30,000

Trademark

---------

10,000

15,000

Total assets

$950,000

$120,000

Current liabilities

$500,000

$50,000

50,000

Bonds payable

120,000

20,000

30,000

Common shares

200,000

30,000

Retained earnings

130,000

20,000

Total liabilities and equity

$950,000

$120,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2022: Income Statements Remburn Inc. Sales Dividend income

Stanton Inc.

$295,750

$125,000

3,600

Less: expenses: Cost of goods sold

200,000

19,000

Depreciation

10,000

25,000

Interest expense

16,000

36,000

Other expenses

5,000

28,000

(8,000)

$68,350

$25,000

Gain on sale of land Net income

Retained Earnings Statements Remburn Inc.

Version 1

Stanton Inc.

Balance, January 1, 2022

$130,000

$20,000

Net income

68,350

25,000

Dividends

(12,000)

(4,000)

Balance, December 31, 2022

$186,350

$41,000

Balance Sheets Remburn Inc.

Stanton Inc.

Cash

$190,950

$156,000

Accounts receivable

200,000

150,000

Investment in Stanton Inc.

90,000

Inventory

100,000

30,000

Equipment (net)

350,000

25,000

Trademark

--------

10,000

Total assets

$930,950

$371,000

Current liabilities

$424,600

$280,000

Bonds payable

120,000

20,000

Common shares

200,000

30,000

Retained earnings

186,350

41,000

Total Liabilities and Equity

$930,950

$371,000

Other information: • Both companies use a FIFO system, and Stanton's entire inventory on the date of acquisition was sold during the following year. • During 2022, Stanton borrowed $20,000 in cash from Remburn interest free to finance its operations. The amount remains unpaid on December 31, 2022. • Remburn uses the cost method to account for its investment in Stanton Inc. • Stanton sold all of its land during the year for $28,000. • The goodwill impairment for 2022 was determined to be $7,000. • Remburn has chosen to use the identifiable net assets (INA) method to value the noncontrolling interest in Stanton on the acquisition date.

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24.1) Prepare Remburn's consolidated income statement for the year ended December 31, 2022 and show the allocation of the consolidated net income between the controlling and noncontrolling interests.

24.2) Prepare Remburn's statement of consolidated retained earnings as at December 31, 2022.

24.3) Prepare a statement of changes in noncontrolling interest for the year ended December 31, 2022.

24.4)

Prepare a consolidated balance sheet for Remburn Inc. as at December 31, 2022.

24.5) Assume that Stanton's equipment, land and trademark on the date of acquisition form part of a single asset group. Also assume that due to significant adverse changes in Stanton's technological environment, the assets are expected to only generate future cash flows of $40,000. Does this mean that Stanton will have to recognize an impairment loss? Explain.

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24.6) Assume that Stanton had other intangible assets with indefinite lives on its books at the date of acquisition. How would the impairment test differ from that which would apply to its amortizable assets, if at all? A simple explanation is required. Please do not use any numbers to support your answer.

24.7) Disregard the above goodwill impairment loss provided in the question. Instead, assume that Stanton has only one cash-generating unit with goodwill and that Stanton's common shares had a fair market value of $51,000 on December 31, 2022. Determine if an impairment loss has resulted. If yes, apply the impairment loss to determine the revised carrying amounts of the goodwill and identifiable assets.

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25) Davis Inc. (Davis) purchased a controlling interest in Martin Inc. (Martin) on January 1, 2022, when Martin's common shares and retained earnings were carried at $180,000 and $60,000, respectively. On that date, Martin's book values approximated its fair values, with the exception of the company's inventories and a patent held by Martin. The patent, which had an estimated remaining useful life of ten years, had a fair value which was $20,000 higher than its book value. Martin's inventories on January 1, 2022 were estimated to have a fair value that was $16,000 higher than their book value. It was predicted that Martin's goodwill impairment test, which was to be conducted on December 31, 2023, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition. During 2022, Martin reported a net income of $60,000 and declared and paid $12,000 in dividends. Martin's 2023 net income and dividends declared and paid were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets. Assuming that Davis purchases 100% of Martin for $300,000, answer the following: Required: a) Prepare Davis' equity method journal entries for 2022 and 2023. b) Compute the following as at December 31, 2023: i. Investment in Martin Inc. ii. Goodwill iii. The remaining acquisition differential.

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26) Davis Inc. (Davis) purchased a controlling interest in Martin Inc. (Martin) on January 1, 2022, when Martin's common shares and retained earnings were carried at $180,000 and $60,000, respectively. On that date, Martin's book values approximated its fair values, with the exception of the company's inventories and a patent held by Martin. The patent, which had an estimated remaining useful life of ten years, had a fair value which was $20,000 higher than its book value. Martin's inventories on January 1, 2022 were estimated to have a fair value that was $16,000 higher than their book value. It was predicted that Martin's goodwill impairment test, which was to be conducted on December 31, 2023, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition. During 2022, Martin reported a net income of $60,000 and declared and paid $12,000 in dividends. Martin's 2023 net income and dividends declared and paid were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets. Davis uses the fair value enterprise (FVE) method. Assuming that Davis purchases 70% of Martin for $280,000, answer the following: Required: a) Prepare Davis' equity method journal entries for 2022 and 2023. b) Compute the following as at December 31, 2023: i. Investment in Martin Inc. ii. Goodwill iii. The remaining acquisition differential.

27) Linton Inc. (Linton) purchased 75% of Marsh Ltd. (Marsh) on January 1, 2022 for $937,500. Marsh's common shares and retained earnings were worth $400,000 each on that date. The acquisition differential was allocated as follows: Trademark

$15,000 (which had not been previously recorded)

Inventory

$8,000 (fair value in excess of book value)

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The balance was allocated to goodwill. The trademark had an estimated remaining useful life of 10 years from the date of acquisition. Marsh Ltd. uses straight line amortization. In 2022, Marsh's net income was $40,000. Marsh declared and paid $5,000 in dividends to shareholders on record as at December 31, 2022. In 2023, Marsh reported a net income of $8,000 and declared and paid $1,000 in dividends. Required: a) Prepare the equity method journal entries for Linton for 2022 and 2023. b) Calculate the value of Marsh's trademark as at December 31, 2023. c) Prepare a statement that shows the changes in Linton's non-controlling interest in 2023. Answer: a)EquityMethodJournalEntries 2022:

Debit

Investment in Marsh Ltd.

937,500

Cash Investment in Marsh Ltd.

937,500 30,000

Equity method income Equity method income

30,000 7,125

Investment in Marsh Ltd. Cash

7,125 3,750

Investment in Marsh Ltd.

3,750

2023:

Debit

Investment in Marsh Ltd.

6,000

Equity method income Equity method income

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Credit

6,000 1,125

Investment in Marsh Ltd. Cash

Credit

1,125 750

Investment in Marsh Ltd.

750

Calculation and Allocation of Acquisition Differential Schedule Cost of 75% of Marsh

$937,500

Implied value of 100% of Marsh

$937,500/75%

$1,250,000

Less: Carrying value of net identifiable assets of subsidiary

($400,000 common shares + $400,000 retained earnings)

800,000

Acquisition differential

$450,000

Allocation:

(FV–CV)

Inventory

8,000

Trademark

15,000

Balance - goodwill

$427,000

Changes to Acquisition Differential Schedule Balance – Jan. 1, 2022

Changes in 2022

Changes in 2023

Balance Dec. 31, 2023

Inventory

$8,000

$-8,000

Trademark

15,000

-1,500

12,000

Goodwill

427,000

Total

$450,000

$-9,500

$-1,500

$439,000

b) Trademark: $15,000 - ($1,500 × 2) = $12,000 c)ChangesinNoncontrollingInterest: Noncontrolling Interest, January 1, 2022: ($1,250,000 × 25 %)

$312,500

2022 Net Income (noncontrolling share) ($40,000 × 25%) – ($8,000 + $1,500) × 25%

7,625

Less: 2022 Dividends (noncontrolling share)

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($5,000 × 25%)

(1,250)

2023 Net Income (noncontrolling share) ($8,000 × 25%) – ($1,500 × 25%)

1,625

Less: 2023 Dividends (noncontrolling share) ($1,000 × 25%) Noncontrolling Interest, December 31, 2023

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(250) $320,250

28) Selectron Inc. (Selectron) acquired 60% of Insor Inc. (Insor) on January 1, 2022 for $180,000, when Insor's common shares and retained earnings were worth $60,000 and $180,000, respectively. Insor's fair values equaled their book values on that date. Selectron currently uses the equity method to account for its investment in Insor. During 2022, investment income in the amount of $12,000 and dividends in the amount of $1,200 were recorded in Selectron's Investment in Insor account. During 2023, investment income in the amount of $24,000 and dividends in the amount of $2,400 were recorded in Selectron's Investment in Insor account. Insor declares dividends in the amount of 10% of its earnings. Required: a) Compute Insor's net income for 2022 and 2023. b) Compute the amount of dividends declared by Insor in each year. c) Compute the balance in the non-controlling interest account as at December 31, 2023. Answer: a) Insor's net income for 2022 and 2023 had to be $20,000 and $40,000 respectively. Insor's net income for 2022 is calculated as follows: 2022 net income flowing through investment account = $12,000; $12,000/60% = $20,000 Insor's 2023 net income would be calculated in the same manner, and would be $40,000 ($24,000/60%) b) Dividends, 2022 = $20,000 × 10 % = $2,000 (or $1,200/60%). Dividends, 2023 = $4,000 ($40,000 × 10 % = $4,000 (or $2,400/60%) c) Non-Controlling Interest:

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Fair value of Insor at date of acquisition: ($180,000/60%)

$300,000

Add: 2022 Net Income

20,000

Less: 2022 Dividends

(2,000)

Add: 2020 Net Income

40,000

Less: 2020 Dividends

(4,000)

Book value of Insor, December 31, 2023

$354,000

Non-Controlling Interest (40%)

$141,600

29) Subsequent to the date of acquisition, a parent company can choose between the consolidation method or equity method when accounting for an investment in a subsidiary in its own internal accounting records. ⊚ ⊚

true false

30) The Canada Revenue Agency requires consolidated financial statements for income tax assessment purposes. ⊚ ⊚

true false

31) If the noncontrolling interest (NCI) is measured using the identifiable net assets method, the NCI's share of the subsidiary's goodwill is excluded. ⊚ ⊚

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true false

Answer Key Test name: ch 5 1) A 2) C 3) C 4) D 5) D 6) A 7) B 8) D 9) D 10) C 11) A 12) D 13) D 14) B 15) B 16) C 17) D 18) Section Break 18.1) D 18.2) A 18.3) B 18.4) A 18.5) D 18.6) A 18.7) C 18.8) A Version 1

18.9) B 18.10) D 19) Section Break 19.1) B 19.2) D 19.3) A 20) Section Break 20.1) A 20.2) D 21) Section Break 21.1) C 21.2) C 21.3) A 21.4) D 21.5) C 21.6) C 21.7) B 21.8) C 21.9) A 21.10) A 21.11) D 21.12) C 21.13) C 21.14) C 21.15) B 21.16) C 21.17) A 21.18) A 22) Section Break 23) Section Break Version 1

24) Section Break 29) FALSE 30) FALSE 31) TRUE

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Student name:__________ 1)

Intercompany profits on sales of inventory are only realized:

A) once the seller receives payment for the sale. B) once the inventory has been sold to outsiders. C) when the inventory has been ordered by the purchaser. D) when the inventory has been delivered to the purchaser.

2) If a parent company borrows money at an interest rate of 6% from its subsidiary, what effect (if any) will this have on the noncontrolling interest?

A) This would have no effect on the noncontrolling interest. B) The noncontrolling interest balance would be reduced by the amount of the loan and interest revenue. C) The noncontrolling interest balance would be reduced by the amount of the loan. D) The noncontrolling interest balance would be increased by the amount of the interest revenue.

3) How would any management fees charged by a parent company to its subsidiary be accounted for during the consolidation process?

A) The parent company would only record its pro rata share of any management revenues in the consolidated financial statement. B) The parent company's profit on the rendering of management services would be charged to retained earnings in the consolidated financial statement. C) Both the parent's management fees, and the subsidiary's related expense would be eliminated when preparing consolidated financial statements. D) No special accounting treatment is required since this would have no effect on consolidated net income.

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4) Which of the following statements best describes the appropriate reporting requirements with respect to income taxes when eliminating intercompany profits?

A) The income taxes can be ignored since an increase in income tax expense for one company is offset by an equivalent reduction in income tax expense for the other. B) The income taxes will be recognized as assets for the purchasing entity and liabilities for the selling entity in their respective standalone Balance Sheets. C) The income taxes will be expensed when the profit is realized in accordance with the matching principle. D) The income taxes will be charged to retained earnings during the preparation of the consolidated financial statements.

5) In 2023, A Ltd. sold merchandise to its subsidiary, B Company, for $80,000 at a gross profit rate of 30%. B Company was able to sell 60% of the merchandise to outsiders by the end of the fiscal period. What effect does this intercompany transaction have on consolidated cost of goods sold?

A) The purchase component decreases cost of goods sold by $80,000 and the ending inventory component increases cost of goods sold by $9,600. B) No effect. C) The purchase component increases cost of goods sold by $80,000 and the ending inventory component decreases cost of goods sold by $14,400. D) Cost of goods sold has an overall decrease of $32,000.

6) In 2023, A Ltd. sold merchandise to its subsidiary, B Company, for $80,000 at a gross profit rate of 30%. B Company was able to sell 60% of the merchandise to outsiders by the end of the fiscal period. What is the original cost of the remaining inventory to the consolidated entity?

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A) $32,000 B) $24,000I C) $22,400 D) Insufficient information provided to determine the original cost.

7) Which accounting principle is applied when the unrealized profit is deducted from ending inventory to bring it back to the original price paid to the outsiders?

A) Historical cost. B) Matching. C) Revenue recognition. D) Full disclosure.

When are profits from intercompany land sales realized?

A) They are realized only when sold to outsiders. B) They are realized once legal ownership of the land has been transferred. C) They are realized when full consideration has been received for the land. D) They are realized when legal agreements are signed with respect to ownership of the land.

9) Under which of the following consolidation methods would the elimination of only the parent's share of any intercompany profits be required for the preparation of consolidated financial statements?

A) Parent company method B) Fair value enterprise method C) Proportionate consolidation method D) Identifiable net asset method

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10) Assuming the parent company owns 80% of the subsidiary company, what effect will the rent of $10,000 charged by the subsidiary company to the parent company have on the calculation of the noncontrolling interest (NCI) in the net income of the subsidiary?

A) The NCI will decrease by $10,000. B) The NCI will decrease by $8,000. C) There is no effect on the NCI. D) The NCI will increase by $10,000.

11)

Which of the following methods calls for the elimination of all intercompany profits?

A) New-entity method. B) Fair value enterprise method C) Proportionate consolidation method D) Acquisition method.

12) Which of the following statements best describes the problem with intercompany transfer pricing?

A) The management of a company in a high-tax-rate jurisdiction structures each company's transfer price to that the profit is earned in a low-tax-rate jurisdiction. B) The management of the parent company structures each company's transfer price so that eliminations of the intercompany profits are not required when preparing consolidated financial statements. C) Companies that are in the same taxation jurisdiction benefit from the transfer price being structured in such a way for the poor performing company to report the higher net income. D) Intercompany transfer pricing is a mechanism used by management to maximize bonus payments.

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13) Xavier Inc. (Xavier) owns 80% of Young Inc. (Young). During 2023, Xavier sold inventory to Young for $12,000. Thirty percent (30%) of this inventory remained in Y's warehouse at year end. Young sold inventory to Xavier for $6,000. 40% of this inventory remained in Xavier's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume Xavier uses the cost method to account for its investment in Young.

13.1) What is the after-tax dollar value of Xavier'sunrealized profits during the year on its sales to Young?

A) $1,008 B) $720 C) $432 D) $672

13.2) What is the after-tax dollar value of Xavier'srealized profits during the year on its sales to Young?

A) $1,008 B) $720 C) $432 D) $672

13.3) What is the after-tax dollar value of Young'sunrealized profits during the year on its sales to Xavier?

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A) $288 B) $432 C) $720 D) $480

13.4) What is the after-tax dollar value of Young'srealized profits during the year on its sales to Xavier?

A) $288 B) $432 C) $720 D) $480

14) Arthur Inc. (Arthur) owns 80% of Haddon Inc. (Haddon). During 2023, Arthur sold inventory to Haddon for $10,000. Half (50%) of this inventory remained in Haddon's warehouse at year end. Haddon sold inventory to Arthur for $5,000. 40% of this inventory remained in Arthur's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume Arthur uses the cost method to account for its investment in Haddon.

14.1) What effect (if any) would Arthur'sunrealized profits on its sales to Haddon have on the noncontrolling interest account on the consolidated balance sheet?

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A) There would be no effect. B) There would be an decrease to the non-controlling interest account for the amount of $200. C) There would be a decrease to the non-controlling interest account for the amount of $120. D) There would be an increase to the non-controlling interest account for the amount of $120.

14.2) What would be the journal entry to eliminate any after tax unrealized profits from the consolidated financial statements during the year?

A) Debit Cost of goods sold

1,400

Deferred income tax asset

560

Credit

Inventory

1,400

Income tax expense

560

B) Debit Sales

15,000

Income tax expense

4,000

Credit

Cost of goods sold

15,000

Deferred income tax liability

4,000

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Debit Sales

15,000

Deferred income tax asset

4,000

Credit

Cost of Goods Sold

12,000

Inventory

3,000

Income tax expense

4,000

D) Debit Cost of Goods Sold

Credit

1,400

Inventory

840

Income tax expense

560

14.3) Assuming that Arthur used the equity method instead of the cost method, what adjustment would have to be made to the investment in Haddon account to adjust for any unrealized profits on Haddon's sales to Arthur?

A) No adjustment would be required. B) The account would have to be reduced by $240. C) The account would have to be reduced by $192. D) The account would have to be reduced by $48.

14.4) Assume that Haddon reported an after-tax net income of $20,000 in 2023, what would be Haddon's adjusted net income for the year?

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A) $15,000 B) $20,000 C) $19,840 D) $19,760

15) Coco Ltd. (Coco) purchased 90% of the voting shares of Ferdinand Inc. (Ferdinand) for $612,000 on January 1, 2022. On that date, Ferdinand's common shares and retained earnings were valued at $200,000 and $250,000, respectively. Unless otherwise stated, assume that Coco uses the cost method to account for its investment in Ferdinand. Coco uses the fair value enterprise (FVE) method. Ferdinand 's fair values approximated its carrying values with the following exceptions: Ferdinand 's trademark had a fair value which was $60,000 higher than its carrying value. Ferdinand 's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2032. Both companies use straight line amortization exclusively. The financial statements of both companies for the year ended December 31, 2023 are shown below: IncomeStatements Coco Ltd.

Ferdinand Inc.

Sales

$700,000

$640,000

Other revenues

300,000

$160,000

Cost of goods sold

280,000

256,000

Depreciation/amortization expense

30,000

14,000

Other expenses

240,000

155,000

Income tax expense

90,000

75,000

Net income

$360,000

$300,000

Less: expenses:

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RetainedEarningsStatements Coco Ltd.

Ferdinand Inc.

Balance, January 1, 2023

$200,000

$100,000

Net income

$360,000

$300,000

Less: dividends

($60,000)

($50,000)

Retained Earnings, Dec 31, 2023

$500,000

$350,000

BalanceSheets Coco Ltd. Cash

$200,000

$150,000

Accounts receivable

50,000

150,000

Inventory

50,000

150,000

Investment in Ferdinand

612,000

Equipment (net)

500,000

Trademark

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Ferdinand Inc.

150,000 200,000

Total assets

$1,412,000

$800,000

Current liabilities

$292,000

$150,000

Bonds payable

120,000

100,000

Common shares

500,000

200,000

Retained earnings

500,000

350,000

Total liabilities and equity

$1,412,000

$800,000

Other Information: A goodwill impairment test conducted during August 2023 revealed that the acquired goodwill amount on the date of acquisition had been impaired by $10,000. During 2022, Coco sold $50,000 worth of inventory to Ferdinand, 60% of which was sold to outsiders during the year. During 2023, Coco sold inventory to Ferdinand for $90,000. 75% of this inventory was resold by Ferdinand to outside parties. During 2022, Ferdinand sold $40,000 worth of inventory to Coco, 80% of which was sold to outsiders during the year. During 2023, Ferdinand sold inventory to Coco for $50,000. 90% of this inventory was resold by Coco to outside parties. All intercompany sales as well as sales to outsiders earn a gross margin on sales of 30%. The effective tax rate for both companies is 25%. Since Coco acquired Ferdinand, Coco has charged Ferdinand an annual management fee of $70,000. Ferdinand has paid Coco for the management services on January 31st of the following year.

15.1) Which of the following is the correct amount of goodwill arising from this business combination on acquisition date?

A) $230,000 B) $270,000 C) $150,000 D) $190,000

15.2) Which if the following would be the correct journal entry to record the dividends received by Coco during 2023?

A) Debit Cash

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Credit

$50,000

Investment in Ferdinand

$50,000

B) Debit Cash

Credit

$45,000

Acquisition differential

$45,000

C) Debit Cash

Credit

$45,000

Dividend income

$45,000

D) Debit Cash Goodwill

Credit

$50,000 $50,000

15.3) Which of the following is the correct amount of sales revenue that would appear on Coco's consolidated income statement for the year ended December 31, 2023?

A) $1,200,000 B) $1,276,000 C) $1,340,000 D) $1,400,000

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15.4) Which of the following is the correct amount of other revenue that would appear on Coco's consolidated income statement for the year ended December 31, 2023?

A) $345,000 B) $415,000 C) $390,000 D) $460,000

15.5) Which of the following amounts is the total amount of before tax profits from the 2022 intercompany sales that were realized during 2022?

A) Nil B) $62,000 C) $27,000 D) $18,600

15.6) Which of the following amounts is the total amount of before tax unrealized profits in inventory at the start of 2023?

A) Nil B) $6,000 C) $8,400 D) $6,200

15.7) Which of the following amounts is the total amount of before tax unrealized profits in inventory at the end of 2023?

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A) Nil B) $6,750 C) $8,250 D) $8,000

15.8) How is the change to the acquisition differential for the bonds payable reflected on Coco's 2023 consolidated income statement?

A) It would be reflected through sales. B) It would be reflected through other expenses. C) It would be reflected through cost of goods sold. D) It would be reflected through the depreciation/amortization expense.

15.9) Which of the following amounts is the correct total changes to the acquisition differential for 2023?

A) Nil B) $10,000 C) $6,000 D) $(4,000)

15.10) What effect (if any) would the unrealized profits in beginning inventory have on income tax expense for 2023?

A) They would cause a $2,100 reduction in income tax expense. B) They would cause a $900 reduction in income tax expense. C) They would cause a $900 increase in income tax expense. D) They would cause a $2,100 increase in income tax expense.

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15.11) What effect (if any) would the unrealized profits in ending inventory have on income tax expense for 2023? (Round your answer to the nearest dollar.)

A) They would cause a $2,063 reduction in income tax expense. B) They would cause a $1,313 reduction in income tax expense. C) They would cause a $2,063 increase in income tax expense. D) They would cause a $1,313 increase in income tax expense.

15.12) Which of the following is the correct noncontrolling interest amount that would appear on Coco's consolidated statement of financial position on the date of acquisition?

A) $45,000 B) $61,200 C) $68,000 D) $49,000

15.13) Which of the following is the correct noncontrolling interest amount that would appear on Coco's consolidated statement of financial position at the end of 2023?

A) $55,000 B) $76,200 C) $76,000 D) $76,088

15.14) Which of the following is the correct amount that would appear on the December 31, 2023 consolidated statement of financial position for trademarks?

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A) $200,000 B) $248,000 C) $240,000 D) $230,000

15.15) Which of the following is the correct amount appearing on the December 31, 2023 consolidated statement of financial position for current liabilities?

A) $372,000 B) $442,000 C) $410,000 D) $412,000

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16) Leaf Inc. (Leaf) acquired a 60% interest in Maple Company (Maple) on January 1, 2022 for $270,000. Unless otherwise stated, Leaf uses the cost method to account for its investment in Maple. Leaf used the fair value enterprise (FVE) method to value the noncontrolling interest. On the acquisition date, Maple had common stock and retained earnings valued at $100,000 and $220,000, respectively. The acquisition differential was allocated as follows: • $80,000 to undervalued inventory. • $30,000 to undervalued equipment (to be amortized over 20 years). The following took place during 2022: • Maple reported a net income and declared dividends of $25,000 and $5,000, respectively. • Leaf's December 31, 2022 inventory contained an intercompany profit of $10,000. • Leaf's net income was $75,000. The following took place during 2023: • Maple reported a net income and declared dividends of $36,000 and $6,000, respectively. • Maple's December 31, 2023 inventory contained an intercompany profit of $5,000. • Leaf's net income was $48,000. Both companies are subject to a 30% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%.

16.1) Which of the following would be the correct amount of the changes to the acquisition differential during 2022?

A) $78,500 B) $80,000 C) $81,500 D) $120,000

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16.2) Assuming that Leaf uses the equity method to account for its investment in Maple, what would be the NET increase/decrease to the investment in Maple account during 2022?

A) $(38,100) B) $(41,100) C) $25,000 D) $(40,900)

16.3) Which of the following would be the correct amount of the changes to the acquisition differential during 2023?

A) $1,500 B) $0 C) $81,500 D) $20,000

16.4) Assuming that Leaf uses the equity method to account for its investment in Maple, what would be the NET increase/decrease to the investment in Maple account during 2023?

A) $(38,100) B) $11,500 C) $17,800 D) $22,000

16.5) Which of the following is the correct consolidated net income attributable to the shareholders of the parent for 2022?

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A) $(63,500) B) $33,900 C) $72,000 D) $36,900

16.6) Which of the following is the correct consolidated net income attributable to the shareholders of the parent for 2023?

