TEST BANK for Modern advanced accounting in Canada, 8th Edition by Murray Hilton & Darrell Herauf. by welldoneassistant

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following would NOT be a reason to obtain a greater understanding of accounting

practices in other nations? A) Departures from the historical cost principle may be possible in other nations. B) Financial results are disclosed in different currencies. C) Income-smoothing may have affected a foreign subsidiary's results; such smoothing practices are not permitted in North America. D) One needs to be aware of differing disclosure requirements from nation to nation, as this impacts the preparation of financial statements. Answer: B 2) Which of the following would be most affected by financial statements being prepared under

different accounting principles? A) Reduced comparability. C) Reduced reliability.

B) Increased complexity. D) Inaccurate asset valuations.

Answer: A 3) The CPA Canada Handbook -- Accounting is the handbook of Canadian accounting standards. Why

do companies in Canada ensure that their financial reporting is consistent with Canadian GAAP? A) Their bank requires them to do so. B) Compliance with the CPA Canada Handbook - Accounting pronouncements is usually required by many legal statutes. C) Reporting under the CPA Canada Handbook - Accounting is required by public companies' boards of directors. D) Their auditors require them to do so. Answer: B 4) Which decision has Canada made with respect to financial reporting for private enterprises? A) To adopt the IFRS standards for small and medium-sized enterprises. B) To look to US GAAP for standards. C) To retain the current standards. D) To develop and maintain its own standards for private enterprises. Answer: D 5) Starting in 2011, what is the definition of a private enterprise (PE) under Canadian GAAP? A) A corporation that has less than 500 shareholders and is not listed on a stock exchange. B) A corporation that has no public shareholders. C) A corporation which is not profit oriented. D) 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. Answer: D

6) Which enterprises must report under IFRS in Canada? A) Public companies, private companies and not-for-profit organizations. B) All corporations, government agencies and private companies. C) Public companies and private companies whose shareholders' equity is in excess of

$500,000,000 at any particular year end. D) Publicly accountable enterprises. Answer: D 7) What approach did Canada first decide to take with respect to convergence with IFRS? A) Harmonization of CPA Canada Handbook with IFRS. B) Substituting IFRS for Canadian GAAP when approved by the IASB. C) Reviewing them with all publically accountable entities to see which ones would be acceptable. D) Adopting some but not necessarily all IFRSs by reviewing them on a case by case basis. Answer: A 8) What choice(s) do private enterprises have in their financial reporting in Canada? A) They may adopt accounting principles that are appropriate to the circumstances. B) They may elect to continue with differential reporting. C) They have no choice at all; they will need to report under IFRS. D) They may elect to report under either IFRS or ASPE. Answer: D 9) For which of the following types of organizations does the CPA Canada Handbook not provide

specific accounting standards? A) Proprietorships. C) Publicly accountable enterprises.

B) Private enterprises. D) Not-for-profit organizations.

Answer: A 10) Which of the following is NOT a reason why a Canadian private company would elect to report

under IFRS? A) It is likely to be less expensive than reporting under ASPE. B) The company seeks comparability with public companies of a similar size. C) The company is a subsidiary of a Canadian public company. D) The company is planning to go public in the near future. Answer: A 11) The current ratio measures: A) profitability of assets.

B) solvency.

C) liquidity.

D) profitability of owners' investment.

Answer: C 12) The formula for the current ratio is: A) current assets / current liabilities

B) net income / shareholders' equity

C) total debt / shareholders' equity

D) current assets - current liabilities

Answer: A 2

13) The debt-to-equity ratio measures: A) profitability of owners' investment.

B) liquidity.

C) solvency.

D) profitability of assets.

Answer: C SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 14) One of the underlying assumptions of the Historical Cost Principle is that a stable unit of measure

(currency) should be used for Financial Reporting. Is this always the case? Answer: The Historical Cost Principle is not very useful when inflation rates are high. As a result of the eroding purchase power associated with periods of high inflation, many countries have had to experiment with price-level adjustments. These adjustments often include asset revaluations to reflect their current values.

15) 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. is a public company based in Canada and follows IFRS while Y Inc. is a private enterprise based in Canada and follows ASPE. The following were the condensed income statements for both companies for the last year before both adopted IFRS.

Sales: Less: Cost of Goods Sold Gross Margin Administrative Expenses Net Income:

X Inc. Y Inc. $1,000,000 $2,000,000 $500,000 $1,600,000 $500,000 $400,000 $200,000 $300,000 $300,000

$100,000

Required: Given the information provided, what are some possible causes for the differing results of these companies? Answer: There could be many possible explanations for these differing results. Y Inc.'s net income is $100,000, compared to X Inc.'s $300,000. Conversely, Y Inc.'s sales are twice those of X Inc. What is particularly noteworthy is Y Inc.'s 20% gross margin compared to X Inc.'s 50% gross margin. This could be due to the accelerated depreciation on Y Inc.'s property, plant and equipment or provisions made for future maintenance costs. Smoothing practices may have been applied to reduce Y Inc.'s income, and of course, its tax liability. Y Inc.'s income may have been further reduced by higher estimates (for example: bad debt expense, warranty costs and so forth) which are not necessarily be indicative of economic conditions. Note: Once again, the above analysis is not necessarily exhaustive. Students may be able to identify other valid differences. 16) Briefly discuss the anticipated changes to accounting standards in Canada over the next few years. Answer: 1. The format and structure of financial statements may change to present a cohesive

relationship between the various statements; 2. The Conceptual Framework will be revised to create a sound foundation for future accounting standards that are principles based, internally consistent, and internationally converged. Relevance and faithful representation will be the fundamental qualitative characteristics of financial information. The definitions of assets and liabilities may change to focus more on rights and obligations to eliminate the reference to past events. When and how to use various measurement bases may be clarified. 4

17) What disclosure requirements must be met when a Canadian company adopts IFRS for the first

time? Answer: 1. The company must reconcile its equity reported under the previous GAAP to its equity in

accordance with IFRS for both the date of transition to IFRS and the end of the latest period reported under the previous GAAP. 2. The company must reconcile its total comprehensive income in accordance with IFRS to that reported in the latest statements prepared under the previous GAAP. 3. The company must provide sufficient detail to enable users to understand the material adjustments to the statement of financial position, the statement of comprehensive income and the statement of cash flows. 18) List some of the key differences between IFRS and ASPE. Answer: Some key differences between IFRS and ASPE are:

> disclosure > impaired loans > property, plant, and equipment revaluation option > asset impairment (test for impairment if indicator requires, and subsequent reversal of impairment loss) > development costs > post-employment benefits (recognition of actuarial gains/losses) > income taxes > interest capitalization > compound financial instruments > preferred shares in tax planning arrangements > value of conversion option for convertible bonds (See Exhibit 1.1 "Some Key Differences between IFRS and ASPE" for a full list and a description of the difference.)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following types of share investment does NOT qualify as a strategic investment? A) Controlled investments.

B) Joint Control investments.

C) Investments without significant influence.

D) Significant influence investments.

Answer: C 2) A significant influence investment is one that: A) allows the investor to exercise significant influence over the strategic and operating policies of

the Associate. B) allows the investor to exercise significant influence over the strategic operating and financing policies of the Associate. C) allows the investor to exercise significant influence over only the operating policies of the Associate. D) allows the investor to exercise significant influence over only the financing policies of the Associate. Answer: B 3) What is the dominant factor used to distinguish portfolio investments from significant influence

investments? A) The percentage of equity held by the investor. B) Use of the Equity Method to account for and report the investment. C) The investor's intention to establish or maintain a long-term operating relationship with the investee. D) Use of the Cost Method to account for and report the investment. Answer: C 4) Which of the following statements is TRUE under IFRS 9? A) Other Comprehensive Income (OCI) is included in Retained Earnings. B) Unrealized gains and losses on equity investments may be included in Other Comprehensive

Income (OCI) only if a decision to do so is made when the investment is acquired. C) All unrealized gains and losses on equity investments flow through Other Comprehensive Income (OCI). D) Unrealized gains and losses on fair value through profit and loss (FVTPL) securities are included in Other Comprehensive Income. Answer: B 5) Gains and losses on fair value through profit or loss (FVTPL) securities: A) are included in net income only when realized. B) are never recorded until the securities are sold. C) are included in net income, regardless of whether they are realized or not. D) are included in net income only when the investment has become permanently impaired. Answer: C

6) How are realized gains from the sale of investments accounted for at fair value through Other

Comprehensive Income (FVTOCI) accounted for under IFRS 9? A) They are transferred to Retained Earnings without going through net income. B) They are transferred to net income in the period of the sale. C) They remain in Accumulated Other Comprehensive Income. D) They are transferred to Contributed Surplus. Answer: A 7) When using the cost method of accounting, which method should be used to determine the carrying

value of shares sold when a portion of the shares making up an investment is sold? A) Specific cost. B) Last in, first out. C) Average cost. D) First in, first out. Answer: C 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) 20% or more. B) Between 20% and 50%. C) 25% or more. D) Less than 20%. Answer: B 9) Which of the following methods uses procedures closest to those used in preparing consolidated

financial statements? A) Fair value through profit or loss (FVTPL). B) The equity method. C) Fair value through other comprehensive income. D) The cost method. Answer: B 10) Which of the following is NOT a possible indicator of significant influence? A) The Associate's new CEO was previously CEO of the investor company. B) The investor has the ability to elect members to the Board of Directors. C) The investor has engaged in numerous intercompany transactions with the Associate. D) The investor has the right to participate in the policy-making process. Answer: A 11) Which of the following statements is CORRECT? A) An ownership interest between 0 and 10% can never imply significant influence. B) An ownership interest between 20% and 50% always implies significant influence. C) Significant influence is still possible if the Investor owns less than 20% of the voting shares of

the Associate. D) Control is only possible if the Investor owns more than 50% of the voting shares of the

Associate. Answer: C

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) the Acquisition Differential. C) the Excess Book Value.

B) Goodwill. D) the Fair Value Increment.

Answer: A 13) Any unallocated positive acquisition differential is normally: A) expensed during the year following the acquisition. B) charged to Retained Earnings. C) pro-rated across the Associate's identifiable net assets. D) recorded as Goodwill. Answer: D 14) When are gains on intercompany transfers of assets between an investor and a significant influence

investment recognized as part of the investment income accounted for by the parent under the equity method? A) They are never recognized. B) In the period(s) when the assets are sold to third parties or consumed. C) In the period when the intercompany transfer takes place. D) They are recognized only when the investment is sold. Answer: B 15) The ________ investment must be shown as a current asset, whereas the other investments could be

current or non-current, depending on management's intention. A) FVTPL B) cost method C) FVTOCI

D) equity method

Answer: A 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) exactly the same C) almost similar except for the fair value methods D) almost similar except for the equity method Answer: B 17) Reportingin accordance with the Accounting Standards for Private Enterprises (ASPE) is permitted

in certain instances for: A) all Canadian companies. B) privately held companies. C) publicly held companies. D) Canadian companies consolidating their foreign subsidiaries. Answer: B

18) When reporting under the Accounting Standards for Private Enterprises (ASPE) which method must

be used to report investments where the investor has significant influence over the investee? A) It may use the cost method for some such investments and the equity method for other such investments. B) It must use the cost method to report all such investments. C) It must use the equity method to report all such investments. D) It may use the cost method, equity method, or at fair value but must account for all such investments by the same method. Answer: D

On January 1, 2016, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income $50,000 $70,000 $30,000

2016 2017 2018

Dividends $20,000 $80,000 $60,000

19) Which of the following journal entries would have to be made to record X's purchase of Y's shares? A)

Debit Investment in Y $12,000 Cash

Credit

Debit Credit Investment in Y $112,000 Cash $112,000

$12,000

D) No entry required.

Debit Credit Investment in Y $100,000 Cash $100,000 Answer: C

20) Which of the following journal entries would have to be made to record X's share of Y's net income

for 2016? A)

Investment in Y Investment Income

Debit Credit $50,000 $50,000

Investment in Y Investment Income

Debit Credit $12,000 $12,000

D) No entry required.

Investment in Y Investment Income

Debit $6,000

Credit $6,000

Answer: D 21) Which of the following journal entries would have to be made to record X's share of Y's dividends

paid for 2016? A)

Cash Investment in Y

Debit Credit $2,400 $2,400

Cash Dividend Income D) No entry required.

Investment in Y Dividend Income

Debit Credit $2,400 $2,400

Answer: B

Debit Credit $2,400 $2,400

22) Which of the following journal entries would have to be made to record X's share of Y's dividends

paid for 2017? A)

Cash Investment in Y

Debit $9,600

Credit

Debit Credit Cash $9,600 Dividend Income $8,400 Investment in Y $1,200

$9,600

D) No entry required.

Debit Credit Cash $9,600 Dividend Income $9,600

Answer: C 23) Which of the following journal entries would have to be made to record X's share of Y's dividends

paid for 2018? A)

Cash Dividend Income

Debit $7,200

Credit Cash Investment in Y

$7,200

Debit $7,200

Credit $7,200

D) No entry required.

Investment in Y Dividend Income

Debit $7,200

Credit $7,200

Answer: A 24) What would be the carrying value of X's Investment in Y at the end of 2018? A) $91,200

B) $98,800

C) $100,000

Answer: C

D) $90,000

On January 1, 2016, X Inc. purchased 25% of the voting shares of Y Inc. for $100,000. The investment is reported using the equity method, as X has significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income $50,000 $70,000 $30,000

2016 2017 2018

Dividends $20,000 $80,000 $60,000

25) Which of the following journal entries would have to be made to record X's purchase of Y's shares? A)

Debit Credit Investment in Y $112,000 Goodwill $112,000 B)

Debit Investment in Y $12,000 Cash

Credit $12,000

Debit Credit Investment in Y $100,000 Cash $100,000 D) No entry required. Answer: C

26) Which of the following journal entries would have to be made to record X's share of Y's net income

for 2016? A)

Debit Credit Investment in Y $12,500 Equity method income $12,500 B)

Debit Credit Investment in Y $12,000 Equity method income $12,000 C)

Investment in Y Equity method income

Debit $7,500

Credit $7,500

D) No entry required. Answer: A 27) Which of the following journal entries would have to be made to record X's share of Y's dividends

paid for 2016? A)

Debit Credit Cash $5,000 Dividend Income $5,000

Debit Credit Investment in Y $5,000 Dividend Income $5,000 D) No entry required.

Cash Investment in Y

Debit $5,000

Credit $5,000

Answer: C

28) Which of the following journal entries would have to be made to record X's share of Y's dividends

paid for 2017? A)

Cash Investment in Y

Debit Credit $20,000 $20,000

Cash Dividend Income Investment in Y

Debit Credit $20,000 $17,500 $2,500

D) No entry required.

Cash Dividend Income

Debit Credit $20,000 $20,000

Answer: A 29) Which of the following journal entries would have to be made to record X's share of Y's dividends

paid for 2018? A)

Cash Investment in Y

Debit Credit $15,000 $15,000

Cash Dividend Income

Debit Credit $15,000 $15,000

D) No entry required.

Cash Dividend Income Investment in Y

Debit Credit $15,000 $12,500 $2,500

Answer: A 30) What would be the carrying value of X's Investment in Y at the end of 2018? A) $98,800

B) $97,500

C) $100,000

Answer: B

D) $91,200

31) If an investor's ownership interest in a significant influence investment increases or decreases, how

are changes from accounting at fair value to the use of the Equity Method (or vice-versa) to be handled? A) Changes from the Equity Method are to be handled prospectively, while changes to the Equity Method are to be handled retroactively. B) Changes from the Equity Method are to be handled retroactively, while changes to the Equity Method are to be handled prospectively. C) Any change is to be handled retroactively. D) Any change is to be handled prospectively. Answer: D 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 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 are added to or deducted from the Investment account. B) No specific accounting treatment is required. These items simply have to be disclosed in a note to the financial statements. C) Any such gains or losses are to be charged directly to Retained Earnings net of tax. D) Any such gains or losses are combined with revenue and expenses from operations. The investor's pro rata share of these after-tax gains and losses are added to or deducted from the Investment account. Answer: A 33) If the Investor sells part of its stake in an Associate, accounted for using the equity method, which

method is used to calculate the gain or loss on the sale of these shares? A) FIFO. B) The average carrying amount of the Investment. C) LIFO. D) Specific Identification. Answer: B 34) If an investment accounted for using the equity method suffers an impairment loss and the value in

use of the investment subsequently recovers, what accounting entry should be made? A) None; once an investment has been written down, it cannot subsequently be written up. B) 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. 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) It may be written up in value but not more than the amount of the impairment loss that was recorded at the time of impairment. Answer: D

35) If an investor is reporting in compliance with the International Financial Reporting Standards and

has an investment with significant influence over the investee, what are the reporting requirements for the investor if the investment is in shares which are actively traded on an exchange? A) The investment must be reported at fair value through profit and loss. B) The investment must be reported using the equity method with the fair value disclosed in the notes to the financial statements. C) The investment must be reported at fair value through other comprehensive income. D) The investment must be reported using the equity method; disclosure of the fair value of the investment is at the discretion of the investor. Answer: B 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) The Accounting Standards for Private Enterprises do not recognize Other Comprehensive Income. 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) 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. Answer: A 37) Under which method of accounting for investments are investments required to be included in

current assets? A) Equity method. B) Fair value through profit or loss. C) Cost method. D) Fair value through other comprehensive income. Answer: B

Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2016, for a cash consideration of $200,000. During 2016, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2016, shares of Stamp Company were trading for $11 each. 38) If Posthorn Corporation accounts for its investment in Stamp Company at fair value through profit

or loss, what entry will the company make to record the dividends received from Stamp Company for 2016? A)

Investment in Stamp Company Dividend Income

Debit Credit $16,000 $16,000

Cash Dividend Income

Debit Credit $16,000 $16,000

Cash Investment in Stamp Company

Debit Credit $16,000 $16,000

D) No entry required. Answer: B

39) If Posthorn Corporation accounts for its investment in Stamp Company at fair value through profit

or loss, what entry will the company make to record the revaluation of the investment at December 31, 2016? A)

Investment in Stamp Company Unrealized gain (OCI)

Debit Credit $20,000 $20,000

Investment in Stamp Company Unrealized gain (net income)

Debit Credit $20,000 $20,000

Unrealized loss (net income) Investment in Stamp Company

Debit Credit $20,000 $20,000

D) No entry required. Answer: B 40) If Posthorn Corporation accounts for its investment in Stamp Company at fair value through profit

or loss, what will the balance in the Investment in Stamp Company be at December 31, 2016? A) $200,000 B) $240,000 C) $220,000 D) $208,000 Answer: C

41) If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other

comprehensive income, what entry will the company make to record the dividends received from Stamp Company for 2016? A)

Cash Investment in Stamp Company

Debit Credit $16,000 $16,000

Investment in Stamp Company Dividend Income

Debit Credit $16,000 $16,000

Cash Dividend Income

Debit Credit $16,000 $16,000

D) No entry required. Answer: C 42) If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other

comprehensive income, what entry will the company make to record the revaluation of the investment at December 31, 2016? A)

Unrealized loss (net income) Investment in Stamp Company

Debit Credit $20,000 $20,000

Investment in Stamp Company Unrealized gain (OCI)

Debit Credit $20,000 $20,000

Investment in Stamp Company Unrealized gain (net income)

Debit Credit $20,000 $20,000

D) No entry required. Answer: B

43) If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other

comprehensive income, what will the balance in the Investment in Stamp Company be at December 31, 2016? A) $208,000 B) $200,000 C) $240,000 D) $220,000 Answer: D 44) If Posthorn Corporation 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 2016? A)

Cash Investment in Stamp Company

Debit Credit $16,000 $16,000

Cash Dividend Income

Debit Credit $16,000 $16,000

Investment in Stamp Company Dividend Income

Debit Credit $16,000 $16,000

D) No entry required. Answer: A

45) If Posthorn Corporation 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, 2016? A)

Unrealized loss (net income) Investment in Stamp Company

Debit Credit $20,000 $20,000

Investment in Stamp Company Unrealized gain (OCI)

Debit Credit $20,000 $20,000

Investment in Stamp Company Unrealized gain (net income)

Debit Credit $20,000 $20,000

D) No entry required. Answer: D 46) If Posthorn 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, 2016? A) $240,000 B) $200,000 C) $220,000 D) $208,000 Answer: B

47) If Posthorn 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 2016? A)

Cash Dividend Income

Debit Credit $16,000 $16,000

Investment in Stamp Company Dividend Income

Debit Credit $16,000 $16,000

Cash Investment in Stamp Company

Debit Credit $16,000 $16,000

D) No entry required. Answer: A 48) If Posthorn 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, 2016? A)

Investment in Stamp Company Unrealized gain (OCI)

Debit Credit $20,000 $20,000

Unrealized loss (net income) Investment in Stamp Company

Debit Credit $20,000 $20,000

Investment in Stamp Company Unrealized gain (net income)

Debit Credit $20,000 $20,000

D) No entry required. Answer: D

49) If Posthorn Corporation 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, 2016? A) $200,000 B) $220,000 C) $208,000 D) $240,000 Answer: C 50) Under which standards is it appropriate to record losses in excess of the investor's interest in an

associate company because the associate is imminently expected to return to profitability? A) Only under IFRS. B) Either under IFRS or ASPE. C) Under ASPE, but not IFRS. D) Neither under IFRS nor ASPE. Answer: C SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 51) On January 1, 2017, Joyce Inc. paid $600,000 to purchase 25% of Mark Inc's outstanding voting

shares. Joyce has significant influence over Mark. Mark's earnings for 2017 and 2018 were $100,000 and $200,000 respectively. Mark paid dividends in the amount of $20,000 and $10,000 during 2017 and 2018, respectively. Required: Calculate the balance in Joyce's Investment account as at December 31, 2018. Answer: Joyce Inc. Investment in Mark Account As at December 31, 2018 Acquisition cost:

$600,000

Pro-rata share of Mark's 2017 Net Income Pro-rata share of Mark's 2017 Dividends Pro-rata share of Mark's 2018 Net Income Pro-rata share of Mark's 2018 Dividends

$25,000 ($5,000) $50,000 ($2,500)

Investment in Mark Inc. as at December 31, 2018

$667,500

52) X purchased 40% of Y on January 1, 2016 for $400,000. Y paid dividends of $50,000 in each year.

Y's income statements for 2016 and 2017 showed the following.

Income (loss) before income taxes Income tax expense (recovery) Net income (loss) Other comprehensive income Comprehensive income (loss) 18

2016

2017

$100,000 40,000 $ 60,000 20,000 $ 80,000

($60,000) ( 15,000) ($45,000) 25,000 ($20,000)

At December 31, 2016, the fair value of the investment was $440,000 and at December 31, 2017, the fair value of the investment was $420,000. Required: Prepare X's journal entries for 2016 and 2017, assuming that this is a Portfolio Investment and is accounted for at fair value through profit and loss. Answer:

2016: Investment in Y Cash To record X's purchase of Y

Debit $400,000

Credit

Cash Dividend Revenue To record receipt of Dividends from Y - 2016

$20,000

Investment in Y Investment revaluation gain (net income) To record revaluation at December 31, 2016

$40,000

2017: Cash Dividend Revenue To record receipt of Dividends from Y - 2017

Debit Credit $20,000 $20,000

Investment revaluation loss (net income) Investment in Y To record revaluation at December 31, 2017

$20,000

$400,000

$20,000

$40,000

$20,000

53) X purchased 40% of Y on January 1, 2016 for $400,000. Y paid dividends of $50,000 in each year.

Y's income statements for 2016 and 2017 showed the following:

Income (loss) before income taxes Income tax expense (recovery) Net income (loss) Other comprehensive income Comprehensive income (loss)

2016

2017

$100,000 40,000 $ 60,000 20,000 $ 80,000

($60,000) ( 15,000) ($45,000) 25,000 ($20,000)

2016: Investment in Y Cash To record X's purchase of Y.

Debit $400,000

Investment in Y Investment Income Other comprehensive income Income tax expense To record 2016 Net Income and Unusual Gain

$32,000

Cash Investment in Y To record receipt of Dividends from Y - 2016

$20,000

2017: Investment Income Other comprehensive income Income tax recovery Investment in Y To record 2017 Net Loss

Debit $24,000

Cash Investment in Y To record receipt of Dividends from Y - 2017

$20,000

Credit $400,000

$40,000 $ 8,000 $16,000

$20,000

Credit $10,000 $ 6,000 $ 8,000

$20,000

54) Telnor Corporation (whose year end is December 31 of each year) has made a series of investments

in Pineapple Corp., one of their major customers. The management of Telnor has been impressed by the products produced and sold by Pineapple and their market success. These investments are only going to be held for a short period of time. The market price of Pineapple stock on December 31, 2018 and 2019 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 purchases and sales that Telnor entered into in 2018 and 2019: Date March 31, 2018

No. Of Shares 1,000

Total 1,000 20

Cost (per share) $75

June 30, 2018 September 30, 2018 September 30, 2019

1,000 1,000 (3,000)

2,000 3,000 0

$125 $175 $240

Assume that Telnor accounts for its investment in Pineapple Corp. at fair value through profit and loss. Required: (a) Prepare the journal entries to record the transactions in 2018 and 2019 with respect to Telnor's investment in Pineapple. (b) How would Telnor disclose the investment in Pineapple on its balance sheet? Answer:

Date March 31, 2018 June 30, 2018 September 30, 2018

No. Of Shares 1,000 1,000 1,000

Total 1,000 2,000 3.000

Cost (per share) $75 $125 $175

Total Cost $ 75,000 $200,000 $375,000

Unrealized gain at December 31, 2018 (3,000 × $200) - $375,000 = $225,000. (a) 03.31.2018 Investment in Pineapple Cash To record investment

75,000

06.30.2018 Investment in Pineapple Cash To record investment

125,000

12.31.2018 Investment in Pineapple Cash To record investment

175,000

12.31.2018 Investment in Pineapple Investment revaluation gain (FVTPL) To record unrealized gain

225,000

12.31.2018 Cash Dividend Income To record dividend income 09.30.2019 Cash

75,000

125,000

175,000

225,000

3,000 3,000

720,000 21

Gain on sale Investment in Pineapple To record disposal of Pineapple shares

120,000 600,000

(b) The investment would be included in current assets given management's intention to hold them for a short period of time. 55) Telnor Corporation (whose year end is December 31 of each year) has made a series of investments

No. Of Shares 1,000 1,000 1,000 (3,000)

Total 1,000 2,000 3,000 0

Cost (per share) $75 $125 $175 $240

Assume that Telnor accounts for its investment in Pineapple Corp. at fair value through other comprehensive income. Required: (a) Prepare the journal entries to record the transactions in 2018 and 2019 with respect to Telnor's investment in Pineapple. (b) How would Telnor disclose the investment in Pineapple on its balance sheet? Answer:

Date March 31, 2018 June 30, 2018 September 30, 2018

No. Of Shares 1,000 1,000 1,000

Total 1,000 2,000 3.000

Cost (per share) $75 $125 $175

Total Cost $ 75,000 $200,000 $375,000

Unrealized gain at December 31, 2018 (3,000 * $200) - $375,000 = $225,000 (a) 03.31.2018 Investment in Pineapple Cash To record investment

75,000

06.30.2018 Investment in Pineapple

125,000

75,000

Cash To record investment

125,000

12.31.2018 Investment in Pineapple Cash To record investment

175,000

12.31.2018 Investment in Pineapple Investment revaluation gain (OCI) To record investment

225,000

12.31.2018 Cash Dividend Income To record dividend income

175,000

225,000

3,000 3,000

09.30.2019 Cash Gain on sale (OCI) Investment in Pineapple To record disposal of Pineapple shares

720,000

Realized gain on sale (OCI) Retained earnings To transfer realized gain from OCI to Retained Earnings

345,000

120,000 600,000

345,000

(b) The investment would be included in current assets given management's intention to hold them for a short period of time. 56) Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp

Company on January 1, 2016, for a cash consideration of $200,000. During 2016, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2016, shares of Stamp Company were trading for $11 each. During 2017, Stamp Company had a loss of $60,000 and paid dividends of $40,000. Income for the first half of the year was $80,000 and the loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2017, Posthorn Corporation sold 5,000 shares of Stamp Company for a consideration of $12 per share. At the end of 2017, the share price of Stamp Company 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 Posthorn Corporation for all transactions relating to its investment in 23

Stamp Company for the year 2017 if it accounts for its investment in Stamp Company as a fair value through profit and loss investment. Answer:

June 30, Cash 2017 Dividend income (To record dividend paid on June 30, 2017)

$ 8,000

July 2, 2017

$60,000

Cash

$ 8,000

Investment in Stamp Company Gain on sale of investment (To record sale of shares on July 2, 2017; carrying value was $11 per share) Dec 31, 2017

Investment revaluation loss (FVTPL)

$55,000

$75,000

Investment in Stamp Company (To revalue investment to fair value at year-end)

$75,000

57) On January 1, 2016, Black Corporation purchased 15 per cent of the outstanding shares of White

Corporation for $498,000. From Black's perspective, White was a FVTPL investment. The fair value of Black's investment was $520,000 at December 31, 2016. On January 1, 2017, Black purchased an additional 30 per cent of White's shares for $1,040,000. The second share purchase allows Black to exert significant influence over White. During the two years White reported the following results:

2016 2017

Profits 400,000 540,000

Dividends 240,000 250,000

Required: With respect to this investment, prepare Black's journal entries for both 2016 and 2017.

Answer: The 15 per cent purchase should be recorded under the fair value method. Black's journal

entries during 2016 are as follows: Investment in White Cash Purchase 15% of White's shares

498,000

Cash Dividend Income 15% of $240,000

36,000

Investment in White Investment revaluation gain (FVTPL) $520,000 - $498,000

22,000

498,000

36,000

22,000

The shareholder will now record its share of White's income on the equity method as it now has significant influence. Investment in White Cash Purchase 30 per cent of the shares of White

1,040,000 1,040,000

Investment in White Investment Income 45% of $540,000 profit for 2017

243,000

Cash Investment in White 45% × $250,000 dividends for 2017

112,500

243,000

112,500

58) Dragon Corporation acquired a 7% interest in the outstanding shares of Slayer Inc. on January 1,

2016 at a cost of $200,000. Dragon Corporation was a private company and reported in compliance with the Accounting Standards for Private Enterprises (ASPE) and accounted for Slayer Inc., whose shares were not publicly traded, using the cost method. Slayer reported net income and made dividend payments to its shareholders at noted below. On December 31, 2018 Slayer declared bankruptcy as a result of a series of losses as noted.