A) $62,500 B) $69,300/ C) $65,800 D) $61,600.

16.7)

What would be the change in the non-controlling interest account for 2022?

A) Non-controlling interest would decrease by $27,400. B) Non-controlling interest would decrease by $8,000. C) Non-controlling interest would increase by $8,000. D) Non-controlling interest would decrease by $25,400.

16.8)

What would be the change in the non-controlling interest account for 2023?

A) Non-controlling interest would increase by $14,200. B) Non-controlling interest would increase by $16,800. C) Non-controlling interest would decrease by $45,000. D) Non-controlling interest would increase by $48,000.

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16.9) 2022?

What would be the balance in the investment in Maple account at December 31,

A) $270,000 B) $228,900 C) $358,300 D) $228,000

16.10) 2023?

What would be the balance in the investment in Maple account at December 31,

A) $270,000 B) $250,900 C) $246,700 D) $250,200

16.11) Which of the following is the correct amount of goodwill arising from this combination on January 1, 2022?

A) $240,000 B) $80,000 C) $180,000 D) $20,000

16.12) Assuming Leaf used the identifiable net asset (INA) method to value the noncontrolling interest, which of the following is the correct balance in the noncontrolling interest account on the date of acquisition?

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A) $172,000 B) $180,000 C) $128,000 D) $270,000

17) On June 30, 2022, Past Company (Past) sold some land to its subsidiary, Sloan Ltd. (Sloan), for $380,000. The land had cost Past $200,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On April 1, 2024, Sloan sold the land to an outside party for $475,000. This transaction was also subject to income tax at a 20% rate. Past owns 75% of the outstanding shares of Sloan and accounts for its investment using the cost method.

17.1) What amount will appear on the "Gain on sale of land" line in Past's consolidated income statement for the year ended December 31, 2022?

A) $0 B) $180,000 C) $120,000 D) $135,000

17.2) What amount will appear on the "Gain on sale of land" line in Past's consolidated income statement for the year ended December 31, 2024?

A) $180,000 B) $95,000 C) $155,000 D) $275,000

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17.3) What effect will the elimination of the unrealized intercompany gain (in the preparation of the consolidated income statement) have on consolidated income tax expense for 2022?

A) It will have no effect. B) It will reduce income tax expense by $36,000. C) It will reduce income tax expense by $27,000. D) It will increase income tax expense by $36,000.

17.4) What effect will the adjustment for the realization of the intercompany gain (in the preparation of the consolidated income statement) have on consolidated income tax expense for 2024?

A) It will have no effect. B) It will reduce income tax expense by $36,000. C) It will increase income tax expense by $27,000. D) It will increase income tax expense by $36,000.

17.5) What effect will the adjustment for the realization of the intercompany gain (in the preparation of the consolidated income statement) have on the noncontrolling interest in income for 2024?

A) It will have no effect on the non-controlling interest in income. B) It will decrease the non-controlling interest in income by $36,000. C) It will increase the non-controlling interest in income by $36,000. D) It will increase the non-controlling interest in income by $45,000.

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17.6) On December 31, 2022, the land account balance in the books of Past is $300,000 and in the books of Sloan is $300,000. No acquisition differential was allocated to land. What will be the amount of land in the consolidated balance sheet at December 31, 2022?

A) $420,000 B) $465,000 C) $456,000 D) $600,000

17.7) On December 31, 2023, the land account balance in the books of Past is $300,000 and in the books of Sloan is $340,000. No acquisition differential was allocated to land. What will be the amount of land in the consolidated balance sheet at December 31, 2023?

A) $460,000 B) $820,000. C) $555,000 D) $640,000

18) Parker Inc. (Parker) owns 70% of Queen Ltd. (Queen). Parker and Queen both have December 31st year ends. On January 1, 2022, Queen had inventory in its warehouse which was purchased from Parker for $12,000 in 2021. This inventory was sold to an outside party during 2022. During 2022, Parker sold inventory to Queen for $50,000. 40% remained in Queen's warehouse at year end. Also, during 2022, Queen sold inventory to Parker for $25,000. 70% of this inventory remained in Parker's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 30% for both companies. Parker uses the cost method to account for its Investment in Queen. The inventories of both companies as at December 31, 2022 were all sold to outsiders during 2023. There were no intercompany transactions during 2023.

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18.1) Prepare a schedule showing the realized and unrealized profits resulting from downstream transactions (i.e., Parker selling to Queen) for 2022 and 2023. Your schedule should include both pre-tax and after-tax amounts.

18.2) Prepare a schedule showing the realized and unrealized profits resulting from upstream transactions (i.e., Queen selling to Parker) for 2022 and 2023. Your schedule should include both pre-tax and after-tax amounts.

18.3) Provide an explanation of the effect (if any) these intercompany transactions would have on the noncontrolling interest.

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19) Port Company (Port) purchased 70% of the voting shares of Sail Ltd. (Sail) for $630,000 on January 1, 2021. On that date, Sail's common shares and retained earnings were valued at $300,000 and $150,000 respectively. Unless otherwise stated, assume that Port uses the cost method to account for its investment in Sail. Sail's fair values approximated its carrying values with the following exceptions: • The trademark had a fair value which was $80,000 higher than its carrying value. • The bonds payable had a fair value which was $30,000 higher than their carrying value. The trademark had a useful life of twenty years remaining from the date of acquisition. The bonds payable mature on January 1, 2041. Both companies use straight line amortization exclusively. The financial statements of both companies for the year ended December 31, 2023 are shown below: IncomeStatements Port

Sail

Sales

$640,000

$520,000

Other revenues

460,000

160,000

Cost of goods sold

480,000

390,000

Depreciation expense

40,000

20,000

Other expenses

80,000

40,000

Income tax expense

250,000

115,000

Net income

$250,000

$115,000

Less: expenses

RetainedEarningsStatements Port

Sail

Balance, January 1, 2023

$420,000

$330,000

Net income

250,000

115,000

Less: dividends

(50,000)

(65,000)

Retained Earnings, Dec 31, 2023

$620,000

$380,000

BalanceSheets

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Port

Sail

Cash

$100,000

$90,000

Accounts receivable

270,000

190,000

Inventory

350,000

110,000

Investment in Sail

630,000

Equipment (net)

520,000

150,000

Land

------

100,000

Trademark

------

300,000

Total assets

$1,870,000

$940,000

Current liabilities

$300,000

$110,000

Bonds payable

450,000

150,000

Common shares

500,000

300,000

Retained earnings

620,000

380,000

Total liabilities and equity

$1,870,000

$940,000

OtherInformation: • A goodwill impairment test conducted in 2023 revealed that Sail's goodwill amount on the date of acquisition had been impaired by $5,000 • During 2022, Port sold $60,000 worth of inventory to Sail, 80% of which was sold to outsiders during the year. • During 2023, Port sold inventory to Sail for $80,000. 75% of this inventory was resold by Sail to outside parties during that year. • During 2022, Sail sold $100,000 worth of inventory to Port, 70% of which was sold to outsiders during the year. • During 2023, Sail sold inventory to Port for $120,000. 60% of this inventory was resold by Port to outside parties during that year. • On April 1, 2023, Port sold land to Sail for $190,000. Port originally acquired the land for $40,000 in 2015. • All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 50%. Assume that any gain on the sale of land is fully taxable.

19.1)

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Compute Port's goodwill at the date of acquisition.

19.2) Prepare a schedule detailing the realized and unrealized before tax and after-tax profits or gains resulting from the intercompany transactions for 2023.

19.3)

Compute Port's consolidated net income for 2023.

19.4) Calculate the non-controlling interest that would appear on the consolidated balance sheet as at December 31, 2023.

19.5)

Calculate Consolidated Retained Earnings as at December 31, 2023.

19.6) 2023.

Prepare Port's Consolidated Statement of Financial Position as at December 31,

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20) Prince Inc. (Prince) purchased 90% of the voting shares of Charming Company (Charming) for $720,000 on July 1, 2020. On that date, Charming's common shares and retained earnings were valued at $200,000 and $400,000, respectively. Unless otherwise stated, assume that Prince uses the cost method to account for its investment in Charming. Prince uses the fair value enterprise method to value the noncontrolling interest. Charming's fair values approximated its carrying values with the exception of the following: • Charming's bonds payable had a fair value which was $50,000 higher than their carrying value. The bonds payable mature on July 1, 2030. Both companies use straight line amortization. The financial statements of both companies for the year ended June 30, 2023 are shown below: IncomeStatements Prince Inc.

Charming Company

Sales

$500,000

$400,000

Other revenues

100,000

60,000

Cost of goods sold

400,000

320,000

Depreciation/amortization expense

20,000

10,000

Other expenses

60,000

30,000

Income tax expense

48,000

40,000

Net income

$72,000

$60,000

Less: expenses

RetainedEarningsStatements Prince Inc.

Charming Company

Balance, July 1, 2022

$420,000

$240,000

Net income

72,000

60,000

Less: dividends

(22,000)

(30,000)

Retained earnings, June 30, 2023

$470,000

$270,000

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BalanceSheets Prince Inc.

Charming Company

Cash

$150,000

$120,000

Accounts receivable

350,000

160,000

Inventory

200,000

180,000

Investment in Charming.

720,000

---------

Land

40,000

---------

Equipment (net)

360,000

240,000

Total assets

$1,820,000

$700,000

Current liabilities

$600,000

$130,000

Bonds payable

250,000

100,000

Common shares

500,000

200,000

Retained earnings

470,000

270,000

Total liabilities and equity

$1,820,000

$700,000

OtherInformation: • During August of 2021, Prince sold $60,000 worth of inventory to Charming, 80% of which was sold to outsiders during the year. During October of 2022, Prince sold inventory to Charming for $90,000 of which 65% of this inventory was resold by Charming to outside parties in June 2023. • During September of 2021, Charming sold $90,000 worth of inventory to Prince, 50% of which was sold to outsiders during the year. During April of 2023, Charming sold inventory to Prince for $120,000. 80% of this inventory was resold by Prince to outside parties in May 2023. • During May of 2023, Charming sold a plot of land to Prince for $40,000. The land was recorded at cost of $24,000 on Charming's books prior to the sale. Prince has not yet sold the land. • Charming rents office space from Prince. The other expenses include rent expense of $20,000. • The rate of gross profit on all intercompany sales is 25% of sales. The effective tax rate for both companies is 40%. Assume that any gain on the sale of land is fully taxable.

20.1)

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Compute Prince's goodwill at the date of acquisition.

20.2) Prepare a schedule detailing the realized and unrealized before tax and after-tax profits or gains resulting from the intercompany transactions for 2023.

20.3) Prepare Prince's consolidated income statement for the year ended June 30, 2023. Show the allocation of the consolidated net income between the controlling and noncontrolling interests.

20.4)

Calculate the non-controlling interest (Balance Sheet) as at June 30, 2023.

20.5)

Calculate consolidated retained earnings as at June 30, 2023.

20.6)

Calculate consolidated balance sheet as at June 30, 2023.

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20.7) Assuming that Prince uses the equity method to account for its investment in Charming, compute the balance in its investment in Charming account at June 30, 2023.

21) The holdback of the unrealized gross profit in ending inventory is accomplished by decreasing sales. ⊚ ⊚

true false

22) Profits held back as unrealized from the consolidated perspective are not eliminated on the separate-entity financial statements. ⊚ ⊚

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true false

Answer Key Test name: ch 6 1) B 2) A 3) C 4) C 5) A 6) C 7) A 8) A 9) C 10) C 11) B 12) A 13) Section Break 13.1) C 13.2) A 13.3) A 13.4) B 14) Section Break 14.1) A 14.2) A 14.3) C 14.4) D 15) Section Break 15.1) D 15.2) C 15.3) A Version 1

15.4) A 15.5) D 15.6) C 15.7) C 15.8) B 15.9) C 15.10) D 15.11) A 15.12) C 15.13) D 15.14) B 15.15) A 16) Section Break 16.1) C 16.2) B 16.3) A 16.4) C 16.5) B 16.6) C 16.7) A 16.8) A 16.9) B 16.10) C 16.11) D 16.12) A 17) Section Break 17.1) A 17.2) D 17.3) B 17.4) D Version 1

17.5) A 17.6) A 17.7) A 18) Section Break 19) Section Break 20) Section Break 21) FALSE 22) TRUE

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Student name:__________ 1) Picture Company (Picture) owns 90% of Snapshot Inc. (Snapshot). On January 1, 2022, the investment in Snapshot account had a balance of $350,000 and Snapshot's common shares and retained earnings on that date were valued at $200,000 and $100,889, respectively. Moreover, the assets to which the remaining acquisition differential relates had a remaining life of 10 years on that date. Picture uses the equity method to account for its investment in Snapshot. On January 1, 2022, Picture sold a depreciable asset to Snapshot for cash of $50,000 resulting in a before-tax gain of $10,000. On January 1, 2023, Snapshot sold a depreciable asset to Picture for cash of $80,000 resulting in a before-tax gain of $20,000. Both assets had remaining useful lives of 10 years on their respective sale dates. Note: neither transaction was a capital gain for tax purposes. The tax rate for both companies is 30%. Snapshot's net income and dividends for 2022 and 2023 are shown below.

1.1)

2022

2023

Net Income

$80,000

$120,000

Dividends

$20,000

$30,000

What is the net after-tax reduction to consolidated net income in 2022?

A) $5,670 B) $6,300 C) $7,000 D) $9,000

1.2) How much intercompany (after-tax) profit was realized during 2023 on Picture's 2022 sale of the depreciable asset to Snapshot?

A) $1,000 B) $2,000 C) $700 D) $630.

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1.3) What effect does the realized intercompany profit of Picture's 2022 sale of the depreciable asset to Snapshot have on the 2023 consolidated income statement?

A) A decrease to depreciation expense of $1,000 and an increase to income tax expense of $300. B) An increase to depreciation expense of $1,000 and a decrease to income tax expense of $300. C) No effect on the 2023 consolidated income statement. D) A decrease to depreciation expense of $700.

1.4) What is the net after-tax reduction to consolidated net income in 2023 from Snapshot's 2023 sale of the depreciable asset to Picture?

A) $11,340 B) $14,000 C) $12,600 D) $18,000

1.5) Which of the following is the correct journal entry to record the realized profit in 2023 from the Snapshot sale of the depreciable asset to Picture?

A) Debit Investment in Snapshot Equity method income

Credit

1,400 1,400

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Debit Equity method income

Credit

1,400

Investment in Snapshot

1,400

C) Debit Investment in Snapshot

Credit

1,260

Equity method income

1,260

D) Debit Depreciation expense

2,000

Income tax expense

600

Credit

Gain on sale of depreciable asset

2,000

Deferred income tax

600

1.6) 2023?

What is the total amount of unrealized profit (after-tax) remaining at the end of

A) $23,100 B) $18,200 C) $22,400 D) $21,000

1.7)

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What is the amount of the change to the acquisition differential for 2023?

A) $7,200 B) $8,800 C) $10,000 D) $7,920

1.8)

What is the balance in the Investment in Snapshot account at the end of 2023?

A) $485,000 B) $350,000 C) $444,960 D) $452,220

2) Portland Inc. (Portland) owns 80% of Seattle Inc. (Seattle) and uses the cost method to account for its investment. The 2023 income statements of both companies are shown below. Portland

Seattle

Gross profit

$100,000

$50,000

Miscellaneous revenues (losses)

(30,000)

(20,000)

Depreciation expense

(20,000)

(15,000)

Income tax expense

(20,000

(6,000)

Net Income

$30,000

$9,000

On January 1, 2023, Seattle acquired equipment for $7,000 and sold it the same day to Portland for $12,000. The equipment had a remaining useful life of 10 years on that date. Both companies are subject to an effective tax rate of 40%.

2.1) Which of the following is the correct amount of gross profit appearing on Portland's 2023 consolidated income statement?

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A) $145,000 B) $147,600 C) $150,000 D) $153,000

2.2) Which of the following is the correct amount of miscellaneous revenues (losses) appearing on Portland's 2023 consolidated income statement?

A) $45,000 B) $53,000 C) $50,000 D) $55,000

2.3) Which of the following is the correct amount of depreciation expense appearing on Portland's 2023 consolidated income statement?

A) $34,700 B) $34,850 C) $34,500 D) $35,000

2.4) What is the correct amount of income tax expense appearing on Portland's 2023 consolidated income statement?

A) $24,860 B) $24,200 C) $26,000 D) $27,800

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2.5) Which of the following is the correct amount of consolidated net income attributable to the noncontrolling interest in Portland's 2023 consolidated income statement?

A) $2,340 B) $1,260 C) $1,200 D) $2,700

2.6) Which of the following is the correct amount of consolidated net income attributable to the shareholders of Portland (i.e., the controlling interest) in Portland's 2023 consolidated income statement?

A) $35,040 B) $35,832 C) $36,300 D) $39,360

2.7) Which of the following is the correct amount of deferred taxes appearing on Portland's 2023 consolidated balance sheet?

A) $1,800 B) $2,000 C) $1,140 D) $2,700

2.8) Assuming Portland uses the equity method to account for the investment in Seattle, which of the following is the correct journal entry to record the realized after-tax profit from the sale of the equipment in 2023? Version 1

A) Debit Investment in Snapshot

Credit

500

Equity method income

500

B) Debit Equity method income

Credit

240

Investment in Snapshot

240

C) Debit Investment in Snapshot

Credit

240

Equity method income

240

D) Debit Accumulated depreciation

500

Income tax expense

200

Credit

Depreciation expense

500

Deferred income tax

200

2.9) Which of the following statements correctly describes the effect on the consolidated balance sheet when the gain on the intercompany sale of the equipment is eliminated?

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A) The equipment is reduced to its original cost to the entity and the deferred income taxes are increased. B) The equipment is decreased to its original cost to the entity and the deferred income taxes are decreased. C) There is no change to the consolidated balance sheet when the gain is eliminated. D) The net effect of the elimination of the gain increases consolidated retained earnings.

3) Pepper Ltd. (Pepper) owns 75% of Sage Corp. (Sage) and uses the equity method to account for its investment. Pepper has a $240,0000 bond issue outstanding that pays 12% interest annually. Interest payment dates are June 30 and December 31 each year. The bonds were originally issued at a discount. The unamortized bond discount is $20,000. The bonds mature on January 1, 2033. On January 1, 2023, Sage purchased $120,000 par value, 12% bonds for $100,000. Straight line amortization is used to amortize the discount. Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company. During 2023, Sage earned a net income of $80,000 and paid dividends of $20,000.

3.1) Which of the following is the correct pre-tax gain or loss to Sage on the intercompany purchase of the bonds?

A) $20,000 loss B) Nil C) $20,000 gain D) $40,000 loss

3.2) Which of the following is the correct pre-tax gain or loss to Pepper on the intercompany sale of the bonds?

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A) $20,000 loss B) $10,000 loss C) Nil D) $10,000 gain

3.3) What would be the pre-tax gain or loss on bond retirement on the consolidated income statement for year ended December 31, 2023?

A) $10,000 gain B) $10,000 loss C) $7,000 gain D) $9,000 gain

3.4) What amount of interest expense, excluding amortization of the bond discount (if any), would have to be eliminated in 2023 as a result of the intercompany sale of the bonds?

A) None B) $12,000 C) $12,200 D) $14,400

3.5) What amount would be shown on Pepper's consolidated balance sheet at December 31, 2023 under bonds payable?

A) $110,000 B) $111,000 C) $112,000 D) $220,000

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4) On January 1, 2022, Pacer Corporation (Pacer) acquired 80% of Sprint Ltd. (Sprint) Corp. for $500,000. Please uses the cost method to account for its investment. On January 1, 2022, Sprint's retained earnings and common shares were $350,000 and $110,000, respectively. Sprint's book values did not differ materially from its fair values on the date of acquisition with the following exceptions: • Inventory had a fair value that was $20,000 higher than its book value. This inventory was sold to outsiders during 2022. • A patent (which had not previously been accounted for) was identified on the acquisition date with an estimated fair value of $15,000. The patent had an estimated useful life of 3 years. The financial statements of Pacer and Sprint for the year ended December 31, 2023 are shown below: IncomeStatements Pacer Corporation

Sprint Ltd.

Sales

$500,000

$300,000

Other revenues

300,000

120,000

Cost of goods sold

400,000

240,000

Depreciation/amortization expense

20,000

10,000

Other expenses

80,000

40,000

Income tax expense

120,000

52,000

Net income

$180,000

$78,000

Less: expenses

RetainedEarningsStatements Pacer Corporation

Sprint Ltd.

Balance, January 1, 2023

$250,000

$350,000

Net income

180,000

78,000

Less: dividends

(30,000)

(38,000)

Retained Earnings, December 31, 2023

$400,000

$390,000

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BalanceSheets Pacer Corporation

Sprint Ltd.

Cash

$50,000

$25,000

Accounts receivable

100,000

250,000

Inventory

50,000

250,000

Investment in Sprint Ltd.

500,000

---------

Land

----------

25,000

Equipment

400,000

200,000

Accumulated depreciation

(250,000)

(150,000)

Total assets

$850,000

$600,000

Current liabilities

$320,000

$62,000

Dividends payable

30,000

38,000

Common shares

100,000

110,000

Retained earnings

400,000

390,000

Total liabilities and equity

$850,000

$600,000

Other Information: • Pacer sold land to Sprint at a profit of $10,000 during 2023. This land is still owned by Sprint on December 31, 2023. • On January 1, 2023, Sprint sold equipment to Pacer at a price that was $20,000 higher than its book value. The equipment had a remaining useful life of 4 years from that date. • On January 1, 2023, Pacer's inventories contained items purchased during 2022 from Sprint for $12,000. This entire inventory was sold to outsiders during 2023. During 2023, Pacer sold inventory to Sprint for $50,000. 70% of this inventory is still in Sprint's warehouse at year end. All sales are priced at a 25% mark-up above cost, regardless of whether the sales are internal or external. • There was a goodwill impairment loss of $4,000 during 2023. • Both companies are subject to an effective tax rate of 40%. Note: disregard capital gains for tax purposes. • Both companies use straight line amortization.

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4.1) Which of the following is the correct amount of goodwill arising from this business combination on the acquisition date?

A) Nil B) $72,000 C) $130,000 D) $220,000

4.2) Which of the following is the correct amount of noncontrolling interest appearing on Pacer's consolidated balance sheet at January 1, 2022?

A) $100,000 B) $101,800 C) $125,000 D) $185,000

4.3) Which of the following is the correct amount of goodwill appearing on Pacer's December 31, 2023 consolidated balance sheet?

A) Nil B) $126,000 C) $224,000 D) $240,000

4.4) Which of the following is the correct amount of sales revenue appearing on Pacer's consolidated income statement for the year ended December 31, 2023?

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A) $750,000 B) $790,000 C) $800,000 D) $810,000

4.5) Which of the following would be the correct amount of other revenue appearing on Pacer's consolidated income statement for the year ended December 31, 2023?

A) $359,600 B) $399,600 C) $410,000 D) $420,000

4.6) Which of the following is the correct total amount of before-tax profit from intercompany inventory sales that was realized during 2023?

A) $2,400 B) $5,400 C) $7,000 D) $10,000

4.7) Which of the following is the correct amount of unrealized before-tax profits in inventory at the end of 2023?

A) $7,000 B) $3,000 C) $5,000 D) $8,000

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4.8) Which of the following is the correct amount of patents appearing on Pacer's consolidated balance sheet as at December 31, 2023?

A) $4,000 B) $5,000 C) $12,000 D) $15,000

4.9) Which of the following is the correct amount of changes to the acquisition differential on December 31, 2023?

A) $4,000 B) $5,000 C) $9,000 D) $10,000

4.10) Which of the following is the correct amount of depreciation/amortization expense appearing on the consolidated income statement for the period ending December 31, 2023?

A) $30,000 B) $35,000 C) $40,000 D) $32,000

4.11) Which of the following is the correct amount of consolidated cost of goods sold appearing on the consolidated income statement for the period ending December 31, 2023?

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A) $635,400 B) $594,600 C) $644,600 D) $640,000

4.12) Which of the following is the correct consolidated net income attributable to the non-controlling interest for 2023?

A) $12,288 B) $11,280 C) $11,688 D) $15,600

4.13) Assuming Pacer is using the equity method to account for its investment in Sprint, which of the following is the correct amount of the "Investment in Sprint" account that would appear on Pacer's separate entity balance sheet at December 31, 2023?

A) $487,400 B) $500,000 C) $497,600 D) $472,800

4.14) Which of the following is the correct amount for land appearing on the December 31, 2023 consolidated balance sheet?

A) $15,000 B) $17,000 C) $21,000 D) $25,000

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4.15) Which of the following is the correct amount for deferred income taxes appearing on the December 31, 2023 consolidated balance?

A) $9,760 B) $13,760 C) $14,800 D) $12,800

4.16) Which of the following is the correct amount for inventories appearing on the December 31, 2023 consolidated balance sheet?

A) $293,000 B) $295,800 C) $297,000 D) $300,000

4.17) Assuming Pacer is using the equity method to account for its investment in Sprint, which of the following is the correct amount of equity method income that would appear on Pacer's separate entity income statement for the year ending December 31, 2023?

A) $30,400 B) $38,952 C) $49,152 D) $62,400

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5) On January 1, 2022, Ping Ltd. (Ping) acquired 75% of Sing Corp. (Sing) for $1,350,000. Ping uses the cost method to account for its investment in Sing. On January 1, 2022, Sing's retained earnings and common shares were $600,000 and $220,000, respectively. The fair values of Sing's identifiable net assets were equal to their book on the date of acquisition with the following exceptions: • Inventory had a fair value that was $40,000 higher than its book value. • A patent (which had not previously been accounted for) was identified on the acquisition date with an estimated fair value of $60,000. The patent had an estimated useful life of 10 years. The financial statements of Ping and Sing for the year ended December 31, 2023 are shown below: IncomeStatements Ping Ltd.