2016 2017 2018

Income 50,000 (10,000) (40,000)

Dividends 20,000 20,000 20,000 25

Required: (a) Prepare the journal entries that Dragon would make in each year. (b) Prepare the general ledger account for Dragon's investment in Slayer. Answer: (a) 1.1.2016

31.12.2016

31.12.2017

31.12.2018

Investment in Slayer Cash To record Dragon's investment in Slayer

200,000 200,000

Cash Dividend Income To record dividend income

1,400

Cash Dividend Income To record dividend income

1,400

Cash Dividend Income To record dividend income

1,400

Loss on Investment Investment in Slayer To write off investment after impairment

1,400

200,000

(b) General Ledger Investment in Slayer

January 1, 2016 - investment December 31, 2018 - impairment

Dr Cr Balance 200,000 $200,000 200,000 $0

200,000

59) 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, 2016 was $3,750,000. Ronen has now designated its investment in Western as FVTPL as a result of the open market purchase of a 51% 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 as a result of this change? If so, what is the entry? Answer: (a) When an investment changes from significant influence to FVTPL, the equity method ceases to be appropriate and the fair value method takes its place on a prospective basis. On this date, the investor shall measure at fair value any investment the investor retains in the former associate. The investor shall recognize in profit or loss any difference between: 1. The fair value of any retained investment and any proceeds from disposing of the part interest in the associate; and 2. The carrying amount of the investment at the date when significant influence was lost. (b) Loss on investment Investment in Western Communications Recording loss on change from significant influence to FVTPL

1,750,000 1,750,000

60) Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp

Answer: The investment account balance at December 31, 2016 would be as follows:

Purchase consideration Share of 2016 net income Share of 2016 dividends

$200,000 24,000 (160,000) $208,000

June Investment in Stamp Company $16,000 30, 2017 Investment income (equity method) $16,000 (To record share of net income for first six months of 2017) Cash Investment in Stamp Company (To record dividend paid on June 30, 2017)

$8,000

July Cash 2, 2017 Investment in Stamp Company Gain on sale of shares (To record sale of shares; carrying value of shares sold is 5,000/20,000 × [$208,000 + $16,000 $8,000])

$60,000

Dec Investment loss (equity method) 31, 2017 Investment in Stamp Company (To record share of loss for last six months of 2017 [15% of $140,000])

$21,000

Investment impairment loss Investment in Stamp Company (To write investment down to $120,000 [i.e. 15,000 shares at $8]; Carrying value was $141,000 before write-down)

$21,000

At January 1, 2017 Share of Jan to July 2017 net income 28

$208,000 16,000

$8,000

$54,000 $ 6,000

$21,000

Share of 2017 dividends

(8,000) 216,000 (54,000) 162,000 (21,000) 141,000 (21,000) $120,000

Less: sale of 5,000 shares Share of July to Dec 2017 loss Impairment loss

61) Ocean Enterprises Inc. acquired 15% of the 100,000 outstanding common shares of Zebrafish Ltd. on

January 1, 2017 for a cash consideration of $150,000 and a further 10% of the company's common shares a year later for $110,000. On July 1, 2018, Ocean Enterprises sold half their holding in Zebrafish for proceeds of $150,000. Zebrafish earned income of $150,000 in 2017 and $180,000 in 2018 (evenly over both years) and paid a regular semi-annual dividend of $60,000 in June and December each year. Ocean Enterprises does not have significant influence over Zebrafish and its investment in Zebrafish is classified as a fair value through profit and loss investment. The company's shares were trading for $11 at the end of 2017 and $12.50 at the end of 2018. Required: Prepare dated journal entries for Ocean Enterprises for 2017 to account for its investment in Zebrafish and any related income therefrom. Answer:

January 1, 2017

Investment in Zebrafish

$150,000

Cash (To record initial investment in 15,000 shares of Zebrafish) June 30, 2017

Cash

$150,000

$9,000

Dividend income (To record receipt of dividend at June 30, 2017) Dec 31, 2017

Cash

$9,000

Dividend income (To record receipt of dividend at Dec 31, 2017) 29

$9,000

Investment in Zebrafish Investment revaluation gain (To revalue shares to $11 to year-end)

$15,000 $15,000

62) Ocean Enterprises Inc. acquired 15% of the 100,000 outstanding common shares of Zebrafish Ltd. on

January 1, 2017 for a cash consideration of $150,000 and a further 10% of the company's common shares a year later for $110,000. On July 1, 2018, Ocean Enterprises sold half their holding in Zebrafish for proceeds of $150,000. Zebrafish earned income of $150,000 in 2017 and $180,000 in 2018 (evenly over both years) and paid a regular semi-annual dividend of $60,000 in June and December each year. Ocean Enterprises does not have significant influence over Zebrafish and its investment in Zebrafish is classified as a fair value through profit and loss investment. The company's shares were trading for $11 at the end of 2017 and $12.50 at the end of 2018. Required: Prepare dated journal entries for Ocean Enterprises for 2018 to account for its investment in Zebrafish and any related income therefrom. Answer:

January 1, 2018

Investment in Zebrafish

$110,000

Cash (To record second purchase of shares in Zebrafish) June 30, 2018

Cash

$110,000

$15,000

Dividend income (To record receipt of dividend at June 30, 2018) July 1, 2018

Cash Investment in Zebrafish Gain on sale of shares (FVTPL) (To record sale of 12,500 shares for $12 per share)

Dec 31, 2018 Cash Dividend income

$15,000

$150,000 $137,500 12,500

$7,500 $7,500

(To record receipt of Dec 31, 2018 dividend) Investment in Zebrafish Investment revaluation gain (To revalue shares to $12.50 per share)

$18,750 $18,750

63) Ocean Enterprises Inc. acquired 15% of the 100,000 outstanding common shares of Zebrafish Ltd. on

January 1, 2017 for a cash consideration of $150,000 and a further 10% of the company's common shares a year later for $110,000. On July 1, 2018, Ocean Enterprises sold half their holding in Zebrafish for proceeds of $150,000. Zebrafish earned income of $150,000 in 2017 and $180,000 in 2018 (evenly over both years) and paid a regular semi-annual dividend of $60,000 in June and December each year. Ocean Enterprises does not have significant influence over Zebrafish and elected when it first acquired its initial investment in Zebrafish to account for this investment through other comprehensive income. The company's shares were trading for $11 at the end of 2017 and $12.50 at the end of 2018. Required: Prepare dated journal entries for Ocean Enterprises for 2017 to account for its investment in Zebrafish and any related income therefrom. Answer:

January 1, 2017

Investment in Zebrafish

$150,000

Cash (To record initial investment in 15,000 shares of Zebrafish) June 30, 2017

Cash

$150,000

$9,000

Dividend income (To record receipt of dividend at June 30, 2017) Dec 31, 2017

Cash

$9,000

Dividend income (To record receipt of dividend at Dec 31, 2017) Investment in Zebrafish 31

$9,000

$15,000

Investment revaluation gain (OCI) (To revalue shares to $11 at year-end)

$15,000

64) Ocean Enterprises Inc. acquired 15% of the 100,000 outstanding common shares of Zebrafish Ltd. on

January 1, 2017 for a cash consideration of $150,000 and a further 10% of the company's common shares a year later for $110,000. On July 1, 2018, Ocean Enterprises sold half their holding in Zebrafish for proceeds of $150,000. Zebrafish earned income of $150,000 in 2017 and $180,000 in 2018 (evenly over both years) and paid a regular semi-annual dividend of $60,000 in June and December each year. Ocean Enterprises does not have significant influence over Zebrafish and elected when it first acquired its initial investment in Zebrafish to account for this investment through other comprehensive income. The company's shares were trading for $11 at the end of 2017 and $12.50 at the end of 2018. Required: Prepare dated journal entries for Ocean Enterprises for 2018 to account for its investment in Zebrafish and any related income therefrom. Answer:

January 1, 2018

Investment in Zebrafish

$110,000

Cash (To record second purchase of shares in Zebrafish) June 30, 2018

Cash

$110,000

$15,000

Dividend income (To record receipt of dividend at June 30, 2018) July 1, 2018

$15,000

Investment in Zebrafish Investment revaluation gain (OCI) (To revalue holding to $12 per share on date of sale)

$25,000

Cash Investment in Zebrafish (To record sale of 12,500 shares for $12 each)

$150,000

Investment gain (OCI)

$20,000

$25,000

$150,000

Retained earnings (To transfer realized gain to retained earnings) Dec 31, 2018 Cash Dividend income (To record receipt of Dec 31, 2018 dividend) Investment in Zebrafish Investment revaluation gain (OCI) (To revalue shares to $12.50 per share)

$20,000

$7,500 $7,500

$6,250 $6,250

65) 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. Answer: When realized gains on investments accounted for through other comprehensive income were cycled through net income, companies could designate investments as accounted for through other comprehensive income and then time the disposal of such investments to recycle the gains through net income to increase or decrease earnings. To increase net income, investments with unrealized gains could be sold and the gains recognized in net income. To reduce net income, investments with unrealized losses could be sold and the losses recognized in net income. This was potentially effective because the market places more emphasis on net income relative to other comprehensive income.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Company A has made an offer to purchase all of the outstanding shares of Company B for $10 per

share (the current market value of the shares). In response to Company A's offer, the shareholders of Company B were given rights to purchase additional shares at $8 per share. Which of the following tactics was employed by Company B to prevent Company A from acquiring control of Company B? A) Reverse-takeover. B) Pac-man defence. C) Poison Pill. D) Selling the crown jewels. Answer: C 2) IOU Inc. purchased all of the outstanding common shares of UNI Inc. for $800,000. 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, with the exception of the company's Land, which was estimated to have a fair market value which was $50,000 higher than its book value. How much goodwill would be created by IOU's acquisition of UNI? A) $30,000 B) $50,000 C) Nil Answer: A

D) $80,000

3) IOU Inc. purchased all of the outstanding common shares of UNI Inc. for $800,000. On the date of

Inventory Land Goodwill Liabilities Cash

Debit $2,000,000 $170,000 $30,000

Credit

$1,400,000 $800,000

Net Assets Cash

Debit $800,000

Credit $800,000

Investment in UNI Cash

Debit $800,000

Credit $800,000

D) No entry. Answer: C

4) IOU Inc. purchased all of the outstanding common shares of UNI Inc. for $800,000. 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, with the exception of the company's Land, which was estimated to have a fair market value which was $50,000 higher than its book value. Assuming that the acquisition was properly recorded at cost, which of the following journal entries is required to prepare Consolidated Financial Statements the day following the acquisition? A)

Net Assets Cash

Debit $800,000

Credit $800,000

Inventory Land Goodwill Liabilities Investments in UNI

Debit $2,000,000 $170,000 $30,000

Credit

$1,400,000 $800,000

Investment in UNI Cash

Debit $800,000

Credit $800,000

D) No entry. Answer: B

5) IOU Inc. purchased all of the outstanding common shares of UNI Inc. for $800,000. 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, with the exception of the company's Land, which was estimated to have a fair market value which was $50,000 higher than its book value. Parent Company acquires Subsidiary Company's common shares for cash. On the date of acquisition, Subsidiary had Goodwill of $100,000 on its books. Which of the following statements regarding Subsidiary's Goodwill on the date of acquisition is correct? A) Subsidiary's goodwill is not considered as an identifiable asset and should therefore be included in Parent Company's Acquisition Differential calculation. B) Subsidiary's goodwill is not considered as an identifiable asset and should therefore be excluded from Parent Company's Acquisition Differential calculation. C) Subsidiary's goodwill is considered as an identifiable asset and should therefore be excluded from Parent Company's Acquisition Differential calculation. D) Subsidiary's goodwill is considered as an identifiable asset and should therefore be included in Parent Company's Acquisition Differential calculation. Answer: B 6) Which of the following would NOT be included in the acquisition cost? A) Share issue costs.

B) Fair value of any shares issued.

C) Fair value of assets transferred.

D) Fair value of contingent consideration.

Answer: A 7) How should the acquisition cost of a Business Combination be allocated prior to preparing

Consolidated Financial Statements? A) The acquisition cost should be reflected as an increase in the acquirer's Investment (in the subsidiary) account. B) The acquisition cost should be allocated to the acquiree's book value. C) The treatment of the acquisition cost depends largely on the type of consideration given by the acquirer. D) The acquisition cost should be allocated to the acquired company's identifiable assets and liabilities to bring them to their fair value. Answer: D 8) During an acquisition, when should intangible assets NOT be recognized apart from Goodwill? A) The assets can be sold, licensed or exchanged. B) The assets have been identified but not accounted for by the subsidiary. C) The assets have been accounted for by the subsidiary but have no Fair Value on the date of

acquisition. D) The assets have been identified and accounted for by the subsidiary. Answer: C

9) Which of the following pertaining to Consolidated Financial Statements is correct? A) When one company has control over another, Consolidated Financial Statements must be

prepared for the combined entity. B) Before preparing Consolidated Financial Statements, a subsidiary's Financial Statements prior

to the date of acquisition must be restated. C) The preparation of Consolidated Financial Statements means that the companies involved cease to operate as separate legal entities. D) The preparation of Consolidated Financial Statements is at the Parent Company's discretion. Answer: A 10) Company Y purchases a controlling interest in Company Z on January 1, 2018. 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 sum of the 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 fair market value. D) Company Y's Shareholders' Equity as well as Company Y's proportional share of Company Z's net assets at book value. Answer: A 11) The process of preparing Consolidated Financial Statements involves the elimination of

inter-company transactions between a Parent Company and its subsidiary. Where would these entries be recorded? A) On the Subsidiary's books. B) The effect of any inter-company transaction must be reflected on the books of both companies. C) On the Parent's books only. D) The entries are not recorded in the books of either company. The entries are only made on the working papers. Answer: D

12) Parent and Sub Inc. had the following balance sheets on December 31, 2018:

Current Assets Fixed Assets (net) Total Assets

Parent $ 60,000 $100,000 $160,000

Sub $10,000 $60,000 $70,000

$ 42,000 $ 20,000 $ 90,000 $ 8,000 $160,000

$35,000 $12,000 $12,000 $11,000 $70,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

On January 1, 2019 Parent purchased all of Sub Inc.'s Common Shares for $40,000 in cash. On that date, Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000, respectively. Assuming that Consolidated Financial Statements were prepared on that date, answer the following: The Current Assets of the combined entity should be valued at: A) $46,000 B) $114,000 C) $70,000

D) $170,000

Answer: A 13) Parent and Sub Inc. had the following balance sheets on December 31, 2018:

Current Assets Fixed Assets (net) Total Assets

Parent $ 60,000 $100,000 $160,000

Sub $10,000 $60,000 $70,000

$ 42,000 $ 20,000 $ 90,000 $ 8,000 $160,000

$35,000 $12,000 $12,000 $11,000 $70,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

On January 1, 2019 Parent purchased all of Sub Inc.'s Common Shares for $40,000 in cash. On that date, Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000, respectively. Assuming that Consolidated Financial Statements were prepared on that date, answer the following: The Fixed Assets of the combined entity should be valued at: A) $154,000 B) $70,000 C) $120,000 Answer: A

D) $160,000

14) Parent and Sub Inc. had the following balance sheets on December 31, 2018:

Current Assets Fixed Assets (net) Total Assets

Parent $ 60,000 $100,000 $160,000

Sub $10,000 $60,000 $70,000

$ 42,000 $ 20,000 $ 90,000 $ 8,000 $160,000

$35,000 $12,000 $12,000 $11,000 $70,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

On January 1, 2019 Parent purchased all of Sub Inc.'s Common Shares for $40,000 in cash. On that date, Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000, respectively. Assuming that Consolidated Financial Statements were prepared on that date, answer the following: The Goodwill arising from this Business Combination would be: A) $7,000 B) ($17,000) C) $17,000

D) $120,000

Answer: A 15) Parent and Sub Inc. had the following balance sheets on December 31, 2018:

Current Assets Fixed Assets (net) Total Assets

Parent $ 60,000 $100,000 $160,000

Sub $10,000 $60,000 $70,000

$ 42,000 $ 20,000 $ 90,000 $ 8,000 $160,000

$35,000 $12,000 $12,000 $11,000 $70,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

On January 1, 2019 Parent purchased all of Sub Inc.'s Common Shares for $40,000 in cash. On that date, Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000, respectively. Assuming that Consolidated Financial Statements were prepared on that date, answer the following: The Shareholders' Equity section of the Consolidated Balance Sheet would show what amount? A) $121,000 B) $98,000 C) $90,000 D) $19,000 Answer: B

16) 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) Relative holdings of voting shares in the combined entity. B) Any by-laws or provisions of the incorporation acts of each company that details the manner in which a business combination will occur at law. C) If the means of payment is cash, which party is paying the cash. D) Voting rights of the respective parties after the combination of their businesses. Answer: B 17) The IASB standard (IFRS 3 Business Combinations) issued with respect to the treatment of negative

goodwill requires that: A) it must be recognized in income immediately as an extraordinary item. B) it must be reflected as an increase in Liabilities and a Reduction in Capital for the Parent Company. C) it must be recognized in income immediately. D) it can be deferred and amortized over a maximum of 40 years. Answer: C 18) How should intangible assets which are readily identifiable but not accurately measured be

accounted for? A) They should be independently appraised and accounted for at their appraised value. B) They should be accounted for at an amount deemed reasonable by management. C) They should be included in Goodwill. D) They should be ignored since they can't be accurately measured. Answer: C 19) Which of the following regarding the preparation of Consolidated Financial Statement is correct? A) Consolidated Financial Statements are required by the Parent Company for reporting purposes

only; each company must continue to prepare its own Financial Statements. B) Consolidated Financial Statements are required only when both companies are publicly traded. C) Only the subsidiaries are required to prepare Financial Statements. D) Once the parent company prepares Consolidated Financial Statements, it no longer needs to

prepare financial statements for its own activities. Answer: A

20) 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 is more dominant. 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. Answer: A 21) 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) Selling the crown jewels. B) Hostile defence. C) Pac-man defence. D) Poison pill. Answer: C 22) 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 allowable) A) Yes, this is permissible under the Purchase Method under certain circumstances. B) No, this would not be possible under any circumstances. C) Yes, this is permissible under the Acquisition Method. D) Yes, this is permissible under the New Entity Method is used. Answer: D 23) 1234567 Inc. is contemplating a Business Combination with 7654321 Inc. One company is

incorporated under Federal law, the other under provincial law. Is a statutory amalgamation permissible under these circumstances? A) No, a statutory amalgamation would not be possible, since one company is incorporated under federal law and the other under provincial law. B) Yes, provided the combination is accounted for using the Acquisition Method. C) Yes, provided the surviving corporation would have had control of the purchased company. D) Cannot be determined from the information given. Answer: A

24) Company A wishes to acquire control of Company B as cheaply as possible. For economic reasons,

a consultant recommended that Company A can do this through purchase of assets, rather than purchase of shares. Which of the following statements regarding the above scenario is correct? A) Company A only needs to acquire control of Company B's fixed assets. B) The consideration given by Company A must exceed 50% of the fair market value of Company B's net assets. C) Company A must purchase all of Company B's assets and liabilities. D) Company A only needs to acquire control of Company B's net assets. Answer: D 25) AInc. 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: A) the fair market 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 fair market value of B's assets and liabilities. C) the book value of A's assets and liabilities plus the book value of B's assets and liabilities. D) the book value of A's assets and liabilities plus the fair market value of B's assets and liabilities. Answer: D 26) Which of the following must be possible in order for a Business Combination to exist? A) Ownership of all of a subsidiary's assets. B) Ownership of 100 % of a subsidiary's voting shares. C) Control of a subsidiary's net assets. D) Ownership of all of a subsidiary's operating assets. Answer: C 27) Company A has decided to purchase 100% of the voting shares of Company B for $100,000 cash on

January 1, 2018. 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) $550,000 B) $350,000 C) $450,000 D) $250,000 Answer: B

28) AInc. is contemplating a Business combination with B Inc. However, A Inc.'s management is

uncertain as to whether it should purchase B's assets or a majority of B's voting shares. The fair market values of B's assets far exceed their book values. A's management should be advised that IN MOST CASES: A) the purchase of B's shares would likely be the costlier method of acquiring control. It would also be less advantageous to the consolidated entity from a Tax standpoint. B) the purchase of B's shares would likely be the costlier method of acquiring control. However, it would be more advantageous to the consolidated entity from a Tax standpoint. C) the purchase of B's shares would likely be the cheaper method of acquiring control. However, it would be less advantageous to the consolidated entity from a Tax standpoint. D) the purchase of B's shares would likely be the cheaper method of acquiring control. It would also be more advantageous to the consolidated entity from a Tax standpoint. Answer: C 29) Which of the following statements is correct? A) The only acceptable method of accounting for business combinations is the New Entity

Method. B) Companies may choose between the New Entity Method and the Acquisition Method when

accounting for business combinations. 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. Answer: C 30) Which of the following is closest to IFRS 3 Business Combinations definition of control? A) Control exists only when a company has the continuing power to determine the operating and

financing policies of another company and attempts to exercise such powers. B) A company is deemed to have control when it can elect a majority of the Board members of

another company. C) A company is deemed to have control over another only when it owns a majority of the voting shares of another company. D) Control is the power of one company to govern the financial and operating policies of an entity so as to obtain the benefits of its activities. Answer: D

31) 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? A) As long as GHI Inc. does not exercise its option to convert its bonds to voting shares, XYZ Inc. has control over DEF Inc. B) XYZ Inc. does not have control over DEF Inc., as it cannot exercise control over DEF's strategic operating, investing and Financing activities without the cooperation of GHI Inc. C) XYZ Inc. has control over DEF Inc. as it owns a majority of the latter's currently outstanding voting shares. D) XYZ Inc. has de facto control over DEF Inc. Answer: B 32) AInc. purchases 100% of the voting shares of B Inc. on July 1, 2018. On that date, A Inc. would be

required to prepare which of the following statements? A) A Consolidated Income Statement. B) No statement preparation is required. C) A Consolidated Balance Sheet. D) A Consolidated Income Statement and a Consolidated Balance Sheet. Answer: C 33) 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 direct control over Company C. B) Company A has no control over Company C because it does not own any shares of Company C. C) Control cannot be determined from the information given. D) Company A has indirect control over Company C. Answer: D 34) Zen Inc. owns 35% of Sun Inc.'s voting shares. Zen is by far the largest single shareholder of Sun

Inc.'s shares, with the rest of Sun's shares being very widely held by individual investors. There was a very poor turnout at Sun Inc.'s recent annual meeting, enabling Zen Inc. to elect the majority of Sun's Board of Directors. Does Zen control Sun under IFRS? A) Zen could only control Sun if it owned 50% of Sun's voting shares. B) No, Zen does not control Sun because it cannot exercise control over Sun without the cooperation of Sun's other shareholders. C) Yes, Zen controls Sun because it is Sun's single largest shareholder group. D) Yes, Zen is deemed to control Sun because it has elected a majority of Sun's Board members and the other shareholders are not organized in such a way to actively cooperate when they vote. Answer: D

35) Which of the following statements is correct? A) Under the New Entity Method, both of the company's net assets are recorded at their fair

market values for these assets on the date of acquisition. B) As of January 1st, 2011, the New Entity Method must be used to account for business combinations where an acquirer can be identified. C) The Acquisition Method is consistent with the historical cost principle while the New Entity Method is not. D) Under the Acquisition Method, the acquirer company's net assets are recorded at the price paid for the assets on the date of acquisition. Answer: A 36) How is negative goodwill treated under the acquisition method? A) The negative goodwill is prorated using the fair values of the acquired company's net assets. B) The acquiring company will report a loss on acquisition. C) The negative goodwill will be included in other comprehensive income, as it is essentially an

unrealized gain. D) The acquiring company will report a gain on acquisition. Answer: D 37) 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 recorded at fair value. B) The net assets of both companies are recorded at book value. C) The net assets of the acquiring company are recorded at fair value while those of the acquired

company are recorded at book value. D) The net assets of both companies are recorded at fair market value. Answer: D 38) Appendix A of IFRS 3provides 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 net assets of both companies at book value as disclosed in the financial statements of each company prior to the business combination. B) The acquisition-date fair value of the total consideration given. C) The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed. D) Legal, contractual and regulatory restrictions and the carrying amount of the assets and liabilities to which those restrictions apply. Answer: A

39) A Corporation had net income of $50,000 in 2018 and $60,000 in 2019, excluding any income from

its investment in B Company. B Company had net income of $30,000 in 2018 and $40,000 in 2019. On January 1, 2019, 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. What net income would A Corporation report for 2018 in its comparative consolidated financial statements at the end of 2019? A) $80,000 B) $30,000 C) $50,000 D) $100,000 Answer: C 40) A Corporation had net income of $50,000 in 2018 and $60,000 in 2019, excluding any income from

its investment in B Company. B Company had net income of $30,000 in 2018 and $40,000 in 2019. On January 1, 2019, 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. What net income would A Corporation report for 2019 in its comparative consolidated financial statements at the end of 2019? A) $60,000 B) $80,000 C) $100,000 D) $40,000 Answer: C 41) When are parent companies allowed to comprehensively revalue the assets and liabilities of a

subsidiary to their fair values at the acquisition date, following a business combination? A) When reporting under ASPE and there is an insignificant (or no) non-controlling interest. B) When reporting under ASPE and there is a significant 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. Answer: A 42) 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 parent's investment account must be eliminated against the subsidiary's retained earnings. B) The assets and liabilities of the subsidiary must be revalued to fair value. C) The goodwill from the business combination must be calculated. D) The parent's investment account must be eliminated against the subsidiary's share capital. Answer: D 43) Company A makes an offer to purchase all of the shares of Company B from Company B's

shareholders. The board of directors of Company B does not feel that the offer is adequate and seeks out another purchaser who might offer more for the shares. This defence to the takeover is referred as: A) Selling the crown jewels. B) White knight. C) Poison pill. D) Pac-man defence. Answer: B

44) Which of the following is NOT required for an investor to have control over an investee? A) The investor must have exposure to variable returns from the investment. B) The investor must have power over the investee. C) The investor must be able to use its power to affect the amount of its returns. D) The investor must currently own a majority of the voting shares of the investee. Answer: D 45) In general, which of the following statements about the income tax implications of the form of a

business combination is true? A) An acquisition of net assets is generally better for the acquirer but worse for the seller. B) An acquisition of shares is generally better for both the acquirer and the seller. C) An acquisition of shares is generally better for the acquirer but worse for the seller. D) An acquisition of net assets is generally better for both the acquirer and the seller. Answer: C 46) Which of the following is NOT considered to be part of the acquisition cost of a subsidiary? A) The cost of issuing shares as part of the consideration. B) Any cash paid to the seller. C) The present value of any debt issued by the acquirer to the seller. D) The fair value of any contingent consideration. Answer: A 47) Which of the following is NOT considered to be part of the acquisition cost of a subsidiary? A) Due diligence fees paid to accountants, consultants and/or lawyers. B) The fair value of any shares issued. C) The fair value of any contingent considerations. D) The fair value of any assets transferred to the seller. Answer: A 48) Which of the following conditions need NOT be met before a parent company is not required to

present consolidated financial statements for external reporting purposes? A) It is a wholly-owned subsidiary of another entity and its other owner have not been informed about the parent not presenting consolidated financial statement. B) It does not have any debt or equity instruments traded in a public market. C) It has not filed, nor is in the process of filing, financial statements with a regulatory organization for the purposes of a public offering. D) Its ultimate or any intermediate parent company produces financial statements available for public use and comply with IFRS. Answer: A

49) On December 31, 2018, A Company has capital assets with a cost of $250,000 and accumulated

depreciation of $150,000 and B Company has capital assets with a cost of $180,000 and accumulated depreciation of $80,000. B Company's capital assets have a fair value of $200,000 on that date. If Company A acquires Company B on January 1, 2019, 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 $630,000 and accumulated depreciation of $230,000. B) Cost of $450,000 and accumulated depreciation of $150,000. C) Cost of $430,000 and accumulated depreciation of $230,000. D) Cost of $610,000 and accumulated depreciation of $310,000. Answer: B SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 50) On April 1, 2018, the balance sheets of Optimum Inc. and Electra Inc. were as follows:

Optimum Inc Electra Inc Cash and Short-Term Securities Inventory Plant and Equipment (net) Total Assets

$380,000 $ 50,000 $320,000 $750,000

$ 20,000 $ 10,000 $120,000 $150,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$ 75,000 $100,000 $150,000 $425,000 $750,000

$ 15,000 $ 30,000 $ 55,000 $ 50,000 $150,000

On that date, the fair values of Electra's Assets and Liabilities were as follows: Short-Term Securities Inventory Plant and Equipment (net) Current Liabilities Bonds Payable

$ 32,000 $ 5,000 $150,000 $ 15,000 $ 28,000

On April 1, 2018, Optimum issued 5,000 new common shares with a market value of $50.00 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. 16

c) Prepare Optimum's Consolidated Balance Sheet immediately following its acquisition of Electra's assets. d) Prepare Electra's Balance Sheet following the acquisition. Answer: a) Purchase Price: $250,000 Less: Fair value of Net Assets Acquired: $144,000 Goodwill: $106,000 b) Cash & Short-Term Securities Inventory Plant & Equipment (net) Current Liabilities Bonds Payable Goodwill Common Shares

$32,000 $5,000 $150,000 $15,000 $28,000 $106,000 $250,000

c) OPTIMUM INC. Consolidated Balance Sheet as at April 1, 2018 ASSETS: Cash & Short-Term Securities Inventory Plant & Equipment (net) Goodwill Total Assets

$ 412,000 $ 55,000 $ 470,000 $ 106,000 $1,043,000

LIABILITIES: Current Liabilities Bonds Payable Total Liabilities Shareholders' Equity Common Shares Retained Earnings Total Shareholders' Equity

$ 90,000 $ 128,000 $ 218,000 $ 400,000 $ 425,000 $ 825,000

Total Liabilities and Shareholders' Equity

$1,043,000

d) ELECTRA INC. Balance Sheet as at April 1, 2018 ASSETS: Investment in Optimum Inc. TOTAL ASSETS

$250,000 $250,000

Shareholders' Equity: Common Shares Retained Earnings Total Shareholders' Equity

$ 55,000 $195,000 $250,000

51) Sonic Enterprises Inc has decided to purchase 100% of the voting shares of Jackson Inc. for $300,000

in Cash on May 1, 2018. On the date, the balance sheets of each of these companies were as follows: Sonic Inc

Jackson Inc

Cash and Short-Term Securities Inventory Plant and Equipment (net) Total Assets

$750,000 $60,000 $280,000 $1,090,000

$30,000 $20,000 $140,000 $190,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$150,000 $120,000 $120,000 $700,000 $1,090,000

$25,000 $30,000 $70,000 $65,000 $190,000

On that date, the fair values of Jackson's assets and liabilities were as follows: Cash and Short-Term Securities Inventory Plant and Equipment (net) Current Liabilities Bonds Payable

$40,000 $15,000 $250,000 $25,000 $25,000

Sonic's Book Values approximated their Fair Values on that date. Required: a) Calculate the amount of Goodwill arising from this combination. 18

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. Answer: a) Purchase Price: Less: Fair value of Net Assets Acquired: Goodwill:

$300,000 $255,000 $ 45,000

b) Investment in Jackson Inc. Cash

$300,000 $300,000

c) SONIC INC. Consolidated Balance Sheet as at May 1, 2018 ASSETS Cash & Short-Term Securities Inventory Plant & Equipment (net) Goodwill Total Assets

$ 490,000 $ 75,000 $ 530,000 $ 45,000 $1,140,000

LIABILITIES Current Liabilities Bonds Payable Total Liabilities

$ 175,000 $ 145,000 $ 320,000

Shareholders' Equity Common Shares Retained Earnings Total Shareholders' Equity

$ 120,000 $ 700,000 $ 820,000

Total Liabilities and Shareholders' Equity

$1,140,000

Note that Sonic's Fair Values are not relevant to the Answer.

52) ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on

July 1, 2018. On the date, the balance sheets of each of these companies were as follows: ABC123 Inc DEF456 Inc Cash and Short-Term Securities Inventory Plant and Equipment (net) Goodwill Total Assets

$900,000 $ 50,000 $350,000 $ ---$1,300,000

$200,000 $120,000 $150,000 $ 80,000 $550,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$ 180,000 $ 400,000 $ 500,000 $ 220,000 $1,300,000

$160,000 $100,000 $200,000 $ 90,000 $550,000

On that date, the fair values of DEF456 Assets and Liabilities were as follows: Cash and Short-Term Securities Inventory Plant and Equipment (net) Current Liabilities Bonds Payable

$200,000 $ 90,000 $250,000 $160,000 $ 88,000

In addition to the above, an independent appraiser deemed that DEF456 Inc. had trademarks with a fair market value of $100,000 which had not been accounted for. In turn, ABC123'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 Market 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 ABC123's acquisition of DEF456's shares. c) Prepare ABC123's Consolidated Balance Sheet immediately following its acquisition of DEF123's voting shares.

Answer: a)

Purchase Price: Less: Fair value of Net Assets Acquired: Goodwill:

$400,000 $392,000 $ 8,000

(DEF456'S identifiable assets exclude its own Goodwill but include the trademark valued at $100,000) b) Investment in DEF456 Inc. Cash

$400,000 $400,000

c) ABC123 INC. Consolidated Balance Sheet, as at July 1, 2018 ASSETS Cash & Short-Term Securities Inventory Plant & Equipment (net) Trademark Goodwill Total Assets

$ 700,000 $ 140,000 $ 600,000 $ 100,000 $ 8,000 $1,548,000

LIABILITIES Current Liabilities Bonds Payable Total Liabilities

$ 340,000 $ 488,000 $ 828,000

Shareholders' Equity Common Shares Retained Earnings Total Shareholders' Equity

$ 500,000 $ 220,000 $ 720,000

Total Liabilities and Shareholders' Equity

$1,548,000

53) ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on

$900,000 $ 50,000 $350,000 $ ----$1,300,000

$200,000 $120,000 $150,000 $ 80,000 $550,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$ 180,000 $ 400,000 $ 500,000 $ 220,000 $1,300,000

$160,000 $100,000 $200,000 $ 90,000 $550,000

On that date, the fair values of DEF456 Assets and Liabilities were as follows: Cash and Short-Term Securities Inventory Plant and Equipment (net) Current Liabilities Bonds Payable

$200,000 $ 90,000 $250,000 $160,000 $ 88,000

In addition to the above, an independent appraiser deemed that DEF456 Inc. had trademarks with a fair market value of $100,000 which had not been accounted for. In turn, ABC123'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 Market Values of $30,000 and $480,000, respectively. Assume that both companies would be wound up and a new company called ABCDEF Inc. was created in its place. Prepare the Balance Sheet to reflect this occurrence as at July 1, 2018. The new entity would have10,000 voting shares issued to the current shareholders for a total market value of $1,222,000. Answer: ABCDEF INC Balance Sheet, as at July 1, 2018 ASSETS Cash & Short-Term Securities Inventory Plant & Equipment (net) Trademark Total Assets

$1,100,000 $ 120,000 $ 730,000 $ 100,000 $2,050,000 22

LIABILITIES Current Liabilities Bonds Payable Total Liabilities

$ 340,000 $ 488,000 $ 828,000

Shareholders' Equity Common Shares Retained Earnings Total Shareholders' Equity

$1,222,000 $1,222,000

Total Liabilities and Shareholders' Equity

$2,050,000

54) ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on

$900,000 $ 50,000 $350,000 $$1,300,000

$200,000 $120,000 $150,000 $ 80,000 $550,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$ 180,000 $ 400,000 $ 500,000 $ 220,000 $1,300,000

$160,000 $100,000 $200,000 $ 90,000 $550,000

On that date, the fair values of DEF456 Assets and Liabilities were as follows: Cash and Short-Term Securities Inventory Plant and Equipment (net) Current Liabilities Bonds Payable

$200,000 $ 90,000 $250,000 $160,000 $ 88,000

Equipment, which were said to have Fair Market Values of $30,000 and $480,000, respectively. Prepare any disclosure required for ABC123 Inc. under IFRS. Assume DEF456 produces high-end loudspeakers for touring musicians. Answer: On July 1, 20128, ABC123 purchased 100% of the outstanding voting shares of DEF456 INC, a manufacturer of high-end speaker cabinets for touring musicians, for $400,000 in Cash. There were no borrowings or sales between the companies prior to the acquisition date. The excess of the purchase price over the fair values of DEF456's assets and liabilities was allocated as follows: Inventory Plant & Equipment (net) Bonds Payable Trademark Goodwill

($30,000) $100,000 $ 12,000 $100,000 $ 8,000

Acquisition of DEF456

Cash & Short-Term Securities Inventory Plant & Equipment (net) Trademark Current Liabilities Bonds Payable Goodwill

Pre-Acquisition Carry Cost $200,000

Recognized Values at Acquisition $200,000

120,000 150,000 0 (160,000) (100,000) 80,000

90,000 250,000 100,000 (160,000) ( 88,000) 8,000

$290,000

$400,000

Net identifiable assets and liabilities Consideration paid

$400,000

55) ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on

July 1, 2018. On the date, the balance sheets of each of these companies were as follows: ABC123 Inc DEF456 Inc Cash and Short-Term Securities Inventory Plant and Equipment (net)

$900,000 $ 50,000 $350,000 24

$200,000 $120,000 $150,000

Goodwill Total Assets

$$1,300,000

$ 80,000 $550,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$ 180,000 $ 400,000 $ 500,000 $ 220,000 $1,300,000

$160,000 $100,000 $200,000 $ 90,000 $550,000

On that date, the fair values of DEF456 Assets and Liabilities were as follows: Cash and Short-Term Securities Inventory Plant and Equipment (net) Current Liabilities Bonds Payable

$200,000 $ 90,000 $250,000 $160,000 $ 88,000

In addition to the above, an independent appraiser deemed that DEF456 Inc. had trademarks with a fair market value of $100,000 which had not been accounted for. In turn, ABC123'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 Market Values of $30,000 and $480,000, respectively. Assuming that DEF456's Plant and Equipment was worth $400,000. Calculate the goodwill arising from this business combination and state how it would be shown in the consolidated balance sheet on the acquisition date. Answer: The new Purchase Price discrepancy would be calculated as follows: a) Purchase Price: Less: Fair value of Net Assets Acquired: Goodwill:

$400,000 $542,000 ($142,000)

Note that DEF456' s identifiable assets include a trademark worth $100,000 but exclude the company's Goodwill. Because the purchase price is below the fair market values of DEF456's identifiable assets, we have negative Goodwill. This negative goodwill should be allocated to reduce the value of the subsidiary's goodwill to zero and to record any remaining amount as a gain.

56) Assume that X Inc. wishes to enter into a Business Combination with Y Inc. on January 1, 2017. 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, 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. Answer: Report to the Board of Directors of X Inc: In order for a Business Combination to exist, an acquirer must be identified. In most cases it would be cheaper for X to acquire control of Y's assets through a Share Purchase than it would be to purchase the assets outright, since X would only to purchase a majority of Y's voting shares. However, if the Fair Value of Y's Net Assets exceeds its book values, a purchase of assets instead of shares would be more advantageous to X from a Tax standpoint, as its deduction for capital cost allowance (CCA) would then be based on Fair Market Values, which are higher than its book values. The fact that both corporations lie in different jurisdictions precludes a Statutory Amalgamation. When consolidated Financial Statements are prepared, Y Inc's Trademark would appear at its fair value of $250,000. Although the company has other intangibles, because they are not readily identifiable, their values would be attributed to Goodwill. After January 1, 2011 (or sooner if IFRS 3 had been adopted earlier), IFRS 3 requires that the acquisition method be used to account for all business combinations. Under this method, the company reports the identifiable net assets being acquired at the fair value of these net assets regardless of the amount paid for these net assets. When the purchase price is greater than the fair value of the identifiable net assets, the excess is reported as goodwill similar to the purchase method. When the purchase price is less than the fair value of identifiable net assets, the identifiable net assets are still reported at fair value and the deficiency in purchase price is reported as a gain on the purchase. The practice is not consistent with the historical cost principle, where assets are reported at the amount paid for the assets. This is, however, the general trend in accounting. 57) Company Inc. owns all of the outstanding voting shares of Firm Inc. On January 1st, 2017, 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. Answer: Given that Firm Inc is a wholly owned subsidiary of Company Inc, its acquisition of N-CORP would have to meet with Company Inc.'s approval. In effect, any shares of N-CORP acquired by Firm Inc. would be controlled by Company Inc. Such a purchase would constitute a Business Combination, and Company Inc. would have to prepare consolidated financial statements including both Firm Inc. and N-CORP.

58) Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on July 1, 2018.

On the date, the balance sheets of each of these companies were as follows: Telecom Inc Intron Inc Cash and Short-Term Securities Inventory Plant and Equipment (net) Total Assets

$920,000 $150,000 $330,000 $1,400,000

$200,000 $ 20,000 $180,000 $400,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$420,000 $700,000 $180,000 $100,000 $1,400,000

$ 90,000 $200,000 $ 60,000 $ 50,000 $400,000

On that date, the fair values of Intron's assets and liabilities were as follows: Cash/Short-Term Securities Inventory Plant and Equipment (net) Current Liabilities Bonds Payable

$200,000 $ 15,000 $250,000 $ 90,000 $210,000

Required: Based on the information provided, answer the following: a) Prepare the journal entry to record the purchases Intron's shares. b) Prepare the required journal entry prior to the preparation of the Consolidated Financial Statements. Answer: a) Investment in Intron Inc. Cash

$300,000 $300,000

b) Cash & Short-Term Securities Inventory Plant & Equipment (net) Current Liabilities Bonds Payable Goodwill

$200,000 $ 15,000 $250,000 $ 90,000 $210,000 $135,000 27

Investment in Intron Inc.

$300,000

59) Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on July 1, 2018.

On the date, the balance sheets of each of these companies were as follows: Telecom Inc Intron Inc Cash and Short-Term Securities Inventory Plant and Equipment (net) Total Assets

$920,000 $150,000 $330,000 $1,400,000

$200,000 $ 20,000 $180,000 $400,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$420,000 $700,000 $180,000 $100,000 $1,400,000

$ 90,000 $200,000 $ 60,000 $ 50,000 $400,000

On that date, the fair values of Intron's assets and liabilities were as follows: Cash/Short-Term Securities Inventory Plant and Equipment (net) Current Liabilities Bonds Payable

$200,000 $ 15,000 $250,000 $ 90,000 $210,000

Required: Assume that Intron's assets and liabilities were purchased instead of its shares for $300,000. Prepare the journal entry to record this purchase. Answer:

Cash & Short-Term Securities Inventory Plant & Equipment (net) Current Liabilities Bonds Payable Goodwill Cash

$200,000 $ 15,000 $250,000 $ 90,000 $210,000 $135,000 $300,000

60) Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on July 1, 2018.

On the date, the balance sheets of each of these companies were as follows: Telecom Inc Intron Inc Cash and Short-Term Securities Inventory Plant and Equipment (net) Total Assets

$920,000 $150,000 $330,000 $1,400,000

$200,000 $ 20,000 $180,000 $400,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$420,000 $700,000 $180,000 $100,000 $1,400,000

$ 90,000 $200,000 $ 60,000 $ 50,000 $400,000

On that date, the fair values of Intron's assets and liabilities were as follows: Cash/Short-Term Securities Inventory Plant and Equipment (net) Current Liabilities Bonds Payable

$200,000 $ 15,000 $250,000 $ 90,000 $210,000

Assume that two days after the acquisition, the Goodwill was put to an impairment test, after which it was decided that its true value was $70,000. Required: Prepare the necessary journal entry to write-down the goodwill as well as another Consolidated Balance Sheet to reflect the new Goodwill amount. Answer: Journal Entry: Loss due to Impairment of Goodwill (to Retained Earnings) Goodwill Telecom Inc, Consolidated Balance Sheet as at July 3, 2018 ASSETS Cash & Short-Term Securities Inventory Plant & Equipment (net)

$ 820,000 $ 165,000 $ 580,000 29

$65,000 $65,000

Goodwill Total Assets

$70,000 $1,635,000

LIABILITIES Current Liabilities Bonds Payable Total Liabilities

$ 510,000 $ 910,000 $1,420,000

Shareholders' Equity Common Shares Retained Earnings Total Shareholders' Equity

$ 180,000 $35,000 $ 215,000

Total Liabilities and Shareholders' Equity

$1,635,000

61) Great Western Manufacturing Inc. ("GWM") was acquired by Great Eastern Holding Ltd) ("GEH")

in 2018. The Vice President, Finance of GWM has asked you, the manager in charge of this year's audit, whether or not GWM has to prepare consolidated financial statements for the year ended December 31, 2018. 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. Answer: IAS 27 Separate Financial Statements states that a parent is not required to present consolidated financial statements for external reporting purposes if and only if: a) The parent itself is a wholly owned subsidiary, or a partially owned subsidiary, of another entity and its owners, including those that are not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements; b) The parent's debt or equity instruments are not traded on a public market (a domestic or foreign stock exchange or an over-the-counter market); c) The parent did not file, nor is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; d) The ultimate or intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRSs. If GWM meets these conditions, it can (but is not required to) present separate financial statements in accordance with GAAP as its only financial statements to end users.

62) 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. Answer:

Investment in Martha Limited Cash Debenture payable Common shares

$1,00,000

Investment acquisition costs Cash

$60,000

Debentures payable Cash

$10,000

Common shares Cash

$10,000

$200,000 $300,000 $500,000

$60,000

$10,000

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The purchase price of an entity includes: A) the fair market value of the subsidiary's net assets. B) the fair market value of the subsidiary's shareholders' equity and the purchase price

discrepancy. C) the book value of the subsidiary's shareholders' equity and goodwill. D) the book value of the subsidiary's shareholders' equity and the acquisition differential. Answer: D 2) On the date of acquisition, consolidated shareholders' equity under proprietary theory is equal to: A) the sum of the parent and subsidiary's shareholders' equities. B) the sum of the parent's shareholders' equity plus its pro rata share of the subsidiary's

shareholders' equity on the date of acquisition. C) the subsidiary's shareholders' equity. D) the parent's shareholders' equity. Answer: D 3) When preparing the consolidated balance sheet on the date of acquisition, the parent's investment (in

subsidiary company) is: A) replaced with 100% of the assets and liabilities of the subsidiary at book value. B) replaced with the parent's pro rata share of the assets and liabilities of the subsidiary at fair market value. C) replaced with 100% of the assets and liabilities of the subsidiary at fair market value. D) revalued to fair market value. Answer: C 4) When the parent forms a new subsidiary: A) there should be no acquisition differential. B) it should not be included in the company's consolidated financial statements as this would

effectively be double-counting. C) push down accounting rules must be followed. D) gain or loss will usually arise. Answer: A 5) Any negative goodwill arising on the date of acquisition: A) is recognized as a loss on the date of acquisition. B) is prorated among the parent company's identifiable net assets. C) should be amortized over a predetermined period. D) is recognized as a gain on the date of acquisition. Answer: D

6) A company owning a majority (but less than 100%) of another company's voting shares on the date

of acquisition should account for its subsidiary (in its consolidated balance sheet): A) by including 100% of the fair market values of the subsidiary's net assets and accounting for any unowned portion of the subsidiary's voting shares using the non-controlling interest (NCI) account. B) by including 100% of the fair market values of the subsidiary's net assets. C) by including only its share of the book values of the subsidiary's net assets. D) by including only its share of the fair market values of the subsidiary's net assets. Answer: A 7) HRN Enterprises Inc. purchases 80% of the outstanding voting shares of NHR Inc. on January 1,

2018. On that date, which of the following statements pertaining to non-controlling interest (NCI) is TRUE? A) HRN's non-controlling interest (NCI) account will include 20% of the fair value of NHR's net assets. B) HRN's non-controlling interest (NCI) account will include 20% of the book value of NHR's net assets. C) HRN's non-controlling interest (NCI) account will include 20% of any unallocated portion of the acquisition differential on the date of acquisition. D) HRN's non-controlling interest (NCI) account will include 20% of the acquisition differential on the date of acquisition. Answer: A 8) Under the Proprietary Theory, non-controlling interest (NCI) is: A) based on the book values of the subsidiary's net assets. Goodwill is established based on the

Parent's acquisition cost. B) based on the fair market values of the subsidiary's net assets. Goodwill is established based on the Parent's acquisition cost. C) nonexistent. Goodwill is established based on the Parent's pro-rata share of any acquisition differential. D) nonexistent. Goodwill is established based on the Parent's acquisition cost. Answer: D 9) The calculation of Goodwill and non-controlling interest (NCI) under the Entity Theory is derived : A) by using an imputed acquisition cost, which would be the presumed cost of acquiring 100% of

the outstanding voting shares of the subsidiary. B) by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net assets at fair market value. C) by using the actual acquisition cost. D) by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net assets at book value. Answer: A

10) One weakness associated with the Entity Theory is that: A) non-controlling interest (NCI) is computed using the book values of the subsidiary's net assets. B) the presumed acquisition cost may be unrealistic when the parent purchases significantly less

than 100% of the subsidiary's voting shares, or voting control is achieved incrementally. C) non-controlling interest (NCI) is computed using the fair market values of the subsidiary's net assets. D) it is inconsistent with the historical cost principle. Answer: B 11) Under the Parent Company Theory, 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 any acquisition differentials. C) The consolidated balance sheet is prepared by adding together the fair market values of both the parent and its subsidiary. D) 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 any acquisition differentials. Answer: B 12) On the date of formation of a 100% owned subsidiary by the parent, which of the following

statements pertaining to consolidated financial statements is TRUE? A) Consolidation requires the elimination of the parent's investment account against the subsidiary's share capital. B) It is possible to prepare consolidated financial statements that include all the assets and liabilities of the subsidiary. C) Consolidation will not be required since a new legal entity will have been formed. D) Consolidated financial statements are difficult to prepare because the assets and liabilities of the subsidiary have yet to be determined. Answer: A 13) Contingent consideration should be valued at: A) the acquirer's pro-rata share of the subsidiary's net assets at fair value at the date of acquisition. B) the fair value of the consideration on 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 book value of the consideration at the date of acquisition. Answer: B

14) Contingent consideration will be classified as a liability when: A) it will be paid in the form of cash or another asset. B) the form of payment will be determined at a future date. C) the acquirer decides the appropriate time to make a payment. D) it will be paid in the form of additional equity. Answer: A 15) Which consolidation theory should be used in preparing consolidated financial statements in

accordance with IFRS? A) Either Entity Theory or Parent Company Extension Theory. B) Parent Company Theory. C) Proprietary Theory. D) Proportionate Consolidation. Answer: A 16) A negative acquisition differential: A) occurs when the fair value of the subsidiary's net assets are less than their carrying amounts. B) implies that the parent company may have overpaid for its acquisition. C) is always equal to negative goodwill. D) cannot occur under the acquisition method. Answer: A

Parent and Sub Inc. had the following balance sheets on July 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Goodwill Trademark Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Parent Inc (carrying value) $180,000 $100,000 $ 60,000 $200,000

Sub Inc (carrying value) $36,000 $40,000 $24,000 $80,000

Sub Inc (fair value) $36,000 $40,000 $27,000 $93,000

$$$540,000

$ 8,000 $12,000 $200,000

$15,000

$ 80,000 $320,000 $ 90,000 $ 50,000 $540,000

$50,000 $20,000 $80,000 $50,000 $200,000

$50,000 $24,000

The net income for Parent Inc and Sub Inc for the year ended July 31, 2018 were $120,000 and $60,000 respectively. 17) Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2018 and decides

to prepare an Income Statement for the combined entity on the date of acquisition. If Parent acquired 100% of Sub Inc. on that date, what would be the net income reported for the combined entity (for the year ended July 31, 2018)? A) $180,000 B) $60,000 C) Nil D) $120,000 Answer: D 18) Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2018 and decides

to prepare an Income Statement for the combined entity on the date of acquisition. If Parent acquired 80% of Sub Inc. on that date, what would be the net income reported for the combined entity (for the year ended July 31, 2018)? A) Nil B) $120,000 C) $130,000 D) $104,000 Answer: B 19) Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2018, what amount would appear in

the Non-Controlling Interest (NCI) Account on the Consolidated Balance Sheet on the date of acquisition if the Proprietary Method were used? A) $200,000 B) $120,000 C) Nil D) $100,000 Answer: C 5

20) Assuming that Parent Inc. purchased 80% of Sub's voting shares on the date of acquisition (August

1, 2018) for $180,000, what would be the amount of the Non-Controlling Interest (NCI) on the date of acquisition if the Entity Method were used? A) $38,000 B) $104,000 C) $26,000 D) $45,000 Answer: D 21) Assuming that the Proprietary Theory was applied, what would be the amount of Goodwill

appearing on the Consolidated Balance Sheet on the date of acquisition, assuming that Parent purchased 80% of Sub Inc. for $180,000 on August 1, 2018? A) $88,000 B) Nil C) $72,000 D) Cannot be determined from the information given. Answer: C 22) Assuming the Entity Theory was applied, what would be the amount of Goodwill appearing on the

Consolidated Balance Sheet on the Date of acquisition, assuming that Parent purchased 80% of Sub Inc. for $180,000? A) $138,000 B) $130,000 C) $88,000 D) $137,000 Answer: C 23) The Shareholders' Equity section of Parent's consolidated balance sheet on the date of acquisition

would total what amount under the Entity Method? A) $185,000 B) $140,000

C) $244,000

D) $270,000

Answer: A 24) Assuming Parent purchased 80% of Sub Inc. for $180,000; the assets section of Parent's

consolidated balance sheet on the date of acquisition (August 1, 2018) would total what amount under the Entity Method? A) $651,000 B) $552,000 C) $639,200 D) $659,000 Answer: D 25) If Parent Company purchased 80% of Sub Inc. for $180,000, the liabilities section of Parent's

consolidated balance sheet on the date of acquisition (August 1, 2018) would total what amount under the Entity Method? A) $519,000 B) $500,000 C) $470,000 D) $474,000 Answer: D

26) What would be the amount of Non-Controlling Interest (NCI) appearing on the consolidated balance

sheet on the date of acquisition (August 1, 2018), under the Proprietary Method, assuming that Parent purchased 80% of Sub Inc. for $180,000? A) $36,000 B) $0 C) $45,000 D) The answer cannot be determined from the information given. Answer: B 27) Any goodwill on the subsidiary company's books on the date of acquisition: A) must be revalued. B) must be eliminated in preparing consolidated financial statements. C) must be subject to an impairment test. D) must be recorded as a loss on acquisition. Answer: B 28) 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 Proprietary Theory. B) the Parent Company Theory. C) the Parent Company Extension Theory. D) the Entity Theory. Answer: C 29) The focus of the consolidated financial statements on the shareholders of the parent company is

characteristic of: A) the Proprietary Theory. B) the Entity Theory. C) the Parent Company Theory. D) both the Parent Company Theory and the Proprietary Theory. Answer: D 30) Non-Controlling Interest (NCI) is presented in the Shareholders' Equity section of the Balance Sheet

under: A) the Parent Company Theory. B) the Proprietary Theory. C) the Entity Theory. D) both the Parent Company Extension Theory and the Proprietary Theory. Answer: C 31) Non-Controlling Interest (NCI) is presented under the Liabilities section of the Consolidated

Balance Sheet using the: A) the Parent Company Theory. B) the Proprietary Theory. C) the Entity Theory. D) both the Parent Company Theory and the Proprietary Theory. Answer: A 7

32) 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 an estimate included in the determination of net income. B) As an adjustment to consolidated contributed surplus. C) As an adjustment to the consideration paid for the subsidiary. D) As a direct adjustment to consolidated retained earnings. Answer: A 33) 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? A) As a direct adjustment to consolidated retained earnings. B) As an adjustment to consolidated contributed surplus. C) As an adjustment to the consideration paid for the subsidiary. D) As an adjustment to an estimate included in the determination of net income. Answer: C 34) 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 consolidated contributed surplus. B) As an adjustment to the consideration paid for the subsidiary. C) As a memorandum entry indicating that additional shares had been issued. D) As an adjustment to an estimate included in the determination of net income. Answer: C 35) Which statement about the differences between consolidation methods permitted under ASPE and

IFRS is true? A) IFRS permits either the entity theory or the parent company extension theory; ASPE requires the entity theory. B) IFRS permits either the entity theory or the parent company extension theory; ASPE requires the parent company extension theory. C) IFRS and ASPE both require the use of the parent company extension theory. D) IFRS and ASPE both require the use of the entity theory or the parent company extension theory. Answer: D

36) IFRS permits several methods to be used to determine the fair value of the non-controlling 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)? A) The NCI may be valued at the market value of the subsidiary's shares. B) The NCI may be valued at the fair value of the subsidiary's identifiable net assets. C) The NCI may be valued by determining the fair value of the business by means of an independent business valuation and then deducting the fair value of the controlling interest. D) The NCI may be valued proportionately to the price paid by the parent for its controlling interest. Answer: B 37) Which accounts differ on the consolidated balance sheet when Entity Theory compared to Parent

Company Extension Theory? A) The investment in subsidiary balance and the non-controlling interest balance. B) The investment in subsidiary balance and the consolidated retained earnings balance. C) The goodwill balance and the non-controlling interest balance. D) The goodwill balance and the consolidated retained earnings balance. Answer: C 38) If the non-controlling interest at acquisition is based on the fair value of the subsidiary's identifiable

net assets, which consolidation theory is being applied? A) The parent company extension theory. B) The proprietary theory. C) The parent company theory. D) The entity theory. Answer: A 39) When the acquisition differential is calculated and allocated, what will the consequence be of a

"bargain purchase"? A) The goodwill balance will always be negative. B) The fair value of the assets will always have been overstated. C) The acquisition differential will always be negative. D) Both the acquisition differential and goodwill balances will always be negative. Answer: A 40) A business combination involves a contingent consideration. It is considered 70% probable that a

payment of $500,000 will become payable three years after the acquisition date. Using a 7% discount rate, what liability should be recorded for the contingent consideration on the acquisition date? A) $350,000 B) $285,704 C) $500,000 D) $408,149 Answer: B

41) A business combination involves a contingent consideration. It is considered 70% probable that a

payment of $500,000 will become payable three years after the acquisition date. Using a 7% discount rate, how much interest expense should be recorded on the liability for the first year after acquisition? A) $19,999 B) $28,570 C) $24,500 D) $35,000 Answer: A 42) 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 decrease by $160,000. B) It would increase by $160,000. C) It would not change. D) It is not possible to determine the effect from the information provided. Answer: C 43) In an inflationary economy, under which consolidation theory would total assets in the consolidated

balance sheet at the acquisition date be greatest? A) The entity theory. C) The parent company theory.

B) The proprietary theory. D) The parent company extension theory.

Answer: A 44) 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 probabilistic estimate of the amount to be paid. C) The discounted present value of the maximum amount that could be paid. D) The undiscounted probabilistic estimate of the amount to be paid. Answer: B 45) 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) The parent company extension theory. B) The parent company theory. C) The proprietary theory. D) The entity theory. Answer: D SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

46) Keen Inc and Lax Inc had the following balance sheets on October 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Keen Inc Lax Inc Lax Inc (carrying value) (carrying value) (fair value) $300,000 $ 80,000 $ 80,000 $ 60,000 $ 24,000 $ 24,000 $ 30,000 $ 54,000 $ 50,000 $310,000 $280,000 $300,000 --$ 12,000 $ 16,000 $700,000 $450,000 $150,000 $400,000 $100,000 $ 50,000 $700,000

$200,000 $120,000 $ 60,000 $ 70,000 $450,000

$200,000 $100,000

Assuming that Keen Purchases 100% of Lax for a consideration of $100,000, and accounts for its investment using the cost method, prepare (under the Entity Theory): 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. Answer: a)

Investment in Lax Inc Cash

Debit $100,000

Credit $100,000

b) Common Shares Retained Earnings Plant and Equipment Trademark Bonds Payable Goodwill Inventory Investment in Lax Inc

$60,000 $70,000 $20,000 $ 4,000 $20,000 $ 70,000 $ 4,000 $100,000

Note: Negative Goodwill amount arises from this combination. Under IFRS the negative Goodwill is treated as a gain on acquisition and is charged to net income (and then to Retained 11

Earnings) as follows:

Goodwill Gain on bargain purchase

Debit Credit $70,000 $70,000

47) Keen Inc and Lax Inc had the following balance sheets on October 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Keen Inc Lax Inc (carrying value) (carrying value) $300,000 $ 80,000 $ 60,000 $ 24,000 $ 30,000 $ 54,000 $310,000 $280,000 --$ 12,000 $700,000 $450,000 $150,000 $400,000 $100,000 $ 50,000 $700,000

$200,000 $120,000 $ 60,000 $ 70,000 $450,000

Lax Inc (fair value) $ 80,000 $ 24,000 $ 50,000 $300,000 $ 16,000

$200,000 $100,000

Assuming that Keen Purchases 80% of Lax for a consideration of $240,000, prepare (under the Entity Theory): 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. Answer: a)

Investment in Lax Inc Cash

Debit $240,000

Credit $240,000

b) Common Shares Retained Earnings Plant and Equipment Trademark

$ 60,000 $ 70,000 $ 20,000 $ 4,000 12

Bonds Payable Goodwill Non-Controlling Interest Inventory Investment in Lax Inc

$ 20,000 $130,000 $ 60,000 $ 4,000 $240,000

48) Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets

Keen Inc Lax Inc (carrying value) (carrying value) $300,000 $ 80,000 $ 60,000 $ 24,000 $ 30,000 $ 54,000 $310,000 $280,000 --$ 12,000 $700,000 $450,000

Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$150,000 $400,000 $100,000 $ 50,000 $700,000

$200,000 $120,000 $ 60,000 $ 70,000 $450,000

Lax Inc (fair value) $ 80,000 $ 24,000 $ 50,000 $300,000 $ 16,000

$200,000 $100,000

Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare the consolidated balance sheet on the date of acquisition under the Entity Theory. Answer: Keen Inc. Consolidated Balance Sheet as at October 31, 2018 Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Goodwill Total Assets

$ 180,000 $84,000 $80,000 $ 610,000 $16,000 $30,000 $1,000,000

Accounts Payable Bonds Payable

$ 350,000 $ 500,000 13

Common Shares Retained Earnings Total Liabilities and Equity

$ 100,000 $50,000 $1,000,000

49) Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets

Keen Inc. Lax Inc. (carrying value) (carrying value) $300,000 $ 80,000 $ 60,000 $ 24,000 $ 30,000 $ 54,000 $310,000 $280,000 --$ 12,000 $700,000 $450,000

Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$150,000 $400,000 $100,000 $ 50,000 $700,000

$200,000 $120,000 $ 60,000 $ 70,000 $450,000

Lax Inc. (fair value) $ 80,000 $ 24,000 $ 50,000 $300,000 $ 16,000

$200,000 $100,000

Assuming that Keen Inc. purchases 80% of Lax Inc. for $240,000, prepare the consolidated balance sheet on the date of acquisition under the Entity Theory. Answer: Keen Inc. Consolidated Balance Sheet as at October 31, 2018 Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Goodwill Total Assets

$ 140,000 $84,000 $80,000 $ 610,000 $16,000 $ 130,000 $1,060,000

Accounts Payable Bonds Payable Total Liabilities

$ 350,000 $ 500,000 $ 850,000 14

Non-Controlling Interest Common Shares Retained Earnings Shareholders' Equity

$60,000 $ 100,000 $50,000 $ 210,000

Total Liabilities and Equity

$1,060,000

50) Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Keen Inc. Lax Inc. (carrying value) (carrying value) $300,000 $ 80,000 $ 60,000 $ 24,000 $ 30,000 $ 54,000 $310,000 $280,000 --$ 12,000 $700,000 $450,000 $150,000 $400,000 $100,000 $ 50,000 $700,000

$200,000 $120,000 $ 60,000 $ 70,000 $450,000

Lax Inc. (fair value) $ 80,000 $ 24,000 $ 50,000 $300,000 $ 16,000

$200,000 $100,000

Assume that the following draft balance sheet was prepared by a co-worker subsequent to Keen's 80% purchase of Lax Inc. for $240,000. 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 October 31, 2018 Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Goodwill

$124,000 $ 79,200 $ 70,000 $550,000 $ 12,800 $104,000 15

Total Assets

$940,000

Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$310,000 $480,000 $100,000 $ 50,000 $940,000

Answer: This balance sheet was prepared using the Proprietary Theory. There is no non-controlling

interest (NCI) section on the balance sheet, and Keen's consolidated balance sheet amounts (with the exception of the shareholders' equity section) include Keen's book values and 80% of Lax's fair values. 51) Jean Inc and John Inc had the following balance sheets on August 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Jean Inc. John Inc. (carrying value) (carrying value) $1,200,000 $300,000 $ 400,000 $ 64,000 $ 240,000 $ 80,000 $ 860,000 $256,000 --$ 20,000 $2,700,000 $720,000 $1,500,000 $ 600,000 $ 500,000 $ 100,000 $2,700,000

$300,000 $240,000 $ 60,000 $120,000 $720,000

John Inc. (fair value) $300,000 $ 64,000 $ 60,000 $300,000 $ 36,000

$300,000 $210,000

On August 31, 2018, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for $400,000. Prepare Jean Inc's consolidated balance sheet on the date of acquisition using the Proprietary Theory.

Answer:

Jean Inc. Consolidated Balance Sheet as at August 31, 2018 Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Goodwill Total Assets

$1,070,000 $ 457,600 $ 294,000 $1,130,000 $32,400 $ 175,000 $3,159,000

Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$1,770,000 $ 789,000 $ 500,000 $ 100,000 $3,159,000

52) Jean and John Inc had the following balance sheets on August 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$300,000 $240,000 $ 60,000 $120,000 $720,000

John Inc. (fair value) $300,000 $ 64,000 $ 60,000 $300,000 $ 36,000

$300,000 $210,000

On August 31, 2018, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for $400,000. Prepare Jean Inc.'s consolidated balance sheet on the date of acquisition using the Entity Theory. 17

Answer:

Jean Inc. Consolidated Balance Sheet as at August 31, 2018 Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Goodwill Total Assets

$1,100,000 $ 464,000 $ 300,000 $1,160,000 $36,000 $ 194,444 $3,254,444

Accounts Payable Bonds Payable Total Liabilities

$1,800,000 $ 810,000 $2,610,000

Common Shares Retained Earnings Non-Controlling Interest Total Shareholders' Equity

$ 500,000 $ 100,000 $44,444 $ 644,444

Total Liabilities and Equity

$3,254,444

· Note that Jean's imputed acquisition cost of acquiring 100% of John Inc. would be $400,000/0.9 or $444,444 (rounded). · Goodwill would be calculated as follows: Imputed acquisition cost of 100% of John Inc: Less: Fair Value of John's Net Assets: Goodwill:

$444,444 ($250,000) $194,444

Non-Controlling Interest would be 10% of John Inc.'s fair values including Goodwill: i.e. 10% * ($250,000 + $194,444) = $44,444.