Sing Corp.

Sales

$1,200,000

$800,000

Other revenues

600,000

240,000

Cost of goods sold

800,000

480,000

Depreciation expense

40,000

20,000

Other expenses

160,000

80,000

Income tax expense

240,000

104,000

Net income

$560,000

$356,000

Less: expenses

RetainedEarningsStatements Ping Ltd.

Sing Corp.

Balance, January 1, 2023

$400,000

$700,000

Net income

560,000

356,000

Less: dividends

(100,000)

(95,000)

Balance, December 31, 2023

$860,000

$961,000

BalanceSheets:

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Ping Ltd.

Sing Corp.

Cash

$339,250

$180,000

Accounts receivable

500,000

325,000

Inventory

410,000

500,000

Investment in Sing

1,350,000

Investment in Sing bonds

60,750 50,000

Land

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Equipment

1,000,000

676,000

Accumulated depreciation

(500,000)

(300,000)

Total assets

$3,160,000

$1,431,000

Current liabilities

$1,300,000

$119,000

Bonds payable

150,000

Less: bond discount

(19,000)

Common shares

1,000,000

220,000

Retained earnings

860,000

961,000

Total liabilities and equity

$3,160,000

$1,431,000

Other Information: • Sing sold land to Ping at a profit of $26,000 during 2022. This land is still the property of Ping. • On January 1, 2023, Ping sold equipment to Sing for $70,000. The original cost of the equipment was $130,000 and the book value was $90,000. The equipment had a remaining useful life of 5 years from that date. • On January 1, 2023, Sing's inventories contained items purchased from Ping for $108,000. This entire inventory was sold to outsiders during the year. Also, during 2023, Sing sold inventory to Ping for $30,000. 60% of this inventory is still in Ping's warehouse at year end. All sales are priced at a 20% mark-up above cost, regardless of whether the sales are internal or external. • There was a goodwill impairment loss of $20,000 during 2022. • Both companies are subject to an effective tax rate of 30%. • Both companies use straight line amortization exclusively. • On January 1, 2023, Ping acquired half of Sing's bonds for $60,000. • The bonds carry a coupon rate of 10% and mature on January 1, 2043. The initial bond issue took place on January 1, 2023. The total discount on the issue date of the bonds was $20,000. • Gains and losses from intercompany bond holdings are to be allocated to the two companies when consolidated statements are prepared.

5.1) Which of the following is the correct amount of goodwill arising from this business combination on January 1, 2022?

A) $880,000 B) $1,080,000 C) $980,000 D) $820,000

5.2)

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What effect would the intercompany bond sale have on Ping?

A) Ping would record a loss $5,000. B) Ping would record a loss of $4,000. C) Ping would record a gain of $14,000. D) Ping would record a gain of $15,000.

5.3)

What effect would the intercompany bond sale have on Sing?

A) Sing would record a loss $14,000. B) Sing would record a loss of $10,000. C) Sing would record a gain of $4,000. D) Sing would record a gain of $10,000.

5.4) What effect would the intercompany bond sale have on Ping's December 31, 2023 consolidated income statement?

A) Ping would record a loss of $15,000. B) Ping would record a loss of $10,000. C) Ping would record a gain of $5,000. D) Ping would record a gain of $15,000.

5.5) What would be the carrying value of the bonds payable appearing on Ping's December 31, 2023 consolidated balance sheet?

A) $64,500 B) $65,000 C) $65,500 D) $131,000

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5.6) Which of the following is the correct interest elimination loss/gain on the consolidated income statement for the intercompany bond acquisition?

A) Nil B) $250 C) $1,000 D) $5,000

5.7) Which of the following is the correct amount of sales revenue that would appear on Ping's consolidated income statement for the year ended December 31, 2023?

A) $2,000,000 B) $1,930,000 C) $1,970,000 D) $1,770,000

5.8) Which of the following is the correct amount of other revenue appearing on Ping's consolidated income statement for the year ended December 31, 2023?

A) $820,000 B) $840,000 C) $768,750 D) $793,750

5.9) Which of the following is the correct amount of before-tax profit from intercompany inventory sales that was realized during 2023?

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A) $12,000 B) $30,000 C) $18,000 D) $20,000

5.10) Which of the following is the correct amount of after-tax unrealized profits in inventory at the end of 2023?

A) $2,100 B) $3,000 C) $12,600 D) $1,575

5.11) Which of the following is the correct amount of consolidated patents appearing on Ping's consolidated balance sheet as at December 31, 2023?

A) $60,000 B) $54,000 C) $48,000 D) $36,000

5.12) Which of the following is the correct amount of remaining acquisition differential on December 31, 2023?

A) $948,000 B) $860,000 C) $908,000 D) $980,000

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5.13) How will the before-tax profit/(loss) from the intercompany sale of equipment be realized on the consolidated income statement for the period ended December 31, 2023?

A) Depreciation expense will be decreased by $5,000. B) Depreciation expense increased by $5,000. C) Other revenues will be decreased by $5,000. D) Other revenues will be increased by $5,000.

5.14) Which of the following is the correct amount of before tax, unrealized profit/(loss) remaining from the intercompany sale of equipment at December 31, 2023?

A) $15,000 loss B) $15,000 profit C) Losses are not recognized in intercompany transactions. D) $5,000 gain

5.15) Which of the following is the correct amount sheet for deferred income taxes appearing on the December 31, 2023 consolidated balance?

A) $1,275 B) $14,700 C) $6,675 D) $2,700

5.16) Which of the following is the correct amount of noncontrolling interest appearing on the consolidated balance sheet at December 31, 2023?

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A) $515,513 B) $522,250 C) $521,725 D) $517,175

6) Pep Ltd. (Pep) owns 70% of Step Corp. (Step). On January 1, 2023, Pep sold equipment to its subsidiary company, Step for $50,000. The equipment had an original cost of $80,000. The net book value of the equipment on January 1, 2023 was $40,000 and had a remaining useful life of 5 years. Both companies have a tax rate of 30% and a December 31 year end. Pep uses the equity method to account for its investment in Step.

6.1) Which of the following is the correct adjustment to consolidated net income on December 31, 2023 for the intercompany equipment sale?

A) Increase - $7,000 B) Decrease - $5,600 C) Increase - $16,800 D) Decrease - $8,000

6.2) Which of the following is the correct amount for deferred income taxes appearing on the December 31, 2024 consolidated balance?

A) $1,800 B) $3,000 C) Nil D) $2,400

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6.3) Which of the following is the correct carrying amount of the equipment on the consolidated balance sheet for December 31, 2023?

A) $32,000 B) $40,000 C) $48,000 D) $50,000

6.4) Which of the following is the correct journal entry to record the realized equipment gain on December 31, 2023?

A) Debit Investment in Step

Credit

1,400

Equity method income

1,400

B) Debit Equity method income

Credit

2,000

Investment in Step

240

C) Debit Investment in Step Equity method income

Credit

980 980

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Debit Accumulated depreciation

2,000

Income tax expense

600

Credit

Depreciation expense

2,000

Deferred income tax

600

7) Hot Inc. owns 60% of Cold Inc, which it purchased on January 1, 2022 for $540,000. On that date, Cold's retained earnings and common shares were valued at $100,000 and $250,000, respectively. Cold's book values approximated its fair values on that date, with the exception of the company's inventory and a patent identified on acquisition. The patent had an estimated useful life of 10 years from the date of acquisition. The inventory had a book value that was $10,000 in excess of its fair value, while the patent had a fair value of $50,000. Hot uses the equity method to account for its investment in Cold Inc. The inventory on hand on the acquisition date was sold to outside parties during the year. Hot Inc. sold equipment to Cold on January 1, 2022, at a loss of $15,000. On January 1, 2023, Cold sold equipment to Hot at a gain of $10,000. Both assets had a remaining useful life of 5 years on the date of their intercompany sale. During 2022, Cold sold inventory to Hot in the amount of $18,000. This inventory was sold to outside parties during 2023. During 2023, Hot sold inventory to Cold for $45,000. 45% of this inventory was still in Cold's warehouse on December 31, 2023. All sales (both internal and external) are priced to provide the seller with a mark-up of 50% above cost. Cold's Net Income and Dividends for 2022 and 2023 are shown below. 2022

2023

Net income

$180,000

$200,000

Dividends

$20,000

$60,000

Both companies are subject to a tax rate of 20%.

7.1)

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Compute the goodwill on the acquisition date.

7.2) Prepare a schedule of realized and unrealized profits/losses for 2022 and 2023 for both companies. Show your before-tax, tax and after-tax amounts.

7.3) 2023.

Compute the amount of deferred income tax asset/liability as at December 31,

7.4) 2023.

Compute the balance in Hot's Investment in Cold account as at December 31,

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8) Pro Inc. (Pro) acquired 75% of Snap Corporation (Snap) on January 1, 2019 for $217,500, when Snap's retained earnings were $80,000 and the acquisition differential was attributable entirely to goodwill. There were impairment losses to the goodwill of $6,400 and $1,600 in 2020 and 2023, respectively. Pro uses the cost method to account for its investment. The financial statements of Pro and Snap for the year ended December 31, 2023 are shown below: Income Statements Pro Inc Miscellaneous revenues

Snap Corporation $1,300,000

Interest revenues

11,250

Dividend revenue

15,000

$400,000

Less: expenses Miscellaneous expense

864,000

259,200

Interest expense

19,400

Income tax expense

198,000

48,000

Net income

$264,250

$73,400

Retained Earnings Statements Pro Inc

Snap Corporation

Balance, January 1, 2023

$490,000

$180,000

Net income

264,250

$73,400

Less: dividends

(126,000)

(20,000)

Balance, December 31, 2023

$628,250

$233,400

Balance Sheets Pro Inc

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Snap Corporation

Miscellaneous assets

$1,210,000

$745,200

Investment in Snap shares

217,500

---------

Investment in Snap bonds

122,250

----------

Total assets

$1,549,750

$745,200

Miscellaneous liabilities

$621,500

$150,000

Bonds payable

200,000

Bond premium

1,800

Common shares

300,000

160,000

Retained earnings

628,250

233,400

Total liabilities and equity

$1,549,750

$745,200

Other Information: • Snap has 10% par value bonds outstanding in the amount of $200,000 which mature on December 31, 2026. The bonds were issued at a premium. On January 1, 2023, the unamortized premium amounted to $2,400. Snap uses the straight line method to amortize the premium. • On January 1, 2023, Pro acquired $120,000 face value of Snap's bonds for $123,000. Pro also uses the straight line method to amortize any bond premium or discount. • Both companies are subject to a 40% tax rate. • Gains and losses from intercompany bond holdings are to be allocated to the two companies when consolidated financial statements are prepared.

8.1)

Calculate the goodwill as at December 31, 2023.

8.2) Prepare a summary of intercompany bond transactions including the gain or loss for each company (before- tax) as well as the effect on the consolidated entity.

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8.3) tax).

Prepare a summary of the intercompany interest revenues and expenses (before-

8.4)

Prepare a detailed calculation of consolidated net income for 2023.

8.5) Prepare Pro's consolidated income statement for the year ended December 31, 2023. Show the allocation of consolidated net income between the controlling and noncontrolling shareholders.

8.6) 2023.

Prepare a detailed calculation of consolidated retained earnings as at January 1,

8.7) Prepare a detailed calculation of consolidated retained earnings as at December 31, 2023.

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8.8) Prepare a Statement of Consolidated Retained Earnings for the year ended December 31, 2023 for Pro Inc.

8.9)

prepare acalculation of noncontrolling interest as at December 31, 2023

8.10)

Prepare Pro's Consolidated Balance Sheet as at December 31, 2023.

8.11) Assuming that Pro uses the equity method, prepare a computation showing the balance in Pro's investment in Snap account on December 31, 2023.

9) Separate-entity statements under the cost method and the equity method are the same except for the investment account. ⊚ ⊚

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true false

10) Consolidated net income is the same no matter if the transactions are upstream or downstream. ⊚ ⊚

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true false

Answer Key Test name: ch 7 1) Section Break 1.1) B 1.2) C 1.3) A 1.4) C 1.5) C 1.6) B 1.7) B 1.8) D 2) Section Break 2.1) C 2.2) D 2.3) C 2.4) B 2.5) B 2.6) A 2.7) A 2.8) C 2.9) A 3) Section Break 3.1) C 3.2) B 3.3) D 3.4) D 3.5) B 4) Section Break Version 1

4.1) C 4.2) C 4.3) B 4.4) A 4.5) A 4.6) B 4.7) A 4.8) B 4.9) C 4.10) A 4.11) B 4.12) A 4.13) A 4.14) A 4.15) D 4.16) A 4.17) B 5) Section Break 5.1) A 5.2) D 5.3) B 5.4) C 5.5) C 5.6) B 5.7) C 5.8) D 5.9) D 5.10) A 5.11) C 5.12) C Version 1

5.13) A 5.14) A 5.15) A 5.16) A 6) Section Break 6.1) B 6.2) A 6.3) A 6.4) A 7) Section Break 8) Section Break 9) FALSE 10) TRUE

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Student name:__________ 1) Ace Inc. (Ace) owns 80% of Base Corporation's (Base) outstanding voting shares. Under which of the following scenarios would Ace's ownership percentage of Base change?

A) Base. announces a 2-for-1 stock split to all its common shareholders. B) Base issues an additional 10,000 voting shares; A acquires 8,000 shares of the new issue. C) Base issues an additional 10,000 voting shares; A acquires 6,400 shares of the new issue. D) Base retires 20,000 voting shares, and in doing so, buy back 16,000 shares from A.

2) Excellent Corp. (Excellent) currently controls Yes Corp. (Yes). Excellent purchases and sells Yes's voting shares on the open market but always ensures that it maintains a controlling interest over Yes. Which of the following statements pertaining to Excellent's buying and selling activity is correct?

A) Excellent's activity has no effect on the non-controlling interest. B) As Excellent sells shares of Yes, the non-controlling interest increases. C) As Excellent sells shares of Yes, the noncontrolling interest decreases. D) As Excellent buys shares of Yes, the noncontrolling interest increases.

3) Over a 2 month period, Ace Limited (Ace) made 25 separate share purchases of Blaze Corporation (Blaze) in an attempt to acquire control of Blaze. What is the appropriate treatment of the numerous small purchases?

A) An acquisition differential must be computed following each purchase. B) The equity method must be adopted retroactively once 20% ownership is obtained. C) The purchases should all be grouped together and treated as a single block purchase. D) The cost method should be used until a controlling interest is acquired.

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4) A owns 80% of B, which in turn owns 55% of C. Which of the following statements is correct?

A) A has direct control over C. B) A has indirect control over C. C) A has no control over C. D) A has contingent control over C.

5) X owns 70% of Y, which in turn owns 25% of Z. X, also owns 35% of Z. Which of the following statements is correct?

A) X has control over Z. B) X has significant influence over Z. C) X has joint control over Z. D) X does not control Z.

6) What is the amount of common shares appearing on the December 31, 2023 consolidated balance sheet?

A) $500,000. B) $660,000. C) $770,000. D) $860,000.

7) What is the correct method of treating an acquisition differential related to the acquisition of the subsidiary's preferred shares by the parent?

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A) It should be allocated to the identifiable net assets or goodwill. B) It should be pro-rated across the subsidiary's identifiable assets and liabilities. C) It should be expensed in the current year. D) It should be charged to consolidated retained earnings or credited to contributed surplus.

8) Which of the following is a correct statement pertaining to consolidation of a subsidiary with preferred shares?

A) If the preferred shares are non-cumulative, the current year's net income would be allocated to the preferred shares whether or not preferred dividends are declared. B) If the preferred shares are non-cumulative, the current year's net income would only be allocated to preferred shares if preferred dividends are declared. C) If the preferred shares are cumulative, the current year's net income would be allocated to the preferred shares only if dividends are declared in the year. D) When preferred shares are cumulative, the preferred shareholders are only entitled to income equal to the yearly dividend, if the company has not suffered a loss for the year.

9) Which of the following is NOT included in the amount of shareholders' equity allocated to the holders of the preference shares on the consolidated balance sheet?

A) The stated or par value of the preference shares. B) Cumulative dividends in arrears on the preference shares. C) Contributed surplus arising from the issue of preference shares. D) Redemption premium payable on redemption of preference shares.

10) If the carrying amount of the subsidiary's preferred shares is $240,000 and the parent company acquires 60% of the subsidiary's preferred shares at a cost of $150,000, what is the noncontrolling interest's share in the preferred shares after the purchase by the parent?

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A) $90,000 B) $96,000 C) $120,000 D) $240,000

11) If the carrying amount of the subsidiary's preferred shares is $240,000 and the parent company acquires 60% of the subsidiary's preferred shares at a cost of $150,000, what effect will the transaction have on consolidated shareholders' equity?

A) Non-controlling interest will decrease by $144,000 and retained earnings will decrease by $6,000. B) Non-controlling interest will decrease by $144,000 and contributed surplus will increase by $6,000. C) Non-controlling interest will increase by $144,000 and retained earnings will increase by $6,000. D) There will be no change in consolidated shareholders' equity as a result of this transaction.

12) If the carrying amount of the subsidiary's preferred shares is $240,000 and the parent company acquires 60% of the subsidiary's preferred shares at a cost of $150,000, how much will the amount of cash on the consolidated balance sheet change as a result of this transaction?

A) It will not change. B) It will increase by $150,000. C) It will decrease by $144,000. D) It will decrease by $150,000.

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13) Pal Corporation (Pal) obtained control of Sister Ltd. (Sister) by purchasing 60% of Sister's 100,000 issued and outstanding voting common shares. Two years later on January 1, 2023, Pal purchased an additional 12,000 voting common shares. The noncontrolling interest had a carrying amount of $74,000 on January 1, 2023, just prior to the sale. What portion of the noncontrolling interest has been sold to the controlling interest?

A) $22,200 B) $12,000 C) $40,000 D) $16,000

14) Which of the following statements pertaining to a sale of a subsidiary's shares by the parent company is INCORRECT?

A) A loss of control will result in a remeasurement to fair value of any investment retained in the former subsidiary. B) A decrease in ownership where the parent still maintains control is treated as an equity transaction. C) When the parent sells the subsidiary shares, the cash received from the sale appears on the consolidated cash flow statement. D) When the parent sells the subsidiary shares, the subsidiary's net assets are revalued.

15) In 2022, Pop Company (Pop) owned 800 shares (80%) of the shares of Sold Inc. (Sold). Sold had 1000 issued and outstanding voting common shares. In 2023, Pop disposed of 400 shares of Sold. Which of the following statements pertaining to this disposition is FALSE?

A) This transaction is treated as an equity transaction. B) Any gain or loss resulting from the disposition is reported in net income. C) The remaining 400 shares owned by Pop are remeasured at fair value. D) Consolidated financial statements will no longer be required.

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16) Prancer Inc. (Prancer) purchased 40,000 voting shares out of Starter Corporation's 50,000 outstanding voting shares for $320,000 on January 1, 2023. On the date of acquisition, Starter's common shares and retained earnings were valued at $120,000 and $180,000, respectively. Starter's book values approximated its fair values on the acquisition date with the exception of a patent and a trademark, neither of which had been previously recorded. The fair values of the patent and trademark on the date of acquisition were $15,000 and $45,000 respectively. On January 2, 2023, Prancer sold 7,000 shares of Starter on the open market for $84,000. Prancer uses the equity method to account for its investment in Starter.

16.1)

What is the amount of goodwill arising from this business combination?

A) $60,000 B) $100,000 C) $160,000 D) $40,000

16.2) Which of the following is the correct percentage of shares sold by Prancer of its investment in Starter?

A) 14% B) No change. C) 66% D) 17.5%

16.3)

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What is Prancer's ownership interest in Starter after its sale?

A) 66% B) 14% C) 42% D) 80%

16.4) Which of the following is the correct carrying amount of the "Investment in Starter" account after the sale?

A) $313,000 B) $264,000 C) $280,000 D) $320,000

16.5) Which of the following is the amount of gain or loss on the sale of the 7,000 shares?

A) A loss of $12,250. B) A loss of $70,000. C) A gain of $12,250. D) A gain of $28,000.

16.6)

What is the amount of acquisition differential (including goodwill) after the sale?

A) $34,000 B) $66,000 C) $200,000 D) $100,000

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16.7) What is the amount of the noncontrolling interest after the disposition of the Starter shares owned by Prancer?

A) $102,000 B) $350,000. C) $136,000. D) $150,000.

16.8) Which of the following statements best describes how the gain or loss on sale of the Starter shares will be reported in the consolidated financial statements?

A) The gain or loss is credited (charged) directly to shareholders' equity. B) The gain or loss is not reported on the consolidated financial statements since Prancer still controls Starter. C) The gain or loss is reported on the consolidated income statement as an extraordinary item. D) The gain or loss is reported as other comprehensive income on the consolidated statement of comprehensive income.

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17) On January 1, 2022, Pastel Inc. (Pastel) purchased 97,500 voting shares of Sunny Corporation (Sunny) for $253,500. Sunny has 150,000 outstanding voting. On that date, Sunny's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Sunny's book values approximated its fair values on the acquisition date with the exception of the company's patent, which was estimated to have a fair value that was $70,000 in excess of its recorded book value. The patent had a useful life of 14 years on acquisition date. Both companies use straight line amortization exclusively. On January 1, 2023, Pastel purchased an additional 9,000 shares of Sunny on the open market for $27,000. On this date, Sunny's book values were equal to its fair values with the exception of the company's equipment, which is undervalued by $60,000. The equipment's estimated useful life is 5 years. Sunny's net income and dividends for 2022 and 2023 are as follows: 2022

2023

Net Income

$60,000

$80,000

Dividends

$9,000

$14,000

Neither company has contributed surplus on its separate-entity balance sheets at the end of 2022 or 2023. Sunny's goodwill suffered an impairment loss of $8,000 during 2022. Pastel uses the equity method to account for its investment in Sunny.

17.1) Which of the following is the correct amount of goodwill arising from Pastel's January 1, 2022 acquisition?

A) $59,500 B) $70,000 C) $240,000 D) $170,000

17.2)

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What percentage of Sunny's shares was purchased by Pastel on January 1, 2022?

A) 65% B) 60% C) 70% D) 90%

17.3) Assuming that Pastel had no recorded goodwill prior to January 1, 2022, which of the following would be the correct amount of goodwill appearing on Pastel's December 31, 2022 consolidated balance sheet?

A) $33,500 B) $70,000 C) $165,000 D) $162,000

17.4) Assuming that Pastel had no recorded goodwill prior to January 1, 2022, what would be the amount of goodwill appearing on Pastel's December 31, 2023 consolidated balance sheet?

A) $361,000 B) $116,000 C) $162,000 D) $206,900

17.5)

What is the noncontrolling interest in Sunny after the January 1, 2023 purchase?

A) 35% B) 29% C) 20% D) 10%

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17.6) Which of the following is the correct amount of change to the acquisition differential for 2022 (excluding the goodwill impairment)?

A) $4,375 B) $5,000 C) $6,250 D) $4,700

17.7) Which of the following is the correct amount of change to the acquisition differential for 2023 (excluding the goodwill impairment)?

A) $1,500 B) $6,250 C) $5,000 D) $4,700

17.8) Which of the following is the correct balance of acquisition differential (excluding goodwill) at the end of 2023?

A) $60,000 B) $61,100 C) $56,100 D) $56,400

17.9) What effect (if any) would Pastel's January 1, 2023 purchase have on the company's consolidated cash flows for the year?

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A) There would be no effect. B) There would be a decrease in cash of $27,000 to the consolidated entity. C) There would be a decrease in cash of $39,000 to the consolidated entity. D) There would be a decrease in cash of $5,000 to the consolidated entity.

17.10) Which of the following is the correct change to the noncontrolling interest as a result of Pastel's second purchase of shares on January 1, 2023?

A) A decrease of $43,975. B) A decrease of $25,680. C) An increase of $37,857. D) An increase of $43,975.

17.11) What effect would the purchase on January 1, 2023 have on the consolidated equity of Pastel?

A) There would be a decrease in consolidated contributed surplus. B) There would be a decrease in consolidated retained earnings. C) There would be an increase in consolidated contributed surplus. D) There would be an increase in consolidated retained earnings.

17.12) What is the amount of the change to Pastel's consolidated equity as a result of the purchase of the additional shares on January 1, 2023?

A) $1,320 B) $1,620 C) $8,988 D) $15,210

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17.13) Which of the following is the correct balance in Pastel's investment in Sunny account on December 31, 2023?

A) $347,190 B) $303,880 C) $280,500 D) $349,650

18) Potter Corp.(Potter) acquired 200 voting common shares of Slade Ltd.'s (Slade) on January 1, 2021 for cash of $8,000. At all relevant times, Slade had 1,000 voting common shares issued and outstanding with a stated value of $10,000. On December 31, 2021, the shares were trading at $45 per share. The management of Potter classified this investment as fair value through profit or loss (FVTPL). On January 1, 2022, Potter acquired an additional 250 shares for cash of $12,500. This second purchase of shares was enough to give Potter significant influence over the key decision-making for Slade. Potter is using the equity method to account for its investment in Slade. Slade's book values approximated its fair values on the acquisition date with the exception of the company's patent, which was estimated to have a fair value that was $4,000 in excess of its recorded book value. The patent had a useful life of 20 years on acquisition date. Both companies use straight line amortization exclusively. On January 1, 2021, the shareholder's equity section of Slade was comprised of $10,000 in common shares and retained earnings of $15,000. On January 1, 2023, Potter acquired an additional 300 shares for cash of $16,500. Potter now has control over Slade. The entire acquisition differential was allocated to land. Slade's net income and dividends for 2021, 2022 and 2023 are as follows:

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2021

2022

2023

Net Income

$25,000

$18,000

$32,000

Dividends

$10,000

$9,000

$14,000

18.1) What is the gain or loss to be reported by Potter on December 31, 2021 for its investment in Slade?