53) Company A Inc. owns a controlling interest in Company B. which is located overseas. Company A

and B are in entirely different lines of business. Company A wishes to file a request allowing it to not consolidate its financial statements with those of Company B. Assuming that Company A is based in Canada, is this allowed? Explain. Answer: Generally speaking, this practice is not allowed. IFRS requires that all subsidiaries be consolidated, unless the subsidiary is subject to any long-term restrictions which prevent it from transferring funds to the Parent, or if the nature of the Parent Company's control over the subsidiary is temporary. IFRS describes control as the power to govern the financial and operating policies of an enterprise so as to benefit from its activities. Although Control is presumed to exist when a company owns more than 50% of the voting shares of another, evidence of control may still exist without such a controlling interest. It should be noted that some countries allow for exclusions for temporary control, non-homogeneous subsidiaries, subsidiaries that are bankrupt or under reorganization or subsidiaries that are immaterial in size. It should also be noted that the non-homogeneous exclusion was used in the past, both in the United States and Canada. N.B. The determination of control/significant influence, etc., is covered at length in Chapters 2 and 3. However, its inclusion in this chapter is still, arguably, very relevant. 54) X Company Purchases a (100%) controlling interest in Y Company by issuing $2,000,000 worth of

common shares. An agreement was drawn whereby 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 that date, X's shares had a market value of $80 per share. Required: a) Assuming that Y's net income was $950,000, prepare any journal entries (for company X) that you feel may be necessary to reflect Y's results under IFRS 3 Business Combinations. Assume that on the acquisition date no provision was made for the contingent consideration. b) Assuming that the agreement called for Y's shareholders to be compensated 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? Answer: a) Loss from Contingent Consideration Cash

$20,000 $20,000

b) Common shares-old shares Common shares-new shares

$20,000 $20,000

55) Major Corporation issues 1,000,000 common shares for all of the outstanding common shares of

Minor Corporation on August 1, Year 1. 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. On August 1, Year 3, the stock market price of major's shares is $55. In accordance with their agreement, Major Corporation issues an additional number of shares. Required: a) Prepare the journal entry to record the issuance of the shares. b) Calculate the number of additional shares that Major Corporation will have to issue to the former shareholders of Minor Corporation. c) Prepare the journal entry to record the transaction under IFRS 3 Business Combinations. d) Are there any alternatives for recording the additional share issuance? e) What would be the required disclosure for this series of events? Answer: a) Journal entry to record the issuance of shares Investment in Minor Common Shares

$40,000,000 $40,000,000

b) Additional shares (60,000,000/$55 - 1,000,000) = 90,909.09 c) Common shares-old shares (90,909.09 * $55) Common shares-new shares

$5,000,000 $5,000,000

d) A memorandum entry indicating that additional shares were issued for no consideration. e) Footnote disclosure for the amount and the reasons for the consideration and the accounting treatment used.

56) There are a number of theories of how financial statements should be prepared for non-wholly

owned subsidiaries. Briefly discuss each theory and provide your reasoning to support the theory that is being adopted under IFRSs. Answer: There are four theories that have been put forward for the preparation of financial statements under circumstances where the subsidiary is non-wholly owned and they are: a) The Proprietary theory b) The Parent Company theory c) The Parent Company Extension theory d) The Entity theory The theory that was adopted under IFRS 3 Business Combinations was the Entity Theory. The Entity Theory views the consolidated entity as having two distinct groups of shareholders: the controlling shareholders and the non-controlling shareholders. All values are reflected at fair value of the subsidiary's identifiable net assets with the balance recorded as goodwill. The issue becomes one of determining the fair value of the fair value of the subsidiary's identifiable assets and liabilities and the fair value of NCI. In addition, the Entity Theory represents a departure from the historical cost basis that has been used by accountants in the past as objective and verifiable. But the reality is that fair value of each party constitutes their participation in the entity. And arguably with a transaction having occurred in the shares of the subsidiary each of the participants should have their participation re-valued at current market prices or valuations and not historical cost. 57) Discuss the disclosure requirements for long term investments including accounting policies and

non-controlling interest (NCI). Answer: Companies should disclose their policies with regard to long-term investments. The general presumptions regarding the factors that establish a control investment and noted that these presumptions could be overcome in certain situations. IFRS 3 Business Combinations requires that a reporting entity describe the basis for its assessment and any significant assumptions or judgments when the reporting entity has concluded that: (a) it controls an entity whose activities are directed through voting shares even though the reporting entity has less than half of that entity's voting shares, and (b) it does not control an entity whose activities are directed through voting shares even though the reporting entity is the dominant shareholder with voting rights. IFRS 3 requires that a reporting entity disclose the following for each business combination in which the acquirer holds less than 100% of the equity interests in the acquiree at the acquisition date: a) The amount of the NCI in the acquiree recognized at the acquisition date and the measurement basis for that amount; and; b) For each NCI in an acquiree measured at fair value, the valuation techniques and key model inputs used for determining that value.

58) After the introduction of the entity method in Canada, many companies opted to value the

non-controlling interest in subsidiaries based on the fair value of the subsidiary's identifiable net assets at the acquisition date instead of valuing the non-controlling interest at its fair value. That is, they opted to use the parent company extension approach rather than the entity method when preparing consolidated financial statements. What motivation might preparers of consolidated financial statements have that would cause them to have this preference? Answer: Using the parent company extension approach results in total assets being lower (because only the parent's share of the goodwill arising from the business acquisition is recorded). In addition, only the parent's share of any goodwill impairment would be recorded in future years. As a result, the net income would be the same or higher when the parent company extension approach is used and the total assets is lower, so the return on assets would be higher making the results look better than if the entity method had been applied. 59) Why might the fair value of the non-controlling interest in a subsidiary on the date 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? Answer: Reasons why the fair value of the non-controlling interest might not be proportionate to the price paid by the parent include: · there may be synergies to the controlling interest that do not benefit the non-controlling interest in the subsidiary; · often a premium is paid to achieve control; · the acquisition may have taken place at different prices in a series of purchases, not as a single purchase on the acquisition date. IFRS recognizes this by permitting both the entity method and the parent company extension methods of valuing the non-controlling interest at acquisition. The standards allow the NCI to be valued based either on its fair value or on the basis of the fair value of the subsidiary's identifiable net assets at acquisition.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Intangible assets with definite useful lives should be amortized: A) over their useful lives. B) over two years. C) under the applicable capital cost allowance rates provided by the Canada Revenue Agency. D) over the time periods provided under IAS 36 Impairment of Assets which prescribes

amortization periods for different classes of assets. Answer: A 2) Testing intangible assets with indefinite useful lives for impairment: A) occurs whenever required by the company's auditors. B) never occurs because the asset has an indefinite useful life. C) occurs every year. D) occurs when only there has been an indication of an impairment in the value of the asset such

as a reduction in cash flow generation, idle assets, etc. Answer: C 3) Which of the following statements best describes the accounting treatment of Intangible Assets with

indefinite lives? A) All intangible assets are written down when their carrying values exceed their fair market values. B) With the exception of Goodwill, all intangible assets are written down when their carrying values exceed their fair market values. C) The recoverable amount is determined and compared to the carrying amount. If the recoverable amount is greater than the carrying amount than no impairment exists; otherwise, there is an impairment and the asset is written down to its recoverable amount. D) All intangible assets are written down when their carrying values exceed their undiscounted future cash flows. Answer: C 4) The rationale behind allocating goodwill across a subsidiary's various cash-generating units is: A) that it is necessary to comply with IASB requirements. B) that the cash-generating units will benefit from the synergies of the combination. C) that doing so will result in more accurate asset valuations. D) that doing so would facilitate comparisons between operating segments. Answer: B

5) An impairment loss can be reversed when: A) there is no indication that the impairment loss no longer exists or has been reduced and there

has not been a change in the estimates used to determine the assets recoverable amount. B) the intangible assets carrying values exceed their undiscounted future cash flows. C) with the exception of goodwill, the recoverable amount is determined and compared to the

carrying amount. If the recoverable amount is greater than the carrying amount then the impairment loss previously recorded is reversed. D) with the exception of goodwill, all intangible assets carrying values exceed their fair market values. Answer: C 6) Under the Cost Method, which of the following statements is TRUE? A) The parent's investment in the subsidiary is recorded at cost, and only changed thereafter if

there has been a permanent impairment in the value of the investment. B) 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. C) The parent records its pro rata share of the subsidiary's post-acquisition income 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 any excess dividends received from the subsidiary. Answer: A 7) Under the Equity Method, which of the following statements is TRUE? A) The parent's investment in the subsidiary is recorded at cost, and only changed thereafter if

there has been a permanent impairment in the value of the investment. B) 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. C) The parent records its pro rata share of the subsidiary's post-acquisition income 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 any excess dividends received from the subsidiary. Answer: C 8) 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) the same under both the Cost and Equity Methods. D) lower if the parent chooses to use Equity Method rather than the Cost Method. Answer: C

9) Consolidated Net Income is equal to: A) the sum of the net incomes of both the parent and its subsidiaries less any inter-company

dividends. B) the parent's net income excluding any income arising from its investment in the subsidiary. C) the parent's net income excluding any income arising from its investment in the Subsidiary,

plus the net income of the subsidiary less the amortization of the acquisition differential and the impairment of goodwill. D) the sum of the net incomes of both the parent and its subsidiaries. Answer: C

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2018. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below:

Cash Accounts Receivable Inventory Equipment (net) Trademark Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Errant Inc. (carrying value) $120,000 $ 80,000 $ 60,000 $400,000 $660,000

Grub Inc. (carrying value) $76,000 $40,000 $34,000 $80,000 $70,000 $300,000

Grub Inc. (fair value) $76,000 $40,000 $50,000 $70,000 $84,000

$180,000 $320,000 $ 90,000 $ 70,000 $660,000

$ 80,000 $ 60,000 $100,000 $ 60,000 $300,000

$80,000 $64,000

The net incomes for Errant and Grub for the year ended December 31, 2018 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2018 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub's inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year. Assume that Errant Inc. uses the Equity Method unless stated otherwise. 10) The amount of goodwill arising from this business combination is: A) $24,000.

B) $12,000.

C) $(24,000).

Answer: A 3

D) Nil.

11) How much Goodwill will be carried on Grub's balance sheet on December 31, 2018? A) Nil.

B) $(24,000).

C) $24,000.

D) $20,000.

Answer: A 12) Which of the following journal entries would be required on December 31, 2018 to record the

Impairment of the Goodwill? A) No entry is required.

Acquisition Differential

Investment in Errant C)

Debit Credit $4,000 $4,000

Debit Credit Equity method income $4,000 Investment in Grub $4,000

Debit Credit Investment in Grub $4,000 Equity method income $4,000

Answer: C 13) What would be the journal entry to record the dividends received by Errant during the year? A)

Cash Equity method income

Debit $9,000

Credit $9,000

Cash Acquisition Differential

Debit $9,000

Credit $9,000

Cash Investment in Grub

Debit $9,000

Credit $9,000

Cash Goodwill

Debit $9,000

Credit $9,000

Answer: C

14) Assuming that Errant uses the Cost Method, what would be the journal entry to record the dividends

received by Errant during the year? A)

Cash Goodwill

Debit $9,000

Credit Cash Dividend Income

$9,000

Debit $9,000

Credit $9,000

Cash Acquisition Income

Debit $9,000

Credit $9,000

Cash Investment in Grub

Debit $9,000

Credit $9,000

Answer: B 15) What would be Errant's journal entry to record the amortization of the acquisition differential

(excluding any goodwill impairment) on December 31, 2018? (Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.) A)

Debit Credit Equity method income $16,000 Investment in Grub $16,000 B)

Debit Credit Equity method income $18,800 Investment in Grub $18,800 C)

Debit Credit Investment in Grub $18,800 Equity method income $18,800 D)

Debit Credit Investment in Grub $16,000 Equity method income $16,000 Answer: A

16) What would be Errant's journal entry to record Grub's Net Income for 2018? A)

Debit Credit Equity method income $90,000 Investment in Grub $90,000 B)

Debit Credit Investment in Grub $81,000 Equity method income $81,000 C)

Debit Credit Investment in Grub $90,000 Equity method income $90,000 D) No entry is required. Answer: C 17) If Errant used the equity method to account for its investment in Grub and had net income of

$160,000 from its own operations (before making any entries to reflect its investment in Grub), what consolidated net income would Errant report in its consolidated income statement for the year ended December 31, 2018? A) $230,000. B) $90,000. C) $160,000. D) $250,000. Answer: A 18) The amount of Retained Earnings appearing on the consolidated balance sheet as at January 1, 2018

would be: A) $70,000.

B) $160,000.

C) $60,000.

D) $130,000.

Answer: A 19) If Errant used the equity method to account for its investment in Grub and had net income of

$160,000 from its own operations (before making any entries to reflect its investment in Grub) and paid no dividends in 2018, what amount of consolidated retained earnings would appear on Errant's consolidated balance sheet as at December 31, 2018? A) $130,000. B) $60,000. C) $300,000. D) $160,000. Answer: C

20) Consolidated Retained Earnings include: A) the parent's net income plus its share of the subsidiary's income less any dividends declared by

either the parent or the subsidiary. B) consolidated net income less any dividends declared by either the parent or the subsidiary. C) the parent's share of consolidated net income less any dividends declared by the parent. D) consolidated net income less any dividends declared by the parent only. Answer: C 21) Company A sells inventory to its subsidiary, Company B at a mark-up of 20% on cost. Of what

significance is this transaction, should A wish to prepare consolidated financial statements? The inventory is still in B's warehouse at year end. A) There will be unrealized profits in inventory which will only be realized once B sells this inventory to outsiders. B) A's net income will be under-stated. C) This is not significant. Any inter-company profits are eliminated during the Consolidation process. D) B's income will be over-stated. Answer: A 22) 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 share of its Subsidiary's income less any dividends received from the subsidiary. B) No adjustment is required if the parent has been using the Equity Method. C) No adjustment is required under either the Cost or the Equity methods. D) Under both the Cost and Equity methods, the parent must record its share of its Subsidiary's income. Answer: B 23) Any excess of fair value over book value attributable to land on the date of acquisition is to be: A) taken into income when the Land is sold. B) charged to Retained Earnings on the date of acquisition. C) capitalized and amortized. D) allocated to other identifiable assets. Answer: A 24) Consolidated shareholders' equity: A) is equal to that of the parent company under the Equity Method. B) is equal to the sum of the Shareholders' Equity Sections of the parent and the subsidiary. C) does not include any non-controlling Interest. D) is higher under the Equity Method when the subsidiary does not declare dividends. Answer: A

25) 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)

Investment Income - Subsidiary Equity method income - Parent

Debit $$$

Credit $$$

Equity method income - Parent Investment in Subsidiary

Debit $$$

Credit $$$

Equity method income - Parent Acquisition Differential

Debit $$$

Credit $$$

Equity method income - Parent Retained Earnings - Parent

Debit $$$

Credit $$$

Answer: B

26) 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 sub) would be: A)

Dividend Income - Subsidiary Investment in Subsidiary

Debit $$$

Credit $$$

Debit Equity method income - Subsidiary $$$ Equity method income - Parent

Credit

Debit $$$

Credit

$$$

Equity method income - Parent Retained Earnings - Parent

$$$

Dividend Income - Parent Dividends - Subsidiary

Debit $$$

Credit $$$

Answer: D 27) GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and

paid dividends of $10,000. Assuming that GNR Inc. uses the Equity Method, what effect would the above information have on GNR's investment in NMX account? A) An increase of $40,000. B) An increase of $30,000. C) An increase of $10,000. D) No effect. Answer: B 28) GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and

paid dividends of $10,000. Assuming that GNR Inc. uses the Cost Method, what effect would the above information have on GNR's investment in NMX account? A) An increase of $40,000 B) An increase of $10,000. C) An increase of $30,000. D) No effect. Answer: D

29) GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and

paid dividends of $10,000. Assuming that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR's investment in NMX account under the Equity Method? A) An increase of $40,000. B) An increase of $24,000. C) An increase of $30,000. D) No effect. Answer: B 30) GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and

paid dividends of $10,000. Assuming that GNR owned 80% of NMX instead of 100%, what would be the effect on GNR's investment in NMX account under the Cost Method? A) An increase of $24,000. B) An increase of $40,000. C) An increase of $30,000. D) No effect. Answer: D 31) GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and

paid dividends of $10,000. Assuming once again that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR's investment in NMX account under the cost method if GNR received $9,000 in dividends from NMX? A) A decrease of $1,000. B) No effect. C) An increase of $1,000 D) An increase of $23,000. Answer: B

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. 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, 2027. 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:

Cash Accounts Receivable Inventory Equipment (net) Trademark Total Assets

Big Guy (carrying value) $ 820,000 $ 240,000 $ 60,000 $ 900,000 --$2,000,000

Humble (carrying value) $245,000 $ 40,000 $ 45,000 $ 80,000 $ 90,000 $500,000 10

Humble (fair value) $245,000 $ 40,000 $ 50,000 $ 72,000 $193,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$ 200,000 $ 260,000 $ 900,000 $ 640,000 $2,000,000

$160,000 $ 70,000 $180,000 $ 90,000 $500,000

$160,000 $ 40,000

The following are the Financial Statements for both companies for the fiscal year ended June 30, 2020: Income Statements:

Sales Investment Revenue

Big Guy Humble $640,000 $240,000 $ 8,480 -

Less: Expenses: Cost of Goods Sold Depreciation Interest Expense Other Expenses

$300,000 $160,000 $ 81,000 $ 34,000 $ 34,000 $ 26,000 $ 5,000 $ 8,000

Net Income

$228,480

$ 12,000

Retained Earnings Statements

Balance, July 1, 2019 Net Income Dividends

Big Guy Humble $ 960,560 $48,000 $ 228,480 $12,000 $ 20,000 $ 2,000

Balance, June 30, 2020

$1,169,040

$58,000

Balance Sheets Big Guy Cash Accounts Receivable Investment in Humble

Humble

$1,200,000 $365,000 $ 270,000 $ 55,000 $ 319,040 11

Inventory Equipment (net) Trademark Total Assets

$ 70,000 $ 70,000 $ 820,000 $ 65,000 --$ 85,000 $2,679,040 $640,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$ 350,000 $332,000 $ 260,000 $ 70,000 $ 900,000 $180,000 $1,169,040 $ 58,000 $2,679,040 $640,000

An impairment test conducted in September 2018 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 2020, Humble Inc. borrowed $20,000 in cash from Big Guy Inc. interest free to finance its operations. Big Guy uses the Equity Method to account for its investment in Humble Corp. Assume that the entity method applies. 32) The amount of Goodwill arising from this business combination is: A) $50,000.

B) $(40,000).

C) $64,000.

D) Nil.

Answer: A 33) The amount of Non-Controlling Interest on Big Guy's consolidated balance sheet on July 1, 2017

would be: A) $0.

B) $90,000.

C) $270,000.

D) $88,000.

Answer: B 34) The amount of depreciation expense appearing on Big Guy's June 30, 2020 consolidated income

statement would be: A) $113,400.

B) $116,280.

C) $113,720.

D) $115,000.

Answer: A 35) The amount of interest expense appearing on Big Guy's June 30, 2020 consolidated income

statement would be: A) $62,400.

B) $36,000.

C) $57,600.

D) $63,000.

Answer: D 36) The amount of other expenses appearing on Big Guy's June 30, 2020 consolidated income statement

would be: A) $13,000.

B) $13,400.

C) $12,000.

Answer: A

D) $11,600.

37) The amount of non-controlling interest appearing on Big Guy's June 30, 2020 consolidated income

statement would be: A) $2,000.

B) Nil.

C) $2,120.

D) $3,600.

Answer: C 38) The Net Income attributable to Big Guy appearing on Big Guy's consolidated income statement on

June 30, 2020 would be: A) $228,480.

B) $216,080.

C) $279,600.

D) $218,480.

Answer: A 39) What amount of dividends would appear on Big Guy's consolidated statement of retained earnings

as at June 30, 2020? A) $21,600.

B) $20,000.

C) $2,000.

D) $22,000.

Answer: B 40) Big Guy's consolidated retained earnings as at June 30, 2020 would be: A) $1,500,000.

B) $1,486,400.

C) $1,169,040.

D) $1,508,000.

Answer: C 41) The amount of non-controlling interest appearing on Big Guy's consolidated balance sheet as at June

30, 2020 would be: A) $83,600.

B) $90,000.

C) $79,760.

D) $226,400.

Answer: C 42) What amount would appear as Big Guy's investment in Humble Corp. on its June 30, 2020

consolidated balance sheet? A) $9,600. B) $360,000. C) $12,000. D) The Investment in Humble Account would not appear on the consolidated balance sheet. Answer: D 43) The amount of goodwill appearing on Big Guy's consolidated balance sheet as at June 30, 2020

would be: A) $40,000.

B) $50,000.

C) Nil.

D) $30,000.

Answer: A 44) The net amount appearing on Big Guy's consolidated balance sheet for Equipment as at June 30,

2020 would be: A) $885,000.

B) $878,600.

C) $881,800.

Answer: C

D) $872,000.

45) The amount of Current Liabilities appearing on Big Guy's consolidated balance sheet as at June 30,

2020 would be: A) $662,000.

B) $682,000.

C) $630,000.

D) $350,000.

Answer: A 46) The amount of Accounts Receivable appearing on Big Guy's consolidated balance sheet as at June

30, 2020 would be: A) $325,000.

B) $305,000.

C) $314,000.

D) $270,000.

Answer: B 47) The amount of Cash on Big Guy's consolidated balance sheet on June 30, 2020 would be: A) $1,545,000.

B) $1,585,000.

C) $1,565,000.

D) $1,200,000.

Answer: C 48) The amount of Common Shares appearing on Big Guy's consolidated balance sheet on June 30,

2020 would be: A) $1,080,000.

B) $1,800,000.

C) $1,044,000.

D) $900,000.

Answer: D 49) The amount of Bonds Payable appearing on Big Guy's consolidated balance sheet on June 30, 2020

would be: A) $330,000.

B) $317,800.

C) $309,000.

D) $318,000.

Answer: C SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 50) Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, 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, 2015 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, 2016, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition being recorded. During 2015, Martin reported a net income of $60,000 and paid $12,000 in dividends. Martin's 2016 net income and dividends 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 2015 and 2016. b) Compute the following as at December 31, 2016:

i. Investment in Martin Inc. ii. Goodwill iii. The amount of unamortized acquisition differential. Answer: a) Equity Method Journal Entries 2015: Investment in Martin Inc. Cash

Debit $300,000

Investment in Martin Inc. Investment Income

$60,000

Investment Income Investment in Martin Inc.

$18,000

Cash Investment in Martin Inc.

$12,000

2016: Investment in Martin Inc. Investment Income

Debit $72,000

Investment Income Investment in Martin Inc.

$4,400

Cash Investment in Martin Inc.

$15,000

Credit $300,000

$60,000

$18,000

$12,000 Credit $72,000

$4,400

$15,000

b) i) Investment in Martin Inc.: Cost:

$300,000

Add: 2015 Income: Less: 2015 Dividends Less: 2015 Acquisition Differential Amortization:

$60,000 ($12,000) ($18,000)

Add: 2016 Income: Less: 2016 Dividends Less: 2016 Acquisition Differential Amortization:

$72,000 ($15,000) ($4,400)

Investment in Martin Inc., December 31, 2016:

$382,600

ii) Goodwill: Purchase Price of Martin: Less: book value of Martin's net identifiable assets Acquisition differential Less: Excess of fair value over book values: Inventories Patent Goodwill at date of acquisition

$300,000 ($240,000) $60,000 ($20,000) ($16,000) $24,000

Less: Impairment Loss (10%)

($2,400)

Goodwill

$21,600

iii) The only unamortized acquisition differential remaining would be 8/10 of the excess fair value of the patent, which would be $16,000 plus the goodwill of $21,600 for a total of $37,600. 51) Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, 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, 2015 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, 2016, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition being recorded. During 2015, Martin reported a net income of $60,000 and paid $12,000 in dividends. Martin's 2016 net income and dividends were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets. Assuming that Davis purchases 80% of Martin for $300,000, answer the following: Required: Prepare Davis' Equity-Method journal entries for 2015 and 2016. a) Compute the following as at December 31, 2016: i. Investment in Martin Inc. ii. Goodwill iii. The amount of unamortized acquisition differential. 16

Answer: a) Equity Method Journal Entries

2015:

Debit

Credit

Investment in Martin Inc. Cash

$300,000

Investment in Martin Inc. Investment Income

$48,000

Investment Income Investment in Martin Inc.

$14,400

Cash Investment in Martin Inc.

$9,600

2016:

Debit

Investment in Martin Inc. Investment Income

$57,600

Investment Income Investment in Martin Inc.

$9,520

Cash Investment in Martin Inc.

$12,000

$300,000

$48,000

$14,400

$9,600 Credit

$57,600

$9,520

$12,000

b) i) Investment in Martin Inc.: Cost:

$300,000

Add: 2015 Income: Less: 2015 Dividends Less: 2015 Acquisition Differential Amortization:

$48,000 ($9,600) ($14,400)

Add: 2016 Income: Less: 2016 Dividends Less: 2016 Acquisition Differential Amortization:

$57,600 ($12,000) ($9,520)

Investment in Martin Inc., December 31, 2016:

$360,080

ii) Goodwill Purchase Price of Martin: 80%

$300,000

Imputed value at 100% Less: book value of Martin's net identifiable assets Acquisition differential Less: excess of fair value over book values: Inventories Patent Goodwill at date of acquisition

$375,000 $240,000 $135,000

Less: impairment loss (10%)

($9,900)

Goodwill

$89,100

($20,000) ($16,000) $99,000

iii) The only unamortized acquisition differential remaining would be 8/10 of the excess fair value of the patent, which would be $16,000 plus the goodwill of $89,100 for a total of $105,100. 52) Linton Inc. purchased 75% of Marsh Inc. on January 1, 2015 for $1,000,000. 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) The balance was allocated to goodwill. The trademark had an estimated remaining useful life of 10 years from the date of acquisition. Marsh Inc. uses straight line amortization. In 2015, Marsh's net income was $40,000. Marsh paid $5,000 in dividends to shareholders on record as at December 31, 2015. In 2016, Marsh reported a net income of $8,000 and declared $1,000 in dividends. Required: a) Prepare the equity method journal entries for Linton for 2015 and 2016. b) Calculate the value of Marsh's trademark as at December 31, 2016. c) Prepare a statement that shows the changes in Linton's non-controlling interest in 2016.

Answer: a) Equity Method Journal Entries

2015: Investment in Marsh Inc. Cash

Debit $1,000,000

Investment in Marsh Inc. Investment Income

$30,000

Investment Income Investment in Marsh Inc.

$7,125

Cash Investment in Marsh Inc.

$3,750

2016: Investment in Marsh Inc. Investment Income

Debit $6,000

Investment Income Investment in Marsh Inc.

$1,125

Cash Investment in Marsh Inc.

$750

Credit $1,000,000

$30,000

$7,125

$3,750 Credit $6,000

$1,125

$750

b) Trademark: $15,000 - ($1,500 × 2) = $12,000 c) Changes in Non-Controlling Interest: Non-Controlling Interest, January 1, 2015: ($1,333,333 × 25 %)

$333,333

2015 Net Income (Non-Controlling Share) ($40,000 × 25%) - ($8,000 + $1,500) × 25%

$7,625

Less: 2015 Dividends (Non-Controlling Share) ($5,000 × 25%)

($1,250)

2016 Net Income (Non-Controlling Share) ($8,000 × 25%) - ($1,500 × 25%)

$1,625

Less: 2016 Dividends (Non-Controlling Share) 19

($1,000 × 25%)

($250)

Non-Controlling Interest, December 31, 2016

$341,083

53) Selectron Inc. acquired 60% of Insor Inc. on January 1, 2016 for $180,000, when Insor's Common

Shares and Retained Earnings were worth $60,000 and $180,000 respectively. Insor's fair values approximated their book values on that date. Selectron currently uses the Equity Method to account for its investment in Insor. During 2016, 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 2017, 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. Typically, Insor declares dividends in the amount of 10% of its earnings. Required: a) Compute Insor's net income for 2016 and 2017. b) Compute the amount of dividends declared by Insor in each year. c) Compute the balance in the non-controlling interest count as at December 31, 2017. Answer: a) Insor's Net Income for 2016 and 2017 had to be $20,000 and $40,000 respectively. Insor's Net Income for 2016 is calculated as follows: 2016 Net Income flowing through investment account = $12,000; $12,000/60% = $20,000 Insor's 2017 net income would be calculated in the same manner, and would be $40,000. b) Dividends, 2016 = $20,000 × 10 % = $2,000 (or $1,200/60%) Dividends, 2017 = $4,000. c) Non-Controlling Interest: Fair value of Insor at date of acquisition: Add: 2016 Net Income Less: 2016 Dividends Add: 2017 Net Income Less: 2017 Dividends Book value of Insor, December 31, 2017

$300,000 $20,000 ($2,000) $40,000 ($4,000) $354,000

Non-Controlling Interest (40%)

$141,600

54) Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. 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: Inventory Equipment Patent Bonds Payable

$5,000 less than book value $30,000 less than book value $24,000 greater than fair value $5,000 less than book value

The balance sheets of both companies, as at December 31, 2017 are disclosed below:

Cash Accounts Receivable Inventory Equipment (net) Patent Investment in Brand Y Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Brand X Inc. Brand Y Inc. $200,000 $ 45,000 $100,000 $ 40,000 $ 80,000 $ 55,000 $220,000 $100,000 $ 60,000 $348,000 $948,000 $300,000 $480,000 $270,000 $100,000 $98,000 $948,000

$ 53,000 $ 50,000 $180,000 $ 19,000 $300,000

The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were $1,000 and $50,000 respectively. An impairment test conducted on December 31, 2017 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 X did not declare any dividends during the year. However, Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends. 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, 2022. Prepare Brand X's consolidated balance sheet as at December 31, 2017, assuming that Brand X purchased 100% of Brand Y for $350,000 and accounts for its investment using the equity method.

Brand X Inc. Consolidated Balance Sheet As at December 31, 2017

Answer:

Cash Accounts Receivable Inventory Equipment (net) Patent Goodwill Total Assets

(80 + 55 + 5 - 5) (220 + 100 - 30 + 3) (60 + 24 - 4) * see below

Current Liabilities Bonds Payable (270 + 50 - 5 + 1) Common Shares Retained Earnings Total Liabilities and Equity

$245,000 $140,000 $135,000 $293,000 $ 80,000 $154,000 $1,047,000 $533,000 $316,000 $100,000 $ 98,000 $1,047,000

The following explanation may help students understand how some of these figures were derived: Goodwill: Purchase Price Less: Fair value of net identifiable assets acquired: Goodwill Less: Impairment loss Goodwill

$350,000 $194,000 $156,000 ($2,000) $154,000

Consolidated Retained Earnings: Brand X Retained Earnings, January 1, 2017: Add: Brand X Net Income Less: Dividends Consolidated Retained Earnings

$48,000 $50,000 n/a $98,000

Note: Consolidated Net Income under the Equity Method would be Brand X's net income.

55) Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. On that date, Brand

$5,000 less than book value $30,000 less than book value $24,000 greater than fair value $5,000 less than book value

The balance sheets of both companies, as at December 31, 2017 are disclosed below:

Cash Accounts Receivable Inventory Equipment (net) Patent Investment in Brand Y Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Brand X Inc. Brand Y Inc. $200,000 $ 45,000 $100,000 $ 40,000 $ 80,000 $ 55,000 $220,000 $100,000 --$ 60,000 $348,000 --$948,000 $300,000 $480,000 $270,000 $100,000 $98,000 $948,000

$ 53,000 $ 50,000 $180,000 $ 19,000 $300,000

The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were $1,000 and $50,000 respectively. An impairment test conducted on December 31, 2017 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 X did not declare any dividends during the year. However, Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends. 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, 2022. Prepare Brand X's consolidated balance sheet as at December 31, 2017, assuming that Brand X purchased 80% of Brand Y for $350,000 and accounts for its investment using the equity method.

Brand X Inc. Consolidated Balance Sheet As at December 31, 2017

Answer:

Cash Accounts Receivable Inventory Equipment (net) Patent Goodwill Total Assets

(80 + 55 + 5 - 5) (220 + 100 - 30 + 3) (60 + 24 - 4) * see below

Current Liabilities Bonds Payable (270 + 50 - 5 + 1) Non-Controlling Interest Common Shares Retained Earnings Total Liabilities and Equity

$245,000 $140,000 $135,000 $293,000 $ 80,000 $241,500 $1,134,500 $533,000 $316,000 $ 87,500 $100,000 $98,000 $1,134,500

The following explanations may help students understand how some of the figures were derived: Non-Controlling Interest: NCI at acquisition Income ($50,000 × .2) Dividends ($51,000 × .2) Inventory Equipment Patent Bond Goodwill

$87,500 10,000 (10,200) 1,000 200 (800) 200 (400) $87,500

Goodwill: Purchase Price Less: Fair value of net identifiable assets acquired: (100% × $194,000) 24

$437,500 (imputed at 100% = ($350,000 / 0.8)) ($194,000)

Goodwill Less: Impairment Loss Goodwill

$243,500 ($2,000) $241,500

Par Inc. purchased 70% of the outstanding voting shares of Sub Inc. for $700,000 on July 1, 2015. On that date, Sub Inc. 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 July 1, 2020. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Par Inc. and Sub Inc. declared and paid $10,000 and $5,000 in dividends, respectively during the year. The balance sheets of both companies, as well as Sub's fair values immediately following the acquisition are shown below: Par Inc. Sub Inc. (carrying value) (carrying value) $ 600,000 $515,000 $ 140,000 $ 85,000 $ 60,000 $ 45,000 $ 700,000 --$ 50,000 $180,000 -$115,000 $1,550,000 $940,000

Cash Accounts Receivable Inventory Investment in Sub Inc. Equipment (net) Land Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$ 100,000 $ 160,000 $ 800,000 $ 490,000 $1,550,000

$280,000 $ 80,000 $410,000 $170,000 $940,000

Sub Inc. (fair value) $515,000 $ 85,000 $ 60,000 $185,000 $200,000

$280,000 $ 60,000

The following are the financial statements for both companies for the fiscal year ended June 30, 2016: Income Statements Sales Investment Revenue Less: Expenses: Cost of Goods Sold Depreciation Interest Expense

$800,000 $ 21,000

$300,000 -

$240,000 $ 10,000 $ 12,000

$180,000 $ 20,000 $ 40,000 25

Other Expenses Net Income

$ 8,000 $551,000

$ 10,000 $ 50,000

Retained Earnings Statements Balance, July 1, 2015 Net Income Dividends Balance, June 30, 2016

$ 490,000 $ 551,000 $ (10,000) $1,031,000

$170,000 $ 50,000 $ (5,000) $215,000

Balance Sheets Par Inc.

Sub Inc.

Cash Accounts Receivable Investment in Sub Inventory Equipment (net) Land Total Assets

$ 647,500 $ 665,000 $ 250,000 $ 35,000 $ 717,500 $ 90,000 $ 45,000 $ 750,000 $ 170,000 --$ 115,000 $2,455,000 $1,030,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$ 464,000 $ 325,000 $ 160,000 $ 80,000 $ 800,000 $ 410,000 $1,031,000 $ 215,000 $2,455,000 $1,030,000

Both companies use a FIFO system, and Sub's entire inventory on the date of acquisition was sold during the following year. During 2015, Sub Inc. borrowed $10,000 in cash from Par Inc. interest free to finance its operations. Par uses the Equity Method to account for its investment in Sub Inc. Corp.

56) Prepare Par's consolidated balance sheet as at the date of acquisition. Answer:

Par Inc. Consolidated Balance Sheet As at July 1, 2015 Cash Accounts Receivable Inventory Equipment (net) Land Goodwill* Total Assets

$1,115,000 $225,000 $120,000 $135,000 $200,000 $295,000 $2,190,000

Current Liabilities Bonds Payable Non-Controlling Interest Common Shares Retained Earnings Total Liabilities and Equity

$380,000 $220,000 $300,000 $800,000 $490,000 $2,190,000

*Purchase Price for 70% Implied value of 100% interest Less: Fair value of net identifiable assets acquired Goodwill

$700,000 $1,000,000 $705,000 $295,000

57) Prepare Par's consolidated income statement for the year ended June 30, 2016. Show the allocation

of consolidated net income between the controlling and non-controlling interests. Answer: Par Inc. Consolidated Income Statement for the Year ended June 30, 2016 Sales Less: Expenses: Cost of Goods Sold: Depreciation Interest Expense Other Expenses Consolidated Net Income

$1,100,000 $435,000 ($240,000 + $180,000) + $15,000 $31,000 ($10,000 + $20,000) + $1,000 $56,000 ($12,000 + $40,000) + $4,000 $18,000 $560,000

Less: Non-Controlling Interest

($9,000) ($50,000 - $15,000 - $1,000 - $4,000) × 30%

Parent's Share of CNI

$551,000

58) Prepare Par's statement of consolidated retained earnings for the year ended June 30, 2016. Answer:

Par Inc. Statement of Consolidated Retained Earnings for the year Ended June 30, 2016 Beginning Retained Earnings: Add: Parent's share of Consolidated Net Income: Less: Dividends: Ending Consolidated Retained Earnings:

$490,000 $551,000 ($10,000) $1,031,000

59) Prepare a statement of changes in Non-Controlling Interest for the year ended June 30, 2016. Answer:

Par Inc. Statement of Changes in Non-Controlling Interest for the year ended June 30, 2016 Non-controlling interest, July 1, 2015 NCI share of consolidated net income NCI share of dividends

$300,000 $9,000 ($1,500)

Non-controlling interest, June 30, 2016

$307,500

The ending balance can be calculated as follows: Subsidiary's share capital Subsidiary's retained earnings Unamortized acquisition differential Total

$410,000 $215,000 $400,000 $1,025,000

Noncontrolling interest at 30%

$307,500

60) Prepare a consolidated balance sheet for Par Inc. as at June 30, 2016.

Par Inc. Consolidated Balance Sheet As at June 30, 2016

Answer:

Cash Accounts Receivable Inventory Equipment (net) Land Goodwill Total Assets

(647.5 + 665) (250 + 35 - 10) (90 + 45) (750 + 170 + 4) (0 + 115 + 85)

$1,312,500 $275,000 $135,000 $924,000 $200,000 $295,000 $3,141,500

Current Liabilities (464 + 325 - 10) Bonds Payable (160 + 80 - 16) Non-Controlling Interest Common Shares Retained Earnings Total Liabilities and Equity

$779,000 $224,000 $307,500 $800,000 $1,031,000 $3,141,500

Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2015. On that date, Stanton Inc. 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, 2035. 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 Inc. and Stanton Inc. 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 Accounts Receivable Inventory Investment in Stanton Inc. Equipment (net) Land Trademark Total Assets

Remburn Inc. Stanton Inc. Stanton Inc. (carrying value) (carrying value) (fair value) $400,000 $ 5,000 $ 5,000 $240,000 $ 30,000 $30,000 $ 60,000 $ 30,000 $50,000 $ 90,000 --$160,000 $ 25,000 $20,000 --$ 20,000 $30,000 --$ 10,000 $15,000 $950,000 $120,000 30

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$500,000 $120,000 $200,000 $130,000 $950,000

$ 50,000 $ 20,000 $ 30,000 $ 20,000 $120,000

$50,000 $30,000

The following are the financial statements for both companies for the fiscal year ended December 31, 2015: Income Statements Sales Dividend income Less: Expenses: Cost of Goods Sold Depreciation Interest Expense Other Expenses Gain on Sale of Land Net Income

$295,750 $125,000 $ 3,600 --$200,000 $ 10,000 $ 16,000 $ 5,000 $ --$ 68,350

$ 19,000 $ 25,000 $ 36,000 $ 28,000 $ (8,000) $ 25,000

Retained Earnings Statements Balance, January 1, 2015 Net Income Dividends Balance, December 31, 2015

$130,000 $ 68,350 $(12,000) $186,350

$20,000 $25,000 $(4,000) $41,000

Remburn Inc.

Stanton Inc.

Cash Accounts Receivable Investment in Stanton Inc. Inventory Equipment (net) Trademark Total Assets

$190,950 $200,000 $ 90,000 $100,000 $350,000 --$930,950

$156,000 $150,000

Current Liabilities Bonds Payable

$424,600 $120,000

$280,000 $ 20,000

Balance Sheets

$ 30,000 $ 25,000 $ 10,000 $371,000

Common Shares Retained Earnings Total Liabilities and Equity

$200,000 $186,350 $930,950

$ 30,000 $ 41,000 $371,000

Both companies use a FIFO system, and Stanton's entire inventory on the date of acquisition was sold during the following year. During 2015, Stanton Inc. borrowed $20,000 in cash from Remburn Inc. interest free to finance its operations. Remburn uses the Cost Method to account for its investment in Stanton Inc. Moreover, Stanton sold all of its land during the year for $18,000. Goodwill impairment for 2015 was determined to be $7,000. Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary's identifiable net assets (parent company extension method). 61) Prepare Remburn's consolidated income statement for the year ended December 31, 2015 and show

the allocation of the consolidated net income between the controlling and non-controlling interests. Answer: Remburn Inc. Consolidated Income Statement For the Year ended December 31, 2015 Sales

$420,750

Less: Expenses: Cost of Goods Sold

(200,000 + 19,000 + 20,000) (10,000 + 25,000 - 500) (16,000 + 36,000 - 500) (5,000 + 28,000 + 1,000) (-8,000 + 10,000)

Depreciation Interest Expense Other Expenses Loss on Sale of Land Goodwill impairment Consolidated Net Income

$ 239,000 $34,500 $51,500 $34,000 $2,000 $7,000 $52,750

Less: Non-Controlling Interest

($1,100)

Parent's share of Consolidated Net Income

$51,650

62) Prepare Remburn's statement of consolidated retained earnings as at December 31, 2015. Answer:

Remburn Inc. Statement of Retained Earnings As at December 31, 2015 Beginning Retained Earnings: Add: Parent's share of Consolidated Net Income: Less: Dividends: Ending Consolidated Retained Earnings:

$130,000 $51,650 ($12,000) $169,650

63) Prepare a statement of changes in Non-Controlling Interest for the year ended December 31, 2015. Answer:

Remburn Inc. Statement of Non-Controlling Interest For the year ended December 31, 2015 Non-Controlling interest at acquisition NCI share of consolidated net income NCI share of dividends Non-Controlling Interest:

$7,000 $1,100 ($ 400) $7,700

64) Prepare a consolidated balance sheet for Remburn Inc. as at December 31, 2015.

Remburn Inc. Consolidated Balance Sheet As at December 31, 2015

Answer:

Cash Accounts Receivable Inventory Equipment (net) Trademark Goodwill Total Assets

(190,950 + 156,000) (200,000 + 150,000 - 20,000) (100,000 + 30,000) (350,000 + 25,000 - 4,500) (0 + 10,000 + 4,000) * see below

$346,950 $330,000 $130,000 $370,500 $14,000 $20,000 $1,211,450

Current Liabilities (424,600 + 280,000 - 20,000) Bonds Payable (120,000 + 20,000 + 9,500) Non-Controlling Interest Common Shares Retained Earnings Total Liabilities and Equity

$684,600 $149,500 $7,700 $200,000 $169,650 $1,211,450

Total Liabilities and Equity

*Purchase Price (90%) Value assigned to NCI

Less: Fair value of net identifiable assets acquired

$1,211,450

$90,000 $7,000 (10% of $70,000 fair value of identifiable net assets) $97,000 $50,000 $47,000

Allocated: Inventory $20,000 Equipment (5,000) Land 10,000 Trademark 5,000 Bonds payable (10,000) Goodwill (parent's share)

$20,000 $27,000

Amortization/impairment of acquisition differential:

Inventory Equipment Land Trademark Bonds payable Goodwill

At acq'n $20,000 ($5,000) $10,000 $5,000 ($10,000)

2015 ($20,000) $500 ($10,000) ($1,000) $500

Balance $0 ($4,500) $0 $4,000 ($9,500)

$27,000

($7,000)

$20,000

65) Assume that Stanton's Equipment, Land and Trademark on the date of acquisition form part of a

single asset group. Assume also that these assets are expected to generate future cash flows of $40,000. Does this mean that Stanton will have to recognize an impairment loss? Explain. Answer: Not necessarily. Given the above information, Stanton has "failed" the first part of the required two-part impairment test required for long-lived assets since the expected future cash flows of this asset group of $40,000 falls well short of the carrying values of the assets within the group, which total $55,000. Given this information, the second part of the two-part impairment test must be applied. The second part of the impairment test requires that an impairment loss be recognized if Stanton fails the first part of the impairment test and the fair values of the assets within the group are less than their total carrying values. However, since the fair values of the assets are higher than their carrying values ($65,000 vs. $55,000 respectively), there would be no impairment loss in this case. 66) 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. Answer: Only the second part of the two-part impairment test would be required. Thus, an impairment loss would have to be recognized only if the fair value of the relevant asset group were less than their carrying values. 67) Assume that Stanton Inc.'s common shares had a fair market value of $51,000 on December 31,

2015. Assume also that the fair values of Stanton's identifiable net assets amounted to $36,000. Assuming that Rembrandt's fair values equaled its book values on the date of acquisition, has the consolidated Goodwill calculated above been impaired, and if so, by how much? Answer: Yes, goodwill has been impaired. Stanton's net assets had a carrying value of $81,000, $30,000 more than their fair values, which indicates that the second part of the two step impairment test for goodwill must be performed. This is essentially a recalculation of the consolidated goodwill, which in this case would amount to $15,000 ($51,000 - $36,000). Since consolidated goodwill is currently $20,000, an impairment loss of $5,000 will have to be recognized.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Intercompany profits on sales of inventory are only realized: A) once the inventory has been sold to outsiders. B) when the inventory has been shipped to the purchaser. C) once the seller receives payment for the sale. D) when the inventory has been received by the purchaser. Answer: A 2) If a parent company borrows money from its subsidiary, what effect (if any) will this have on the

non-controlling interest? A) The non-controlling interest balance would be reduced by the amount of the loan. B) The subsidiary would record any interest revenue as an extraordinary gain. C) This would have no effect on the non-controlling interest. D) The subsidiary would book its pro-rata share of any interest revenue. Answer: C 3) How would any management fees charged by a Parent Company to its Subsidiary be accounted for

during the consolidation process? A) Both the Parent's management fees and the subsidiary's related expense would be eliminated when preparing Consolidated Financial Statements. B) The Parent Company would only record its pro rata share of any management revenues. C) No special accounting treatment is required, since this would have no effect on Consolidated Net Income. D) The Parent Company's profit on the rendering of management services would be charged to retained earnings. Answer: A 4) Which of the following statements best describes the required accounting treatment with respect to

income taxes on unrealized intercompany profits? A) These 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) They would be recognized as assets for the selling entity. C) They would be charged to retained earnings during the preparation of Financial Statements. D) They would be recognized as assets for the purchasing entity and liabilities for the selling entity. Answer: B

X Inc. owns 80% of Y Inc. During 2018, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X'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 X Inc. uses the cost method to account for its Investment in Y Inc. 5) What is the after-tax dollar value of X's unrealized profits during the year on its sales to Y? A) $2,000.

B) $1,000.

C) $400.

D) $600.

Answer: D 6) What is the after-tax dollar value of X's realized profits during the year on its sales to Y? A) $600.

B) $2,000.

C) $1,000.

D) $400.

Answer: A 7) What is the after-tax dollar value of Y's unrealized profits during the year on its sales to X? A) $400.

B) $500.

C) $240.

D) $360.

Answer: C 8) What is the after-tax dollar value of Y's realized profits during the year on its sales to X? A) $360.

B) $240.

C) $500.

D) $400.

Answer: A 9) What effect (if any) would Y's unrealized profits on its sales to X have on the non-controlling

interest account on the consolidated balance sheet? A) There would be an increase to the non-controlling interest account for the amount of $30. B) There would be an increase to the non-controlling interest account for the amount of $48. C) There would be a decrease to the non-controlling interest account for the amount of $48. D) There would be no effect. Answer: C

10) What would be the journal entry to eliminate any unrealized profits from the consolidated financial

statements during the year? A)

Debit Cost of Goods Sold $400 Inventory

Credit

Debit Cost of Goods Sold $1,400 Inventory

$400

Credit $1,400

Debit Credit Sales $15,000 Cost of Goods Sold $15,000

Debit Credit Sales $15,000 Cost of Goods Sold $12,000 Inventory $3,000

Answer: B 11) Assuming that X Inc. used the equity method, what adjustment would have to be made to the

investment in Y account to adjust for any unrealized profits on Y's sales to X? A) No adjustment would be required. B) The account would have to be reduced by $48. C) The account would have to be reduced by $192. D) The account would have to be reduced by $240. Answer: C 12) Assume that Y Inc. reported an after-tax net income of $20,000 in 2018, what would be Y's adjusted

net income for the year? A) $19,840.

B) $202,400.

C) $19,760.

D) $20,000.

Answer: C 13) When are profits from intercompany land sales realized? A) They are realized once legal ownership of the land has been transferred. B) They are realized when consideration has been received for the land. C) They are realized when an agreement is signed with respect to ownership of the land. D) They are realized only when sold to outsiders. Answer: D 14) Under which of the following Consolidation Theories would the elimination of only the Parent's

share of any intercompany profits be required for the preparation of consolidated financial statements? A) The Parent Company Theory. B) The Ownership Theory. C) The Entity Theory. D) The Proprietary Theory. Answer: D

15) Which of the following theories does NOT acknowledge the existence of a non-controlling interest

in the consolidated financial statements? A) The Proprietary Theory. C) The Ownership Theory.

B) The Parent Company Theory. D) The Entity Theory.

Answer: A 16) Under which of the following theories is the elimination of ALL intercompany profits called for? A) The Entity Theory.

B) The Proprietary Theory.

C) The Parent Company Theory.

D) The Ownership Theory.

Answer: A

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2017. On that date, Lan's commons shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value. Lan'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, 2027. Both companies use straight line amortization exclusively. The financial statements of both companies for the year ended December 31, 2018 are shown below: Income Statements Kho Inc.

Lan Inc.

Sales Other Revenues

$700,000 $300,000

$640,000 $160,000

Less: Expenses: Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense

$280,000 $30,000 $240,000 $90,000

$256,000 $14,000 $155,000 $75,000

Net Income

$360,000

$300,000

Retained Earnings Statements KhoInc.

Lan Inc. 4

Balance, January 1, 2018 Net Income Less: Dividends Retained Earnings, Dec 31, 2018

KhoInc. Lan Inc. $200,000 $100,000 $360,000 $300,000 ($60,000) ($50,000) $500,000 $350,000

Balance Sheets

Cash Accounts Receivable Inventory Investment in Lan Inc. Equipment (net) Trademark Total Assets

KhoInc. $200,000 $50,000 $50,000 $600,000 $500,000 --$1,400,000

Lan Inc. $150,000 $150,000 $150,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$280,000 $120,000 $500,000 $500,000 $1,400,000

$150,000 $100,000 $200,000 $350,000 $800,000

$150,000 $200,000 $800,000

Other Information: A goodwill impairment test conducted during August 2018 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000. During 2017, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2018, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2017, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2018, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 20%. 17) What is the amount of goodwill arising from this business combination? A) $168,000.

B) $(180,000).

C) $186,667.

Answer: C

D) $120,000.

18) What would be the journal entry to record the dividends received by Kho Inc. during the year? A)

Cash Goodwill

Debit Credit $50,000 $50,000

Cash Dividend Income

Debit Credit $45,000 $45,000

Cash Investment in Lan

Debit Credit $50,000 $50,000

Debit Credit Cash $45,000 Acquisition Differential $45,000 Answer: B 19) What amount of sales revenue would appear on Kho Inc.'s consolidated income statement for the

year ended December 31, 2018? A) $1,276,000. B) $1,210,000.

C) $1,400,000.

D) $1,340,000.

Answer: B 20) What would be the amount of other revenue appearing on Kho Inc.'s consolidated income statement

for the year ended December 31, 2018? A) $444,000. B) $415,000.

C) $460,000.

D) $410,000.

Answer: B 21) Ignoring taxes, what is the total amount of pre-tax profit from 2017 sales that was realized during

2017? A) Nil.

B) $5,000.

C) $6,200.

D) $9,800.

Answer: D 22) Ignoring taxes, what is the total amount of unrealized profits in inventory at the start of 2018? A) Nil.

B) $5,000.

C) $6,000.

Answer: D

D) $6,200.

23) Ignoring taxes, what is the total amount of unrealized profits in inventory at the end of 2018? A) Nil.

B) $6,000.

C) $7,800.

D) $8,000.

Answer: D 24) Where would be the amortization of the acquisition differential reflected on Kho's consolidated

income statement? A) It would be reflected as a reduction of sales. B) It would be reflected through other expenses. C) It would be reflected through non-controlling interest in earnings. D) It would be reflected through cost of sales. Answer: B 25) Excluding any goodwill impairment losses, what would be the amount of the acquisition differential

amortization for 2018? A) $4,000.

B) $2,700.

C) $3,000.

D) $2,000.

Answer: C 26) What effect (if any) would the unrealized profits in beginning inventory have on income tax expense

for 2018? A) They would cause a $1,240 reduction in income tax expense. B) They would cause a $1,200 increase in income tax expense. C) They would cause a $1,240 increase in income tax expense. D) They would cause a $1,200 reduction in income tax expense. Answer: C 27) What effect (if any) would the unrealized profits in ending inventory have on income tax expense

for 2018? A) They would cause a $1,600 reduction in income tax expense. B) They would cause a $1,600 increase in income tax expense. C) They would cause a $1,200 reduction in income tax expense. D) They would cause a $1,200 increase in income tax expense. Answer: A 28) What would be the non-controlling interest amount appearing on Kho's consolidated statement of

financial position on the date of acquisition? A) $66,667. B) $30,000.

C) $120,000.

D) $29,936.

Answer: A 29) What would be the non-controlling interest amount appearing on Kho's consolidated statement of

financial position at the end of 2018? A) $57,400. B) $55,840.

C) $29,936.

Answer: D

D) $74,907.

30) What would be the amount appearing on the December 31, 2018 consolidated statement of financial

position for trademarks? A) $245,000.

B) $236,000.

C) $240,000.

D) $200,000.

Answer: C 31) What would be the amount appearing on the December 31, 2018 consolidated statement of financial

position for bonds payable? A) $234,400. B) $236,000.

C) $216,000.

D) $240,000.

Answer: B

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2018 for $400,000. Unless otherwise stated, LEO uses the cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2018: ▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively. ▪ LEO's December 31, 2018 inventory contained an intercompany profit of $10,000. ▪ LEO's net income was $75,000. The following took place during 2019: ▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively. ▪ MARS' December 31, 2019 inventory contained an intercompany profit of $5,000. ▪ LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross margin of 20%. 32) What would be the amount of the acquisition differential amortized during 2018? A) $78,000.

B) $82,000.

C) $80,000.

D) $120,000.

Answer: B 33) What would be the amount of the acquisition differential amortized during 2019? A) $2,000.

B) $82,000.

C) $40,000.

Answer: A 8

D) $78,000.

34) Assuming that LEO uses the equity method to account for its investment in MARS, what would be

the NET increase/decrease to the investment in MARS account during 2018? A) $43,200. B) $(49,200). C) $12,000.

D) $(41,700).

Answer: D 35) Assuming once again that LEO uses the equity method to account for its investment in MARS, what

would be the NET increase to the investment in MARS account during 2019? A) $17,550. B) $16,000. C) $16,800.

D) $20,000.

Answer: A 36) Consolidated net income attributable to the shareholders of the parent for 2018 would be: A) $33,300.

B) $12,500.

C) $36,300.

D) $53,200.

Answer: A 37) Consolidated net income attributable to the shareholders of the parent for 2019 would be: A) $65,550.

B) $69,150.

C) $58,000.

D) $56,000.

Answer: A 38) What would be the change in the non-controlling interest account for 2018? A) Non-controlling interest would decrease by $18,000. B) Non-controlling interest would increase by $18,000. C) Non-controlling interest would decrease by $27,800. D) Non-controlling interest would increase by $27,800. Answer: C 39) What would be the change in the non-controlling interest account for 2019? A) Non-controlling interest would decrease by $45,000. B) Non-controlling interest would increase by $48,000. C) Non-controlling interest would increase by $14,200. D) Non-controlling interest would increase by $16,800. Answer: C 40) What would be the balance in the investment in MARS account at December 31, 2018? A) $358,300.

B) $400,000.

C) $318,000.

D) $330,000.

Answer: A 41) What would be the balance in the investment in MARS account at December 31, 2019? A) $400,000.

B) $348,000.

C) $330,000.

D) $375,850.

Answer: D 42) The amount of goodwill arising from this combination would be: A) $200,000.

B) $296,667.

C) $130,000.

Answer: B

D) $120,000.

43) What would be the balance in the non-controlling interest account on the date of acquisition? A) $403,000.

B) $400,000.

C) $397,000.

D) $266,667.

Answer: D

On June 30, 2015, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2017, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. 44) What amount will appear on the "Gain on sale of land" line in Parent Company's consolidated

income statement for the year ended December 31, 2015? A) $0. B) $96,000. C) $120,000.

D) $240,000.

Answer: A 45) What amount will appear on the "Gain on sale of land" line in Parent Company's consolidated

income statement for the year ended December 31, 2017? A) $0. B) $93,000. C) $124,000.

D) $155,000.

Answer: D 46) 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 2015? A) It will have no effect. B) It will increase income tax expense by $24,000. C) It will reduce income tax expense by $18,000. D) It will reduce income tax expense by $24,000. Answer: D 47) 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 2017? A) It will have no effect. B) It will reduce income tax expense by $18,000. C) It will increase income tax expense by $24,000. D) It will reduce income tax expense by $24,000. Answer: C 48) What effect will the adjustment for the realization of the intercompany gain (in the preparation of

the consolidated income statement) have on the non-controlling interest in income for 2017? A) It will have no effect on the non-controlling interest in income. B) It will increase the non-controlling interest in income by $24,000. C) It will decrease the non-controlling interest in income by $24,000. D) It will increase the non-controlling interest in income by $30,000. Answer: A

49) On December 31, 2015, the land account balance in the books of Parent Company is $300,000 and

in the books of the subsidiary 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, 2015? A) $600,000. B) $510,000. C) $480,000. D) $504,000. Answer: C 50) On December 31, 2016, the land account balance in the books of Parent Company is $300,000 and

in the books of the subsidiary 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, 2016? A) $550,000. B) $544,000. C) $640,000. D) $520,000. Answer: D SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

P Inc. owns 70% of Q Inc. During 2017, P Inc sold inventory to Q for $20,000. Half of this inventory remained in Q's warehouse at December 31, 2017 year end. On January 1, 2017, Q Inc had inventory in its warehouse which was purchased from P for $5,000. This inventory was sold to an outside party during 2017. Also during 2017, Q Inc sold inventory to P Inc. for $10,000. 50% of this inventory remained in P's warehouse at year end. Both companies are subject to a tax rate of 25%. The gross profit percentage on sales is 30% for both companies. P Inc. uses the cost method to account for its Investment in Q Inc. The inventories of both companies as at December 31, 2017 was all sold to outsiders during 2018. There were no intercompany transactions during 2018. 51) Prepare a schedule showing the realized and unrealized profits for P Inc. for 2017 and 2018. Your

schedule should include both pre-tax and after-tax amounts. Answer:

2017 Profits realized during 2017 Inventory Sales Profits Realized from Opening Inventory

Before Tax After Tax $3,000 $2,250 $1,500 $1,125

Unrealized Profits at Year-end (2017) Inventory Sales

$3,000

$2,250

2018 Profits realized during 2018 Inventory Sales

$3,000

$2,250

52) Prepare a schedule showing the realized and unrealized profits for Q Inc. for 2017 and 2018. Your

schedule should include both pre-tax and after-tax amounts. Answer:

2017 Profits realized during 2017 Inventory Sales

Before Tax After Tax $1,500 $1,125

Unrealized Profits at Year-end (2017) Inventory Sales

$1,500

$1,125

2018 Profits realized during 2018 Inventory Sales

$1,500

$1,125

53) In your own words, explain what effect (if any) these intercompany transactions would have on

non-controlling interest. Answer: Non-controlling interest is only affected by upstream transactions - that is, sales from a subsidiary to the parent. Unrealized profits serve to decrease the non-controlling interest by the non-controlling interest's pro rata share of the after-tax upstream profits. Conversely, profits realized in a given year serve to increase the non-controlling interest by the non-controlling interest's pro rata share of the after-tax upstream profits. In 2017, there will be an unrealized profit in ending inventory from the upstream transactions; this will decrease the non-controlling interest in income (and the non-controlling interest account on the consolidated balance sheet) by 30% of the after-tax unrealized profit, i.e., 30% of $1,125 or $338. However, the unrealized upstream profits in inventory at the end of 2018 will have been realized during 2018, thus increasing the non-controlling interest in income and the non-controlling interest account by $338 (i.e. $1,125 × 30%). MAX Inc. purchased 80% of the voting shares of MIN Inc for $750,000 on January 1, 2015. On that date, MAX's common shares and retained earnings were valued at $300,000 and $150,000 respectively. Unless otherwise stated, assume that MAX uses the cost method to account for its investment in MIN Inc. MIN's fair values approximated its carrying values with the following exceptions: MIN's trademark had a fair value which was $80,000 higher than its carrying value. MIN's bonds payable had a fair value which was $30,000 higher than their carrying value. The trademark had a useful life of exactly twenty years remaining from the date of acquisition. The bonds payable mature on January 1, 2035. Both companies use straight line amortization exclusively. The financial statements of both companies for the year ended December 31, 2017 are shown below: 12

Income Statements MAX Inc. $640,000 $360,000

MIN Inc. $520,000 $160,000

Less: Expenses Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense

$480,000 $40,000 $80,000 $250,000

$390,000 $20,000 $40,000 $115,000

Net Income

$250,000

$115,000

Sales Other Revenues

Retained Earnings Statements

Balance, January 1, 2017 Net Income Less: Dividends Retained Earnings, Dec 31, 2017

MAX Inc. $200,000 $250,000 ($50,000) $400,000

MIN Inc. $350,000 $115,000 ($65,000) $400,000

Balance Sheets

Cash Accounts Receivable Inventory Investment in MIN Inc. Equipment (net) Trademark Total Assets

MAXInc. MIN Inc. $100,000 $150,000 $150,000 $150,000 $200,000 $150,000 $750,000 --$300,000 $250,000 $300,000 $1,500,000 $1,000,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$300,000 $150,000 $300,000 $150,000 $500,000 $300,000 $400,000 $400,000 $1,500,000 $1,000,000

Other Information: A goodwill impairment test conducted during August 2017 revealed that the Min's goodwill amount on the date of acquisition had been impaired by $5,000. During 2016, Max sold $60,000 worth of Inventory to Min, 80% of which was sold to outsiders during the year. During 2017, Max sold inventory to Min for $80,000. 75% of this inventory was resold by Min to outside parties during that year. During 2016, Min sold $40,000 worth of Inventory to Max, 80% of which was sold to outsiders during the year. During 2017, Min sold inventory to Max for $50,000. 80% of this inventory was resold by Max to outside parties during that year. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 50%. 54) Compute MAX's Goodwill at the date of acquisition. Answer:

Purchase Price for 80% ownership interest

$750,000

Imputed price of 100% of fair value of net identifiable assets ($750,000 / 0.80)

$937,500

Less: carrying value of MIN: Add/Deduct: fair value increments: Trademark Bonds Payable

$450,000 $ 80,000 ($30,000)

Goodwill

$500,000 $437,500

55) Prepare a schedule of Realized and Unrealized Profits for 2017 for both companies. Show your

figures before and after tax. Answer: Schedule of Realized and Unrealized Profits, 2017 Unrealized Profits Realized During 2017: MAX Inc: Before Tax After Tax Profits in Beginning Inventory $2,400 $1,200 ($12,000 - $12,000/1.25) MIN Inc: Profits in Beginning Inventory ($8,000 - $8,000/1.25)

$1,600

Unrealized Profits at December 31, 2014: MAX Inc: Inventory Sales ($20,000 - $20,000/1.25) MIN Inc: Inventory Sales ($10,000 - $10,000/1.25)

Before Tax After Tax $4,000 $2,000

$2,000

$800

$1,000

56) Compute MAX's Consolidated Net Income for 2017. Answer:

MAX's Income Less: Dividends from MIN

$250,000 ($ 52,000)

Less: Goodwill Impairment Loss ($1,000 to NCI) Ending Inventory Profit Add: Opening Inventory Profit: MAX's Net Income - Adjusted

($5,000) ($2,000) $1,200 $192,200

MIN's Net Income Less: Ending Inventory Profit Add: Opening Inventory Profit Amortization of acquisition differential MIN's Net Income

$115,000 ($1,000) $800 ($2,500)

Consolidated Net Income

$112,300 $304,500

57) Calculate the non-controlling interest (Balance Sheet) as at December 31, 2017. Answer:

Non-Controlling Interest at Acquisition: ($937,500 × 20%) Add (Deduct): Increase in MIN's Retained Earnings Add/Deduct: Acquisition differential amortizations: Trademark Bonds Payable Goodwill Impairment Less: Unrealized Inventory Profit at year end: Subtotal

Non-Controlling Interest

$187,500

$250,000 ($ 12,000) $4,500 ($5,000) ($1,000) ($236,500) × 20%

$ 47,300 $234,800

58) Calculate Consolidated Retained Earnings as at December 31, 2017. Answer:

MAX's Retained Earnings

$400,000

Less: Ending Inventory Profit MAX's Adjusted Retained Earnings

($2,000) $398,000

Increase in MIN's Retained Earnings since acquisition: Acquisition differential amortization (2015 - 2017) Less: Unrealized Profit in Ending Inventory Less: Goodwill Impairment MIN's Adjusted Retained Earnings Increase

Consolidated Retained Earnings

$250,000 ($7,500) ($1,000) ($5,000) $236,500 × 80% $189,200 $587,200

59) Prepare MAX's Consolidated Statement of Financial Position as at December 31, 2017. Answer:

MAX Inc Consolidated Statement of Financial Position as at December 31, 2017 Cash Accounts Receivable Inventory Goodwill Equipment (net) Trademark Future Income Taxes Total Assets

$250,000 $300,000 $344,000 $432,500 $550,000 $368,000 $3,000 $2,247,500

Current Liabilities Bonds Payable Non-Controlling Interest Common Shares Retained Earnings Total Liabilities and Equity

$450,000 $475,500 $234,800 $500,000 $587,200 $2,247,500

YIN Inc. purchased 75% of the voting shares of YANG Inc for $500,000 on July 1, 2015. On that date, YANG Inc.'s Common Shares and Retained Earnings were valued at $200,000 and $100,000 respectively. Unless otherwise stated, assume that YIN uses the cost method to account for its investment in YANG Inc. YANG's fair values approximated its carrying values with the following exception: YANG's bonds payable had a fair value which was $50,000 higher than their carrying value. The bonds payable mature on July 1, 2025. Both companies use straight line amortization exclusively. The Financial Statements of both companies for the Year ended June 30, 2018 are shown below: Income Statements YIN Inc.