A) A $1,000 gain. B) A $1,000 loss. C) No gain or loss to be reported. D) A $1,600 gain.

18.2) What is the carrying amount of the investment in Slade account immediately after the share acquisition on January 1, 2022?

A) $28,900 B) $22,500 C) $20,500 D) $21,500

18.3) Which of the following is the correct amount of goodwill arising from Potter's January 1, 2022 acquisition of shares?

A) Nil B) $2,700 C) $500 D) $1,700

18.4)

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What is the balance in the Investment in Slade account on December 31, 2022?

A) $25,000 B) $26,550 C) $22,050 D) $26,460

18.5) What is the amount of gain or loss resulting from the acquisition of the additional shares on January 1, 2023?

A) $4,250 gain B) $4,000 loss C) $1,700 loss D) No gain or loss to be reported on January 1, 2023.

18.6)

What is the balance of the acquisition differential on December 31, 2023?

A) Nil B) $4,500 C) $10,320 D) $6,000

18.7) Assuming Potter is using the equity method to account for its investment in Slade, what is the equity method income (i.e., investment income) for 2023?

A) $24,000 B) $17,250 C) $23,933 D) $32,000

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18.8) Which of the following is the correct noncontrolling interest amount appearing on the consolidated balance sheet at December 31, 2023?

A) Nil B) $18,250 C) $16,750 D) $13,750

19) The following information pertains to the shareholdings of an affiliated group of companies. The respective ownership interest of each company is outlined below. AInc.: A Inc. owns 75% of J Inc. and 60% of G Inc. JInc.: J Inc. owns 60% of D Inc. and 20% of G Inc. GInc.: G Inc. owns 10% of D Inc. and 80% of Y Inc. All intercompany investments are accounted for using the equity method. The net incomes for these companies for the year ended December 31, 2023 were as follows:

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A Inc.

$1,000,000

J Inc.

$200,000

G Inc.

$600,000

D Inc.

$300,000

Y Inc.

$100,000

Unrealized intercompany profits (pre-tax) earned by the various companies for the year ended December 31, 2023 are shown below: G Inc.

$10,000

Y Inc.

$10,000

J Inc.

$20,000

All companies are subject to a 25% tax rate. Feedback: A Inc (parent)

J Inc

G Inc

D Inc

Y Inc

TOTAL

$1,000,000

$200,000

$600,000

$300,000

$100,000

$2,200,000

Unrealized profits (before tax)

(20,000)

(10,000)

(40,000)

Tax effect of unrealized profits @ 25%

5,000

2,500

10,000

$185,000

$592,500

$92,500

$2,170,000

Net income before investment income

Consolidated net income

$1,000,000

$300,000

Allocate Y Inc: 80% to G

74,000

(74,000)

Allocate D Inc: 60% to J

180,000

10% to G Sub-total

$1,000,000

(180,000) 30,000

(30,000)

$365,000

$696,500

$90,000

$18,500

$2,170,000

139,300

(139,300)

$90,000

$18,500

$2,170,000

Allocate G: 20% to J 60% to A

417,900

Sub-total

$1,417,900

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(417,900) $504,300

$139,300

Allocate J: 75% to A

378,225

Non-controlling interest

(378,225) $126,075

$139,300

$90,000

A Inc (parent) net $1,796,125 income – equity method

19.1)

$18,500

$373,875 $1,796,125

How much is A Inc.'s Consolidated Net Income for 2023?

A) $1,510,000 B) $1,773,625 C) $1,796,125 D) $2,170,000

19.2) 2023?

How much is the non-controlling interest in A Inc.'s consolidated net income for

A) Nil B) $382,500 C) $373,875 D) $400,000

19.3) Inc.?

What is the 2023 consolidated net income attributable to the shareholders of A

A) $1,510,000 B) $1,796,125 C) $1,817,500 D) $2,170,000

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20) Parksville Corp. (Parksville) purchased 80% of the outstanding voting shares of Saanich Inc. (Saanich) on December 31, 2023. The balance sheets of both companies on that date are shown below (after Parksville acquired the shares): Parksville

Saanich

Cash

$250,000

$200,000

Accounts receivable

450,000

300,000

Inventory

500,000

100,000

Investment in Saanich Inc.

500,000

Land

140,000

Equipment (net)

460,000

200,000

Total assets

$2,300,000

$800,000

Current liabilities

$900,000

$200,000

Bonds payable

500,000

100,000

Common shares

500,000

200,000

Retained earnings

400,000

300,000

Total liabilities and equity

$2,300,000

$800,000

On December 31, 2023 (after the financial statements appearing above had been prepared), Vancouver Inc. (Vancouver), one of Parksville's main competitors, has agreed to acquire an equity interest in Saanich. As a result of the agreement, Saanich would issue another 8,000 shares (over and above the 32,000 shares it currently has outstanding) to Vancouver for $20 per share. The acquisition differential on the date of acquisition was attributed entirely to equipment, which had a remaining useful life of 10 years from the date of acquisition. Parksville uses the equity method to account for its investment in Saanich. There were no unrealized intercompany profits on December 31, 2023.

20.1) What would be the amount of cash appearing on Parksville's December 31, 2023 consolidated balance sheet (after the issue of shares to Vancouver)? Version 1

A) $450,000 B) $610,000 C) $850,000 D) $810,000

20.2) What would be the amount of the undepleted acquisition differential on December 31, 2023?

A) $40,000 B) $50,000 C) $80,000 D) $125,000

20.3) What would be Parksville's ownership interest in Saanich following Vancouver's purchase of shares in Saanich?

A) 60% B) 64% C) 75% D) 80%

20.4)

What would be the gain or loss arising from Saanich's share issue to Vancouver?

A) A loss of $4,000. B) A loss of $2,400. C) A gain of $2,400. D) A gain of $4,000.

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20.5) What would be the amount of the noncontrolling interest appearing on Parksville's consolidated balance sheet as at December 31, 2023 before the issue of shares to Vancouver?

A) $125,000 B) $160,000 C) $222,000 D) $264,000

20.6) What would be the amount of the non-controlling interest appearing on Parksville's consolidated balance sheet as at December 31, 2023 after the issue of shares to Vancouver?

A) $125,000 B) $222,000 C) $264,000 D) $282,600

20.7) What is the amount of retained earnings appearing on the December 31, 2023 consolidated balance sheet?

A) $384,000. B) $396,000. C) $400,000. D) $402,400.

20.8) What is the consolidated amount of equipment appearing on the December 31, 2023 consolidated balance sheet?

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A) $660,000 B) $785,000 C) $740,000 D) $760,000

21) On January 1, 2020, Lime Inc. (Lime) acquired 80,000 common shares of Stone Corp. (Stone) for $900,000. On January 1, 2020 Stone's balance sheet showed the following shareholders' equity: $3 cumulative preferred shares, 20,000 shares issued

$120,000*

Common shares, 100,000 shares issued

600,000

Surplus (Deficit)

(10,000) $710,000

* Stone's preferred share dividends were one year in arrears on that date. Stone's fair values approximated its book values on that date with the following exceptions: • Inventory had a fair value that was $30,000 higher than its book value. Plant and equipment had a fair value $10,000 lower than their book value. • The plant and equipment had an estimated remaining useful life of 10 years from the date of acquisition. The financial statements of Lime and its subsidiary, Stone, on December 31, 2023 are shown below: RetainedEarningsStatements Lime Inc.

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Stone Corp.

Balance, January 1, 2023

$200,000

$370,000

Net income

350,000

222,000

$550,000

$592,000

Dividends

25,000

100,000

Balance, December 31, 2023

$525,000

$492,000

BalanceSheets Lime Inc.

Stone Corp.

Cash

$120,000

$-----,000

Accounts receivable

270,000

255,000

Inventory

165,000

144,000

Land

210,000

Plant and equipment

1,200,000

2,100,000

Accumulated depreciation

(690,000)

(900,000)

Investment in Stone (common)

900,000

-----------

Total Assets

$2,175,000

$1,602,000

Accounts payable

$276,000

$330,000

Accrued liabilities

24,000

30,000

Preferred shares

150,000

Common shares

1,350,000

600,000

Retained earnings

525,000

492,000

Total liabilities and equity

$2,175,000

$1,602,000

Other information: • Intercompany sales of inventory for 2023 were as follows: Lime to Stone:

$50,000

Stone to Lime:

$40,000

• Unrealized intercompany profits in inventory for 2023 were as follows: January 1, 2023: Stone’s Inventory

$10,000

Lime’s Inventory

$20,000

December 31, 2023:

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Stone’s Inventory

$6,000

Lime’s Inventory

$8,000

• On January 1, 2021, Stone sold equipment to Lime for $30,000. The equipment had a carrying value of $27,000 on that date and an estimated useful life of 3 years. The inventory on hand at the start of 2023 was sold to outsiders during the year. • Both companies are subject to a tax rate of 40%. • There were no dividends in arrears on December 31, 2022. • Lime uses the cost method to account for its investment in Stone.

21.1)

Compute the goodwill on the date of the acquisition.

21.2) a) Prepare a schedule of realized and unrealized intercompany profits and revenues for 2023 for both Lime and Stone. b) Compute the amount of deferred taxes that should appear on the December 31, 2023 consolidated balance sheet.

21.3) Compute the consolidated net income for 2023 and show its allocation between the controlling and noncontrolling interests.

21.4) 2023. Version 1

Prepare a calculation of Consolidated Retained Earnings at as December 31,

21.5)

Prepare a calculation of noncontrolling interest as at December 31, 2023.

21.6)

Prepare Lime's December 31, 2023 Consolidated Balance Sheet.

22) The trial balances of Ash Inc. and its subsidiary Cinder Corp. on December 31, 2023 are shown below: Ash

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Cinder

Inventory

$160,000

$100,000

Plant and equipment (net)

2,700,000

700,000

Dividends declared

200,000

100,000

Investment in Cinder

700,000

Cost of goods sold

650,000

90,000

Other expenses

50,000

10,000

Total debits

$4,460,000

$1,000,000

Liabilities

$1,000,000

$150,000

Common shares

1,660,000

600,000

Retained earnings

600,000

100,000

Sales and other revenue

1,200,000

150,000

Total credits

$4,460,000

$1,000,000

Other Information: Ash acquired Cinder in three stages: January 1, 2020:

Ash purchased 10,000 shares for $100,000. Cinder’s retained earnings were $40,000 on that date. The investment is classified as fair value through profit or loss (FVTPL).

January 1, 2022:

Ash purchased 30,000 shares for $450,000. Cinder’s retained earnings were $80,000 on that date. Ash has obtained significant influence in the key decisions for Cinder. On December 31, 2022, Cinder’s retained earnings were $85,000.

December 31, Ash purchased 20,000 shares for $150,000. Cinder’s retained earnings were $100,000 on 2023: that date. Ash now owns 60% and has control over Cinder.

Cinder was incorporated on January 1, 2018. On that date, Cinder issued 100,000 voting shares. Any difference between the cost and book value is attributable entirely to trademarks, which are to be amortized over 5 years. The company has neither issued nor retired shares since the date of its incorporation. Ash sold depreciable assets to Cinder at a loss of $20,000 on January 1, 2022. These assets had a 10 year remaining life. Intercompany sales of inventory during 2023 amounted to $250,000. Unrealized inventory profits for each company are shown below for 2023. The amounts indicate the amount of profit in each company's inventory. Ash January 1, 2023:

$10,000

December 31, 2023:

$20,000

Cinder January 1, 2023:

$20,000

December 31, 2023:

$40,000

All inventories on hand at the start of 2023 were sold to outsiders during the year. The net incomes of both companies are evenly earned throughout the year. Both companies are subject to an effective corporate tax rate of 20%.

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22.1) What amount will be shown in the Ash's consolidated balance sheet for trademarks as at December 31, 2023?

22.2)

Compute consolidated inventory for Ash as at December 31, 2023.

22.3)

Compute the consolidated cost of goods sold for 2023.

22.4) Using the equity method, calculate the balance in the investment in Cinder account at December 31, 2022.

22.5) Explain the changes in reporting for the investment in Cinder that will take place on January 1, 2022.

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23) Parrot Company (Parrot) purchased 75% of the outstanding common shares and 50% of the outstanding preference shares of Salt Inc. (Salt) on January 1, 2023, on which date the balance sheet and fair values of Salt's assets and liabilities were as follows: Salt Inc. Balance Sheet as at December 31, 2022 Book Values

Fair Values

Cash

$130,000

Accounts receivable

120,000

110,000

Inventory

320,000

290,000

Capital assets (net)

720,000

800,000

$1,290,000 Current liabilities

$190,000

Long-term debt

300,000

Common shares

300,000

Preferred shares

200,000

Contributed surplus

50,000

Retained earnings

250,000 $1,290,000

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Parrot paid $460,000 for the common shares and $105,000 for the preference shares. The contributed surplus arose from the issue of the preferred shares at a price higher than their stated value. The preferred shares paid cumulative dividends of 5% of their stated value but dividends for 2021 and 2022 were unpaid. The shares were redeemable, at the option of the issuer, at a premium of 8%. The capital assets of Salt had a remaining useful life of ten years at January 1, 2013. Any unallocated acquisition differential would be treated as goodwill, which is assessed annually for impairment. Parrot accounts for its interest in Salt using the cost method and accounts for the noncontrolling interest in its consolidated financial statements using the fair value enterprise method. Parrot's net income for 2023 was $300,000 and Parrot paid dividends of $150,000 on December 31, 2023. Salt's net income for 2023 was $120,000 before a loss from discontinued operations of $60,000 (net of tax). Salt paid dividends of $75,000 in 2023. (Parrot included all dividends received in its income for 2023.)

23.1) Calculate the amount of the noncontrolling interest on the consolidated balance sheet of Parrot and its subsidiary as at December 31, 2023.

23.2) Calculate the consolidated net income of Parrot and its subsidiary as at December 31, 2023.

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23.3) Parrot has no contributed surplus on its own balance sheet as at the end of 2023. Calculate the amount of the contributed surplus shown on the consolidated balance sheet of Parrot and its subsidiary as at December 31, 2023.

24) The following information was derived from the 2023 consolidated financial statements of X Inc., which owns 80% of Y Inc. as well as 40% of Z Inc.: Equity earnings from Z Inc.

$120,000

Decrease in accounts payable

$5,000

Increase in accounts receivable

$10,000

Increase in inventory

$20,000

Increase in bonds payable

$40,000

Depreciation

$20,000

Loss on sale of machinery

$10,000

Carrying value of machinery sold

$60,000

Dividends received from Z Inc.

$10,000

Purchase of a building for cash

$400,000

Goodwill impairment loss

$5,000

Entity net income allocated to non-controlling interest

$5,000

Consolidated net income allocated to Parent

$950,000

Dividends paid by X Inc.

$40,000

Dividends paid by Y Inc.

$12,000

The cash balance at the start of 2023 was $200,000. Required: Prepare the consolidated statement of cash flows for Lime Inc for the year ended December 31, 2023.

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25) Beta Corp. owns 80% of Gamma Corp. The consolidated financial statements of Beta Corp. for 2022 and 2023 are shown below: Beta Corp. Consolidated Balance Sheet 2023

2022

Cash

$180,000

$40,000

Accounts receivable

300,000

100,000

Inventory

400,000

100,000

Land

160,000

200,000

Plant and equipment

1,650,000

1,170,000

Accumulated depreciation

(800,000)

(770,000)

Goodwill

60,000

Total assets

$1,950,000

$900,000

Accounts payable

$326,000

$40,000

Accrued liabilities

350,000

140,000

Bonds payable

400,000

100,000

Less: bond discount

(40,000)

(50,000)

Common shares

350,000

Retained earnings

350,000

120,000

Noncontrolling interest

214,000

200,000

Total liabilities and equity

$1,950,000

$900,000

Beta Corp. Consolidated Income Statement, For the year ended December 31, 2023 Sales

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$500,000

Cost of sales

$115,000

Depreciation

30,000

Interest expense

50,000

Gain on land sale

(10,000) (185,000)

Net income

$315,000

Attributable to: Shareholders of parent

$300,000

Noncontrolling interest

15,000 $315,000

Other Information: Beta purchased its interest in Gamma on January 1, 2019 for $360,000 when the company's net assets were valued at $300,000. The acquisition differential was allocated equally between goodwill and equipment, which was estimated to have a remaining useful life of ten years from the acquisition date. Gamma reported a net income of $75,000 and paid dividends of $5,000 during 2023. Beta issued $300,000 in bonds during 2023. Beta reported an equity method net income of $300,000 and paid $70,000 in dividends to its shareholders in 2023. Required: Prepare a consolidated statement of cash flows for Beta Corp. for 2023.

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26) On January 1, 2022, Phil Corp acquired 8,000 of the outstanding 10,000 shares of Ander Co by issuing its own shares with a market value of $400,000. On June 30, 2023, Phil Corp sold 3,500 shares for cash consideration of $60 per share on open market. Immediately before the sale, the shareholders' equity of Ander Co amounted to $500,000 and the unamortized purchase discrepancy was $65,000. Phi l Corp uses the equity method to record its investment in Ander Co. Required: Prepare the journal entry(ies) Phil Corp would make to record the gain or loss resulting from the disposition of the shares?

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Answer Key Test name: ch 8 1) C 2) B 3) C 4) B 5) A 6) A 7) D 8) B 9) C 10) B 11) A 12) D 13) A 14) D 15) A 16) Section Break 16.1) D 16.2) D 16.3) A 16.4) B 16.5) D 16.6) D 16.7) C 16.8) A 17) Section Break 17.1) D Version 1

17.2) A 17.3) D 17.4) C 17.5) B 17.6) B 17.7) C 17.8) A 17.9) B 17.10) B 17.11) B 17.12) A 17.13) A 18) Section Break 18.1) A 18.2) B 18.3) B 18.4) D 18.5) C 18.6) D 18.7) A 18.8) B 19) Section Break 19.1) C 19.2) A 19.3) B 20) Section Break 20.1) B 20.2) D 20.3) B 20.4) C Version 1

20.5) A 20.6) D 20.7) C 20.8) B 21) Section Break 22) Section Break 23) Section Break

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Student name:__________ 1)

The primary beneficiary of a variable interest enterprise:

A) must include the assets, liabilities, and results of the variable interest enterprise in its consolidated financial statements. B) can simply record income on a cash basis when dividends are received, or income accrued. C) only recognizes a gain or loss on the sale of its interest in the variable interest enterprise. D) only includes the results of the variable interest enterprise if it has in excess of 50% of the voting share capital of the variable interest enterprise.

2) Company A and B agree to engage in a joint venture. Which of the following statements pertaining to joint ventures is correct?

A) Both parties to a joint venture must contribute an equal amount of resources to the venture. B) The party contributing the most resources to the venture has control over the venture. C) Both parties have joint control over the venture. D) Company A and B will retain ownership and title to any assets contributed to the joint venture.

How are intercompany transactions handled in a joint venture?

A) They are ignored. B) They are completely eliminated. C) Only the venturer's share of any after tax profit is eliminated. D) The venturer's proportionate share of intercompany revenues and expenses, receivable and payables are eliminated.

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According to Canadian GAAP, what is the key feature of a joint arrangement?

A) One venturer has a controlling interest in the joint arrangement. B) More than one venturer has a controlling interest in the joint arrangement. C) Joint control, namely, no one venturer can unilaterally control the venture regardless of the size of the equity contribution. D) The two largest equity contributors will have joint control over the venture.

5) Which of the following requirements is in line with the requirements set out in IFRS 11 Joint Arrangements for the treatment of unrealized gains and losses on nonmonetary assets contributed to a joint operation?

A) The amounts are included in deferred gains or losses. B) The gain or loss must be eliminated against the underlying assets as a contra account. C) No gain or loss can be recognized until the asset is put into use and the asset is generating revenues. D) The gain or loss should be recorded immediately as other comprehensive income and transferred to operating income as the non-monetary asset is put into service.

6) On December 31, 2023, XYZ Inc. has an account payable of $2,000 for operating expenses incurred during the year. These expenses are only tax deductible when paid. XYZ normally pays for its operating expenses one month after they are incurred. Assuming a 20% tax rate, these expenses will result in:

A) A deferred tax liability of $2,000. B) A deferred tax liability of $400. C) A deferred tax asset of $400. D) A deferred tax asset of $2,000.

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7) On December 31, 2020, XYZ Inc. has an account receivable of $2,000 for consulting fees it earned during the year. Consulting revenues are only taxable when collected. XYZ normally receives payment for the services rendered one month after the client is invoiced. Assuming a 20% tax rate, these revenues shall result in:

A) A deferred tax liability of $2,000. B) A deferred tax liability of $400. C) A deferred tax asset of $400. D) A deferred tax asset of $2,000.

8) Which of the following is NOT a requirement for a business component to be considered an operating segment under current Canadian GAAP?

A) Discrete financial information must be available. B) Operating results are regularly reviewed by the enterprise's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. C) The reportable income or loss must be at least 10% of the combined profit or loss for the combined entity. D) It engages in business activities from which it may earn revenues and incur expenses.

9) Which of the following is NOT used as a quantitative threshold to determine that an operating segment is reportable under IFRS 8 Operating Segments?

A) 10% of the combined revenues of all operating segments. B) 10% of the combined assets of all operating segments. C) 10% of all expenses are traced to the segment. D) 10% or more of the greater, in absolute amount, of the combined reported profit of all operating segments that did not report a loss AND 10% or more of the absolute amount of the combined reported loss of all operating segments that did report a loss.

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10) The implied value of a special-purpose entity (SPE) at acquisition under Canadian GAAP is equal to:

A) the fair value of SPE. B) the fair value of the non-controlling interest of the SPE. C) the book value of the SPE. D) the fair value of the consideration paid by the primary beneficiary to the owners of the business plus the fair value of the non-controlling interest of the SPE.

11) Which of the following statements is correct concerning reporting interests in jointly controlled enterprises in compliance with the Accounting Standards for Private Enterprises (ASPE)?

A) They must be reported using proportionate consolidation. B) They must be reported using the equity method. C) They must be reported using the cost method. D) May report using the cost method or the equity method.

12) Under which accounting standards is the reporting of the liabilities of operating segments required?

A) It is required under US GAAP. B) It is required under ASPE. C) It is required under IFRS. D) It is required under IFRS only when this information is reported to the organization's chief operating decision maker.

13) When sales to a single customer amount to 10% or more of total revenues, disclosure of which of the following is NOT required under IFRS 8?

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A) The fact that sales to a single customer exceed 10% of total revenues. B) The operating segment reporting the revenues. C) The name of the customer. D) The total amount of revenue from each such customer.

14) Which of the following concerning the distinction between joint operations and joint ventures is correct?

A) In a joint operation, the investor has rights to the net assets of the arrangement; in a joint venture, the investor has rights and obligations related to the specific assets and liabilities of the arrangement. B) In a joint venture, the investor has rights to the net assets of the arrangement; in a joint operation, the investor has rights and obligations related to the specific assets and liabilities of the arrangement. C) A joint operation is always an unincorporated business; a joint venture is always an incorporated business. D) In a joint operation, all investors must share control; in a joint venture, investors holding a majority of voting rights do not share control.

15) Which of the following statements pertaining to a special-purpose entity (SPE) is INCORRECT?

A) An SPE is typically created to conduct activities that are part of the sponsoring entity's ongoing activities. B) An SPE offers protection to creditors by limiting the activities of the SPE to ones specified in the governing documents. C) Since the sponsoring entity typically owns no shares or very few of the voting shares of the SPE, it is not required to consolidate the SPE. D) The equity investors often give up control of the SPE to the primary sponsor in exchange for a guaranteed rate of return.

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16) A Ltd. is a corporation established for the sole purpose of owing and leasing a property. An outside investor financed the purchase of the property with cash in exchange for 100% of the common shares of A Ltd. and a guaranteed annual return of 5%. The property is leased to B Ltd. to be used in B Ltd.'s business operations. B Ltd. has veto power on all key operating, investing, and financing decisions for A Ltd. and bears the risk of using the property in its business but will receive the profit earned through the use of the property and its sale. Which of the following statements describes the reporting requirements for B Ltd. for A Ltd.

A) B Ltd. is the primary beneficiary of A Ltd. and is required to include A Ltd.'s assets and liabilities on its consolidated balance sheet. B) A Ltd. is a special-purpose entity that is often used for off-balance sheet financing and is not required to be reported by B Ltd. C) B Ltd. does not own any voting shares in A Ltd.; therefore, consolidated financial statements are not required. D) The property leased from A Ltd. is of integral importance to B Ltd.'s business; therefore, the relationship between the two companies only requires note disclosure.

17)

Which of the following is NOT a characteristic of a joint operation?

A) No one party to the joint operation can unilaterally control it. B) A joint operation can be structured with or without a separate vehicle. C) The joint operators have rights to specific assets of the joint operation. D) The joint operators are not responsible for the liabilities of the joint operation.

18) Find Corp. is a joint operation in which Seek Inc. has a 20% interest. Seek reports its investment in Find using proportionately adjusted financial statements. A contractual agreement gives Seek proportionate rights (20%) to all of Finds' assets and proportionate responsibilities (20%) for all of Find's liabilities. Seek uses the equity method to record its investment but has yet to make any journal entries related to its investment in Find for 2023. The financial statements of both companies as at December 31, 2023, are shown below. Version 1

Seek Inc.

Find Corp.

INCOME STATEMENTS Sales

$800,000

$200,000

Cost of sales

400,000

100,000

Other expenses

200,000

60,000

Net income

$200,000

$40,000

Miscellaneous assets

$600,000

$300,000

Inventory

120,000

60,000

Investment in Find

180,000

Total assets

$900,000

$360,000

Miscellaneous liabilities

$160,000

$80,000

Common shares

200,000

100,000

Retained earnings

540,000

180,000

Total liabilities & equity

$900,000

$360,000

BALANCE SHEETS

During 2023, Seek sold merchandise totaling $120,000 to Find and recorded a gross profit of 50% on these sales. At the end of 2023, Find's inventory contained $30,000 worth of merchandise purchased from Seek. Find also owed Seek $50,000 for the merchandise at the end of 2023. Both companies are subject to a 40% tax rate.