YANG Inc.

Sales Other Revenues

$500,000 $100,000

$400,000 $60,000

Less: Expenses Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense

$400,000 $20,000 $60,000 $48,000

$320,000 $10,000 $30,000 $40,000

Net Income

$72,000

$60,000

Retained Earnings Statements

Balance, July 1, 2017 Net Income Less: Dividends Retained Earnings, June 30, 2018

YIN Inc. YANG Inc. $200,000 $240,000 $72,000 $60,000 ($22,000) ($30,000) $250,000 $270,000

Balance Sheets YINInc. Cash Accounts Receivable Inventory

YANG Inc.

$150,000 $350,000 $200,000

$120,000 $160,000 $180,000 18

Investment in YANG Inc. Land Equipment (net) Total Assets

$500,000 $40,000 $360,000 $1,600,000

$240,000 $700,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$600,000 $250,000 $500,000 $250,000 $1,600,000

$130,000 $100,000 $200,000 $270,000 $700,000

Other Information: During August of 2016, YIN sold $60,000 worth of Inventory to YANG, 80% of which was sold to outsiders during the year. During October of 2017, YIN sold inventory to YANG for $90,000. two-thirds of this inventory was resold by YANG to outside parties later that year. During September of 2016, YANG sold $90,000 worth of inventory to YIN, 50% of which was sold to outsiders during the year. During April of 2018, Yang sold inventory to YIN for $120,000. 80% of this inventory was resold by YANG to outside parties in May. During May of 2018, YANG sold a plot of Land to YIN for $40,000. The land was recorded at cost of $24,000 on YANG's book prior to the sale. YIN has not yet sold the land. All intercompany sales as well as sales to outsiders are priced 50% above cost. The effective tax rate for both companies is 40%. 60) Compute YIN's Goodwill at the date of acquisition. Answer:

Purchase Price Imputed Purchase Price for 100% Of Fair Value of Net Assets:

$500,000

Fair Value of Net Assets:

$250,000

Goodwill

$416,667

$666,667

61) Prepare a schedule of realized and unrealized profits for the fiscal year ended June 30, 2018 for both

companies. Show your figures before and after tax. Answer: Schedule of Realized and Unrealized Profits For the year ended June 30, 2018 YIN Inc: Profits in Beginning Inventory ($12,000 - $12,000/1.5)

Before Tax After Tax $4,000 $2,400

YANG Inc: Profits in Beginning Inventory ($45,000 - $45,000/1.5)

$15,000

Unrealized Profits as at June 30, 2015: YIN Inc: Inventory Sales ($30,000 - $30,000/1.5)

$9,000

Before Tax After Tax $10,000 $6,000

YANG Inc: Inventory Sales ($24,000 - $24,000/1.5)

$8,000

$4,800

Unrealized Gain on Land Sale to YIN

$16,000

$9,600

62) Prepare YIN's Consolidated Income Statement for the Year ended June 30, 2018. Show the

allocation of the income between the controlling and non-controlling interests. Answer: YIN Inc. Consolidated Income Statement for the Year Ended June 30, 2018. Sales Other Revenues Less: Expenses: Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense

($500,000 + $400,000 - $90,000 - $120,000) ($100,000 + $60,000 - $16,000 - $22,500)

$690,000 $121,500

($400,000 + $320,000 - $90,000 - $120,000 $15,000 - $4,000 + $10,000 + $8,000) ($20,000 + $10,000)

$509,000

($60,000 + $30,000) - $5,000 ($48,000 + $40,000 - $6,400 + $6,000 + $1,600 $4,000 - $3,200)

$85,000 $82,000

Net Income

$30,000

$105,500

Attributable to: Shareholders of Parent Non-Controlling [($60,000 + $9,000 - $4,800 - $9,600 + $5,000) × Interest 25%]

$90,600 $14,900

63) Calculate the non-controlling interest (Balance Sheet) as at June 30, 2018. Answer:

Non-Controlling Interest at Acquisition: ($666,667 × 25%) Add (Deduct): Increase in Min's Retained Earnings Add/Deduct: Acquisition differential amortizations: Bonds Payable Less: Unrealized Inventory Profit at year end: Less: Unrealized Land Gain: Subtotal

$166,667

$170,000 $15,000 ($ 4,800) ($ 9,600) ($170,600) × 25%

Non-Controlling Interest

$ 42,650 $209,317

64) Calculate Consolidated Retained Earnings as at June 30, 2018. Answer:

YIN's Retained Earnings Less: Ending Inventory Profit YIN's Adjusted Retained Earnings

$250,000 ($6,000) $244,000

Increase in YANG's Retained Earnings since acquisition: $170,000 Acquisition differential amortization to date (Bonds) $15,000 Less: Unrealized Inventory Profit at year end: ($ 4,800) Less: Unrealized Land Gain: ($ 9,600) YANG's Adjusted Retained Earnings Increase $170,600 × 75% $127,950 Consolidated Retained Earnings

$371,950

65) Assuming that YIN Inc uses the equity method to account for its investment in YANG, compute the

balance in its investment in YANG account at June 30, 2018. Answer: YIN Inc Investment in YANG Account as at June 30, 2018 Investment at Cost

$500,000

Increase in Retained Earnings since acquisition:

$170,000 ×75% $127,500

Ending Inventory

($6,000)

Acquisition differential amortization: Bonds: ($50,000 × 75%) / 10 × 3 Less: Unrealized Profits at year end (Upstream) Land Inventory

Investment in YANG as at June 30, 2018

$11,250

$9,600 $4,800 $14,400 × 75% ($10,800) $621,950

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Rin owns 90% of Stempy Inc. On January 1, 2018, the investment in Stempy account had a balance of $350,000 and Stempy's common shares and retained earnings on that date were valued at $200,000 and $100,889 respectively. Moreover, the assets to which the unamortized acquisition differential relates had a remaining life of 10 years on that date. Rin uses the equity method to account for its investment in Stempy. Rin sold depreciable assets to Stempy on January 1, 2018 at an after-tax gain of $10,000. On January 1, 2019, Stempy sold depreciable assets to Rin at an after-tax gain of $20,000. Both assets are being depreciated over 10 years. Stempy's Net Income and Dividends for 2018 and 2019 are shown below.

Net Income Dividends

2018 2019 $80,000 $120,000 $20,000 $30,000

1) How much intercompany (after-tax) profit was realized during 2019 from Rin's 2018 sale of assets

to Stempy? A) Nil.

B) $1,000.

C) $2,000.

D) $10,000.

Answer: B 2) How much intercompany (after-tax) profit was realized during 2019 on Stempy's 2019 sale of assets

to Rin? A) Nil.

B) $1,000.

C) $2,000.

D) $10,000.

Answer: C 3) What is the total amount of unrealized profit (after-tax) remaining at the end of 2018? A) $1,000.

B) $2,000.

C) $9,000.

D) $10,000.

Answer: C 4) What is the total amount of unrealized profit (after-tax) remaining at the end of 2019? A) Nil.

B) $26,000.

C) $27,000.

D) $30,000.

Answer: B 5) What is the amount of the amortization of the acquisition differential during 2019? A) $7,200.

B) $10,000.

C) $8,800.

D) $80,000.

Answer: C 6) What is the balance in the Investment in Stempy account at the end of 2019? A) $350,000.

B) $444,960.

C) $469,000.

Answer: B

D) $300,000.

Jay Inc. owns 80% of Tesla Inc. and uses the cost method to account for its investment. The 2019 income statements of both companies are shown below.

Gross Profit

Jay Tesla $100,000 $50,000

Miscellaneous Revenues/Expenses Depreciation Expense Income Tax Expense

$30,000 $20,000 $20,000 $15,000 $20,000 $ 6,000

Net Income

$30,000

$ 9,000

On January 1, 2019, Tesla sold equipment to Jay at a profit of $3,000. The equipment had a remaining useful life of twenty years on that date. Both companies are subject to an effective tax rate of 40%. 7) The amount of gross profit appearing on Jay's 2019 Consolidated Income Statement would be: A) $150,000.

B) $147,600.

C) $153,000.

D) $147,000.

Answer: A 8) The amount of Miscellaneous Revenues/Expense appearing on Jay's 2019 Consolidated Income

Statement would be: A) $50,000.

B) $47,000.

C) $47,600.

D) $53,000.

Answer: D 9) The amount of depreciation expense appearing on Jay's 2019 Consolidated Income Statement would

be: A) $34,880.

B) $15,000.

C) $34,850.

D) $35,000.

Answer: C 10) The amount of income tax expense appearing on Jay's 2019 Consolidated Income Statement would

be: A) $24,860.

B) $34,880.

C) $25,040.

D) $26,000.

Answer: A 11) The amount of non-controlling interest in Jay's 2019 Consolidated Net Income would be: A) Nil.

B) $1,800.

C) $1,458.

D) $1,818.

Answer: C 12) The controlling interest (attributable to the shareholders of Jay) in Jay's 2019 Consolidated Net

Income would be: A) $35,832.

B) $37,200.

C) $36,000.

Answer: A

D) $30,000.

13) The amount of deferred taxes appearing on Jay's 2019 Consolidated Statement of Financial Position

would be: A) $1,140.

B) $2,550.

C) Nil.

D) $1,000.

Answer: A

Duff Inc. owns 75% of Paddy Corp. and uses the Equity Method to account for its investment. Paddy purchased $120,000 face value of Duff's 12% par value bonds on January 1, 2017 for $100,000, when Duff's bond liability consisted of $240,000 par of 12% bonds maturing on January 1, 2027. There was an unamortized bond discount of $20,000 attached to the bonds on that date. Interest payment dates are June 30 and December 31 each year. Straight line amortization is used. Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company. During 2017, Paddy earned a net income of $80,000 and paid dividends of $20,000. 14) What was the pre-tax gain or loss to Paddy Inc. on the intercompany purchase of the bonds? A) Nil.

B) $20,000 loss.

C) $20,000 gain.

D) $40,000 loss.

Answer: C 15) What was the pre-tax gain or loss to Duff Inc. on the intercompany sale of the bonds? A) Nil.

B) $10,000 loss.

C) $10,000 gain.

D) $20,000 loss.

Answer: B 16) What would be the pre-tax gain or loss to the combined entity on the intercompany sale of the

bonds? A) $20,000 loss.

B) Nil.

C) $10,000 loss.

D) $10,000 gain.

Answer: D 17) What amount of interest expense, excluding amortization of the bond discount, (if any) would have

to be eliminated in 2017 as a result of the intercompany sale of the bonds? A) $12,200. B) $14,400. C) None.

D) $12,000.

Answer: B 18) What amount would be shown on Duff's 2017 Consolidated Statement of Financial Position under

bonds payable? A) $220,000.

B) $112,000.

C) $110,000.

D) $111,000.

Answer: D

King Corp. owns 80% of Kong Corp. and uses the cost method to account for its investment, which it acquired on January 1, 2018. The Financial Statements of King Corp. and Kong Corp. for the Year ended December 31, 2018 are shown below: Income Statements

Sales Other Revenues Less: Expenses

King Corp. Kong Corp. $500,000 $300,000 $300,000 $120,000 3

Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income

$400,000 $ 20,000 $80,000 $120,000 $180,000

$240,000 $10,000 $40,000 $52,000 $78,000

Retained Earnings Statements

Balance, January 1, 2018 Net Income Less: Dividends Retained Earnings

King Corp. Kong Corp. $250,000 $350,000 $180,000 $78,000 ($30,000) ($38,000) $400,000 $390,000

Balance Sheets

Cash Accounts Receivable Inventory Investment in Kong Corp. Land Equipment Accumulated Depreciation Total Assets Current Liabilities Dividends Payable Common Shares Retained Earnings Total Liabilities and Equity

King Corp. Kong Corp. $50,000 $25,000 $100,000 $250,000 $50,000 $250,000 $500,000 ----$25,000 $400,000 $200,000 ($250,000) ($150,000) $850,000 $600,000 $320,000 $30,000 $100,000 $400,000 $850,000

$62,000 $38,000 $110,000 $390,000 $600,000

Other Information: > King sold a tract of Land to Kong at a profit of $10,000 during 2018. This land is still the property of Kong Corp. > On January 1, 2018, Kong sold equipment to King 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. 4

> On January 1, 2018, King's inventories contained items purchased from Kong for $10,000. This entire inventory was sold to outsiders during the year. Also during 2018, King sold Inventory to Kong for $50,000. Half this inventory is still in Kong'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. > Kong's Retained Earnings on the date of acquisition amounted to $350,000. There have been no changes to the company's common shares account. > Kong'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 2018. • 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. • There was a goodwill impairment loss of $4,000 during 2018. • Both companies are subject to an effective tax rate of 40%. • Both companies use straight line amortization. 19) The amount of goodwill arising from this business combination is: A) $220,000.

B) Nil.

C) $130,000.

D) $72,000.

Answer: C 20) What would be the journal entry to record the dividends declared by King Corp during the year? A)

Debit Credit Dividends receivable $30,000 Dividend income $30,000

Debit Credit Dividends receivable $30,400 Investment in Kong $30,400 D) No entry.

Debit Credit Dividends receivable $30,000 Investment in Kong $30,000 Answer: A

21) The amount of goodwill appearing on King's December 31, 2018 Consolidated Statement of

Financial Position would be: A) $240,000. B) Nil.

C) $126,000.

D) $224,000.

Answer: C 22) What amount of sales revenue would appear on King's Consolidated Income Statement for the year

ended December 31, 2018? A) $750,000. B) $800,000.

C) $810,000.

D) $790,000.

Answer: A 23) What would be the amount of other revenue appearing on King's Consolidated Income Statement

for the year ended December 31, 2018? A) $420,000. B) $399,600.

C) $410,000.

D) $359,600.

Answer: D 24) What is the total amount of pre-tax profit from intercompany inventory sales that was realized

during 2018? A) $2,000.

B) $5,000.

C) $10,000.

D) $7,000.

Answer: D 25) What is the total amount of unrealized pre-tax profits in inventory at the start of 2019? A) $8,000.

B) $2,000.

C) $5,000.

D) Nil.

Answer: C 26) What would be the amount of consolidated patents appearing on King's Consolidated Statement of

Financial Position as at December 31, 2018? A) $8,000. B) $15,000.

C) $12,000.

D) $10,000.

Answer: A 27) What is the amount of unamortized acquisition differential (excluding unimpaired goodwill) on

December 31, 2018? A) $8,000.

B) $4,000.

C) $5,000.

D) $10,000.

Answer: D 28) Ignoring income taxes and any minority interest effects, what is the amount of profit realized during

2018 from the intercompany sale of equipment? A) $8,000. B) $4,000.

C) Nil.

D) $5,000.

Answer: D 29) Ignoring income taxes and any minority interest effects, what is the amount of unrealized profit

remaining from the intercompany sale of equipment at December 31, 2018? A) $20,000. B) $10,000. C) $15,000. Answer: C

D) Nil.

30) What would be the non-controlling interest amount in King's Consolidated Net Income for 2018? A) $10,000.

B) $11,600.

C) $8,240.

D) $15,000.

Answer: C 31) What would be the non-controlling Interest amount appearing on King's Consolidated Statement of

Financial Position at January 1, 2018? A) $185,000. B) $125,000.

C) $101,800.

D) $100,000.

Answer: B 32) What would be the amount appearing on the December 31, 2018 Consolidated Statement of

Financial Position for land? A) $15,000. B) $21,000.

C) $17,000.

D) $25,000.

Answer: A 33) What would be the amount appearing on the December 31, 2018 Consolidated Statement of

Financial Position for deferred income taxes? A) $12,000. B) Nil.

C) $11,200.

D) $10,000.

Answer: A 34) What would be the amount appearing on the December 31, 2018 Consolidated Statement of

Financial Position for inventories? A) $300,000. B) $296,000.

C) $295,000.

D) $297,000.

Answer: C 35) What would be the amount appearing on the December 31, 2018 Consolidated Income Statement

for cost of goods sold? A) $400,000.

B) $640,000.

C) $593,000.

D) $590,000.

Answer: C

Ting Corp. owns 75% of Won Corp. and uses the cost method to account for its Investment, which it acquired on January 1, 2019. The Financial Statements of Ting Corp. and Won Corp. for the year ended December 31, 2019 are shown below: Income Statements

Sales Other Revenues Less: Expenses Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income

Ting Corp. Won Corp. $1,000,000 $600,000 $600,000 $240,000 $800,000 $40,000 $160,000 $240,000 $360,000

$480,000 $20,000 $80,000 $104,000 $156,000 7

Retained Earnings Statements

Balance, January 1, 2019 Net Income Less: Dividends Retained Earnings

Ting Corp. Won Corp. $400,000 $700,000 $360,000 $156,000 ($60,000) ($76,000) $700,000 $780,000

Balance Sheets:

Cash Accounts Receivable Inventory Investment in Won Corp. Land Equipment Accumulated Depreciation Total Assets

Ting Corp. Won Corp. $400,000 $50,000 $500,000 $500,000 $100,000 $500,000 $1,500,000 ----$50,000 $1,000,000 $450,000 ($500,000) ($300,000) $3,000,000 $1,250,000

Current Liabilities Bonds Payable Less: Bond Discount Common Shares Retained Earnings Total Liabilities and Equity

$1,300,000 ----$1,000,000 $700,000 $3,000,000

$119,000 $150,000 ($19,000) $220,000 $780,000 $1,250,000

Other Information: > Won sold a tract of land to Ting at a profit of $20,000 during 2019. This land is still the property of Ting Corp. > On January 1, 2019, Won sold equipment to Ting at a price that was $20,000 lower than its book value. The equipment had a remaining useful life of 5 years from that date. > On January 1, 2019, Won's inventories contained items purchased from Ting for $120,000. This entire inventory was sold to outsiders during the year. Also during 2019, Won sold inventory to Ting for $30,000. Half this inventory is still in Ting'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. > Won's Retained Earnings on the date of acquisition amounted to $700,000. There have been no changes to the 8

company's common shares account. > Won'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 $50,000 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 $20,000. The patent had an estimated useful life of 5 years. • There was a goodwill impairment loss of $10,000 during 2019. • Both companies are subject to an effective tax rate of 40%. • Both companies use straight line amortization exclusively. • On January 1, 2019, Ting acquired half of Won's bonds for $60,000. • The bonds carry a coupon rate of 10% and mature on January 1, 2039. The initial bond issue took place on January 1, 2019. 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. 36) The amount of goodwill arising from this business combination is: A) $300,000.

B) $1,010,000.

C) $530,000.

D) $500,000.

Answer: B 37) What effect would the intercompany bond sale have on Ting? A) Ting would record a gain of $14,000.

B) Ting would record a loss $5,000.

C) Ting would record a loss of $4,000.

D) Ting would record a gain of $15,000.

Answer: D 38) What effect would the intercompany bond sale have on Won? A) Won would record a gain of $4,000.

B) Won would record a gain of $10,000.

C) Won would record a loss of $10,000.

D) Won would record a loss $14,000.

Answer: C 39) What effect would the intercompany bond sale have on Ting's December 31, 2019 Consolidated

Income Statement? A) Ting would record a loss of $15,000. C) Ting would record a loss of $10,000.

B) Ting would record a gain of $5,000. D) Ting would record a gain of $15,000.

Answer: B

40) What would be the carrying value of the bonds payable appearing on Ting's December 31, 2019

Consolidated Statement of Financial Position? A) $65,500. B) $64,500.

C) $131,000.

D) $65,000.

Answer: A 41) What amount of sales revenue would appear on Ting's Consolidated Income Statement for the year

ended December 31, 2019? A) $1,480,000. B) $1,570,000.

C) $1,600,000.

D) $1,450,000.

Answer: B 42) What would be the amount of other revenue appearing on Ting's Consolidated Income Statement for

the Year ended December 31, 2019? A) $815,000. B) $840,000.

C) $820,000.

D) $788,000.

Answer: D 43) What is the total amount of pre-tax profit from intercompany inventory sales that was realized

during 2019? A) $20,200.

B) $2,500.

C) $22,500.

D) $6,200.

Answer: C 44) Ignoring taxes, what is the total amount of unrealized profits in inventory at the end of 2019? A) $20,000.

B) $3,000.

C) $5,000.

D) $2,500.

Answer: D 45) What would be the amount of consolidated patents appearing on Ting's Consolidated Statement of

Financial Position as at December 31, 2019? A) $18,000. B) $15,000.

C) $16,000.

D) $14,000.

Answer: C 46) What is the amount of unamortized acquisition differential (excluding unimpaired goodwill) on

December 31, 2019? A) $8,000.

B) $4,000.

C) $16,000.

D) $26,000.

Answer: C 47) Ignoring income taxes, what is the amount of profit/(loss) realized during 2019 from the

intercompany sale of equipment? A) $2,800 gain. B) $20,000 gain.

C) $4,000 loss.

D) $4,000 gain.

Answer: C 48) Ignoring income taxes, what is the amount of unrealized profit/(loss) remaining from the

intercompany sale of equipment at December 31, 2019? A) $12,500 gain. B) $12,000 gain. C) $16,000 gain. Answer: D

D) $16,000 loss.

49) What would be the non-controlling interest amount appearing on Ting's Consolidated Statement of

Financial Position on January 1, 2019? A) $450,000. B) $298,300.

C) $375,000.

D) $500,000.

Answer: D 50) What would be the amount appearing on the December 31, 2019 Consolidated Statement of

Financial Position for deferred income taxes? A) $1,200. B) $600.

C) $900.

Answer: D

D) $2,600.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

Hot Inc. owns 60% of Cold Inc, which it purchased on January 1, 2018 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 depreciable assets to Cold on January 1, 2018, at a loss of $15,000. On January 1, 2019, Cold sold depreciable assets 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 2018, Cold sold inventory to Hot in the amount of $18,000. This inventory was sold to outside parties during 2019. During 2019, Hot sold inventory to Cold for $45,000. One third of this inventory was still in Cold's warehouse on December 31, 2019. 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 2018 and 2019 are shown below.

Net Income Dividends

2018 $180,000 $ 20,000

2019 $200,000 $ 60,000

Both companies are subject to a tax rate of 20%. 51) Compute the goodwill on the acquisition date. Answer:

Purchase price for 60% interest in Cold

$540,000

Imputed acquisition cost (100%) [$540,000 / 0.60]

$900,000

Less: Fair value acquired: Book value at acquisition: Less: Fair value of patent Add: Fair value decrement - inventory

($350,000) ($50,000) $10,000

Goodwill

$510,000

52) Prepare a Schedule of Realized and Unrealized Profits for 2018 and 2019 for both companies. Show

your figures before and after tax. Answer: Schedule of Realizes and Unrealized Profits, 2018, 2019 Profits Realized During 2018:

Before Tax After Tax

HOT Inc: Loss on Intercompany Sale of Equipment Realized through depreciation ($15,000 / 5)

($3,000)

($2,400)

Unrealized Profits at December 31, 2018: Before Tax After Tax HOT Inc: Unrealized Loss on Equipment Sale $12,000 $9,600 COLD Inc: Inventory Sales ($18,000 - $18,000 / 1.5)

$6,000

Profits Realized During 2019: HOT Inc: Loss on Intercompany Sale of Equipment Realized through depreciation ($15,000 / 5) Inventory Sales ($45,000 - $45,000 / 1.5) × 2/3 COLD Inc: Gain on Intercompany Sale of Equipment Realized through depreciation ($10,000 / 5) Inventory Sales ($18,000 - $18,000 / 1.5)

$4,800

Before Tax After Tax

($3,000)

($2,400)

$10,000

$8,000

$2,000

$1,600

$6,000

$4,800

Unrealized Profits at December 31, 2019: Before Tax After Tax HOT Inc: Unrealized Loss on Equipment Sale ($9,000) ($7,200) 13

($15,000 - (2 × $3,000)) Inventory Sales ($45,000 - $45,000 / 1.5) × 1/3

$5,000

$4,000

COLD Inc: Unrealized Gain on Intercompany Sale of Equipment

$8,000

$6,400

53) Compute the amount of income tax that would be deferred as at December 31, 2019. Answer:

Unrealized Gain on Intercompany Equipment Sale Unrealized Loss on Intercompany Equipment Sale Unrealized Profit in Ending Inventory Total Unrealized Profit Income Tax deferred (20%)

$8,000 ($9,000) $5,000 $4,000 × 20% $800

54) Compute the balance in Hot's Investment in Cold account as at December 31, 2019.

Investment in Cold Account Balance as at December 31, 2019

Answer:

Investment at cost Less: Unrealized downstream profits (net of tax) Loss on intercompany equipment sale Profit in ending inventory Increase in retained earnings Since acquisition: Amortization of purchase price discrepancy (Patent) Amortization of purchase price discrepancy (Inventory) Gain on intercompany equipment Sale

Investment in Cold, December 31, 2019

$540,000

$7,200 ($4,000) $543,200 $300,000 ($10,000) $10,000 ($6,400) $293,600 × 60% $176,160 $719,360

The financial statements of Plax Inc. and Slate Corp for the year ended December 31, 2018 are shown below: Income Statements

Miscellaneous Revenues Interest Revenues Dividend Revenue Less: Expenses Miscellaneous Expense Interest Expense Income Tax Expense Net Income

Plax Inc. Slate Corp $1,300,000 $400,000 $11,250 --$15,000 --$864,000 --$198,000 $264,250

$259,200 $19,400 $48,000 $73,400

Retained Earnings Statements

Balance, January 1, 2018 Net Income

Plax Inc. Slate Corp $490,000 $180,000 $264,250 $73,400 15

Less: Dividends Retained Earnings

$(126,000) $628,250

($20,000) $233,400

Balance Sheets

Miscellaneous Assets Investment in Slate Shares Investment in Slate Bonds Total Assets

Plax Inc. Slate Corp $1,210,000 $745,200 $196,000 --$122,250 --$1,528,250 $745,200

Miscellaneous Liabilities Bonds Payable Bond Premium Common Shares Retained Earnings Total Liabilities and Equity

$600,000 ----$300,000 $628,250 $1,528,250

$150,000 $200,000 $1,800 $160,000 $233,400 $745,200

Other Information: > Plax acquired 75% of Slate on January 1, 2014 for $196,000, when Slate's retained earnings was $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 2015 and 2018 respectively. > Plax uses the cost method to account for its investment. > Slate has 10% par value bonds outstanding in the amount of $200,000 which mature on December 31, 2021. The bonds were issued at a premium. On January 1, 2018 the unamortized premium amounted to $2,400 Slate uses the straight line method to amortize the premium. > On January 1, 2018, Plax acquired $120,000 face value of Slate's bonds for $123,000 Plax 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.

55) Calculate the goodwill as at December 31, 2018. Answer:

Imputed purchase price: ($196,000 / 0.75) Fair value at acquisition: Goodwill at acquisition: Less: Impairment losses Goodwill as at December 31, 2018

$261,333 $240,000 $21,333 ($8,000) $13,333

56) Prepare a summary of intercompany bond transactions. Be sure to show the gain or loss for each

company as well as the effect on the consolidated entity. Answer:

Plax: Cost of bonds Face value of bonds acquired Pre-tax loss on acquisition

$123,000 $120,000 $3,000

Slate: Face value of bonds Carrying value of intercompany bonds (60% × $202,400) Pre-tax gain:

$120,000 $121,440 $1,440

The 2018 Consolidated Income Statement would show a pre-tax loss of $1,560 (i.e. $3,000 $1,440).