18.1) 2023?

What is the total amount of intercompany pre-tax profits in ending inventory for

A) $3,000 B) $15,000 C) $20,000 D) $30,000

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18.2) What is the total amount of intercompany sales and purchases that must be eliminated from the financial statements in 2023?

A) $20,000 B) $24,000 C) $80,000 D) $120,000

18.3) What is the total amount of intercompany receivables to be eliminated from the financial statements in 2023?

A) Nil B) $10,000 C) $40,000 D) $50,000

18.4) What is the total amount of deferred taxes that would appear on Seek's consolidated balance sheet as at December 31, 2023?

A) $800 B) $1,200 C) $6,000 D) $8,000

18.5) What is the total amount of miscellaneous assets that would appear on Seek's proportionately adjusted balance sheet as at December 31, 2023?

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A) $650,000 B) $660,000 C) $840,000 D) $900,000

18.6) What is the total amount of inventory that would appear on Seek's proportionately adjusted balance sheet at December 31, 2023?

A) $129,000 B) $132,000 C) $312,000 D) $360,000

18.7) What is the total amount of sales that would appear on Seek's proportionately adjusted income statement for the year ended December 31, 2023?

A) $816,000 B) $880,000 C) $920,000 D) $1,000,000

18.8) What is the total amount of cost of sales that would appear on Seek's proportionately adjusted income statement for the year ended December 31, 2023?

A) $396,000 B) $399,000 C) $420,000 D) $500,000

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18.9) What is the total amount of other expenses that would appear on Seek's proportionately adjusted income statement for the year ended December 31, 2023?

A) $200,000 B) $212,000 C) $248,000 D) $260,000

18.10)

What is the amount proportionately adjusted net income for 2023?

A) $206,200 B) $208,000 C) $216,000 D) $218,000

18.11) 2023?

What is the amount of proportionately adjusted retained earnings at December 31,

A) $340,000 B) $368,000 C) $376,000 D) $546,200

18.12) What is the amount of noncontrolling interest that would appear on Seek's proportionately adjusted balance sheet at December 31, 2023?

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A) Nil B) $136,000 C) $144,000 D) $180,000.

18.13) What is the amount of miscellaneous liabilities that would appear on Seek's proportionately adjusted balance sheet at December 31, 2023?

A) $166,000 B) $176,000 C) $230,000 D) $240,000

19) Base Inc. (Base) and Space Ltd. (Space) formed a joint venture, Moon Ltd., on January 1, 2023. Base invested plant and equipment with a book value of $300,000 and a fair value of $900,000 for a 30% interest in the joint venture. Base's plant and equipment were estimated to provide an additional 5 years of utility to Moon. Space contributed assets with a fair value of $2,100,000 for its 70% stake in Moon. Moon reported a net income of $2,800,000 for 2023. The transactions set out above were considered to have commercial substance.

19.1)

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At what amount would Base record its initial investment in Moon?

A) $270,000 B) $600,000 C) $300,000 D) $900,000

19.2) What is Base's portion of any unrealized gain or loss arising from the transfer of its assets to Moon on January 1, 2023?

A) Nil B) $180,000 C) $420,000 D) $300,000

19.3) What is Space's portion of any unrealized gain or loss arising from the transfer of Base's assets to Moon on January 1, 2023?

A) Nil B) $180,000 C) $420,000 D) $300,000

19.4) Assuming the plant and equipment transferred by Base are used to generate a positive gross profit for Moon, what portion of the unrealized gain arising from the transfer of Base's assets is realized for 2023?

A) Nil B) $36,000 C) $10,800 D) $126,000

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19.5) What would be the recognizable gain on January 1, 2023 arising from Base's investment in Moon?

A) Nil B) $294,000 C) $180,000 D) $420,000

19.6) Assume that the facts provided above with respect to Moon, the joint venture, remain unchanged except that Base receives $162,000 in return for investing its plant and equipment. What would be the unrealized gain on January 1, 2023 arising from Base's investment in Moon?

A) Nil B) $147,600 C) $180,000 D) $162,000

19.7) What is the carrying value of the investment in Moon on Base's balance sheet at December 31, 2023?

A) $900,000 B) $1,740,000 C) $840,000 D) $720,000

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20) SNZ Inc. purchased machinery and equipment in the amount of $30,000 on January 1, 2022. SNZ plans to depreciate the asset straight-line over 20 years with no salvage value. For tax purposes these assets are to be depreciated using a capital cost allowance (CCA) rate of 20% subject to the Accelerated Investment Initiative (ACCII) rules which allows 1.5 times the amount of regular CCA in the year of acquisition. SNZ pays tax at a rate of 25%.

20.1)

What is the tax basis of these assets on January 1, 2022?

A) $24,000 B) $25,200 C) $22,800 D) $30,000

20.2) What is the amount of the temporary difference between the carrying value and tax base on December 31, 2022?

A) $0 B) $7,500 C) $4,500 D) $3,000

20.3) What is the amount of the temporary difference between the carrying value and tax base on December 31, 2023?

A) $0 B) $7,500 C) $3,600 D) $10,200

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20.4)

What is the amount of the deferred tax asset or liability on December 31, 2022?

A) A deferred tax liability of $2,250. B) A deferred tax liability of $1,875. C) A deferred tax asset of $1,875. D) A deferred tax asset of $2,250.

20.5)

What is the amount of the deferred tax asset or liability on December 31, 2023?

A) A deferred tax liability of $2,550. B) A deferred tax liability of $1,050. C) A deferred tax asset of $1,050. D) A deferred tax asset of $2,550.

21) JNG Corp. has four segments, the details of which are shown below. All figures are in thousands of dollars. Segment

Revenues

Profits (Losses)

Assets

$12

$(12)

$40

$60

$80

$35

$10

$80

$200

$80

$20

21.1)

Using only the profit test, which of the following segment(s) would be reportable?

A) A, B and D B) B, C and D C) C and A D) A, C and D

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21.2) Using only the revenue test, which of the following segment(s) would be reportable?

A) A B) A, B, and D C) B, C, and D D) C and D

21.3) Using only the assets test, which of the following segment(s) would be reportable?

A) A B) A, B and C C) A, B, C and D D) B, C and D

21.4) Using ALL of the applicable tests, which of the following segment(s) would be reportable?

A) A B) A, B and C C) A, B, C and D D) B, C and D

22) Zeke Ltd. (Zeke) contributed a patent to VE Company (VE) on January 1, 2023. VE is a business and is deemed to be a special-purpose entity (SPE). The fair value of VE's net identifiable assets (not including the patent) are $75,000. Zeke is the primary beneficiary. The patent has a carrying value of $10,000 on Zeke's separate-entity balance sheet and a fair value of $40,000. The fair value of the noncontrolling interest on January 1, 2023 is $30,000. Version 1

22.1)

What is the total value of the consideration given to VE?

A) $40,000 B) $105,000 C) $75,000 D) $70,000

22.2) What is the correct reporting requirement for the difference, if any, between the implied value and the consideration received?

A) Nothing needs to be accounted for as there was no difference. B) Since VE is a business, the negative goodwill will be reported as a gain on purchase. C) Goodwill will be reported on the consolidated balance sheet. D) The difference is allocated proportionately to VE's identifiable net assets.

23) Alberta Corporation (Alberta) and Ontario Inc. (Ontario) formed a joint venture on January 1, 2023 called Province Ltd. (Province). Alberta has a 70% interest and Ontario has a 30% interest in the venture. The profits or losses arising from the joint venture are shared according to their ownership interests. The following statements were prepared on December 31, 2023. Balance Sheets Alberta

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Province

Current assets

$40,000

$20,000

Investment in Province

28,000

Fixed assets

200,000

80,000

Accumulated depreciation

(80,000)

(10,000)

Other assets

50,000

60,000

Total assets

$238,000

$150,000

Current liabilities

$34,000

$70,000

Long-term debt

28,000

30,000

Common shares

90,000

40,000

Retained earnings, Jan 1

56,000

Net income for the year

30,000

10,000

Liabilities and Equity

$238,000

$150,000

Other Information: During 2023, Alberta purchased $10,000 of inventory from Province. Province recorded a gross profit of $2,000 on these sales. On December 31, 2023, Alberta's inventories contained half of the merchandise purchased from Province. Alberta uses the cost method to account for its investment in Province and uses the equity method to report its investment in the joint venture. Both companies are subject to a 20% tax rate.

23.1) Compute the equity method income (i.e., investment income) from the joint venture to be reported by Alberta.

23.2) Compute Alberta's retained earnings to be reported on the balance sheet at December 31, 2023.

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23.3)

Prepare Alberta's balance sheet at December 31, 2023.

23.4) Assume Alberta and Ontario formed a joint operation instead of a joint venture. Alberta has proportionate rights (70%) to all of Province's assets and proportionate responsibilities (70%) for all of Province's liabilities. Prepare Alberta's proportionately adjusted balance sheet as at December 31, 2023.

24) The following balance sheets have been prepared on December 31, 2023 for Clarke Corp. (Clarke) and Jensen Inc. (Jensen) Balance Sheets Clarke

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Jensen

Cash

$30,000

$20,000

Inventory

70,000

30,000

Accounts receivable

180,000

70,000

Investment in Jensen

200,000

Fixed assets

500,000

90,000

Accumulated depreciation

(280,000)

(30,000)

Total assets

$700,000

$180,000

Current liabilities

$120,000

$60,000

Long-term debt

400,000

20,000

Common shares

90,000

40,000

Retained earnings

90,000

60,000

Liabilities and equity

$700,000

$180,000

Additional Information: Clarke uses the cost method to account for its 50% interest in Jensen, which it acquired on January 1, 2020. On that date, Jensen's retained earnings were $20,000. The acquisition differential was fully amortized by the end of 2023. Clarke sold land to Jensen during 2022 and recorded a $15,000 gain on the sale. Jensen still owns the land on December 31, 2023. In 2023, Jensen sold inventory to Clarke for $50,000. Clarke sold 40% of the inventory to outsiders. Intercompany sales are made at a gross profit rate of 20%. Jensen borrowed $20,000 interest-free from Clarke during 2023. Jensen has not yet repaid any of its debt to Clarke. Both companies are subject to a tax rate of 20%.

24.1) Prepare a Consolidated Balance Sheet for Clarke on December 31, 2023 assuming that Clarke's investment in Jensen is a control investment.

24.2) Prepare a proportionately adjusted balance sheet for Clarke at December 31, 2023 assuming that Clarke's investment in Jensen is a joint operation investment and Clarke reports its investment in Jensen in its proportionately adjusted financial statements. Clarke has proportionate rights (50%) to all of Jensen's assets and proportionate responsibilities (50%) for all of Jensen's liabilities.

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24.3) Prepare a Balance Sheet for Clarke on December 31, 2023 assuming that Clarke's Investment in Jensen is a joint venture investment and is reported using the equity method.

24.4) Prepare a balance sheet for Clarke at December 31, 2023, assuming that Clarke's investment in Jensen is a significant influence investment and is reported using the equity method.

25) Globecorp International has six operating segments, the details of which are shown below. All figures shown are in thousands of dollars. Operating Segment

Revenues

Profits

Assets

A01

$6,000

$1,050

$12,000

B02

4,800

840

10,500

C03

3,600

720

7,500

D04

1,800

330

4,500

E05

2,550

405

4,200

F06

900

135

1,800

Total

$19,650

$3,480

$40,500

25.1) sing only the operating profit (loss) test, determine which of the operating segments require separate disclosures.

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25.2) Using only the revenue test, determine which of the operating segments require separate disclosures.

25.3) Using only the assets test, determine which of the following segments require separate disclosures.

26) X Ltd. (X) and Y Ltd. (Y) formed a joint venture called ABC Inc. (ABC) on January 1, 2023. X contributed equipment with a book value of $600,000 and a fair value of $2,100,000 for a 50% interest in the joint venture. On December 31, 2023, ABC reported a net income of $612,000. The equipment transferred has an estimated useful life of 20 years. Ignore taxes. Assume the transaction does not have commercial substance because X owned a similar portion of the same type of equipment both before and after the contribution to the joint venture.

26.1) Calculate the gain on the contribution of equipment and prepare the journal entries to record the events on January 1 and December 31, 2023. In addition, using the equity method, calculate X's share of ABC's net income and the amount it will recognize.

26.2) Assume X received a 50% interest plus $390,000 in cash. Prepare the journal entries to record the contribution of assets, the share of earnings and the realization of the gain on transfer. Version 1

27)

The following are the 2023 Income Statements of Roller Corp and Larmer Corp.

Income Statements For the Year Ended December 31, 2023 Roller

Larmer

Sales

$900,000

$360,000

Other income

60,000

21,000

Gain on sale of land

30,000

Cost of goods sold

420,000

168,000

Operating expenses

150,000

90,000

Depreciation expense

30,000

39,000

Income tax expense

120,000

45,000

Net Income

$240,000

$69,000

Other Information: During 2023 Larmer paid dividends of $24,000. Roller acquired its 60% stake in Larmer at a cost of $600,000 and uses the cost method to account for its investment. The changes to acquisition differential (AD) schedule showed the following changes for 2023:

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Machinery and equipment

$10,000

Goodwill impairment loss

5,000

Long-term liabilities

(3,000)

Total changes to AD

$12,000

During 2023, Larmer paid rent to Roller in the amount of $12,000, which Roller has recorded as other income. In 2022, Roller sold land to Larmer and recorded a profit of $50,000 on the sale. During 2023, Larmer sold the land to a third party. Both companies are subject to a 30% tax rate. Required: Prepare Roller Inc's 2023 income statement, assuming that Larmer is considered to be a joint venture and is reported using the equity method.

28) ABC Inc. has acquired all of the voting shares of DEF Inc and is gathering the necessary data to prepare consolidated financial statements. ABC paid $1,200,000 for its investment. Details of the companies' assets and liabilities on the acquisition date are shown below: Fair Value

Tax Base

Inventory

$80,000

Accounts receivable

$100,000

Land

$200,000

Buildings

$300,000

$200,000

Equipment

$250,000

$200,000

Accounts payable

$70,000

Required: Assuming that DEF hasn't set up deferred tax asset or liability accounts, determine the amounts that would be used to prepare the consolidated balance sheet on the acquisition date. Assume a tax rate of 50%.

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29) Arch Ltd. (Arch) invested $30 million in cash in Monarch Corporation (Monarch) which was determined to be a special-purpose entity (SPE) whose primary beneficiary is Arch. The balance sheet of Monarch on the acquisition date January 1, 2023 is shown below (all figures in millions $): Book Value

Fair Value

Cash

$30

Capital assets

100

Total assets

$120

130

Liabilities

$50

Owner’s equity Arch

Noncontrolling interest:

Total liabilities & equity:

$120

The fair value of Monarch's noncontrolling interest is $55. Required: Prepare the journal entry required for consolidation purposes on the date of acquisition assuming current Canadian GAAP.

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Answer Key Test name: ch 9 1) A 2) C 3) C 4) C 5) B 6) C 7) B 8) C 9) C 10) D 11) D 12) D 13) C 14) B 15) C 16) A 17) D 18) Section Break 18.1) A 18.2) B 18.3) B 18.4) B 18.5) A 18.6) A 18.7) A 18.8) B Version 1

18.9) B 18.10) A 18.11) D 18.12) A 18.13) A 19) Section Break 19.1) D 19.2) B 19.3) A 19.4) B 19.5) D 19.6) B 19.7) B 20) Section Break 20.1) D 20.2) B 20.3) D 20.4) B 20.5) A 21) Section Break 21.1) D 21.2) C 21.3) B 21.4) C 22) Section Break 22.1) A 22.2) B 23) Section Break 24) Section Break 25) Section Break Version 1

26) Section Break

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Student name:__________ 1) Which of the following is NOT currently a cause of fluctuation in foreign exchange rates?

A) Inflation rates. B) The pegging of a currency to the American (US) dollar. C) Interest rates. D) Trade surpluses and deficits.

Which of the following statements is correct?

A) In Canada, the cost of a unit of foreign currency in Canadian dollars is a direct quotation, while the cost in that foreign currency of purchasing one Canadian dollar is referred to as an indirect quotation. B) In Canada, the cost of a unit of foreign currency in Canadian dollars is an indirect quotation, while the cost in that foreign currency of purchasing one Canadian dollar is referred to as a direct quotation. C) In Canada, the cost of a unit of foreign currency in Canadian dollars is a direct quotation, and the cost in that foreign currency of purchasing one Canadian dollar is also referred to as a direct quotation. D) In Canada, the cost of a unit of foreign currency in Canadian dollars is an indirect quotation, while the cost in that foreign currency of purchasing one Canadian dollar is also referred to as an indirect quotation.

3) The rate charged by commercial banks for the purchase of any foreign currency (in Canadian dollars) on any given day would be based on which of the following?

A) The average rate. B) The closing rate. C) The spot rate. D) The forward rate.

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4) At the end of each reporting period, monetary items denominated in a foreign currency must be translated at what rate?

A) The exchange rate in effect at the time of settlement of the contract. B) The historical rate. C) The closing rate. D) The forward contract rate.

Which statement best describes a forward exchange contract?

A) An agreement between the bank and customer to exchange currencies on a specified future date at a specified rate that is agreed upon today. B) A contract between two parties that is settled with foreign currency at the current market rate. C) An agreement between the bank and customer to exchange currencies on a specified future date at the spot rate in effect at that time. D) An agreement to settle a foreign currency denominated receivable or payable on a specified date at the current market rate.

6) Currently, IAS 21 does not contain requirements on the exchange rate to use by an entity when the spot rate is not observable. In a recent Exposure Draft, steps to take to address the lack of exchangeability between currencies have been suggested. Which of the following is NOT one of the steps?

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A) Identify the circumstance in which exchangeability is lacking. B) Estimate the spot exchange rate based on an exchange rate that would have been accessible at the reporting date, based on market transactions and faithfully reflects economic conditions. C) Provide appropriate disclosure which would include the spot rate used, whether the rate was an observable or estimated and the risks the entity is exposed to because of currency's lack of exchangeability. D) Apply the proposed amendments retroactively to ensure comparability of financial statements from prior periods.

7) What indicator(s) does management primarily rely on to determine the functional currency?

A) Where the sales, labour and materials occur or are obtained and in which currency. B) What stock exchange the company is listed on. C) The currency in which the debt and equity instruments are issued. D) The currency in which excess cash is retained.

8) Which of the following statements pertaining to the functional currency translation (FCT) method is INCORRECT?

A) Foreign currency monetary items must be translated at the closing rate the end of each reporting period. B) It is appropriate to use a weighted average of the historical rates throughout a period to translate foreign currency nonmonetary items as long as the exchange rates do not fluctuate significantly. C) Any exchange adjustments resulting from the translation of monetary items at rates different from those used on initial recognition are recognized in other comprehensive income. D) The FCT method produces translation results consistent with the valuation practices for domestic operations.

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9) Which of the following statements accurately describes the way transactions must be translated under IAS 21.17?

A) All individual transactions must be translated into the functional currency of the reporting entity. B) All individual transactions must be converted into the local currency of the reporting entity. C) All individual transactions are to be reported into the currency of the jurisdiction where the majority of shareholders reside. D) All individual transactions may be reported into the currency of the country where the corporation does the majority of its business.

10)

Which of the following statements is INCORRECT?

A) The historical rate is the exchange rate on the date of the transaction and the closing rate is the exchange rate at the end of the reporting period. B) The forward rate and spot rate on the date of the transaction are the same rate. C) The spot rate is the rate on the date of the transaction and the historical rate on the date of the transaction are the same rate. D) The average rate is the exchange rate used only for transactions where using the historical rate for each transaction would be very costly and not worth the cost-benefit trade-off.

11) Some gains and losses arising on a revaluation of property plant and equipment are to be included in other comprehensive income. When the asset is measured in a foreign currency, how would exchange differences be treated?

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A) As an item to be included in income or loss for the year. B) As a reduction or increase in the carry cost of the asset. C) As a contra account to be fully disclosed and to show the impact of foreign exchange differences. D) The differences should be included in the calculation of other comprehensive income.

12) According to IFRS 9, which of the following statements pertaining to a forward exchange contract is true?

A) A forward contract is valued using spot rates throughout its life with any gains or losses to be deferred and amortized as they occur. B) A forward contract is valued at fair value throughout its life with any gains or losses to be deferred and amortized as they occur. C) A forward contract is valued using spot rates throughout its life with any gains or losses to be taken into income as they occur. D) A forward contract is remeasured at fair value throughout its life, with any gains or losses reflected in net income as they occur.

13)

Which of the following statements best describes the purpose of hedge accounting?

A) To recognize the exchange gains or losses on the hedging instrument in the same period as the exchange gains or losses on the hedged item. B) To minimize or eliminate the risk of suffering a loss. C) To assess whether a hedging relationship meets the hedge effectiveness requirements. D) To record the amount of exchange gain or loss from the hedging instrument and hedged item.

14)

Which of the following statements is NOT correct?

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A) In a fair value hedge, the entity uses a hedging instrument to hedge against the fluctuation in the fair value of the hedged item. This method will be used when the hedged item will be valued at fair value. B) In a cash flow hedge, the entity uses a hedging instrument to hedge against the fluctuation in the Canadian dollar value of future cash flows. C) The gain or loss on the hedging instrument in a cash flow hedge is initially reported in other comprehensive income and reclassified to profit and loss when the hedged item affects profit. D) The gain or loss on the hedging instrument in a fair value hedge is deferred and recognized in profit and loss when the performance obligations are no longer outstanding.

15) In which of the following situations does a gain or loss on a hedged item get recognized in net income before the hedged item legally exists?

A) A speculative forward contract. B) A fair value hedge of a firm commitment. C) A fair value hedge of a recognized monetary item. D) A cash flow hedge of a forecasted transaction.

16) Which of the following provides the best hedge against exchange variations in the value of a stream of income in a foreign currency where the payments are expected to occur in equal amounts over a period of five years?

A) Borrowing in the foreign currency with repayment due at the end of the five years. B) Borrowing in Canadian dollars with repayment due at the end of the five years. C) Borrowing in the foreign currency with annual repayments equal to the expected annual revenue cash flows. D) Borrowing in Canadian dollars with annual repayments equal to the expected annual revenue cash flows.

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17)

Which of the following is NOT a characteristic of a forward exchange contract?

A) Its value changes in response to a change in a foreign exchange rate. B) It requires no initial net investment. C) It is settled at a future date. D) It can be settled independently of the other party to the contract.

18) Case Ltd. (Case) was incorporated in Canada. Case mainly sells the product it manufactures within Canada but recently found a market for some of its products in the United States (US). Payment is to be made in US dollars when the product is delivered to the US customers. Case maintains its general ledger and presents its financial statements in Canadian dollars.

18.1) IAS 21 requires that Case translate individual transactions using which currency perspective?

A) Presentation currency. B) Recording currency. C) Functional currency. D) Denominated currency.

18.2) Which method of translation should Case use to translate the transactions denominated in US dollars?

A) Functional currency translation method. B) Spot rate method. C) Presentation currency translation method. D) Current-rate method.

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19) On July 1, 2023, CANCO purchased inventory from its main US supplier, RNB Enterprises, at a cost of US$12,000. CANCO's year end is on July 31. Payment of US$12,000 for the inventory is due on August 31, 2023. Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are shown below: Transaction date: July 1, 2023:

1 US Dollar = CDN$1.370

Year end: July 31, 2023:

1 US Dollar = CDN$1.345

Settlement date: August 31, 2023:

1 US Dollar = CDN$1.426

19.1) What was the amount in Canadian dollars paid by CANCO to RNB on the settlement date?

A) CDN$15,900 B) CDN$17,112 C) CDN$16,440 D) CDN$12,000

19.2) At what amount would CANCO record its inventory purchase from RNB on July 1, 2023?

A) CDN$15,900 B) CDN$16,440 C) CDN$16,140 D) US$12,000

19.3) At what amount would CANCO record its liability to RNB at the time of the inventory purchase?

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A) CDN$15,900 B) CDN$16,440 C) CDN$16,140 D) US$12,000

19.4) What would be the amount of the foreign exchange gain or loss recorded for the year end, July 31, 2023?

A) A CDN$300 exchange loss. B) A CDN$540 exchange gain. C) A CDN$300 exchange gain. D) Nil. Any exchange gain or loss is deferred until settlement.

19.5) What would be the amount of the foreign exchange gain or loss recorded at the settlement date?

A) A CDN$972 exchange loss. B) A CDN$972 exchange gain. C) A CDN$672 exchange gain. D) A CDN$672 exchange loss.

20) On January 1, 2023, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$210,000 worth of inventory to its main US distributor in Chicago, with full payment of these goods due by February 28, 2023. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below.

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Transaction Date: January 1, 2023

US $1 = CDN $1.141

Year-End Date: January 31, 2023

US $1 = CDN $1.137

Settlement Date: February 28, 2023

US $1 = CDN $1.145

The invoice price billed by CMI was US$210,000.

20.1)

At what value would CMI record the initial sale to its American distributor?

A) CDN$238,770 B) US$210,000 C) CDN$239,610 D) CDN$240,450

20.2)

What is the amount of CMI's foreign exchange gain or loss at year-end?

A) CDN$840 loss B) CDN$1,680 gain C) CDN$840 gain D) Nil; foreign exchange gains or losses are deferred to the settlement date

20.3) What is the amount of cash (in Canadian funds) received by CMI on the settlement date?

A) US$210,000 B) CDN$239,610 C) CDN$240,450 D) CDN$238,770

20.4)

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What is the amount of CMI's foreign exchange gain or loss on February 28th?

A) CDN$1,680 loss. B) CDN$840 gain. C) CDN$1,680 gain. D) CDN$840 loss.

20.5) What is the total amount of CMI's foreign exchange gain or loss on this transaction?

A) CDN$840 loss B) CDN$1,680 gain C) CDN$1,680 loss gain D) CDN$840 gain

21) XYZ Corp. (XYZ) has a calendar year end. On January 1, 2022, the company borrowed $5,000,000 US dollars from an American bank. The loan is to be repaid on December 31, 2025 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in US dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates are in effect throughout the term of the loan: January 1, 2022

US $1 = CDN $1.1800

December 31, 2022

US $1 = CDN $1.1920

December 31, 2023

US $1 = CDN $1.1735

December 31, 2024

US $1 = CDN $1.2340

December 31, 2025

US $1 = CDN $1.1650

The average rates in effect for 2022 and 2023 are as follows: 2022:

US $1 = CDN $1.1662

2023:

US $1 = CDN $1.1787

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21.1) At what amount (in Canadian Dollars) would XYZ record its initial loan liability on January 1, 2022?

A) $5,831,000 B) $5,900,000 C) $5,960,000 D) $5,893,500

21.2)

What is the amount of interest expense (in Canadian Dollars) recorded for 2022?

A) $250,000 B) $298,000 C) $291,550 D) $294,675

21.3)

What is the amount of interest paid (in Canadian Dollars) during 2022?

A) $250,000 B) $298,000 C) $291,550 D) $295,000

21.4) What is the amount of the foreign exchange gain or loss recognized on the 2022 income statement because of revaluing the loan payable?

A) A CDN$60,000 loss B) A CDN60,000 gain C) A CDN$69,000 gain D) No exchange gain or loss to be reported.

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21.5) Which of the following is the correct amount (in Canadian Dollars) that XYZ would have to adjust its loan liability on December 31, 2022 because of the year's foreign exchange rate fluctuations?

A) $60,000 increase. B) $60,000 decrease. C) A $69,000 increase. D) No adjustment is required for noncurrent monetary items.

21.6)

What is the amount of interest paid (in Canadian Dollars) during 2023?

A) $250,000 B) $293,375 C) $294,675 D) $298,000

21.7)

What is the amount of interest expense (in Canadian dollars) recorded for 2023?

A) $293,375 B) $250,000 C) $294,675 D) $287,250

21.8) What is the amount of foreign exchange gain or loss recognized on the 2023 income statement because of revaluing the loan payable?

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A) $60,000 loss B) $32,500 gain C) $60,000 gain D) $92,500 gain

21.9) By what amount (in Canadian Dollars) would XYZ have to adjust its loan liability on December 31, 2023 because of the year's foreign exchange rate fluctuations?

A) $60,000 increase B) $92,500 decrease C) $92,500 increase D) No adjustment is required for noncurrent monetary items.

22) Tall Ltd.'s (Tall) year-end is on December 31. On November 1, 2022 when the US dollar was worth CDN$1.365, Tall sold merchandise to an American client for US$525,000. Full payment of this invoice was expected by March 1, 2023. On December 1, the spot rate was CDN$1.345, and the three-month forward rate was CDN$1.367. In order to minimize its foreign exchange risk and exposure, Tall entered into a forward contract with its bank on December 1, 2022 to deliver US$525,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2022 to March 1, 2023 was CDN$1.34. On March 1, 2023, Tall received the US$525,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable. Tall has not adopted hedge accounting. Significant dates and exchange rates pertaining to this transaction are as follows: Spot Rates November 1, 2022 (Transaction date)

US$1 = CDN$1.365

December 1, 2022 (Hedge date)

US$1 = CDN$1.3450

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Forward Rates*

US$1 = CDN$1.367

December 31, 2022 (Year-end)

CDN$1.36

CDN$1.34

March 1, 2023 (Settlement date)

US$1 = CDN$1.368.

*For contracts expiring on March 1, 2023.

22.1)

At what amount (in Canadian Dollars) would Tall's sale be recorded initially?

A) $525,000 B) $717,675 C) $716,625 D) $706,125

22.2)

What is the amount of Tall's foreign exchange gain or loss prior to its hedge?

A) A CDN$10,500 loss. B) A CDN$10,500 gain. C) A CDN$1,050 gain. D) No gain or loss to report until settlement date.

22.3) At what amount (in Canadian Dollars) would the forward contract with the bank be recorded, if recorded using the gross method?

A) $717,675 B) $525,000 C) $706,125 D) $716,625

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22.4) How much (in Canadian Dollars) will Tall expect to receive from the bank when its forward contract is settled?

A) $717,675 B) $718,200 C) $525,000 D) $706,125

22.5)

What is the amount of the discount or premium on the forward contract?

A) CDN$10,500 premium B) CDN$10,500 discount C) CDN$11,550 discount D) CDN$11,550 premium

22.6) Which of the following is the carrying value of the accounts receivable on December 31, 2022?

A) $703,500 B) $716,625 C) $525,000 D) $714,000

22.7)

What is the amount of the exchange gain or loss on the forward contract for 2022?

A) A gain of CDN$14,175 B) A loss of CDN$14,175. C) A gain of CDN$7875 D) Nil.

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22.8) What is the amount exchange gain or loss to be reported on the income statement for the year ended December 31, 2022?

A) A gain of $22,050 B) A loss of $10,500 C) A gain of $11,550 D) A loss of $11,550

22.9) How should the forward contract be presented on the balance sheet at December 31, 2022?

A) The forward contract is an executory contract and not reported until settled with the bank on March 1, 2023. B) A memorandum entry on December 1, 2022, to note that a forward contract has been entered into is all this is required for reporting. C) The forward contract is reported as an asset with a value of $14,175 on the balance sheet. D) The forward contract is presented as a liability with a value of $14,175 on the balance sheet.

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23) On July 1, 2022, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2022. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.354. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier and fix the price of the inventory. The merchandise was received on October 1, 2022, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3710. North purchased the US dollars to pay its supplier on November 15, 2022 when the spot rate was CDN$1.3725. The forward rate to November 15, 2022, was CDN$1.365 on October 1 and CDN$1.37 on October 31. A summary of the significant dates and exchange rates pertaining to this transaction are as follows: Spot Rates

Forward Rates*

July 1, 2022 (Order date and hedge date)

US$1 = CDN$1.3445

US$1 = CDN$1.354

October 1, 2022 (Delivery date)

US$1 = CDN$1.3575

US$1 = CDN$1.365

October 31, 2022 (Year-end)

CDN$1.371

CDN$1.37

November 15, 2022 (Settlement date)

US$1 = CDN$1.3725

*For contracts expiring on November 15, 2022

23.1)

What is the journal entry required to record the ordering of North's merchandise?

A) No entry is required.

B) Merchandise inventory Account payable

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806,700 806,700

C) Merchandise inventory

817,500

Account payable

817,500

D) Merchandise inventory Account payable

814,500 814,500

23.2) What amount will be recorded as the value of the forward contract on the commitment date if the forward contract is recorded using the net method?

A) $812,400 B) $806,700 C) $819,000 D) NIL

23.3) What is the amount of the liability to the bank on the commitment date if the forward contract is recorded using the gross method?

A) $806,700 B) $812,400 C) $819,000 D) NIL

23.4) What amount will be recorded as the value of the forward contract on October 31, 2022 (year-end) if the forward contract is recorded using the net method?

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A) A liability of CDN$4,500 B) An asset of CDN$4,500 C) An asset of CDN$9,600 D) Nil

23.5) What is the cost of the inventory to North if the exchange gain or loss on the forward contract is adjusted to the value of the inventory on the delivery date? (Assume hedge accounting is done)

A) CDN$806,700 B) CDN$819,000 C) CDN$814,500 D) CDN$807,900

23.6) Which of the following is the correct amount of exchange gain or loss arising from this transaction that will be reported in North's income statement for the year ended October 31, 2022?

A) CDN$5,100 loss B) CDN$3,000 gain C) CDN$10,200 loss D) Nil

23.7)

What is the amount of the discount or premium on the forward contract?

A) CDN$5,700 premium B) CDN$5,700 discount C) CDN$11,100 premium D) CDN$11,100 discount

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24) ABC Inc. sells thermal compressors throughout the world. On January 1, 2022, the company sold 500 compressors to an American customer at a total cost US$70,000 when the spot rate was US$1 = CDN$1.3750. Payment on the invoice was due by May 1, 2022. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.425 on January 2, 2022. The forward contract was declared to be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is on January 31, and on that date in 2022, the spot rate in effect was CDN$1.3845 and the forward rate to May 1, 2022 was CDN$1.430. ABC received payment from its supplier on May 1, 2022, when the spot rate was US$1 = CDN$1.465. A summary of the significant dates and exchange rates pertaining to this transaction are as follows: Spot Rates

Forward Rates*

January 1, 2022

US$1 = CDN$1.3750

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January 2, 2022 (Forward contract date)

US$1 = CDN$1.3750

US$1 = CDN$1.425

January 31, 2022 (Year-end)

CDN$1.3845

CDN$1.430

May 1, 2022 (Settlement date)

US$1 = CDN$1.465

*For contracts expiring on May 1, 2022.

24.1) Which of the following memorandum entries best describes the signing of the forward contract on January 2, 2022?

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A) ABC Inc. entered into a forward contract to pay US$70,000 in exchange for CDN$96,250 to be received from the bank on May 1, 2022. B) ABC Inc. entered into a forward contract to pay US$70,000 in exchange for CDN$102,550 to be received from the bank on May 1, 2022. C) ABC Inc. entered into a forward contract to pay CDN$99,750 in exchange for US$70,000 to be received from the bank on May 1, 2022. D) ABC Inc. entered into a forward contract to pay US$70,000 in exchange for CDN$99,750 to be received from the bank on May 1, 2022.

24.2)

What is the amount of the discount or premium on the forward contract?

A) $3,500 Discount B) $3,500 Premium C) $2,800 Discount D) $2,800 Premium

24.3) Assuming that the forward element and spot elements on the forward contract are accounted for separately, which journal entry is required to amortize the discount or premium?

A) OCI-Exchange gains/losses (forward)

875

Forward Contract

875

B) OCI-Exchange gains/losses (forward) Hedge Revenue

875 875

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Hedge expense OCI-Exchange gains/losses (forward)

875 875

D) No journal entry required

24.4) What is the required adjustment to ABC's accounts receivable at year-end as a result of this transaction?

A) CDN$665 decrease B) CDN$665 increase C) CDN$315 increase D) $6,300 decrease

24.5) 2022?

How should the forward contract be presented on the balance sheet at January 31,

A) The forward contract is an executory contract and not reported until settled with the bank on May 1, 2022. B) A memorandum entry on January 2, 2022, to note the signing of the forward contract is all this is required for reporting. C) The forward contract is reported as an asset with a value of $350 on the balance sheet. D) The forward contract is presented as a liability with a value of $350 on the balance sheet.

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25) Wise Ltd. (Wise) is a Canadian manufacturing company that produces inexpensive personal and laptop computers. The company has been generating progressively more of its sales from foreign markets. During 2022, the company started purchasing most of its components from a supplier in Germany. To deal with the uncertainty associated with foreign exchange fluctuations, all of Wise's foreign currency denominated receivables and payables are hedged with contracts with the company's bank. Wise's year-end is on December 31. The following transactions took place in 2022 and 2023: • On September 1, 2022, Wise purchased components from its German supplier for 100,000 Euros. On that date, Wise entered into a forward contract for 100,000 Euros at the 60-day forward rate of 1 Euro = CDN$1.538. The forward contract was designated as a fair value hedge of the amount payable to the German supplier. Wise settled with the bank and paid its supplier in full on December 1, 2022. • On December 1, 2022, Wise also shipped a batch of laptop computers to an American client for US$250,000. The invoice required that Wise receive its payment in full by January 31, 2023. On the date of the sale, the company entered into a forward contract for US$250,000 at the twomonth forward rate of US$1 = CDN$1.34. This forward contract was designated to be a fair value hedge of the amount due from the American customer. The dates and exchange rates relevant to these transactions are shown below. Spot rate

Forward rate

September 1, 2022

1 Euro = CDN$1.525

1 Euro = CDN$1.538

December 1, 2022

1 Euro = CDN$1.4800

December 1, 2022

US$1 = CDN$1.3200

US$1 = CDN$1.3400

December 31, 2022

US$1 = CDN$1.2700

US$1 = CDN$1.2600

25.1) Prepare the 2022 journal entries to record the above transactions assuming Wise uses the gross method. In addition, prepare any adjusting journal entries that you consider necessary.

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25.2) Provide the December 31, 2022 balance sheet presentation of the receivable from the American client and the accounts associated with the hedge. Assume Wise used the gross method to record the forward contract.

26) Canada Corp. (Canada) sells raw lumber to many countries around the world. On December 1, 2022, Canada shipped lumber to a customer in Japan. The selling price was established at 500,000 Yen with payment to be received on March 1, 2023. On December 3, 2022, Canada entered into a hedge with a Canadian bank at the 90-day forward rate of 1 Yen = CDN$1.185. The forward contract was designated as a fair value hedge of the receivable from the Japanese customer. Canada received the payment from its customer on March 1, 2023. Canada's year end is on December 31. Canada uses the gross method to record the forward contract. Selected spot and forward rates are as follows: Spot Rates

Forward rates (for contracts expiring on March 1, 2023

December 1, 2022:

1 Yen = CDN$1.155

December 3, 2022:

1 Yen = CDN$1.155

1 Yen = CDN$1.185

December 31, 2022:

1 Yen = CDN$1.1625

1 Yen = CDN$1.180

March 1, 2023:

1 Yen = CDN$1.1750

26.1)

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Prepare all journal entries for the relevant dates arising from this transaction.

26.2) Prepare a partial balance sheet for Canada on December 31, 2022 showing the account receivable from the customer in Japan as well as the accounts associated with the hedge.

26.3) Prepare the journal entries to record the receipt of the 500,000 Yen on March 1, 2023, assuming Canada Corp. did not enter into a hedge transaction in December 2022.

27) On January 1, 2020, Growth Inc. (Growth) purchased, in US funds, $500,000 of bonds of Big Company (Big). On that date, the bonds were trading at par. These bonds pay 10% interest annually each December 31. The bonds mature on December 31, 2022. The following exchange rates were applicable between 2020 and 2022. The following are the relevant foreign exchange rates:

27.1)

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January 1, 2020

US$1 = CDN$1.5254

Average rate for 2020

US$1 = CDN $1.5140

December 31, 2020

US$1 = CDN $1.4725

Average rate for 2021

US$1 = CDN $1.4600

December 31, 2021

US$1 = CDN $1.4425

Average rate for 2022

US$1 = CDN $1.4500

December 31, 2022

US$1 = CDN $1.4575

Prepare Growth's journal entries for each of 2020, 2021 and 2022.

27.2)

Compute the carrying value of the investment at the end of each year:

28) Prairie Dog Inc. borrowed US$10,000,000 on January 1, 2020 at an annual rate of 8%. The loan is due December 31, 2023 and interest is payable annually each December 31. The exchange rates on selected dates throughout the life of the loan are shown below: January 1, 2020

US$1 = CDN $1.4025

December 31, 2020

US$1 = CDN $1.4325

December 31, 2021

US$1 = CDN $1.4575

December 31, 2022

US$1 = CDN $1.4435

December 31, 2023

US$1 = CDN $1.4525

Assume that the average annual exchange rate was equal to the December 31st spot rates.

28.1)

Prepare the journal entries for 2020.

28.2) Calculate the exchange gains or losses that would be reported in the net income of the company for each year over the life of the loan.

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29) On July 1, 2023, Great White North (GWN) Inc. purchased merchandise from a supplier in the US for US$800,000 with terms requiring full payment by October 31, 2023. On July 2, 2023, GWN entered into a forward contract to purchase US$800,000 on October 31, 2023 at a rate of CDN$1.2275. The forward contract was designated as a hedge of the fair value of the amount due to the supplier. On October 31, 2023, GWN paid its supplier in full. Selected dates and spot rates are shown below: Spot Rates

Forward Rates (for 3-month contract)

July 1 & 2, 2023

US$1 = CDN $1.2150

US$1 = CDN $1.2275

July 31, 2023

US$1 = CDN $1.2175

US$1 = CDN $1.2225

October 31, 2023

US$1 = CDN $1.22

GWN has a July 31st year end.

29.1) Prepare all relevant journal entries necessary to record the above transaction assuming the forward contract is segregated between the spot element and the forward element. GWN uses the net method to record the forward contract.

29.2) Prepare a July 31, 2023 partial trial balance, indicating how each account balance would appear on the company's financial statements.

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29.3) Assuming that a forward contract was not entered into, prepare the relevant journal entries arising from this transaction.

30) Syrup Inc. (Syrup) sells maple syrup to many clients around the world. On December 1, 2022, the company shipped maple syrup to a client in the U.S. The selling price was established at US$180,000 with payment to be received on March 1, 2023. On December 3, 2022 the company entered into a hedge with a Canadian bank at the 90-day forward rate of US$1 = CDN$1.238. The forward contract was designated as a cash flow hedge of the amount due from the American customer. Syrup uses the net method to record the forward contract. Syrup received the payment from its American client on March 1, 2023. The company's yearend is on December 31. The two-month forward rate for US dollars was CDN$1.255 on that date. Selected spot rates were as follows: Spot Rates

Forward Rates

December 1, 2022:

US$1 = CDN$1.2355

December 3, 2022:

US$1 = CDN$1.2355

US$1 = CDN$1.238

December 31, 2022

US$1 = CDN$1.2455

US$1 = CDN$1.256

March 1, 2023:

US$1 = CDN$1.2480

30.1)

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Prepare all relevant journal entries arising from this transaction.

30.2) Prepare a partial balance sheet for Syrup on December 31, 2022 showing the account receivable from the American client as well as the accounts associated with the hedge.

30.3) Prepare the journal entries to record the receipt of the US$180,000 on March 1, 2023, assuming that Syrup did not enter into a hedge transaction in December 2022.

31)

Digital currencies such as Bitcoin and Ethereum, are accounted for as cash. ⊚ ⊚

true false

32) A forward contract is an executory contract which means until the contract has been fully executed at a future date by both parties, it is only disclosed in the notes to the financial statements. ⊚ ⊚

true false

33) Exchange gains and losses occur on items translated at the historical rate but not on items translated at the closing rate.

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⊚ ⊚

Version 1

true false

Answer Key Test name: ch 10 1) B 2) A 3) C 4) C 5) A 6) D 7) A 8) C 9) A 10) B 11) D 12) D 13) A 14) D 15) B 16) C 17) D 18) Section Break 18.1) C 18.2) A 19) Section Break 19.1) B 19.2) B 19.3) B 19.4) C 19.5) A Version 1

20) Section Break 20.1) C 20.2) A 20.3) C 20.4) C 20.5) D 21) Section Break 21.1) B 21.2) C 21.3) B 21.4) A 21.5) A 21.6) B 21.7) C 21.8) D 21.9) B 22) Section Break 22.1) C 22.2) A 22.3) A 22.4) A 22.5) D 22.6) D 22.7) A 22.8) C 22.9) C 23) Section Break 23.1) A 23.2) D 23.3) B Version 1

23.4) C 23.5) D 23.6) A 23.7) A 24) Section Break 24.1) D 24.2) B 24.3) B 24.4) B 24.5) D 25) Section Break 26) Section Break 27) Section Break 28) Section Break 29) Section Break 30) Section Break 31) FALSE 32) FALSE 33) FALSE

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Student name:__________ 1) Under the functional currency translation (FCT) method, which of the following statements is correct?

A) The relationship of balance sheet items is best preserved. B) A single historic rate is used to translate all income statement items. C) A net asset exposure is most likely. D) There is no exchange rate exposure for the translation of most nonmonetary items.

2) Under the presentation currency translation (PCT) method, which of the following statements is correct?

A) Transaction exposure is greatest. B) The relationship of balance sheet items is best preserved. C) Income statement items are translated using a mix of rates. D) The PCT method is used when the functional currency of the foreign subsidiary is same as the presentation currency of the parent.

3) If the functional currency of a foreign operation is different than the parent's functional currency, how are exchange gains and losses to be reported?

A) As part of other comprehensive income. B) Deferred in an exchange account. C) As part of the noncontrolling interest. D) As part net income.

4) If the functional currency of the foreign operation is the same as the parent's functional currency, which of the following statements is correct?

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A) The foreign operation's financial statements are translated using the functional currency translation (FCT) method. B) The foreign operation's financial statements are translated using the presentation currency translation (PCT) method. C) The foreign operation is classified as a foreign affiliate and its financial statements are not translated. D) The foreign operation is classified as a nonmonetary asset on the consolidated balance sheet.

5) Under the presentation currency translation (PCT) method, which of the following statements is correct?

A) All balance sheet items excluding shareholders equity are translated using the closing rate in effect at the balance sheet date. B) All balance sheet items are translated using the closing rate in effect at the balance sheet date. C) All balance sheet items are translated using the average rate in effect throughout the year. D) Only monetary assets and liabilities are translated using the closing rate in effect at the balance sheet date. Nonmonetary assets are translated using the historical rate.

6) The exposure resulting from the translation of foreign-currency-denominated financial statements into Canadian dollars is referred to as:

A) translation (accounting) exposure. B) transaction exposure. C) economic exposure. D) business risk exposure.

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7) What exposure exists when the present value of future cash flows change as a result of changes in exchange rates?

A) Translation (accounting) exposure B) Transaction exposure C) Economic exposure D) Business risk exposure

8) The risk exposure that occurs between the time of entering into a transaction and the time of settling it is referred to as:

A) translation (accounting) exposure. B) transaction exposure. C) economic exposure. D) business risk.

Which of the following statements is correct?

A) If the functional currency of the foreign operation is different than the parent's functional currency, the nonmonetary items recorded at cost must be translated using historical rates. B) If the functional currency of the foreign operation is different than the parent's functional currency, the nonmonetary items recorded at cost must be translated using average rates. C) If the functional currency of the foreign operation is different than the parent's functional currency, the nonmonetary items recorded at cost must be translated using closing rates. D) If the functional currency of the foreign operation is the same as the parent's functional currency, the nonmonetary items recorded at cost must be translated using closing rates.

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10) Which one of the following indicators would NOT support the Canadian dollar as the functional currency for a foreign operation?

A) The sales occur in Canada and are denominated in Canadian dollars. B) Intercompany transactions are a high proportion of the overall activities. C) Debt and equity instruments are issued in foreign currencies. D) The only goods that are sold are imported from the parent company.

11)

Which of the following statements is correct?

A) If the functional currency of the foreign operation is different than the parent's functional currency, depreciation and amortization must be translated using closing rates. B) If the functional currency of the foreign operation is different than the parent's functional currency, depreciation and amortization are translated using average rates. C) If the functional currency of the foreign operation is different than the parent's functional currency, depreciation and amortization must be translated using historical rates. D) If the functional currency of the foreign operation is the same as the parent's functional currency, depreciation and amortization must be translated using closing rates.

12) Which of the following statements is correct with respect to the translation of cost of sales in a foreign operation where the functional currency of the foreign operation is the same as the parent's functional currency?

A) Opening inventory is translated using an average rate. B) Opening inventory is translated using closing rates. C) Ending inventory is translated using an average rate. D) Ending inventory is translated using the rate in effect when the inventory was acquired.

13) Which of the following statements pertaining to the two methods under IAS 21 to translate the financial statements of a foreign operation is INCORRECT? Version 1

A) The presentation currency translation method preserves the relationship of balance sheet methods by using the same rate to translate all assets and liabilities. B) The presentation currency translation method is used when the functional currency of the foreign operation is the same as the presentation currency of the parent. C) The objective of the functional currency translation method is to produce a set of translated financial statements as if the transactions had first occurred in the functional currency. D) The functional currency translation method is used when the functional currency of the foreign operation is the same as the presentation currency of the parent.

14)

Which of the following statements is correct?

A) If a foreign currency weakens with respect to the Canadian dollar, both foreign operations with a functional currency that is the Canadian dollar and not the Canadian dollar, will show a foreign exchange gain. B) If a foreign currency weakens with respect to the Canadian dollar, both foreign operations with a functional currency that is the Canadian dollar and not the Canadian dollar, will show a foreign exchange loss. C) If a foreign currency weakens with respect to the Canadian dollar, a foreign operation with a functional currency that is not the Canadian dollar will show a foreign exchange gain while a foreign operation with a functional currency that is the Canadian dollar will show a foreign exchange loss. D) If a foreign currency weakens with respect to the Canadian dollar, a foreign operation with a functional currency that is not the Canadian dollar will show a foreign exchange loss while a foreign operation with a functional currency that is the Canadian dollar will show a foreign exchange gain.

15) In the situation where the foreign subsidiary operates in a hyperinflationary economy and the functional currency is the Canadian dollar, what steps should be taken by the Canadian parent company to translate the subsidiary's financial statements?

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A) The financial statements will be translated using the FCT method as usual. No steps are taken to adjust for inflation because the Canadian dollar is not subject to inflation. B) The financial statements will be translated using the PCT method as usual. No steps are taken to adjust for inflation because the Canadian dollar is not subject to inflation. C) The financial statements will have to be adjusted for inflation prior to being translated using the PCT method. D) The financial statements cannot be translated. The equity method will be used to report the investment.

16) Which of the following is an indication that the functional currency of a foreign operation is the Canadian dollar?

A) The foreign operation has a significant degree of autonomy. B) Excess cash is retained in foreign currency. C) Cash to pay obligations is generated by local operations or borrowed from local lenders. D) Intercompany transactions account for a high proportion of the foreign operation's overall activities.

17) A foreign subsidiary has earned income evenly over the year and it has paid its income taxes for the year in two instalments, half on June 30 and half on December 31. Assuming the foreign subsidiary's functional currency is the same as the parent's functional currency, what rate(s) should be used to translate the foreign subsidiary's income tax expense into Canadian dollars when preparing translated financial statements for the year ended December 31?

A) Half at the rate at June 30 and half at the rate at December 31. B) All at the average rate for the year. C) All at the closing rate for the year. D) All at the opening rate for the year.