57) Prepare a summary of intercompany interest revenues and expenses. Answer:

Interest Expense 10% × $200,000 Premium amortization: ($2,400 / 4) Total expense Intercompany portion (60%)

$20,000 ($600) $19,400 × 60 %

Interest Revenue 10% × $120,000 Premium amortization: ($3,000 / 4) Pre-tax interest elimination gain to entity: Allocation: Slate (pre-tax loss - $600 × 60%) Plax (pre-tax gain - $3,000 / 4) Gain allocated (Net)

$12,000 $750

$11,640

$11,250 $390

$360 $750 $390

58) Prepare a detailed calculation of consolidated net income. Do not prepare an income statement for

this requirement. Answer:

Net income - Plax Less: Dividends from Slate January 1 bond loss allocation

$264,250 $15,000 $1,800

Add: 2015 interest elimination gain allocated Adjusted net income - Plax Net income - Slate Less: 2015 Interest elimination loss allocation Add: January 1 bond gain allocation Less: Goodwill impairment loss Adjusted net income

($ 16,800) $247,450 $450 $247,900

$73,400 ($216) $864 ($1,600) $72,448

Consolidated net income

$320,348

Attributable to: Shareholders of Plax Non-controlling interest

(25% × $72,448)

$302,236 $18,112 $320,348

59) Prepare Plax's Consolidated Income Statement for the year ended December 31, 2018. Show the

allocation of consolidated net income between the controlling and non-controlling shareholders. Answer: Plax Inc. Consolidated Income Statement For the year ended December 31, 2018 Miscellaneous Revenues Less: Expenses Miscellaneous Expense Interest Expense Loss on Bond Retirement Goodwill Impairment Loss Income Tax Expense Consolidated Net Income

$1,700,000 $1,123,200 $7,760 $1,560 $1,600 $ 245,532 $320,348

Attributable to: Attributable to Plax's shareholders Non-controlling interest

$302,236 ($18,112) $320,348

60) Prepare a detailed calculation of consolidated retained earnings as at January 1, 2018. Do not

prepare a Statement of Retained Earnings for this requirement. Answer:

Retained earnings - Plax Increase in Slate's retained earnings since acquisition: Less: Goodwill impairment loss

Consolidated Retained Earnings

$490,000 $100,000 ($6,400) $93,600 × 75%

$70,200 $560,200

61) Prepare a detailed calculation of consolidated retained earnings as at December 31, 2018. Do not

prepare a Statement of Retained Earnings for this requirement. Answer:

Retained earnings - Plax Loss re: bond transaction Increase in Slate's retained earnings since acquisition: Gain re: bond transaction Less: Goodwill impairment loss

$628,250 (1,350) $153,400 $648 ($8,000) $146,048 × 75%

Consolidated Retained Earnings

$109,536 $736,436

62) Prepare a Statement of Consolidated Retained Earnings for the year ended December 31, 2018 for

Plax Inc. Answer:

Balance, January 1, 2018 Add: Parent's share of Consolidated Net Income Less Dividends Consolidated Retained Earnings as at December 31, 2018

$560,200 $302,236 ($126,000) $736,436

63) Prepare a Calculation of Non-Controlling Interest as at December 31, 2018 for Plax Inc. Answer:

Plax Inc Calculation of Non-Controlling Interest As at December 31, 2018 Shareholder Equity - Slate Add: Net 2015 bond gain allocation: Add: Unimpaired goodwill Total

$393,400 $648 $13,333 $407,381 × 25% $101,845

Non-controlling interest (25%)

64) Prepare Plax's Consolidated Statement of Financial Position as at December 31, 2018. Answer:

Plax Inc Consolidated Statement of Financial Position As at December 31, 2018 Miscellaneous Assets Deferred Taxes Goodwill Total Assets

$1,955,200 $468 $13,333 $1,969,001

Miscellaneous Liabilities Bonds Payable Bond Premium Total Liabilities

$750,000 $80,000 $720 $830,720

Non-Controlling Interest Common Shares Retained Earnings Total Liabilities and Equity

$101,845 $300,000 $736,436 $1,969,001

65) Assuming that Plax uses the equity method, prepare a computation showing the balance in Plax's

investment in Slate account on December 31, 2018. Answer:

Investment at Cost Increase in Retained Earnings to Dec. 31, 2018 ($153,400 × 75%) Amortization of acquisition differential ($8,000 × 75%) Bond loss allocation 2018 interest elimination gain allocated Bond gain allocated to Slate ($864 × 75%) 2018 interest elimination loss allocated ($216 × 75%) Balance, Investment in Slate as at December 31, 2018

$196,000 $115,050 ($6,000) ($1,800) $450 $648 ($162) $304,186

- OR Common shares Retained earnings Unimpaired goodwill Bond gain allocation

Controlling interest of 75% Bond loss allocation Balance, Investment in Slate as at December 31, 2018

$160,000 $233,400 $13,333 $648 $407,381 × 75% $305,536 ($1,350) $304,186

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A Inc. owns 80% of B's outstanding voting shares. Under which of the following scenarios would

A's ownership percentage of B change? A) B retires 20,000 voting share, and in doing so, buy back 16,000 shares from A. B) B issues an additional 10,000 voting shares; A acquires 6,400 shares of the new issue. C) B issues an additional 10,000 voting shares; A acquires 8,000 shares of the new issue. D) B Inc. announces a 2-for-1 stock split to all its common shareholders. Answer: B 2) Assume that X Corp. controls Y Corp., X constantly purchases and sells Y's voting shares on the

open market while always ensuring that it maintains a controlling interest over Y. Which of the following statements pertaining to X buying and selling activity is correct? A) X's activity has no effect on the non-controlling interest. B) As X sells shares of Y, the non-controlling interest decreases. C) As X buys shares of Y, the non-controlling interest increases. D) As X sells shares of Y, the non-controlling interest increases. Answer: D

ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting shares for $350,000 on January 1, 2018. On the date of acquisition, 123's common shares and retained earnings were valued at $120,000 and $180,000, respectively. 123'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 $30,000 and $20,000 respectively. On January 2, 2018, ABC sold 14,000 shares of 123 on the open market for $98,000. ABC Inc. uses the equity method to account for its investment in 123 Inc. 3) What is the amount of goodwill arising from this business combination? A) Nil.

B) ($5,000).

C) $5,000.

D) $150,000.

Answer: D 4) What percentage of its Investment in 123 was sold by ABC? A) 28%

B) 14%

C) 40%

D) 21%

Answer: C 5) What is ABC's ownership interest in 123 after its sale? A) 56%

B) 36%

C) 21%

D) 42%

Answer: D 6) What would be the balance in the investment in 123 Inc. accounts after the sale? A) $210,000.

B) $100,000.

C) $225,000.

Answer: A

D) $150,000.

7) What would be the amount of the gain or loss on the sale of the 14,000 shares? A) A loss of $42,000.

B) A gain of $4,000.

C) A gain of $54,000.

D) A loss of $4,000.

Answer: A 8) What is the amount of unamortized acquisition differential (including goodwill) after the sale? A) $84,000.

B) $200,000.

C) $140,000.

D) $300,000.

Answer: B 9) What is the amount of the non-controlling interest at acquisition? A) $8,400.

B) $50,000.

C) $18,000.

D) $150,000.

Answer: D 10) What is the carrying value of the trademark after the sale? A) $30,000.

B) $20,000.

C) $12,600.

D) $18,000.

Answer: B

On January 1, 2018, Hanson Inc. purchased 54,000 voting shares out of Marvin Inc.'s 90,000 outstanding voting shares for $240,000. On that date, Marvin's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Marvin's book values approximated its fair values on the acquisition date with the exception of the company's equipment, which was estimated to have a fair value that was $50,000 in excess of its recorded book value. The equipment was estimated to have a useful life of eight years. Both companies use straight line amortization exclusively. On January 1, 2019, Hanson purchased an additional 9,000 shares of Marvin Inc. on the open market for $45,000. On this date, Marvin's book values were equal to its fair values with the exception of the company's equipment, which is now thought to be undervalued by $60,000. Moreover, the equipment's estimated useful life was revised to 5 years on this date. Marvin's net income and dividends for 2018 and 2019 are as follows:

Net Income Dividends

2018 $60,000 $9,000

2019 $80,000 $14,000

Marvin's goodwill suffered an impairment loss of $5,000 during 2018. Hanson Inc. uses the equity method to account for its investment in Marvin Inc. 11) What is the amount of goodwill arising from Hanson's January 1, 2018 acquisition? A) $50,000.

B) $200,000.

C) $60,000.

D) $80,000.

Answer: B 12) What percentage of Marvin's shares was purchased by Hanson on January 1, 2018? A) 90%

B) 10%

C) 70%

Answer: D 2

D) 60%

13) Assuming that Hanson had no recorded goodwill prior to January 1, 2018, what would be the

amount of goodwill appearing on Hanson's December 31, 2018 consolidated balance sheet? A) $195,000. B) $80,000. C) $117,000. D) $75,000. Answer: A 14) Assuming that Hanson had no recorded goodwill prior to January 1, 2018, what would be the

amount of goodwill appearing on Hanson' December 31, 2019 Consolidated Balance Sheet? A) $136,500 B) $75,000 C) $209,900 D) $195,000 Answer: D 15) What is Hanson's ownership interest in Marvin after its January 1, 2019 purchase? A) 80%

B) 90%

C) 70%

D) 60%

Answer: C 16) What is the amount of the acquisition differential amortization for 2018 (excluding goodwill

impairment)? A) $4,375

B) $6,250

C) $12,000

D) $5,625

Answer: B 17) What is the amount of the acquisition differential amortization (excluding goodwill impairment) for

2019? A) $1,500.

B) $8,750.

C) $7,750.

D) $6,250.

Answer: B 18) What would be the amount of the unamortized acquisition differential (excluding goodwill) at the

end of 2019? A) $35,000.

B) $42,000.

C) Nil.

D) $37,500.

Answer: A 19) What effect (if any) would Hanson's January 1, 2019 purchase have on the company's consolidated

cash flows for the year? A) There would be a decrease in cash of $236,000 to the consolidated entity. B) There would be a decrease in cash of $45,000 to the consolidated entity. C) There would be no effect. D) There would be a decrease in cash of $200,000 to the consolidated entity. Answer: B 20) By how much would the non-controlling interest amount have changed as a result of the Hanson's

second purchase? A) An increase of $37,857. C) An increase of $43,975.

B) A decrease of $43,975. D) A decrease of $37,857.

Answer: B

21) What effect would the purchase at January 1, 2019 have on the consolidated equity of Hanson? A) There would be no effect. B) There would be a reduction in consolidated contributed surplus of $1,025. C) There would be a reduction in consolidated retained earnings of $1,025. D) There would be an increase in consolidated retained earnings of $1,025. Answer: C 22) What would be the balance in Hanson's investment in Marvin account on December 31, 2019? A) $303,000.

B) $349,950.

C) $347,900.

D) $348,925.

Answer: C 23) Assuming that A acquired a controlling interest in B through numerous small acquisitions, what

would be appropriate accounting with respect to these acquisitions? A) The equity method must be adopted retroactively once 20% ownership is obtained. B) The cost method should be used until a controlling interest is acquired. C) An acquisition differential must be computed following each purchase. D) The purchases should all be grouped together and treated as a single block purchase. Answer: D 24) A owns 80% of B, which in turn owns 55% of C. Which of the following statements is correct? A) A has contingent control over C.

B) A has indirect control over C.

C) A has no control over C.

D) A has direct control over C.

Answer: B 25) X owns 70% of Y, which in turn owns 25% of Z. X, also owns 20% of Z. Which of the following

statements is correct? A) X has indirect control over Z. C) X has direct control over Z.

B) X has contingent control over Z. D) X has no control over Z.

Answer: D

P Corp. owns 800 voting common shares out of Q Corp.'s 1,000 outstanding voting common shares, which it accounts for using the equity method. On December 31, 2018, the shareholder's equity section of Q Corp. was comprised of $15,000 in common shares and retained earnings with the amount of $450,000. Q Corp. reported net Income and paid dividends of $120,000 and $20,000 respectively for the year ended December 31, 2019. On January 1, 2020, P Corp. sold 200 shares of its investment in Q Corp. for $125,000. On January 1, 2019, the investment account had a balance of $420,000. The acquisition differential was to be allocated as follows: 60% to patents (6 year remaining life). 30% to equipment (9 year remaining life). 26) What is the gain or loss on P's sale of its shares on Q Corp.? A) A $2,000 loss.

B) A $3,000 gain.

C) A $3,000 loss.

D) A $1,600 gain.

Answer: D 27) What is the balance in the investment in Q account immediately following the sale? A) Nil.

B) $80,000.

C) $295,200.

D) $370,200.

Answer: D 28) What is the amount of Goodwill that arose from P's investment in Q? A) Nil.

B) $6,000.

C) $18,000.

D) $36,000.

Answer: B 29) How much of the acquisition differential was allocated to patents? A) Nil.

B) $6,000.

C) $18,000.

D) $36,000.

Answer: D 30) How much of the acquisition differential was allocated to equipment? A) Nil.

B) $6,000.

C) $18,000.

D) $36,000.

Answer: C 31) What was the amount of acquisition differential amortization for 2019? A) Nil.

B) $6,000.

C) $8,000.

D) $12,000.

Answer: C

The following information pertains to the shareholdings of an affiliated group of companies. The respective ownership interest of each company is outlined below. A Inc.: A Inc. owns 75% of J Inc. and 60% of G Inc. J Inc.: 5

J Inc. owns 60% of D Inc. and 20% of G Inc. G Inc.: 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, 2018 were as follows: A Inc. J Inc. G Inc. D Inc. Y Inc.

$1,000,000 $200,000 $600,000 $300,000 $100,000

Unrealized intercompany profits (pre-tax) earned by the various companies for the year ended December 31, 2018 are shown below: G Inc. Y Inc. J Inc.

$10,000 $10,000 $20,000

All companies are subject to a 25% tax rate. 32) How much is A Inc.'s Consolidated Net Income for 2018? A) $2,170,000.

B) $1,773,625.

C) $1,796,125.

D) $1,510,000.

Answer: A 33) How much is the non-controlling interest in A Inc.'s Consolidated Net Income for 2018? A) $382,500.

B) $373,875.

C) Nil.

D) $400,000.

Answer: B 34) What is the Consolidated Net Income for the year attributable to the shareholders of A Inc.? A) $2,170,000.

B) $1,510,000.

C) $1,817,500.

Answer: D

D) $1,796,125.

Whine purchased 80% of the outstanding voting shares of Dine Inc. on December 31, 2018. The balance sheets of both companies on that date are shown below (after Whine acquired the shares):

Cash Accounts Receivable Inventory Investment in Dine Inc. Land Equipment (net) Total Assets

WHINE $250,000 $450,000 $500,000 $500,000 $140,000 $460,000 $2,300,000

DINE $200,000 $300,000 $100,000

Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$900,000 $500,000 $500,000 $400,000 $2,300,000

$200,000 $100,000 $200,000 $300,000 $800,000

$200,000 $800,000

Also on December 31, 2018 (after the financial statements appearing above had been prepared) Chompster Inc., one of Whine's main competitors has agreed to acquire an equity interest in Dine Inc. As a result of the agreement, Dine Inc. would issue another 8,000 shares (over and above the 32,000 shares it currently has outstanding) to Chompster for $20 per share. The acquisition differential on the date of acquisition was attributed entirely to equipment, which had a remaining useful life of ten years from the date of acquisition. Whine Inc. uses the equity method to account for its investment in Dine Inc. There were no unrealized intercompany profits on December 31, 2018. 35) What would be the amount of cash appearing on Whine's December 31, 2018 consolidated balance

sheet (after the issue of shares to Chompster)? A) $450,000. B) $850,000.

C) $810,000.

D) $610,000.

Answer: D 36) What would be the amount of the unamortized acquisition differential on December 31, 2018? A) $80,000.

B) $50,000.

C) $40,000.

D) $125,000.

Answer: D 37) What would be Whine's ownership interest in Dine following Chompster's purchase of shares in

Dine? A) 60%

B) 80%

C) 64%

Answer: C 7

D) 75%

38) What would be the gain or loss arising from Dine's share issue to Chompster? A) A loss of $2,400.

B) A gain of $2,400.

C) A gain of $4,000.

D) A loss of $4,000.

Answer: B 39) What would be the amount of the non-controlling interest appearing on Whine's consolidated

balance sheet as at December 31, 2018 before the issue of shares to Chompster? A) $160,000. B) $222,000. C) $264,000. D) $125,000. Answer: D 40) What would be the amount of the non-controlling interest appearing on Whine's consolidated

balance sheet as at December 31, 2018 after the issue of shares to Chompster? A) $282,600. B) $222,000. C) $264,000. D) $125,000. Answer: A 41) The amount of retained earnings appearing on the December 31, 2018 consolidated balance sheet

would be: A) $396,000.

B) $402,400.

C) $400,000.

D) $384,000.

Answer: C 42) The amount of goodwill appearing on the December 31, 2018 consolidated balance sheet would be: A) Nil.

B) $20,000.

C) $30,000.

D) $10,000.

Answer: A 43) The amount of common shares appearing on the December 31, 2018 consolidated balance sheet

would be: A) $500,000.

B) $770,000.

C) $860,000.

D) $660,000.

Answer: A 44) The amount appearing under equipment on the December 31, 2018 consolidated balance sheet

would be: A) $772,500.

B) $690,000.

C) $785,000.

D) $710,000.

Answer: C 45) What is the correct method of treating an acquisition differential arising from a Preferred Share

Issue? A) It should be expensed in the current year. B) It should be adjusted to a contributed surplus or retained earnings account. C) It should be treated as an adjustment to goodwill. D) It should be pro-rated across the subsidiary's identifiable assets and liabilities. Answer: B

46) Which of the following statements pertaining to preferred shares is correct? A) If the preferred shares are non-cumulative, only the current year's Net Income would be

allocated to preferred shares, since dividends are never in arrears with non-cumulative preferred shares. B) If the preferred shares are participating, only the current year's Net Income would be allocated to the preferred shares. C) If the preferred shares are participating, the current year's Net Income would be allocated to the shares, only if the subsidiary is fully owned by the parent. D) There can never be any dividends in arrears when preferred shares are participating. Answer: A 47) 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) Cumulative dividends in arrears on the preference shares. B) Redemption premium payable on redemption of preference shares. C) The stated or par value of the preference shares. D) Contributed surplus arising from the issue of preference shares. Answer: D 48) If the shareholders' equity allocated to the subsidiary's preference shares amounts to $240,000 and

the parent company acquires 60% of the subsidiary's preference shares at a cost of $150,000, how much will the non-controlling interest in the preferred shares amount to after the purchase by the parent? A) $96,000. B) $90,000. C) $120,000. D) $240,000. Answer: A 49) If the shareholders' equity allocated to the subsidiary's preference shares amounts to $240,000 and

the parent company acquires 60% of the subsidiary's preference 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 increase by $144,000 and retained earnings will increase by $6,000. C) Non-controlling interest will decrease by $144,000 and contributed surplus will increase by $6,000. D) There will be no change in consolidated shareholders' equity as a result of this transaction. Answer: A 50) If the shareholders' equity allocated to the subsidiary's preference shares amounts to $240,000 and

the parent company acquires 60% of the subsidiary's preference 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 decrease by $144,000. B) It will decrease by $150,000. C) It will not change. D) It will increase by $150,000. Answer: B 9

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

The financial statements of Lime Inc. and its subsidiary Stone Corp. on December 31, 2017 are shown below: LIME Inc.

STONE Corp.

RETAINED EARNINGS STATEMENTS Balance, January 1, 2017 Net Income Less: dividends Retained earnings

$200,000 $350,000 ($25,000) $525,000

$370,000 $222,000 ($100,000) $492,000

Cash Accounts receivable Inventory Land Plant and equipment Accumulated depreciation Investment in Stone (common) Total Assets

$120,000 $270,000 $165,000 $210,000 $1,200,000 ($690,000) $900,000 $2,175,000

$3,000 $255,000 $144,000 --$2,100,000 ($900,000) --$1,602,000

Accounts payable Accrued liabilities Preferred shares Common shares Retained earnings Total Liabilities and Equity

$276,000 $24,000 --$1,350,000 $525,000 $2,175,000

$330,000 $30,000 $150,000 $600,000 $492,000 $1,602,000

BALANCE SHEETS

Other Information: On January 1, 2014 Stone's balance sheet showed the following shareholders' equity: $3 cumulative preferred shares, 20,000 shares issued Common shares, 100,000 shares issued Surplus (Deficit)

$120,000 $600,000 ($10,000)* $710,000

On this date, Lime acquired 80,000 common shares for $900,000. 10

* 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. Intercompany sales of inventory for the year were as follows: Lime to Stone: Stone to Lime:

$50,000 $40,000

Unrealized intercompany profits in inventory for 2017 were as follows: January 1, 2017: Stone's Inventory Lime's Inventory

$10,000 $20,000

December 31, 2017: Stone's Inventory Lime's Inventory

$6,000 $8,000

On January 1, 2015, 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 2017 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, 2016. Lime uses the cost method to account for its investment in Stone. Consolidated retained earnings on December 31, 2016 is $523,120.

51) Compute the Goodwill on the date of the acquisition. Answer:

Total $120,000

Preferred $120,000 $60,000 $600,000 --$720,000 $180,000 ($10,000) --$710,000 $180,000

Preferred Preferred Dividend Arrearages Common Total Share Capital Deficit: Total Equity Acquisition Differential: Imputed value of 100% of common shares Less: book value of common shares Acquisition differential

($900,000/0.80) $1,125,000 $530,000 $595,000

Allocated: Plant & Equipment Inventory Goodwill

($10,000) $30,000 $575,000 $595,000

Common $0 (60,000) $600,000 $540,000 ($10,000) $530,000

52) a) Prepare a schedule of intercompany profits as at December 31, 2017 for both companies.

b) Compute the amount of deferred taxes that should appear on the December 31, 2017 Consolidated Balance Sheet. Answer: a) Inventory January 1, 2017 Stone's Inventory (downstream) Lime's Inventory (upstream)

Before Tax $10,000 $20,000

After Tax $6,000 $12,000

December 31, 2017 Stone's Inventory (downstream) Lime's Inventory (upstream)

Before Tax $6,000 $8,000

After Tax $3,600 $4,800

Dividends paid by Stone during 2017: Total:

$100,000

Less: Paid to Preferred Shareholders Paid to Common Shareholders

$60,000 $40,000

Intercompany portion (80%)

$32,000

b) Deferred Taxes: Unrealized Profits in Ending Inventory (total) Future Income Tax ($14,000 × 40%)

$14,000 $5,600

53) Compute the Consolidated Net Income for 2017 and show its allocation between the controlling and

non-controlling interests. Do not prepare an Income Statement. Answer:

Lime's 2017 Net income Intercompany dividends Realized profits from opening inventory (downstream) Unrealized profits in ending inventory (downstream) Stone's Net income Amortization of acquisition differential Realized from open inventory (upstream) Unrealized in ending inventory (upstream) Realized from equipment sale

$350,000 ($32,000) $6,000 ($3,600) $222,000 $1,000 $12,000 ($4,800) $600

Consolidated Net Income

$230,800 $551,200

Non-controlling interest: Preferred shares Common shares (20% of [$230,800 - $60,000])

$60,000 $34,160

Controlling interest ($551,200 - $94,160)

$ 94,160 $457,040 $551,200

54) Prepare a calculation of non-controlling interest as at December 31, 2017. Answer:

Equity - Common Shareholders Goodwill Less: Unamortized acquisition differential Less: Unrealized profit

20% NCI (Common shares) Preferred shares Non-Controlling Interest (Total)

$1,092,000 $575,000 ($6,000) ($4,800) $1,656,200 × 25% $331,240 $150,000 $481,240

55) Prepare a calculation of Consolidated Retained Earnings at as December 31, 2018. Answer: Calculation of Consolidated Retained Earnings:

Lime's Retained Earnings Unrealized profit in ending inventory (downstream) Stone's Retained Earnings Less: at acquisition (include div in arrears) Increase in Retained Earnings Amortization of acquisition differential Unrealized profit in end inventory (upstream) Less; NCI share Consolidated Retained Earnings

$525,000 ($3,600) $492,000 (70,000) $562,000 (26,000) (4,800) $531,200 (106,240) $424,960 $946,360

56) Prepare Lime's December 31, 2017 Consolidated Balance Sheet. Answer:

Lime Inc. Consolidated Balance Sheet As At December 31, 2017 Assets Cash Accounts Receivable Inventory Land Plant and Equipment (net) Goodwill Deferred Taxes Total Assets

$123,000 $525,000 $295,000 $210,000 $1,704,000 $575,000 $5,600 $3,437,600

Liabilities and Equity Accounts Payable Accrued Liabilities Non-Controlling Interest Common Shares Retained Earnings Total Liabilities and Equity

$606,000 $54,000 $481,240 $1,350,000 $946,360 $3,437,600

57) The following information was derived from the 2017 consolidated financial statements of X Inc.,

which owns 80% of Y Inc. as well as 40% of Z Inc.: Equity Earnings from Z Inc. Decrease in Accounts Payable Increase in Accounts Receivable Increase in Inventory Increase in Bonds Payable Depreciation Loss on sale of machinery Carrying value of machinery sold Dividends received from Z Inc. Purchase of a building for cash Goodwill impairment loss Entity Net Income allocated to non-controlling interest Consolidated net income allocated to Parent Dividends paid by X Inc. 16

$120,000 $5,000 $10,000 $20,000 $40,000 $20,000 $10,000 $60,000 $10,000 $400,000 $5,000 $5,000 $950,000 $40,000

Dividends paid by Y Inc.

$12,000

The cash balance at the start of 2017 was $200,000. Required: Prepare the consolidated statement of cash flows for Lime Inc for the year ended December 31, 2017. Answer: X Inc. Consolidated Statement of Cash Flows Consolidated net income

$955,000

Add (Deduct): Goodwill impairment loss Depreciation Loss on machinery sale Equity earnings from Z Inc. Dividends from Z Inc. Increase in inventory Decrease in accounts payable Increase in accounts receivable Cash flow from operations:

$5,000 $20,000 $10,000 ($120,000) $10,000 ($20,000) ($5,000) ($10,000)

Investing Purchase of a building Sale of equipment Total cash from investing

($400,000) $50,000

Financing Bond Issue Dividends - to X Inc.'s shareholders Dividends - Non-controlling shareholders Cash from Financing

$40,000 ($40,000) ($2,400)

$845,000

($350,000)

($2,400)

Net change in cash Increase (decrease) in cash Add: Opening cash balance

$492,600 $200,000

Cash Balance - December 31, 2017

$692,600

The trial balances of Ash Inc. and its subsidiary Cinder Corp. on December 31, 2018 are shown below:

Inventory Plant and Equipment (net) Dividends Declared Investment in Cinder Cost of Goods Sold Other Expenses Total Assets

Ash $160,000 $2,700,000 $200,000 $700,000 $650,000 $50,000 $4,460,000

Cinder $100,000 $700,000 $100,000 $90,000 $10,000 $1,000,000

Liabilities Common Shares Retained Earnings Sales and Other Revenue Total Liabilities and Equity

$1,000,000 $1,660,000 $600,000 $1,200,000 $4,460,000

$150,000 $600,000 $100,000 $150,000 $1,000,000

Other Information: Ash acquired Cinder in three stages: January 1, 2015: January 1, 2017: December 31, 2018:

Ash purchased 10,000 shares for $100,000. Cinder's Retained Earnings were $40,000 on that date. Ash purchased 30,000 shares for $450,000. Cinder's Retained Earnings were $80,000 on that date. Ash purchased 20,000 shares for $150,000. Cinder's Retained Earnings were $100,000 on that date.

Cinder was incorporated on January 1, 2013. 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, 2017. These assets had a 10 year remaining life. Intercompany sales of inventory during 2018 amounted to $250,000. Unrealized inventory profits for each company are shown below for 2018. The amounts indicate the amount of profit in each company's inventory. Ash January 1, 2018: December 31, 2018: Cinder

$10,000 $20,000 18

Cinder January 1, 2018: December 31, 2018:

$20,000 $40,000

All inventories on hand at the start of 2018 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%. 58) What amount will be shown in the consolidated balance sheet of Ash as at December 31, 2018, for

trademarks? Answer:

Consideration (fair value of 60,000 shares) Implied value of NCI (40%) Fair value of Cinder at December 31, 2018 (acquisition date) New book value at acquisition Acquisition differential, allocated to patents

59) Compute consolidated inventory for Ash as at December 31, 2018. Answer:

Book value of inventory

$ 260,000

Less: Unrealized Profits ($20,000 + $40,000)

($60,000) $ 200,000

60) Compute the Consolidated Cost of Goods Sold for 2018. Answer:

Cost of Goods Sold as reported:

$740,000

Add: (Deduct) Intercompany Sales Unrealized Inventory Profit (opening) Unrealized Inventory Profit (ending)

($250,000) ($30,000) $60,000

Consolidated Cost of Goods Sold:

$520,000

$450,000 300,000 750,000 700,000 50,000

61) Beta Corp. owns 80% of Gamma Corp. The Consolidated Financial Statements of Beta Corp. for

2018 and 2019 are shown below: Beta Corp. Consolidated Balance Sheet, December 31, 2019

Cash Accounts Receivable Inventory Land Plant and Equipment Accumulated Depreciation Goodwill Total Assets

2019 $180,000 $300,000 $400,000 $160,000 $1,650,000 ($800,000) $60,000 $1,950,000

2018 $40,000 $100,000 $100,000 $200,000 $1,170,000 ($770,000) $60,000 $900,000

Accounts Payable Accrued Liabilities Bonds Payable Less Bond Discount Non-Controlling Interest Common Shares Retained Earnings Total Liabilities and Equity

$326,000 $350,000 $400,000 ($40,000) $214,000 $350,000 $350,000 $1,950,000

$40,000 $140,000 $100,000 ($50,000) $200,000 $350,000 $120,000 $900,000

Beta Corp. Consolidated Income Statement, For the year ended December 31, 2019 Sales Cost of aales Depreciation Interest expense Gain on land sale

$500,000 $115,000 $30,000 $50,000 ($10,000) ($185,000)

Net income

$315,000

Attributable to: 20

Shareholders of Parent Non-Controlling Interest

$300,000 $15,000

Other Information: Beta purchased its interest in Gamma on January 1, 2015 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 2019. Beta issued $300,000 in bonds during the year. Beta reported an equity method net Income of $300,000 and paid $70,000 in dividends to its shareholders. Required: Prepare a Consolidated Statement of Cash Flows for Beta Corp. for 2019. Answer: Beta Corp. Consolidated Statement of Cash Flows Net Income

$315,000

Add (Deduct) Depreciation Gain on land sale Add: Bond discount amortization Increase in Inventory Increase in Accounts Payable Increase in Accounts Receivable Increase in Accrued Liabilities Cash from Operations

$30,000 ($10,000) $10,000 ($300,000) $286,000 ($200,000) $210,000

Investing Purchase of plant/equipment Sale of land Cash from Investing

($480,000) $50,000

Financing Bond Issue Dividends - to Beta's shareholders Dividends - Non-Controlling shareholders Cash from Financing

$300,000 ($70,000) ($1,000)

$341,000

($430,000)

$229,000

Increase (decrease) in Cash Add: Opening Cash Balance

$140,000 $40,000

Cash Balance - December 31, 2019

$180,000

Parrot Company purchased 75% of the outstanding common shares and 50% of the outstanding preference shares of Saltines Inc. on January 1, 2019, on which date the balance sheet and fair values of Saltines' assets and liabilities were as follows: Saltines Inc. Balance Sheet as at December 31, 2018 Book Values Fair Values Cash Accounts receivable Inventory Capital assets (net)

$ 130,000 120,000 320,000 720,000 $1,290,000

$130,000 110,000 290,000 800,000

Current liabilities Long-term debt Common shares Preferred shares Contributed surplus Retained earnings

$ 190,000 300,000 300,000 200,000 50,000 250,000 $1,290,000

$190,000 300,000

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 2017 and 2018 were unpaid. The shares were redeemable, at the option of the issuer, at a premium of 8%. The capital assets of Saltines had a remaining useful life of ten years at January 1, 2009. Any unallocated acquisition differential would be treated as goodwill, which is assessed annually for impairment. Parrot accounts for its interest in Saltines using the cost method and accounts for the non-controlling interest in its consolidated financial statements based on the fair value of the subsidiary, proportionate to the price paid for the controlling interest. Parrot's net income for 2019 was $300,000 and Parrot paid dividends of $150,000 on December 31, 2019. Saltines' net income for 2019 was $120,000 before a loss from discontinued operations of $60,000 (net of tax). 22

Saltines paid dividends of $75,000 in 2019. (Parrot included all dividends received in its income for 2019.) 62) Calculate the amount of the non-controlling interest on the consolidated balance sheet of Parrot and

its subsidiary as at December 31, 2019. Answer:

Consideration for 75% of common shares Implied value of 100% of common shares

$460,000 ($460,000/0.75) $613,333

Net book value at acquisition Allocated to preferred shares: Stated value Redemption premium Dividends in arrears Acquisition differential

$800,000 $200,000 16,000 20,000

Allocated to: Accounts receivable Inventory Capital assets Goodwill

236,000

($10,000) ($30,000) $80,000 $9,333 $ 49,333

Amortization of acquisition differential

Accounts receivable Inventory Capital assets Goodwill

At acquisition ($10,000) ($30,000) $80,000 $ 9,333 $ 49,333

Total value of company: NBV at beginning of year Net income Dividends Unamortized acquisition differential Allocated to preferred shares: 23

2019 $10,000 $30,000 ($8,000) $ --$32,000

Balance $ --$ --$72,000 $ 9,333 $81,333

$800,000 60,000 (75,000) 81,333

$866,333

$564,000 $ 49,333

Stated value Redemption premium Dividends in arrears Allocated to common shares

200,000 16,000 --

Non-controlling interest: In preferred shares (50% of $216,000) In common shares (25% of $650,333)

$216,000 $650,333

$108,000 $162,583 $270,583

63) Calculate the consolidated net income of Parrot and its subsidiary as at December 31, 2019. Answer:

Parent's net income Less: dividends from subsidiary Preferred shares (50% of $30,000) Common shares (75% of [$75,000 - $30,000]) Amortization of acquisition differential Subsidiary's net income Consolidated net income, before loss from discontinued operation Loss from discontinued operations Consolidated Net Income

$300,000 (15,000) (33,750) 32,000 120,000 $403,250 (60,000) $343,250

64) Parrot has no contributed surplus on its own balance sheet as at the end of 2019. Calculate the

amount of the contributed surplus shown on the consolidated balance sheet of Parrot and its subsidiary as at December 31, 2019. Answer:

Amount paid for preferred shares Carrying value of 50% of preferred shares at acquisition Contributed surplus

$105,000 118,000 $ 13,000

65) On January 1, 2018, Philcorp acquired 8,000 of the outstanding 10,000 shares of Anderco by issuing

its own shares with a market value of $400,000. On June 30, 2019, Anderco issued an additional 2,000 shares for cash consideration of $60 per share, none of which were acquired by Philcorp. Immediately before the issue, the shareholders' equity of Anderco amounted to $500,000 and the unamortized purchase discrepancy was $65,000. Philcorp uses the equity method to record its investment in Anderco. 24

Required: What gain or loss will appear in the consolidated financial statements of Philcorp and its subsidiary Anderco as a result of this transaction? Answer:

Investment account balance prior to new issue: Share of net book value (80% of $500,000) Share of unamortized acquisition differential

$400,000 $ 52,000 $452,000

Shares outstanding:

Before new issue New issue After new issue

Total 10,000 2,000 12,000

Philcorp 8,000 8,000

% 80% 66.67%

Deemed disposition of (80% - 67%) / 80%) = 16.67% Deemed proceeds (66.67% of 2,000 @ $60) Deemed cost (16.67% of $452,000) Gain (to consolidated contributed surplus)

$80,000 $75,333 $ 4,667

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The primary beneficiary of a variable interest enterprise: A) can simply record income on a cash basis when dividends are received or income accrued. B) 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. C) must include the assets, liabilities, and results of the variable interest enterprise in its

consolidated financial statements. D) only recognizes a gain or loss on the sale of its interest in the variable interest enterprise. Answer: C 2) Company A and B agree to engage in a joint venture. Which of the following statements pertaining

to joint ventures is correct? A) All joint ventures have a stated economic useful life. B) Both parties have joint control over the venture. C) The party contributing the most resources to the venture has control over the venture. D) Both parties to a joint venture must contribute an equal amount of resources to the venture. Answer: B 3) How are intercompany transactions handled in a joint venture? A) Intercompany profits are treated as an adjustment to the acquisition differential. B) They are ignored. C) They are completely eliminated. D) Only the venturer's share of any after tax profit is eliminated. Answer: D 4) Which of the following statements pertaining to any acquisition differential arising from a joint

venture is correct? A) There can be no acquisition differential arising from the formation of a new joint Venture. B) The acquisition differential arising from a newly formed joint venture is immediately charged to the retained earnings of each venturer on a pro-rata basis. C) The acquisition differential arising from a newly formed joint venture is allocated across the venture's identifiable net assets. D) An acquisition differential may arise when a venturer increases its ownership percentage of a joint venture. Answer: A

Find Corp. is a joint venture in which Seek Inc. has a 20% interest. Seek uses the equity method to account for its investment but has yet to make any journal entries related to its investment in Find for 2016. The financial statements of both companies as at December 31, 2016, are shown below. Seek Inc.