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18) What is the cost of the investment in Foreign that Canadian will record in a journal entry on January 1, 2023?

A) CDN$1,150,000 B) FC1,000,000 C) CDN $1,220,000 D) CDN$1,180,000

19) Assuming Foreign's financial statements were translated using the functional currency translation method, what is the carrying amount of the trademark at December 31, 2023?

A) $326,860 B) $318,550 C) $337,940 D) $317,860

20) Assuming Foreign's financial statements were translated using the presentation currency translation method, what is the carrying amount of the trademark at December 31, 2023?

A) $326,860 B) $318,550 C) $337,940 D) $317,860

21) Assuming Foreign's financial statements were translated using the presentation currency translation method, what is the amount of consolidated net income attributed to the noncontrolling interest for the period ending December 31, 2023?

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A) $135,712 B) $140,612 C) $155,812 D) $145,612

22) Assuming Foreign's financial statements were translated using the presentation currency translation method, what is the exchange gain or loss (if any) resulting from the translation of the changes to the acquisition differential on consolidation?

A) $20,080 gain B) Nil. C) $21,000 gain D) $(900) loss

23) On January 1, 2023, Canadian Company (Canadian) acquired 80% of Foreign Company (Foreign) at a cost of FC1,000,000 (Note: FC = foreign currency). The carrying amount of Foreign's net assets were equal to fair values except for a trademark which had a fair value of $300,000 in excess of carrying amount. The trademark had a useful life of 15 years and no residual value at the date of acquisition. No goodwill was acquired in this business combination. Foreign had net income of FC$640,000 in 2023. Both companies have a December 31 year end. The relevant exchange rates for 2023 are as follows: January 1, 2023

FC1 = CDN$1.15

Average, 2023

FC1 = CDN$1.18

December 31, 2023

FC1 = CDN$1.22

23.1) On the consolidated balance sheet at December 31, 2023, the accumulated translation adjustments are only the parent's share.

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⊚ ⊚

true false

24) Art Inc. (Art), a Canadian company, has one wholly owned American subsidiary called Paint It Ltd. (Paint) based in Los Angeles, California, which was acquired January 1, 2023. Paint submitted its financial statements for 2023 to Art. Selected exchange rates in effect throughout 2023 are shown below: January 1, 2023:

US$1 =

CDN$1.35

December 31, 2023:

US$1 =

CDN$1.375

Average for 2023:

US$1 =

CDN$1.36

Date of purchase of inventory on hand:

US$1 =

CDN$1.345

Date dividends were declared and paid:

US$1 =

CDN$1.37

Paint's financial results for 2023 were as follows: Paint Financial Statements at December 31, 2023 (in U.S. dollars) Income Statement:

(in U.S. dollars)

Sales

$5,000,000

Cost of sales

3,500,000

Depreciation expense

150,000

Bond interest expense

100,000

Other expense

750,000

Net income

$500,000

Statement of Retained Earnings: January 1, 2023

$400,000

Net Income

500,000

Dividends

(100,000)

December 31, 2023

$800,000

Balance Sheet

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Cash

$1,200,000

Accounts receivable

1,900,000

Inventory

700,000

Plant and equipment (net)

400,000 $4,200,000

Current liabilities

$ 400,000

Bonds payable

2,000,000

Common shares

1,000,000

Retained earnings

800,000 $4,200,000

Otherinformation: • Sales, purchases, bond interest, and other expenses occurred evenly throughout the year. • Paint's functional currency is the U.S. dollar.

24.1) Which of the following rates would be used to translate Paint's income statement items?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.37 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.2) Which of the following rates would be used to translate Paint's retained earnings at the start of the year (January 1, 2023)?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.37 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

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24.3) Which of the following rates would be used to translate Paint's dividends declared during the year?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.37 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.4) Which of the following rates would be used to translate Paint's assets and liabilities?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.5)

Which of the following rates would be used to translate Paint's common shares?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.6)

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What is the amount of the gain or loss arising from translation?

A) A CDN$42,000 loss. B) A CDN$42,000 gain. C) A CDN$42,500 gain. D) A CDN$7,000 loss.

24.7)

Which of the following rates would be used to translate Paint's sales?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.37 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.8) Which of the following rates would be used to translate Paint's depreciation expense for the year?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.37 C) US$1 = CDN$1.36 D) Rate not provided.

24.9) Which of the following rates would be used to translate Paint's bond interest expense for the year?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.37 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

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24.10)

Which of the following rates would be used to translate Paint's other expenses?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.37 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.11) Which of the following statements describes how to translate Paint's ending retained earnings?

A) Use the rate provided for December 31, 2023. B) Use the average rate for 2023. C) Translate the beginning retained earnings using the January 1, 2023 rate, the net income using the average rate and the dividends using the rate on declaration date, dividends being paid before year end. D) Translate the beginning retained earnings using the January 1, 2023 rate, the net income using the average rate and the dividends using the rate on which dividend is actually paid.

24.12) Assuming Art uses the equity method to account for its investment in Paint, which of the following is the correct equity method income on Art's separate-entity income statement for 2023?

A) CDN$680,000 B) US$500,000 C) CDN$687,500 D) CDN$675,000

24.13) Version 1

Which of the following rates would be used to translate Paint's cash? 13

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.14) Which of the following rates would be used to translate Paint's accounts receivable?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.15)

Which of the following rates would be used to translate Paint's ending inventory?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.16) If there were no additions or disposals of plant and equipment in 2023, which of the following rates would be used to translate Paint's plant and equipment?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) Rate not available.

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24.17)

Which of the following rates would be used to translate Paint's current liabilities?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) US$1 = CDN$1.345

24.18)

Which of the following rates would be used to translate Paint's bonds payable?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) Rate not available.

24.19)

Which of the following rates would be used to translate Paint's common shares?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) Rate not available.

24.20) Assuming Art uses the equity method to account for its investment in Paint, how would Art report the dividends it received from its foreign subsidiary on its separate entity financial statements for 2023?

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A) Dividend income from a foreign entity is not taxable in Canada, therefore, not included in net income. B) As a reduction to the Investment in Paint account. C) As a dividend revenue reported in Canadian dollars on the income statement. D) Included in other comprehensive income as part of the translation adjustment.

24.21) Assuming goodwill was acquired in the business combination, at what rate would the goodwill be translated on December 31, 2023?

A) US$1 = CDN$1.35 B) US$1 = CDN$1.375 C) US$1 = CDN$1.36 D) Translation of the goodwill is unnecessary as the goodwill is acquired in Canadian dollars.

25) Terra Limited is located in Brazil and was incorporated on January 1, 2020. Terra issued no-par common shares for $6.0 million Brazilian reals (R). Terra immediately purchased plant and equipment for R4.0 million. The plant and equipment are being depreciated on a straight-line basis over a 10-year life. On January 1, 2023, Davis Inc. (Davis) acquired 90% of the shares of Terra Limited (Terra) for $7.0 Brazilian reals (R). The exchange rate on the acquisition date was R1 = CDN$0.23. The financial statements for Terra on December 31, 2023 are as follows: Terra Financial Statements at December 31, 2023 (in reals) Income Statement:

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Sales

R5,500,000

Cost of goods sold

2,500,000

Depreciation expense

400,000

Bond interest expense

100,000

Other expense

750,000

Net income

R1,750,000

Statement of Retained Earnings: January 1, 2023

R2,400,000

Net Income

1,750,000

Dividends

(500,000)

December 31, 2023

R3,650,000

BalanceSheets December 31, 2023

December 31, 2022

Cash

R2,200,000

R 500,000

Accounts receivable

2,600,000

2,550,000

Inventory

3,850,000

3,750,000

Plant and equipment

4,000,000

Accumulated depreciation

(1,600,000)

(1,200,000)

R11,050,000

R9,600,000

Current liabilities

R 400,000

R200,000

Bonds payable

1,000,000

Common shares

6,000,000

Retained earnings

3,650,000

2,400,000

R11,050,000

R9,600,000

Selected exchange rates are shown below: January 1, 2020

R1 =

CDN$0.185

January 1, 2023:

R1 =

CDN$0.23

December 31, 2023:

R1 =

CDN$0.217

Average for 2023:

R1 =

CDN$0.2145

Date of purchase of inventory on hand at December 31, 2023:

R1 =

CDN$0.225

Date dividends were declared and paid:

R1 =

CDN$0.248

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Otherinformation: • Sales, purchases, bond interest, and other expenses occurred evenly throughout the year. • There were no additions or disposals of plant and equipment in 2023 • Terra's functional currency is the Canadian dollar.

25.1) Which of the following is the correct translated amount for beginning retained earnings (January 1, 2023)?

A) $444,000 B) $514,800 C) $552,000 D) Insufficient information to translate.

25.2)

What is the amount of the gain or loss arising from translation in 2023?

A) Exchange loss - $(127,425) B) Exchange loss - $(3,425) C) Exchange loss - $(11,925) D) Exchange gain - $20,175

25.3) Which of the following rates would be used to translate Terra's dividends declared in 2023?

A) R1 = $0.185 B) R1 = $0.2145 C) R1 = $0.23 D) R1 = $0.248

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25.4) Which of the following is the correct translated amount for common shares at December 31, 2023?

A) CDN$1,380,000 B) R6,000,000 C) CDN$1,110,000 D) CDN$1,302,000

25.5) Which of the following rates would be used to translate Terra's accounts receivable at December 31, 2023?

A) R1 = $0.185 B) R1 = $0.2145 C) R1 = $0.23 D) R1 = $0.217

25.6) Which of the following rates would be used to translate Terra's ending inventory at December 31, 2023?

A) R1 = $0.185 B) R1 = $0.225 C) R1 = $0.23 D) R1 = $0.217

25.7) Which of the following rates would be used to translate Terra's plant and equipment at December 31, 2023?

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A) R1 = $0.185 B) R1 = $0.2145 C) R1 = $0.23 D) R1 = $0.217

25.8) Which of the following is the correct translated amount for Terra's accumulated depreciation at December 31, 2023?

A) $347,200 B) $343,200 C) $368,000 D) $296,000

25.9) Which of the following rates would be used to translate Terra's cash at December 31, 2023?

A) R1 = $0.185 B) R1 = $0.2145 C) R1 = $0.23 D) R1 = $0.217

25.10)

Which of the following is the correct translated amount of cost of goods sold?

A) $553,950 B) $536,250 C) $562,500 D) $542,500

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25.11)

Which of the following rates would be used to translate Terra's sales for 2023?

A) R1 = $0.185 B) R1 = $0.2145 C) R1 = $0.23 D) R1 = $0.217

25.12) Assuming goodwill was acquired in the business combination, at what rate would the goodwill be translated on December 31, 2023?

A) R1 = $0.185 B) R1 = $0.2145 C) R1 = $0.23 D) R1 = $0.217

26) Maker Ltd., an American company, acquired US$200,000 of capital assets on January 1, 2018 when the company was established. These assets were being amortized over 10 years on a straight-line basis, with no significant residual value expected. On January 1, 2022, Holdings Inc., a Canadian company with no capital assets of its own, acquired 100% of the outstanding shares of Maker. US$40,000 of the acquisition differential was allocated to the capital assets, which had eight years remaining economic life on the acquisition date. On March 1, 2023, Maker acquired a further $80,000 of capital assets, which had an estimated useful life of eight years from that date. Exchange rates for the period from January 1, 2018 to December 31, 2023 were:

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January 1, 2018

US$1.00 = CDN$1.056

January 1, 2022

US$1.00 = CDN$1.2684

Average for 2022

US$1.00 = CDN$1.2109

December 31, 2022

US$1.00 = CDN$1.2267

March 1, 2023

US$1.00 = CDN$1.2464

Average for 2023

US$1.00 = CDN$1.2096

December 31, 2023

US$1.00 = CDN$1.2335

26.1) If Maker is considered to be a foreign subsidiary where its functional currency is the U.S. dollar (i.e., different than the parent's functional currency), what amount will be shown for depreciation expense on its translated Canadian dollar financial statements as at December 31, 2022?

A) $20,000 B) $25,358 C) $21,200 D) $24,218

26.2) If Maker is considered to be a foreign subsidiary where its functional currency is the U.S. dollar (i.e., different than the parent's functional currency), what amount will be shown for capital assets (net) on its translated Canadian dollar financial statements as at December 31, 2022?

A) $105,600 B) $126,840 C) $147,204 D) $122,670

26.3) If Maker is considered to be a foreign subsidiary where its functional currency is the U.S. dollar (i.e., different than the parent's functional currency), what amount will be shown for amortization expense on its translated Canadian dollar financial statements as at December 31, 2023?

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A) $36,288 B) $34,949 C) $34,272 D) $31,506

26.4) If Maker's functional currency is the same as the parent's, what amount will be shown for capital assets (net) on its translated Canadian dollar financial statements as at December 31, 2022?

A) $122,670 B) $126,840 C) $105,600 D) $121,090

26.5) If Maker's functional currency is the same as the parent's, what amount will be shown for capital assets (net) on its translated Canadian dollar financial statements as at December 31, 2023?

A) $185,025 B) $190,798 C) $187,081 D) $188,720

26.6) If Maker's functional currency is the same as the parent's, what amount will be shown for depreciation expense on its translated Canadian dollar financial statements as at December 31, 2023?

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A) $32,096 B) $34,272 C) $35,754 D) $37,392

26.7) If Maker is considered to be a foreign subsidiary where its functional currency is the U.S. dollar (i.e., different than the parent's functional currency), what is the amount of the exchange gain or loss resulting from the translation of the changes to the acquisition differential for 2022?

A) $1,459 exchange loss B) Nil C) $1,746 exchange loss D) $645 exchange gain

27) On December 31, 2022, Hilman Enterprises of Montreal paid $12,000,000 for 100% of the outstanding shares of Wilson Corp. of the United States. Wilson's fair values approximated its book values on that date. Wilson's comparative balance sheets for 2022 and 2023 are shown below: Balance Sheet at December 31 (in U.S. dollars) 2023

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2022

Current monetary assets

$8,000,000

$7,500,000

Inventory

2,000,000

3,000,000

Plant and equipment (Net)

1,500,000

1,800,000

Total assets

$11,500,000

$12,300,000

Current liabilities

$1,100,000

$2,300,000

Bonds payable (due December 31, 2029)

5,000,000

Common shares

4,000,000

Retained earnings

1,400,000

1,000,000

Total liabilities and equity

$11,500,000

$12,300,000

Income Statement For the year ended December 31, 2023 (in U.S. dollars) Sales

$5,200,000

Inventory, January 1, 2023

3,000,000

Purchases

3,000,000

Inventory, December 31, 2023

(2,000,000)

Depreciation expense

300,000

Other expenses

400,000 4,700,000

Net income

$ 500,000

Other Information: Exchange Rates: December 31, 2022

US $1 = CDN$1.1850

September 30, 2023

US $1 = CDN$1.1975

December 31, 2023

US $1 = CDN$1.20

Average for 2023

US $1 = CDN$1.19

• Wilson declared and paid US $100,000 in dividends on September 30, 2023. • The inventories on hand at the end of 2023 were purchased when the exchange rate was US$1 = CDN$1.195. • Sales, purchases, and other expenses occurred evenly throughout the year.

27.1) Calculate Wilson's exchange gain or loss for 2023 assuming Wilson's functional currency is the same as Hilman Enterprises' functional currency (i.e., the Canadian dollar).

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27.2) Translate Wilson's 2023 income statement assuming Wilson's functional currency is the same as Hilman Enterprises' functional currency (i.e., the Canadian dollar).

27.3) Translate Wilson's December 31, 2023 statement of retained earnings assuming Wilson's functional currency is the same as Hilman Enterprises' functional currency (i.e., the Canadian dollar).

27.4) Translate Wilson's December 31, 2023 balance sheet assuming Wilson's functional currency is the same as Hilman Enterprises' functional currency (i.e., the Canadian dollar).

27.5) Calculate the exchange gain or loss that would result from the translation of Wilson's financial statements assuming Wilson's functional currency was the U.S. dollar (i.e., the functional currency of the foreign subsidiary is different than the parent's functional currency).

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27.6) Translate Wilson's 2023 income statement assuming Wilson's functional currency was the U.S. dollar (i.e., the functional currency of the foreign subsidiary is different than the parent's functional currency).

27.7) Translate Wilson's December 31, 2023 statement of retained earnings assuming Wilson's functional currency was the U.S. dollar (i.e., the functional currency of the foreign subsidiary is different than the parent's functional currency).

27.8) Translate Wilson's December 31, 2023 balance sheet assuming Wilson's functional currency was the U.S. dollar (i.e., the functional currency of the foreign subsidiary is different than the parent's functional currency).

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28) On January 1, 2023, Larmer Corp. (a Canadian company) purchased 80% of Martin Inc, an American company, for US$50,000. Martin's book values approximated its fair values on that date except for plant and equipment, which had a fair value of US$30,000 with a remaining life expectancy of 5 years. A goodwill impairment loss of US$1,500 occurred during 2023. Martin's January 1, 2023 balance sheet is shown below (in U.S. dollars): Current monetary assets

$50,000

Inventory

40,000

Plant and equipment

25,000

Total assets

$115,000

Current liabilities

$45,000

Bonds payable (maturity: January 1, 2029)

20,000

Common shares

30,000

Retained earnings

20,000

Total liabilities and equity

$115,000

The financial statements of Larmer (in Canadian dollars) and Martin (in U.S. dollars) are shown below: Balance Sheets At December 31, 2023 Larmer(Canadian dollars)

Martin(U.S. dollars)

Current monetary assets

$42,050

$65,000

Inventory

60,000

50,000

Plant and equipment

23,500

20,000

Investment in Martin (at cost)

66,250

-------

Total assets

$191,800

$135,000

Current liabilities

$50,000

$48,000

Bonds payable (maturity: January 1, 2029)

35,000

20,000

Common shares

60,000

30,000

Retained earnings

30,000

20,000

Net Income

28,800

27,000

Dividends

(12,000)

(10,000)

Liabilities and Equity

$191,800

$135,000

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Income Statements For the year ended December 31, 2023 Larmer(Canadian dollars)

Martin(U.S. dollars)

Sales

$80,000

$50,000

Dividend income

10,800

Cost of goods sold

(40,000)

(15,000)

Depreciation

(10,000)

(5,000)

Other expenses

(12,000)

(3,000)

Net income

$28,800

$27,000

Other information: • Sales, purchases, and other expenses occurred evenly throughout the year. • Dividends declared and paid December 31, 2023. • Larmer uses the cost method to account for its investment in Martin The following exchange rates were in effect during 2023: January 1, 2023:

US $1 = CDN$1.3250

Average for 2023:

US $1 = CDN$1.3350

Date when ending inventory was purchased:

US $1 = CDN$1.34

December 31, 2023:

US $1 = CDN$1.35

28.1) Compute Martin's exchange gain or loss for 2023 assuming Martin's functional currency was the Canadian dollar (i.e., the same functional currency as the parent).

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28.2) Translate Martin's 2023 income statement into Canadian dollars assuming Martin's functional currency was the Canadian dollar (i.e., the same functional currency as the parent).

28.3) Translate Martin's December 31, 2023 balance sheet into Canadian dollars assuming Martin's functional currency was the Canadian dollar (i.e., the same functional currency as the parent).

28.4) Prepare Larmer's December 31, 2023 consolidated balance sheet assuming Martin's functional currency was the Canadian dollar (i.e., the same functional currency as the parent).

28.5) Compute Martin's exchange gain or loss for 2023 assuming Martin's functional currency is the U.S. dollar (i.e., the functional currency of the foreign subsidiary is different than the parent's functional currency).

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28.6) Translate Martin's 2020 income statement into Canadian dollars if Martin's functional currency is the U.S. dollar (i.e., the functional currency of the foreign subsidiary is different than the parent's functional currency).

28.7) Calculate Larmer's consolidated net income for 2023 assuming Martin's functional currency is the U.S. dollar (i.e., the functional currency of the foreign subsidiary is different than the parent's functional currency).

29) Only those financial statement items translated at the closing rate, or the forward rate create translation exposure. ⊚ ⊚

true false

30) The functional currency of a foreign operation is likely to be the foreign currency if indicators determine the foreign operation is highly integrated with the Canadian operation. ⊚ ⊚

true false

31) Whether the functional currency is the same or different than the parent's functional currency, the contributed capital must be translated using historical rates. ⊚ ⊚

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true false

32) If the functional currency of the foreign operation is different than the parent's functional currency, dividends declared and paid during the year must be translated using closing rates. ⊚ ⊚

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true false

Answer Key Test name: ch 11 1) D 2) B 3) A 4) A 5) A 6) A 7) C 8) B 9) C 10) C 11) B 12) D 13) B 14) D 15) A 16) D 17) B 18) A 19) B 20) C 21) D 22) A 23) Section Break 23.1) TRUE 24) Section Break 24.1) C Version 1

24.2) A 24.3) B 24.4) B 24.5) A 24.6) B 24.7) C 24.8) C 24.9) C 24.10) C 24.11) C 24.12) A 24.13) B 24.14) B 24.15) B 24.16) B 24.17) B 24.18) B 24.19) A 24.20) B 24.21) B 25) Section Break 25.1) C 25.2) B 25.3) D 25.4) A 25.5) D 25.6) B 25.7) C 25.8) C 25.9) D Version 1

25.10) A 25.11) B 25.12) C 26) Section Break 26.1) D 26.2) D 26.3) C 26.4) B 26.5) B 26.6) C 26.7) C 27) Section Break 28) Section Break 29) TRUE 30) FALSE 31) TRUE 32) FALSE

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Student name:__________ 1)

Which of the following statements is correct?

A) Endowments are donations that are received with the provision that it will be invested and only the investment income may be spent by the organization. B) Endowments are unrestricted donations which can be used for any purposes that are consistent with the goals and objectives of the not-for-profit organization. C) Endowments are provided as donations which only allow a not-for-profit organization to invest in other not-for-profit organizations. D) Endowments may be restricted and unrestricted funds which must be used in accordance with the wishes of the contributor and only available during the life of the donor.

Which of the following statements is correct?

A) Resources that have internally imposed restrictions are reported in the same manner as externally restricted resources. B) Unrestricted resources can be used for any purpose the Board of Directors of the notfor-profit organization considers necessary. C) Restricted contributions are subject to externally imposed stipulations as to how the funds are spent or used. D) Both restricted and unrestricted funds must be used in accordance with the wishes of the contributor.

Which of the following statements is correct?

A) A contribution receivable should be recognized as an asset when the amount can be reasonably estimated AND the ultimate collection is reasonably assured. B) A contribution receivable should be recognized as an asset when the amount can be reasonably estimated OR the ultimate collection is reasonably assured. C) Bequests are accrued at the time the donor advises the NFPO of the gift. D) Government funding is recognized as contribution revenue as long as the government is the direct recipient of the good or service.

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4) Which of the following statements pertaining to an NFPOs interests or investments in other entities is incorrect?

A) Control of an NFPO is evidenced by the right to appoint the majority of the board of directors as allowed by that NFPOs by-laws or articles of incorporation. B) If an NFPO has control over a large number of NFPOs, it can decide to consolidate all NFPOs in one group and provide note disclosure for organizations in the other group. C) If an NFPO has control over profit-oriented companies, the NFPO can either consolidate or use the equity method. D) If an NFPO has significant influence over a another NFPO, it must be accounted for using the equity method.

How does a not-for-profit organization account for an interest in a joint venture?

A) By using either proportionate consolidation or the equity method. B) By using the equity method or cost method. C) By using proportionate consolidation D) By using the cost method.

6) Section 4433 contains a compromise provision applicable to small NFPOs. Which of the following statements pertaining to a small NFPO is false?

A) A small NFPOs average of annual revenues recognized in the statement of operations for the current and preceding period is less than $500,000. B) The small NFPO is exempt from having to record donated capital assets at fair value. C) A small NFPO is exempt from having to capitalize and amortize tangible capital assets. D) A small NFPO can choose to expense a capital asset when it is acquired.

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When is the earliest a bequest can be recorded?

A) When the person making the bequests dies. B) When the person making the bequest includes the amount of the donation in his or her will. C) When the beneficiaries of the estate decide to pay out the bequest. D) When the will has been probated and the time for appeal has passed?

8) For a small NFPO to qualify for the exemption provided for in Section 4433, these organizations must disclose all of the following EXCEPT:

A) Accounting policy for capital assets. B) Information about capital assets not shown in the balance sheet. C) The amount expensed in the current period if their policy is to expense capital assets when acquired. D) An appraised listing of the organization's capital assets, showing book values and appraised market values.

9) Collections are works of art that have been excluded from the definition of capital assets. Which of the following statements is NOT a criterion which must be met before works of art qualify as collections under Canadian accounting standards?

A) It must be possible to establish a useful life for the works and an appropriate amortization period. B) They are held for public exhibition, education, or research. C) They are protected, cared for, and preserved. D) They are subject to organizational policies that require any proceeds from their sale to be used to acquire other items for the collection, or for the direct care of the existing collection.

10) Which of the following financial statements are NOT required by not-for-profit organizations for external reporting purposes? Version 1

A) A balance sheet. B) A statement of changes in members' equity. C) A statement of changes in fund balance. D) A statement of revenues and expenses.

11) Section 4433 of the CPA Canada Handbook contains an exemption from capitalizing and amortizing capital assets for an NFPO that has revenues below $500,000. Which of the following statements pertaining to an NFPO that has revenues that subsequently increase to over $500,000 over a two- year period is TRUE?

A) The NFPO ceases to be a small NFPO but it is only required to capitalize and amortize if the increase in revenue is sustained for a period of two years. B) If the NFPO's revenues subsequently increase to below $500,000, the NFPO can continue to expense capital assets till the end of the accounting period. C) If the NFPO ceases to be a small NFPO, it does not need to adopt the policy of capitalizing and amortizing if that policy does not meet the needs of the financial statement users. D) The NFPO ceases to be a small NFPO and must capitalize and amortize on a prospective basis.

12)

A not-for-profit organization is required to record the donation of capital assets at:

A) a nominal value if fair value can't be determined. B) replacement cost. C) net realizable value. D) the original cost to the donor of the capital asset.

13) Where should the endowment contributions be presented in the financial statements of a not-for-profit organization under the deferral method?

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A) They are disclosed in the notes to the financial statements. B) They are presented as a deferred liability on the balance sheet. C) They are presented in the statement of changes in net assets. D) They are reported as contribution revenue in the statement of operations.

14) If a not-for-profit organization (NFPO) no longer qualifies as a small NFPO, how must it report its capital assets?

A) All asset purchases must be immediately and entirely expensed. B) All capital assets must be capitalized and amortized. C) All capital assets must be capitalized but not amortized. D) All capital assets must be disclosed in a note to the financial statements.

15) An NFPO may exercise significant influence over the strategic operating, investing, and financing activities of another NFPO. Which of the following is NOT a factor in determining significant influence?

A) Ability to place members on the board of directors B) Substantial transactions between the organizations C) Percentage of share ownership D) Sharing of senior personnel

16) NFPOs receive different types of contributions. Which of the following is a contribution with a restriction that the contribution cannot be spent, but must be maintained permanently?

A) Unrestricted contribution B) Endowment contribution C) Restricted contribution D) Internally restricted contribution

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17)

Which of the following is NOT a choice available to a small not-for-profit organization?

A) Capitalize and amortize capital assets. B) Capitalize and not amortize capital assets. C) Expense capital assets when acquired. D) Provide only note disclosure of the capital assets acquired.

18) Which of the following is NOT a requirement to permit a not-for-profit organization to record donated materials and services?

A) The fair value of the donation can be determined. B) The organization uses the deferral method of accounting for contributions. C) The materials or services would normally have been used in the organization's operations. D) The not-for-profit organization would have purchased the goods or services if they had not been donated.

19) If a not-for-profit organization uses the restricted fund method of accounting for contributions and has an endowment fund, how should an endowment contribution be reported?

A) As revenue in the general fund. B) As revenue in the endowment fund. C) As a direct increase in net assets in the general fund. D) As a direct increase in net assets in the endowment fund.

20) If a not-for-profit organization uses the restricted fund method to account for contributions and has a capital fund, how should a donation of cash restricted to the purchase of land be reported?

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A) As revenue in the general fund. B) As revenue in the capital fund. C) As a direct increase in net assets in the general fund. D) As a direct increase in net assets in the capital fund.

21) A not-for-profit organization uses the restricted fund method to account for contributions and has an endowment fund. How should the portion of investment income earned from the investment of endowment contributions be accounted for if it is required to be used to maintain the purchasing power of the endowment?

A) As investment income in the general fund. B) As investment income in the endowment fund. C) As a direct increase in net assets in the general fund. D) As a direct increase in net assets in the endowment fund.

22) A not-for-profit organization (NFPO) receives a restricted contribution of $20,000 to be used for expenses incurred for a specific project. During the current year, $14,000 is spent towards the project with the balance to be spent next year. The NFPO uses the deferral method of accounting for contributions. How much contribution revenue should the NFPO recognize in the current year?

A) $6,000 B) $14,000 C) $20,000 D) $34,000

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23) A not-for-profit organization receives a restricted contribution of $50,000 to be used for expenses incurred for a specific project. During the current year, $26,000 is spent towards the project with the balance to be spent next year. The NFPO uses the deferral method of accounting for contributions. What should the balance in the deferred contribution account be at the end of the year?

A) $50,000 B) $26,000 C) $24,000 D) Nil

24) A not-for-profit organization (NFPO) receives a restricted contribution of $30,000 to be used for expenses for a specific project. During the current year, $16,000 is spent towards the project with the balance to be spent next year. The NFPO uses the restricted fund method of accounting for contributions and has a fund for this project. How much contribution revenue should the NFPO recognize in the current year?

A) $30,000 B) $16,000 C) $14,000 D) Nil

25) A not-for-profit organization (NFPO) receives a restricted contribution of $70,000 to be used for expenses for a specific project. During the current year, $62,000 is spent towards the project with the balance to be spent next year. The NFPO uses the restricted fund method of accounting for contributions and has a fund for this project. What will the net fund balance in the restricted fund be at the end of the year?

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A) $70,000 B) $8,000 C) $62,000 D) Nil

26) A not-for-profit organization (NFPO) receives a restricted contribution of $20,000 to be used for expenses for a specific project. During the current year, $14,000 is spent toward the project with the balance to be spent next year. The NFPO uses the restricted fund method of accounting for contributions and does not maintain a separate fund for this project. How much donation revenue should the not-for-profit organization recognize in the current year?

A) $6,000 B) $14,000 C) $20,000 D) $34,000

27) A not-for-profit organization received unrestricted pledges of $200,000 and believes based on past experience that 95% of them will be paid. What entry should be made to record the pledges?

A) Debit Pledges receivable Donation revenue

Credit

190,000 190,000

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Debit Pledges Receivable

Credit

200,000

Allowance for pledges

10,000

Donation revenue

190,000

C) Debit Pledges receivable

200,000

Donation revenue Bad debt expense

Credit

200,000 10,000

Allowance for pledges

10,000

D) Debit Cash Donation revenue

28)

Credit

200,000 200,000

What reporting choices are given to Canadian private not-for-profit organizations?

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A) They may report under the Accounting Standards for Private Enterprises (ASPE) found in Part II of the CPA Canada Handbook without modification. B) They may report using the standards found in Part III of the CPA Canada Handbook and apply Part II (ASPE) to the extent that the Part II standards address topics not addressed in Part III. C) They may report under the International Financial Reporting Standards (IFRS) modified by the standards found in Part III of the CPA Canada Handbook. D) If the NFPO was formed prior to 2010, they may continue to report in accordance with the Canadian standards for not-for-profit enterprises that existed prior to 2011-2012.

29) When a not-for-profit organization uses the deferral method of revenue recognition and receives a cash donation restricted to the purchase of land, when should the donation be recognized as revenue?

A) When the cash is received. B) When the land is purchased. C) When the land is put into service by the organization. D) It should not be recognized as revenue at all.

30) A statement of changes in net assets in the financial statements of a not-for-profit organization corresponds most closely to which of the following in the financial statements of a profit-oriented business which reports under IFRS?

A) The statement of financial position. B) The statement of cash flows. C) The income statement. D) The statement of changes in shareholders' equity.

31) Which of the following is not a valid statement about a not-for-profit organization (NFPO)?

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A) In a smaller NFPO, there are no paid employees, only volunteers. B) A NFPO does not have to comply with Canadian GAAP since the scope of users for financial statements is limited. C) The resources provided to an NFPO are provided by contributors without expectation of gain or repayment. D) An NFPO typically provides services or goods to identifiable segments of society without expectation of profits.

32) Which of the following statements pertaining to the reporting requirements for public or private not-for-profit organizations (NFPOs) is false?

A) Private NFPOs have a choice of following either Part I (IFRS) or Part III (Accounting Standards for Not-for-Profit Organizations) of the CPA Canada Handbook. B) Public NFPOs have the choice of following either the CPA Public Sector Accounting (PSA) Handbook or Part I (IFRS) of the CPA Canada Handbook. C) Public NFPOs have the choice of following the CPA Public Sector Accounting (PSA) Handbook with or without the 4200 series. D) Private NFPOs that follow Part III (Accounting Standards for Not-for-Profit Organizations) of the CPA Canada Handbook also will apply relevant sections from Part II (ASPE).

33) Which of the following statements pertaining to an NFPO that receives a donation of inventory is correct?

A) The inventory should initially be recorded at fair market value, which then becomes its deemed cost from that point forward. B) The inventory should initially be recorded at the cost to the donor, which then becomes the NFPOs cost from that point forward. C) An NFPO that receives a donation of inventory that it plans to distribute for free, will measure the inventory at lower of cost and net realizable value. D) Inventory donated to an NFPO does not need to be recognized as it was received for no payment by the NFPO.

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34) Which of the following is NOT a category found in the equity section (i.e., net assets or fund balance) on the statement of financial position of an NFPO?

A) Net assets maintained permanently in endowments. B) Internally restricted and other externally restricted net assets. C) Unrestricted net assets. D) Excess of current assets over current liabilities.

35) Which of the following is NOT an option for reporting net assets invested in capital assets for an NFPO?

A) No separate presentation or disclosure. B) Present it as a separate component of net assets on the statement of financial position. C) Provide it in the notes to the financial statements. D) Include the net assets invested in capital assets as part of endowments.

36)

Which of the following statements pertaining to contributions to an NFPO is FALSE?

A) Contributions to an NFPO are nonreciprocal. B) Contributions include donations of property or services and pledges. C) Contributions are accounted for in the same manner as revenue from the sale of goods and services or from investments. D) Payments from members of an NFPO are classified as contributions if the member does not receive services for the amount paid.

37)

Which of the following statements pertaining to pledges is correct?

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A) The collection of pledges is legally enforceable and can be referred to a collection agency for nonpayment. B) When the allowance for estimated uncollectible pledges is established, the debit is made to bad debt expense. C) If the collectability of the pledge amount can be estimated based on historical results, the pledged amount should be recognized as a receivable offset with an allowance for estimated uncollectible amounts. D) A pledge amount should only be recognized as revenue when it is received in cash.

38) Which of the following statements pertaining to capital assets held by not-for-profit organizations is INCORRECT?

A) If fair value of the capital asset is not determinable, the capital asset is not recorded. B) Capital assets of limited useful life are to be amortized on a rational basis over their estimated useful lives. C) When a capital asset is donated, it is recorded at fair value. D) If a not-for-profit organization pays less than fair value, the capital asset is recorded at fair value and the difference between fair value and cost is recorded as a contribution.

39) Which one of the following is not the criteria that must be met to classify a combination of not-for-profit organizations (NFPOs) as a merger?

A) No consideration flows to a third party. B) An acquirer must be identified. C) There is no significant decline in the client communities served. D) Both NFPOs participate in determining the terms of the combination.

40) Which one of the following statements pertaining to a business combination that is classified as an acquisition is INCORRECT?

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A) The identifiable assets acquired, and liabilities assumed at their acquisition-date fair values must be identified by the acquirer. B) A gain on acquisition is reported on the statement of operations if there is any difference between the consideration transferred and the value assigned to the identifiable net assets. C) The primary reason for the acquisition of the NFPO must be disclosed. D) Since the cost-benefit test is not met, donor relationships would generally not be recognized.

41)

Which of the following statements pertaining to fund accounting is INCORRECT?

A) Fund accounting must be used if the restricted fund method is used to account for contributions. B) Fund accounting is used to provide information about restricted resources. C) For stewardship reporting, fund accounting requires a physical segregation of resources. D) Fund accounting results in a self-balancing set of accounts for each fund established by legal, contractual, or voluntary actions of the NFPO.

42)

Which of the following describes how volunteer services are recognized by the NFPO?

A) Volunteer services are reported as a contribution at the provincially legislated minimum wage per hour of service provided. B) The fair value of volunteer services is not recognized but a note to disclose the NFPOs reliance on volunteers is included in the financial statements. C) The deferral method should be used to report the value of the volunteer services provided. D) Volunteer services can be reported at fair value if they are needed by the NFPO.

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43) If a not-for-profit organization uses the restricted fund method to account for contributions and receives a restricted contribution for which it does not have a corresponding restricted fund, how should the contribution be recorded?

A) As a direct increase in net assets in the general fund. B) As contribution revenue in the endowment fund. C) As deferred revenue in the general fund. D) As contribution revenue in the general fund.

44) Which of the following statements pertaining to reporting "net assets invested in capital assets" is incorrect?

A) Net assets invested in capital assets represents resources spent on and tied up in capital assets and therefore, not available for spending. B) If the restricted fund method is used to account for contributions, net assets invested in capital assets is equal to the unamortized portion of all capital assets (net of associated debt) purchased with restricted resources. C) If the deferral method is used to account for contributions, net assets invested in capital assets is equal to the unamortized portion of all capital assets (net of associated debt) purchased with unrestricted resources. D) The reporting of net assets invested in capital assets as a separate component of net assets is optional.

45)

Which of the following entities are not permitted to use IFRS?

A) Government business enterprises. B) Private sector not-for-profit organizations. C) Government (public sector) not-for-profit organizations. D) Publicly accountable enterprises.

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46) Philanthropy Inc. (Philanthropy) is a not-for-profit organization that was formed on January 1, 2023. Philanthropy has a December 31 year end. It has an accounting policy of capitalizing and amortizing its capital assets. On April 1, 2023, Philanthropy purchased equipment costing $8,000. The equipment is estimated to have a useful life of 4 years, with no residual value at that time. This transaction was the only transaction that took place to date. Philanthropy uses the restricted fund method to account for its contributions. It has set up a general fund, a capital fund, and an endowment fund. The capital fund is used to account for restricted funds raised for building and equipment. The capital fund also records the capitalization of all buildings and equipment and the amortization taken. The equipment was purchased from a restricted fund contribution of $8,400.

46.1)

How is the equipment reported on December 31, 2023?

A) In the capital fund at a carrying value of $6,500. B) In the general fund at a carrying value of $6,500. C) As a deferred contribution in the capital fund with a balance of $6,500. D) In the capital fund at a carrying value of $6,000.

46.2)

What would the total fund balance be in the capital fund on December 31, 2023?

A) ($1,600) B) $400 C) $4,400 D) $6,900

46.3) Which of the following is an appropriate way to categorize the fund balance for the capital fund?

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A) Externally restricted funds and fund balance invested in capital assets. B) Fund balance Invested in capital assets. C) Externally and internally restricted funds. D) Unrestricted funds.

47)

A not-for-profit organization uses the deferral method to account for contributions.

47.1) How should the portion of investment income earned from the investment of endowment contributions be accounted for if it is required to be used to maintain the purchasing power of the endowment?

A) As investment income. B) As a deferred contribution. C) As a direct increase in net assets. D) As donation revenue.

47.2) How should investment income earned from the investment of endowment contributions be accounted for if the use of the investment income is restricted to a specific purpose for which the not-for-profit organization has no specific restricted fund?

A) As investment income. B) As a deferred contribution. C) As a direct increase in net assets. D) As donation revenue.

47.3) How should investment income earned from the investment of endowment contributions be accounted for if the use of the investment income is restricted to a specific purpose for which the not-for-profit organization has a restricted fund? Version 1

A) As investment income in the endowment fund B) As a deferred contribution C) As investment income in the general fund D) As investment income in the specific restricted fund

48) The following are selected transactions for HELP-ON-US (HOU), an NFPO for 2023. HOU uses the restricted fund method of accounting for contributions. HOU has an operating fund, a capital fund, and an endowment fund. The capital fund is used to account for restricted funds raised for building and equipment. The capital fund also records the capitalization of all buildings and equipment and the amortization taken. On January 1, 2023, the organization purchased equipment at a cost of $10,000. The equipment was estimated to have a useful life of 5 years with no residual value. Straight-line amortization is used.

48.1) Assuming the equipment was purchased from a restricted contribution that was made on January 1, 2023, in the amount of $11,000, prepare the required journal entries for 2023, indicating the fund or funds to be used.

48.2) Assuming the equipment was purchased from unrestricted contribution that was made on January 1, 2023, in the amount of $11,000, prepare the required journal entries for 2023, indicating the fund or funds to be used.

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48.3) Assume the specialized equipment was purchased from a restricted contribution that was made on January 1, 2023, in the amount of $11,000 for which a corresponding restricted fund hasnot been set up by HOU. Prepare the required journal entries for 2023, indicating the fund or funds to be used.

49)

CARE is a local charity which received the following donations during 2023:

• A local business donated plumbing services valued at $20,000. If the service had not been donated, CARE would have purchased it and used it for the necessary repairs to its staff kitchen and bathrooms. • An anonymous donor donated land with a fair value of $50,000 as well as machinery valued at $4,000. • During a recent fund-raising campaign, volunteers spent roughly 1,000 hours soliciting donations from the public. The minimum hourly wage rate in CARE's main area of operation is $15.00 per hour.

49.1) Prepare the necessary journal entries to record these transactions assuming that the deferral method of accounting for contributions is used. Note: if a journal entry is not needed, state your reason.

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49.2) Prepare the necessary journal entries to record these transactions assuming that the restricted fund method of accounting for contributions is used and the organization has a general fund, a capital fund and an endowment fund. The capital fund is used to account for restricted funds raised for land, building and equipment. The capital fund also records the capitalization of all buildings and equipment whether donated or purchased and the amortization taken. Note: If a journal entry is not needed, state your reason.

50) The Rift Valley Minor Hockey Association was established in the village of Rift Valley in early 2022. It was established to promote hockey in the village and surrounding territory. With the support of the provincial government, local businesspeople and many individuals, the association raised sufficient funds to build an indoor hockey arena and also established an endowment fund to cover maintenance costs. The association is required by the provincial government to prepare financial statements in accordance with generally accepted accounting principles. The board has decided that its year end will be June 30 and that capital assets will be capitalized and amortized over their expected useful lives. They have decided not to use fund accounting or the restricted fund method of accounting for contributions but will account for restricted donations using the deferral method of accounting for contributions. The first set of financial statements will cover the eighteen-month period from the establishment of the association to June 30, 2023. From the bank statements, you determine the following: Cash receipts: Government grant for operating purposes

$60,000

Government grant for construction of the arena

400,000

Corporate donations for the construction of the arena

520,000

Minor hockey player registration fees

70,000

Endowment fund contributions

100,000

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Ice rental and concession revenue

90,000

Interest income received

6,000

$1,246,000

Cash payments: Cost of construction of arena

$920,000

Operating expenses—minor hockey program

90,000

Purchases of inventory for the concession

60,000

Other operating costs

50,000

Investment of endowment fund contributions

100,000

Maintenance costs

3,000

Bank balance, June 30, 2023

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1,223,000 $23,000

Additionalinformation: 1. Thenew arena was completed and officially opened on Canada Day (July 1) of 2022. It has an estimated forty-year life with no residual value. 2. A long-term resident of Rift Valley donated the land upon which the arena was constructed. The land was valued at $120,000 and the association issued a receipt in that amount. Another resident donated ice-making and ice-cleaning equipment to the association. The equipment has an estimated useful life of six years and no residual value and was estimated to have a value of $66,000 when donated. 3. The endowment contribution was received at the opening celebration and was invested for one year at 5% interest. The terms of the endowment were that the income earned from its investment could be used only for maintenance costs for the arena. $3,000 of such costs were incurred and paid for in May 2023. (The other $1,000 in interest income was earned on the balances in the bank account.) 4. The government had agreed to provide funding of $10,000 per month for the eight months of the minor hockey season (September 1 to April 30 each year). The amount was payable at $7,500 per month during the season and the final $20,000 upon submission of the audited annual financial statements to the government. 5. Registration fees for minor hockey players cover the season from September to April. $10,000 of the fees received were payments in advance for the 2023-2024 season. 6. An inventory count was taken at the concession stand at the end of June 2023 and the inventory on hand was valued at $6,000 (lower of cost or realizable value). The concession stand sold snacks and drinks during minor hockey games and other events. 7. At June 30, 2023, unpaid invoices were $3,000 for concession purchases, $2,000 for hockey clinics held and $1,000 for miscellaneous other costs.

50.1) Prepare a statement of operations for the Rift Valley Minor Hockey Association for the eighteen-month period ended June 30, 2023.

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50.2) Prepare a statement of financial position for the Rift Valley Minor Hockey Association as at June 30, 2023.

51) On January 1, 2023, some residents of the community of Kiterup, B.C., formed the Kiterup Winter Sports Association (KWSA) which was organized as a not-for-profit organization which has as its purposes encouraging participation in outdoor winter sports. In its first year, the board decided to restrict its activities to ice skating and skiing. Initial funding was provided by an individual who made an endowment contribution of $200,000 which was invested in bonds and generated income during the year of $8,000. The donor placed no restrictions on the use of the income produced by the investment of the endowment contribution which were to be divided evenly between all programs undertaken by KWSA. During the year, donations of $750,000 were received and a further $150,000 of pledges was outstanding of which the board estimated $130,000 would be collected. It was agreed that such donations, all of which were unrestricted, would be divided evenly between the skating and skiing programs. As a practical matter, donations not yet received at year-end were restricted for use in the following year. A special fund drive was undertaken to raise money to provide skates to needy youngsters and skiing equipment to needy senior citizens. During the year, $25,000 was received in contributions for skates and $15,000 for contributions towards purchasing skis. During the year ended December 31, 2023, the organization incurred the following costs. Ice Skating Program Wages and salaries Ice skates

Skiing Program

$193,000

$81,000

8,000

Skiing equipment

9,000

Other equipment and supplies

58,000

75,000

Transportation

43,000

35,000

Rent

15,000

Other expenses

35,000

39,000

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$352,000

$254,000

At December 31, 2023, the only outstanding payables were for $30,000 relating to the skiing program (the costs are included in the table above). The ice skates and skiing equipment were paid for out of the funds raised by the special fund drive and were expensed as acquired. KWSA does not use fund accounting but uses the deferral method to account for restricted donations and uses programmatic reporting to report the results of its activities.

51.1) Prepare journal entries to record the transactions of the Kiterup Winter Sports Association for the year ended December 31, 2023. Closing entries are not required.

51.2) Prepare a statement of operations for the Kiterup Winter Sports Association for the year ended December 31, 2023.

51.3) Prepare a statement of financial position of the Kiterup Winter Sports Association as at December 31, 2023. Statements for the individual programs are not required.

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52) Helpers Cooperative (Helpers) uses the restricted fund method to account for contributions. Helpers has an operating fund, a capital fund, and an endowment fund. The capital fund is used to account for restricted funds raised for building and equipment. The capital fund also records the capitalization of all buildings and equipment and the amortization taken. The following transaction took place during the year: • Pledges amounting to $400,000 were received for operations, of which $80,000 applies to the operations of the following year. It is estimated that 2% of the pledges will be uncollectible. • The association purchased office equipment at a cost of $6,000. • Pledges of $300,000 were collected, while pledges amounting to $4,000 were written off as uncollectible. • A local newspaper agreed to donate to Helpers a full-page in the newspaper for advertising. This had an estimated value of $5,000. Helpers had planned to advertise the fundraising event it had scheduled for later in the month. • Interest and dividends received amounted to $15,000 on endowment fund investments. These earnings are considered unrestricted. • Depreciation for the year amounted to $40,000. Required: Prepare journal entries to record the above transactions. Also, indicate which fund will be used for each entry.

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53) XYZ is a local charity that commenced operations on January 1, 2023. XYZ uses the restricted fund method of accounting for contributions. XYZ has a general fund, a capital fund, and an endowment fund. The capital fund is used to account for restricted funds raised for building and equipment. The capital fund also records the capitalization of all buildings and equipment and the amortization taken. For the following partial data provided, prepare the journal entry to record that transaction.Specify which fund or funds must be used to record the entry. a) Revenue deferred earlier in 2023, in the amount of $5,000, was recognized. b) Pledges receivable in the amount of $10,000 were collected in full in 2023. c) Accounts payable and wages payable amounting to $10,000 and $5,000 were paid in 2023. d) Government grants amounted to $50,000, half of which was received in 2023. The balance is expected by late 2024. The grants may be applied to any of the organization's programs. e) Total wage costs in 2023 amounted to $60,000 which breaks down as follows: Program A

$40,000

Program B

$10,000

Administration

$10,000

25% of these expenses are still payable at the end of 2023. f) In 2023, a wealthy local businessman donated $100,000 to be held in endowment, with the interest earned to be unrestricted. g) The investments in the endowment fund earned interest in the amount $3,000 in 2023. h) Amortization expense for 2023 amounted to $10,000.

54) A capital asset (equipment) with a fair value of $1,500,000 and land with a fair value of $2,000,000 is donated to a not-for-profit organization on January 1, 2023. The equipment has a 10-year useful life. The organization will use the equipment in its operations. The NFPO has a December 31 year end. Prepare the journal entries (including amortization) if the organization uses the: (a) the deferral method for contributions. (b) the restricted fund method with a capital fund. Version 1

55)

Describe what fund accounting is and why is it used for not-for-profit organizations.

56) The financial statements and issues relating to going concern for an NFPO are similar to standards under ASPE. ⊚ ⊚

true false

57) An NFPO converting from Part I of the CPA Canada Handbook to Part III for the first time, is required to apply changes in accounting policies on a prospective basis unless an exemption or restriction is available. ⊚ ⊚

true false

58) To comply with GAAP, the gross revenues and gross expenses from a fundraising are recognized in the NFPO's financial statements no matter its actual involvement in the event. ⊚ ⊚

true false

59) The Canada Revenue Agency (CRA) allows the charity to issue a donation receipt for the fair market value of services provided to the charity.

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⊚ ⊚

true false

60) If a private sector NFPO choses to follow IFRS (i.e., Part I of the CPA Canada Handbook) but a standard for a specific accounting issue is not available, the NFPO may apply Part II or Part III as needed for reporting purposes. ⊚ ⊚

true false

61) Local governments require a change in provincial or territorial legislation before adopting new government accounting standards. ⊚ ⊚

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true false

Answer Key Test name: ch 12 1) A 2) C 3) A 4) D 5) A 6) B 7) D 8) D 9) A 10) B 11) D 12) A 13) C 14) B 15) C 16) B 17) D 18) B 19) B 20) B 21) B 22) B 23) C 24) A 25) B 26) B Version 1

27) B 28) B 29) D 30) D 31) B 32) B 33) A 34) D 35) D 36) C 37) C 38) A 39) B 40) B 41) C 42) B 43) C 44) B 45) C 46) Section Break 46.1) A 46.2) D 46.3) A 47) Section Break 47.1) C 47.2) B 47.3) D 48) Section Break 49) Section Break 50) Section Break Version 1

51) Section Break 56) TRUE 57) FALSE 58) FALSE 59) FALSE 60) FALSE 61) TRUE

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