Find Corp.

$800,000 $400,000

$200,000 $100,000

INCOME STATEMENTS Sales Cost of Sales

Other Expenses Net Income

$200,000 $200,000

$60,000 $40,000

Miscellaneous Assets Inventory Investment in Find Total Assets

$600,000 $120,000 $180,000 $900,000

$300,000 $60,000 $360,000

Miscellaneous Liabilities Common Shares Retained Earnings, Jan 1 Net Income Total Liabilities & Equity

$160,000 $200,000 $340,000 $200,000 $900,000

$80,000 $100,000 $140,000 $40,000 $360,000

BALANCE SHEETS

During 2016, Seek sold merchandise totalling $120,000 to find and recorded a gross profit of 50% on these sales. At the end of 2016, Find's inventory contained $30,000 worth of merchandise purchased from Seek. Find also owed $50,000 to Seek at the end of 2016. Seek reports under the Accounting Standards for Private Enterprises (ASPE) and has elected to use proportionate consolidation method to report its investment in Find Corp. for 2016. Both companies are subject to 40% tax rate. 5) What is the total amount of intercompany pre-tax profits in ending inventory? A) $3,000

B) $20,000

C) $15,000

D) $30,000

Answer: A 6) What is the total amount of intercompany sales and purchases that must be eliminated from the

financial statements? A) $80,000

B) $20,000

C) $24,000

D) $120,000

Answer: C 7) What is the total amount of intercompany receivables to be eliminated from the financial

statements? A) $50,000

B) Nil

C) $40,000

D) $10,000

Answer: D 8) What is the total amount of deferred taxes that would appear on Seek's Consolidated Balance Sheet

as at December 31, 2016? A) $800

B) $8,000

C) $1,200

Answer: C

D) $6,000

9) What is the total amount of miscellaneous assets that would appear on Seek's Consolidated Balance

Sheet as at December 31, 2016? A) $900,000 B) $840,000

C) $650,000

D) $660,000

Answer: C 10) What is the total amount of inventory that would appear on Seek's Consolidated Balance Sheet as at

December 31, 2016? A) $360,000

B) $312,000

C) $132,000

D) $129,000

Answer: D 11) What is the total amount of sales that would appear on the Consolidated Income Statement? A) $816,000

B) $880,000

C) $1,000,000

D) $920,000

Answer: A 12) What is the total amount of cost of sales that would appear on the Consolidated Income Statement? A) $399,000

B) $396,000

C) $420,000

D) $500,000

Answer: A 13) What is the total amount of other expenses that would appear on the Consolidated Income

Statement? A) $248,000

B) $212,000

C) $200,000

D) $260,000

Answer: B 14) What is the amount of Consolidated Net Income for 2016? A) $208,000

B) $218,000

C) $216,000

D) $206,200

Answer: D 15) What is the amount of Consolidated Retained Earnings at December 31, 2016? A) $376,000

B) $368,000

C) $340,000

D) $546,200

Answer: D 16) What is the amount of non-controlling interest that would appear on Seek's December 31, 2016

Consolidated Balance Sheet? A) Nil B) $136,000

C) $180,000.

D) $144,000

Answer: A 17) What is the amount of miscellaneous liabilities that would appear on Seek's December 31, 2016

Consolidated Balance Sheet? A) $240,000 B) $176,000

C) $166,000

Answer: C

D) $230,000

18) According to GAAP, what is the key feature of a joint arrangement? A) The two largest equity contributors will have joint control over the venture. B) More than one venturer has a controlling interest in the joint arrangement. C) One venturer has a controlling interest in the joint arrangement. D) Joint control, namely, no one venturer can unilaterally control the venture regardless of the size

of the equity contribution. Answer: D 19) Which of the following requirements is in line with the requirements set out in IAS 28 Investments

in Associates and Joint Ventures for the treatment of unrealized gains and losses on non-monetary assets contributed to jointly controlled operations? A) The amounts are included in deferred gains or losses. B) No gain or loss can be recognized until the asset is put into use and the asset is generating revenues. C) The gain or loss must be eliminated against the underlying assets as a contra account. 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. Answer: C

John Inc and Victor Inc. formed a joint venture on January 1, 2016. John invested plant and equipment with a book value of $500,000 and a fair value of $800,000 for a 30% interest in the venture which was to be called Jinxtor Ltd. Victor contributed assets with a fair value of $2,000,000 (including $200,000 in cash) for its 70% stake in Jinxtor. Jinxtor reported a net income of $3,000,000 for 2016. John's plant and equipment were estimated to provide an additional 5 years of utility to Jinxtor. The transactions set out above were considered to be of commercial substance. 20) At what amount would John record its initial investment in Jinxtor? A) $740,000

B) $800,000

C) $240,000

D) $500,000

Answer: B 21) What is John's portion of any unrealized gain or loss arising from the transfer of John's assets to

Jinxtor on January 1, 2016? A) $90,000 B) $300,000

C) $210,000

D) Nil

Answer: A 22) What is Victor's portion of any unrealized gain or loss arising from the transfer of John's assets to

Jinxtor on January 1, 2016? A) $90,000 B) Nil

C) $210,000

D) $300,000

Answer: B 23) What is the amount of the amortization of the unrealized gain for 2016 arising from the transfer of

John's assets? A) $60,000

B) Nil

C) $42,000

Answer: D

D) $18,000

24) Assume that the facts provided above with respect to the Jinxtor joint venture remain unchanged

except that John receives $200,000 in return for investing its plant and equipment. What would be the recognizable gain on January 1, 2016 arising from John's investment in Jinxtor? A) $210,000 B) $90,000 C) $Nil D) $300,000 Answer: A 25) Assume that the facts provided above with respect to the Jinxtor joint venture remain unchanged

except that John receives $200,000 in return for investing its plant and equipment. What would be the amount of the unrealized gain? A) $67,500 B) $225,000 C) $142,500 D) Nil Answer: A 26) Assume that the facts provided above with respect to the Jinxtor Joint Venture remain unchanged

except that John receives $200,000 in return for investing its plant and equipment. What would be the realized portion of the gain for the year ended on December 31, 2016 arising from John's investment in Jinxtor? A) $28,500 B) $13,500 C) $60,000 D) Nil Answer: B 27) On December 31, 2017, 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 shall result in: A) a deferred tax liability of $2,000. B) a deferred tax asset of $400. C) a deferred tax asset of $2,000. D) a deferred tax liability of $400. Answer: B 28) On December 31, 2017, 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 $400. B) a deferred tax asset of $2,000. C) a deferred tax liability of $2,000. D) a deferred tax asset of $400. Answer: A

SNZ Inc. purchased machinery and equipment in the amount of $30,000 on January 1, 2016. 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 rate of 20%. The half-year rule applies. SNZ pays tax at a rate of 25%. 29) What is the tax basis of these assets on January 1, 2016? A) $22,800

B) $25,200

C) $30,000

Answer: C

D) $24,000

30) What is the amount of the temporary difference between straight line depreciation and capital cost

allowance on December 31, 2016? A) $3,000 B) $2,000

C) $1,500

D) Nil

Answer: C 31) What is the amount of the temporary difference between straight line depreciation and capital cost

allowance on December 31, 2017? A) $1,500 B) $5,400

C) $1,800

D) $3,600

Answer: B 32) What is the amount of the Deferred Tax Asset or Liability on December 31, 2016? A) a Deferred Tax Asset of $375

B) a Deferred Tax Asset of $1,500

C) a Deferred Tax Liability of $375

D) a Deferred Tax Liability of $1,500

Answer: C 33) What is the amount of the Deferred Tax Asset or Liability on December 31, 2017? A) a Deferred Tax Asset of $1,350

B) a Deferred Tax Liability of $1,350

C) a Deferred Tax Liability of $375

D) a Deferred Tax Asset of $1,675

Answer: B 34) Which of the following is not a requirement for a business component to be considered an Operating

Segment under current Canadian GAAP? A) The reportable income or loss must be at least 10% of the combined profit or loss for the combined entity. 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) It engages in business activities from which it may earn revenues and incur expenses. D) Discrete financial information must be available. Answer: A 35) 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 assets of all operating segments. B) 10% of all expenses are traced to the segment. C) 10% of the combined revenues of all operating segments. D) 10% or more of the 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. Answer: B

JNG Corp has 4 segments, the details of which are shown below. All figures are in thousands of dollars. Segment A B C D

Revenues $12 $60 $35 $200

Profits $6 $2 $10 $80

Assets $40 $80 $80 $20

36) Using only the Profit test, which of the following segment(s) would be reportable? A) A

B) B

C) C

D) C and D

Answer: D 37) Using only the Revenue test, which of the following segment(s) would be reportable? A) A

B) A, B, and D

C) C and D

D) B, C, and D

Answer: D 38) Using only the Assets test, which of the following segment(s) would be reportable? A) A

B) A, B, C and D

C) B, C and D

D) A, B and C

Answer: D 39) Using ALL of the applicable tests, which of the following segment(s) would be reportable? A) A

B) B, C and D

C) A, B, C and D

D) A, B and C

Answer: C 40) The implied value of a variable interest entity (VIE) at acquisition under Canadian GAAP is equal

to: A) the book value of the variable interest entity. B) the fair value of the non-controlling interest of the variable interest entity. C) the fair value of the consideration paid by the primary beneficiary plus the fair value of the

non-controlling interest of the variable interest entity. D) the fair value of the variable interest entity. Answer: C 41) Which of the following statements is correct concerning reporting interests in joint ventures in

compliance with the Accounting Standards for Private Enterprises (ASPE)? A) They must be reported using the same method used for reporting interests in subsidiaries. B) They must be reported using the equity method. C) They must be reported using the cost method. D) They must be reported using proportionate consolidation. Answer: A

42) Under which accounting standards is the reporting of the liabilities of operating segments required? A) It is required under IFRS. B) It is required under US GAAP. C) It is required under ASPE. D) It is required under IFRS only when this information is reported to the organization's chief

operating decision maker. Answer: D 43) 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? A) The name of the customer. B) The fact that sales to a single customer exceed 10% of total revenues. C) The operating segment reporting the revenues. D) The total amount of revenue from each such customer. Answer: A 44) Which of the following concerning the distinction between joint operations and joint ventures is

correct? A) A joint operation is always an unincorporated business; a joint venture is always an incorporated business. 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) 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. D) In a joint operation, all investors must share control; in a joint venture, investors holding a majority of voting rights may share control. Answer: C SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

Alcor and Vax Inc, both Canadian private companies, formed a joint venture on January 1, 2016 called Inventure Inc. Alcor and Vax each hold a 50% in the venture and share equally in any profits or losses arising from the venture. The following statements were prepared on December 31, 2016. Balance Sheets

Current Assets Investment in Inventure Fixed Assets Accumulated Depreciation

Alcor

Inventure

$40,000 $20,000 $200,000 ($80,000)

$20,000 $80,000 ($10,000) 8

Other Assets Total Assets

$50,000 $230,000

$60,000 $150,000

Current Liabilities Long-Term Debt Common Shares Retained Earnings, Jan 1 Net Income for the year Liabilities and Equity

$34,000 $20,000 $90,000 $56,000 $30,000 $230,000

$70,000 $30,000 $40,000 --$10,000 $150,000

Other Information: During 2016, Inventure purchased $10,000 from Alcor. Alcor recorded a gross profit of $2,000 on these sales. On December 31, 2016, Inventure's inventories contained half of the merchandise purchased from Alcor. Alcor uses the cost method to account for its Investment in Inventure and has elected to report its investment using proportionate consolidation. An income tax allocation rate of 20% applies. 45) Compute the consolidated net income for 2016. Do not prepare an Income Statement. Answer: First, we must calculate the realized/unrealized inventory profits.

Before Tax After Tax Alcor Selling to Inventure: On-Hand at year-end Gross Profit in Inventory Realized (50%)

$10,000 $5,000 $1,000 $500

Calculation of Consolidated Net Income: Alcor - Net Income

$30,000

Less: Unrealized Inventory Profit

($400)

Add: Inventure's Net Income: ($10,000 × 50%)

$5,000

Consolidated Net Income

$34,600

$400

46) Compute Alcor's Consolidated Retained Earnings as at December 31, 2016. Answer:

Alcor, Retained Earnings Balance, Jan 1: Add: Consolidated Net Income Consolidated Retained Earnings

$56,000 $34,600 $90,600

47) Prepare Alcor's Consolidated Balance Sheet as at December 31, 2016. Answer:

Alcor Inc. Consolidated Balance Sheet As at December 31, 2016 Current Assets Fixed Assets Accumulated Depreciation Other Assets Deferred Tax Asset Total Assets

$49,500 $240,000 ($85,000) $80,000 $100 $284,600

Current Liabilities Long-Term Debt Common Shares Retained Earnings Liabilities and Equity

$69,000 $35,000 $90,000 $90,600 $284,600

48) Prepare Alcor's Balance Sheet as at December 31, 2016, if Alcor elected to report its investment in

Inventure using the equity method. Answer: Alcor Inc. Consolidated Balance Sheet As At December 31, 2016 Current Assets Fixed Assets Accumulated Depreciation Other Assets Investment in Inventure Total Assets

$40,000 $200,000 ($80,000) $50,000 $24,600 $234,600

Current Liabilities Long-Term Debt Common Shares Retained Earnings Liabilities and Equity

$34,000 $20,000 $90,000 $90,600 $234,600

The following balance sheets have been prepared on December 31, 2016 for Clarke Corp. and Jensen Inc. Balance Sheets Clarke

Jensen

Cash Inventory Accounts Receivable Investment in Jensen Fixed Assets Accumulated Depreciation Total Assets

$30,000 $20,000 $70,000 $30,000 $180,000 $70,000 $200,000 $500,000 $90,000 ($280,000) ($30,000) $700,000 $180,000

Current Liabilities Long-Term Debt Common Shares Retained Earnings Liabilities and Equity

$120,000 $400,000 $90,000 $90,000 $700,000

$60,000 $20,000 $40,000 $60,000 $180,000

Additional Information: Clarke uses the cost method to account for its 50% interest in Jensen, which it acquired on January 1, 2013. On that date, Jensen's retained earnings were $20,000. The acquisition differential was fully amortized by the end of 2016. Clarke sold Land to Jensen during 2015 and recorded a $15,000 gain on the sale. Clarke is still using this Land. Clarke's December 31, 2016 inventory contained a profit of $10,000 recorded by Jensen. Jensen borrowed $20,000 from Clarke during 2016 interest-free. Jensen has not yet repaid any of its debt to Clarke. Both companies are subject to a tax rate of 20%. 49) Prepare a Consolidated Balance Sheet for Clarke on December 31, 2016 assuming that Clarke's

investment in Jensen is a control investment. Answer: Clarke Inc, Consolidated Balance Sheet as at December 31, 2016 Cash Accounts Receivable Inventory Fixed Assets (net) Deferred Tax Asset Total Assets

$50,000 $230,000 $90,000 $265,000 $5,000 $640,000

Current Liabilities Long-Term Debt Non-Controlling Interest Common Shares Consolidated Retained Earnings Liabilities and Equity

$160,000 $420,000 $46,000 $90,000 ($76,000) $640,000

50) Prepare a Consolidated Balance Sheet for Clarke on December 31, 2016 assuming that Clarke's

Investment in Jensen is a joint venture investment and is reported using proportionate consolidation. Answer: Clarke Inc, Consolidated Balance Sheet as at December 31, 2016 Cash Accounts Receivable Inventory Fixed Assets (net) Deferred Tax Asset Total Assets

$40,000 $205,000 $80,000 $242,500 $2,500 $570,000

Current Liabilities Long-Term Debt Common Shares Retained Earnings Liabilities and Equity

$140,000 $410,000 $90,000 ($70,000) $570,000

51) Prepare a Balance Sheet for Clarke on December 31, 2016 assuming that Clarke's Investment in

Jensen is a joint venture investment and is reported using the equity method. Answer: Clarke Inc, Balance Sheet as at December 31, 2016 Cash Accounts Receivable Inventory Fixed Assets (net) Investment in Jensen Total Assets

$30,000 $180,000 $70,000 $220,000 $40,000 $540,000

Current Liabilities Long-Term Debt Common Shares Retained Earnings Liabilities and Equity

$120,000 $400,000 $90,000 ($70,000) $540,000

52) Prepare a Balance Sheet for Clarke on December 31, 2016 in accordance with current Canadian

GAAP, assuming that Clarke's investment in Jensen is a significant influence investment and is reported using the equity method. Answer: Clarke Inc, Balance Sheet as at December 31, 2016 Cash Accounts Receivable Inventory Investment in Jensen Fixed Assets (net) Total Assets

$30,000 $70,000 $180,000 $34,000 $220,000 $534,000

Current Liabilities Long-Term Debt Common Shares Retained Earnings Total Liabilities and Equity

$120,000 $400,000 $90,000 ($76,000) $534,000

Globecorp International has six operating segments, the details of which are shown below. All figures shown are in thousands of dollars. Operating Segment A01 B02 C03 D04 E05 F06

Revenues $6,000 $4,800 $3,600 $1,800 $2,550 $900

Profits $1,050 $840 $720 $330 $405 $135

Assets $12,000 $10,500 $7,500 $4,500 $4,200 $1,800

53) Using ONLY the operating profit test, determine which of the operating segments require separate

disclosures. Answer: Total profits of those segments making a profit add up to $3,480. Only segments A01, B02, C03 and E05 are reportable as their profits exceed $348. 54) Using ONLY the revenues test, determine which of the operating segments require separate

disclosures. Answer: Total revenues add up to $19,650. Only segments A01, B02, C03 and E05 are reportable as their revenues exceed $1,965. 14

55) Using ONLY the assets test, determine which of the following segments require separate

disclosures. Answer: Total assets add up to $40,500. Segments A01, B02, C03, D04 and E05 are reportable as their assets exceed $4,050. 56) The following are the 2016 Income Statements of Roller Corp and Larmer Corp.

Income Statements For the Year Ended December 31, 2016 Roller

Larmer

Sales Other Income Gain on Sale of Land

$900,000 $60,000 ---

$360,000 $21,000 $30,000

Cost of Sales Operating Expenses Depreciation Expense Income Tax

$420,000 $150,000 $30,000 $120,000

$168,000 $90,000 $39,000 $45,000

Net Income

$240,000

$69,000

Other Information: During 2016 Larmer paid dividends of $24,000. Roller acquired its 30% stake in Larmer at a cost of $400,000 and uses the cost method to account for its investment. The acquisition differential amortization schedule showed the following write-off for 2016: Machinery and Equipment Goodwill Impairment Loss Long-Term Liabilities

$10,000 $5,000 ($3,000)

Acquisition Differential Amortization - 2016

$12,000

During 2016, Larmer paid rent to Roller in the amount of $12,000, which Roller has recorded as other income. In 2015, Roller sold Land to Larmer and recorded a profit of $10,000 on the sale. During 2016, Larmer sold the land to a third party. Both companies are subject to a 40% tax rate. 15

Required: Prepare Roller Inc's 2016 income statement, assuming that Larmer is considered to be a joint venture and is reported using the equity method. Answer: Roller Inc. Income Statement for the Year ended December 31, 2016 Sales Other Income ($60,000 - 30% × $24,000) Investment Income ($69,000 × 30% - $12,000 + $10,000 × 60% × 30%)

$900,000 $52,800 $10,500

Cost of Sales Operating Expenses Depreciation Expense Income Tax

$420,000 $150,000 $30,000 $120,000

Net Income

$243,300

57) 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:

Inventory Accounts Receivable Land Buildings Equipment Accounts Payable

Fair Market Value $80,000 $100,000 $200,000 $300,000 $250,000 $70,000

Tax Basis $80,000 $ ---$200,000 $200,000 $200,000 $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%.

Answer:

Fair Market Value $80,000 $100,000 $200,000 $300,000 $250,000 $70,000

Inventory Accounts Receivable Land Buildings Equipment Accounts Payable Total Difference

$1,000,000

Deferred Tax Liability (50%)

Tax Basis Difference $80,000 $ --$ --$100,000 $200,000 $ --$200,000 $100,000 $200,000 $50,000 $70,000 $ --$750,000

$250,000 $125,000

Calculation of Goodwill: Purchase Price

$1,200,000

Less: Fair Value of Assets Acquired: Allocation to Deferred Tax Liability

($1,000,000) ($125,000)

Goodwill

$75,000

The following amounts would be used to prepare the Consolidated Balance Sheet: Inventory Accounts Receivable Land Buildings Equipment Accounts Payable Goodwill Deferred Liability Investment Account

$80,000 $100,000 $200,000 $300,000 $250,000 $70,000 $75,000 $125,000 $810,000

58) ABC invested $30 million in cash in DEF Inc, which was determined to be a VIE whose primary

beneficiary is ABC Inc. The balance sheet of DEF on the acquisition date January 1, 2016 is shown below (all figures in millions $$):

Cash Capital Assets Total Assets

Book Value Fair Value $30 $30 $90 $100 $120 $130

Liabilities Owner's Equity ABC Non-Controlling Interest: Total Liabilities & Equity:

$50

$40 $30 $120

The fair value of DEF's non-controlling interest is $55. Required: Prepare the journal entry required for consolidation purposes on the date of acquisition assuming current Canadian GAAP. Answer:

Total Implied Value of DEF Amount Invested FMV of NCI

$30 $55 $85

Assessed Value of DEF's Net Assets: Carrying value of amount invested by ABC: Fair Value of DEF's own assets Less: Fair Value of DEF's liabilities

$30 $100 ($50)

Total Assessed Value:

($80)

Difference between Implied & Assessed Values (Goodwill)

Journal Entry: Goodwill Cash Capital Assets Liabilities

Debit $5 $30 $100

Credit

$50 18

Non-Controlling Interest Investment in DEF

$55 $30

59) X Ltd. and Y Ltd. formed a joint venture on joint venture called XY Inc. on January 1, 2018. X Ltd.

Invested 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, 2018, XY Inc. reported a net income of $612,000. The equipment transferred has an estimated useful life of 20 years. Ignore taxes. Calculate the gain on the contribution of equipment and prepare the journal entries to record the events on January 1 and December 31, 2018. Also calculate under the equity method X Ltd.'s share of net income and the amount it will recognize. Answer:

Fair value of equipment transferred to XY Inc. Carrying value of the equipment on X's books Unrealized gain on the transfer to XY Inc. To be netted against investment account

$2,100,000 $ 600,000 $1,500,000

The journal entry to record the initial investment on January 1, 2018 is as follows: Investment in XY Inc. Equipment Unrealized gain-contra account

$2,100,000 $600,000 $1,500,000

Equity pickup: Investment in XY Inc. (50% of net income) Equity earnings from JV

$306,000

Unrealized gain-contra account Gain on transfer of equipment ($1,500,000 / 20 years)

$75,000

$306,000

$75,000

60) X Ltd. and Y Ltd. formed a joint venture on joint venture called XY Inc. on January 1, 2018. X Ltd.

Invested 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, 2018, XY Inc. reported a net income of $612,000. The equipment transferred has an estimated useful life of 20 years. Ignore taxes. The same facts apply, but in this case assume that X Ltd. Receives a 50% interest plus $390,000 in 19

cash (which was contributed by the other joint venturer). Record the contribution of assets, the share of earnings and the realization of the gain on transfer. Answer: With the cash provided a portion of the equipment is now considered to have been sold. Sales proceeds Carry value of equipment sold ($390,000 / $2,100,000 × ($600,000))

$390,000

Immediate gain on sale

$278,571

$111,429

The journal entries to record the events during the year are: Contribution of equipment Cash Investment in XY Inc. Equipment Gain on transfer to XY Inc. Unrealized gain-contra account

$390,000 $1,710,000 $600,000 $278,571 $832,599

Year-end entries Investment in XY Inc. (50% of net income) Equity earnings from XY Inc.

$306,000

Unrealized gain-contra account (832,599/20) Gain on transfer of equipment to XY Inc.

$41,630

$306,000

$41,360

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is NOT currently a cause of fluctuation in foreign exchange rates? A) Inflation rates. B) Interest rates. C) Trade surpluses and deficits. D) The pegging of a currency to the American (U.S.) dollar. Answer: D 2) Which of the following statements is correct? A) 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. B) 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. C) 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. D) 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. Answer: B 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 forward rate. B) The spot rate. C) The average rate. D) The closing rate. Answer: B 4) At the balance sheet date, monetary items denominated in a foreign currency should be adjusted to

reflect the exchange rate in effect at the: A) time the sale was recorded. C) balance sheet date.

B) time of settlement of the contract. D) time of payment.

Answer: C

On July 1, 2018, CDN purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of US$1,000. CDN's year end is on July 31. 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, 2018: Year end: July 31, 2018: Settlement date: August 31, 2018:

1 U.S. Dollar = CDN$0.82 1 U.S. Dollar = CDN$0.81 1 U.S. Dollar = CDN$0.805

5) What was the cost to CDN of the amount paid to RNB on the settlement date? A) US$820.

B) CDN$820.

C) CDN$810.

D) CDN$805.

Answer: D 6) At what amount would CDN record its inventory purchase from RNB at the time of purchase? A) US$820.

B) CDN$810.

C) CDN$820.

D) CDN$805.

Answer: C 7) At what amount would CDN record its liability to RNB at the time of purchase? A) CDN$810.

B) CDN$805.

C) CDN$820.

D) US$820.

Answer: C 8) What would be the amount of the foreign exchange gain or loss recorded at the balance sheet date? A) A CDN$15 exchange loss.

B) A CDN$10 exchange gain.

C) Nil.

D) A CDN$10 exchange loss.

Answer: B 9) What would be the amount of the foreign exchange gain or loss recorded at the settlement date? A) A CDN$15 exchange loss.

B) A CDN$10 exchange gain.

C) A CDN$10 exchange loss.

D) A CDN$5 exchange gain.

Answer: D

On January 1, 2019, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full payment of these goods due by February 28, 2019. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below. Transaction Date: January 1, 2019 Year-End Date: January 31, 2019 Settlement Date: February 28, 2019

US $1 = CDN $1.141 US $1 = CDN $1.142 US $1 = CDN $1.145

The invoice price billed by CMI was US$120,000. 10) At what value would CMI record the initial sale to its American distributor? A) CDN$120,000.

B) CDN$105,171

C) CDN$136,920.

D) US$120,000

Answer: C 11) What is the amount of CMI's foreign exchange gain or loss at year-end? A) Nil.

B) CDN$120 loss.

C) CDN$480 gain.

D) CDN$120 gain.

Answer: D 12) What is the amount of cash (in Canadian funds) received by CMI on the settlement date? A) CDN$136,920.

B) CDN$137,040.

C) CDN$137,880.

D) CDN$137,400.

Answer: D 13) What is the amount of CMI's foreign exchange gain or loss on February 28th? A) CDN$120 gain.

B) CDN$480 gain.

C) CDN$360 loss.

D) CDN$360 gain.

Answer: D 14) What is the total amount of CMI's foreign exchange gain or loss on this transaction? A) CDN$360 gain.

B) CDN$120 gain.

C) CDN$360 loss.

D) CDN$480 gain.

Answer: D 15) Which of the following statements accurately describes the manner in which transactions must be

translated under IAS 21 The Effects of Changes in Foreign Exchange Rates? A) All individual transactions may be reported into the currency of the country where the corporation does the majority of its business. 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 must be translated into the functional currency of the reporting entity. Answer: D

16) Which of the following statements is correct? A) The spot rate is the rate on the date of the transaction and the relevant forward rate is the

exchange rate used at the end of the reporting period. B) The historical rate is the exchange rate on the date of the transaction and the closing rate is the

rate on which any hedge transactions mature. C) 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. D) None of the above are correct. Answer: C 17) 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? A) As a contra account to be fully disclosed and to show the impact of foreign exchange differences. B) The differences should be included in the calculation of other comprehensive income. C) As an item to be included in income or loss for the year. D) As a reduction or increase in the carry cost of the asset. Answer: B

XYZ Corp. has a calendar year end. On January 1, 2016, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2019 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan: January 1, 2016 December 31, 2016 December 31, 2017 December 31, 2018 December 31, 2019

US $1 = CDN $1.1500 US $1 = CDN $1.1490 US $1 = CDN $1.1485 US $1 = CDN $1.1483 US $1 = CDN $1.1487

The average rates in effect for 2016 and 2017 were as follows: 2016: US $1 = CDN $1.1493 2017: US $1 = CDN $1.1487 18) At what amount (in Canadian Dollars) would XYZ record its initial Loan Liability on January 1,

2016? A) $5,750,000.

B) $5,471,500.

C) $5,747,500.

Answer: A

D) $5,476,500.

19) What is the amount of interest expense (in Canadian Dollars) recorded for 2016? A) $250,000.

B) $372,500.

C) $287,250.

D) $287,325.

Answer: D 20) What is the amount of interest paid (in Canadian Dollars) during 2016? A) $287,325.

B) $372,500.

C) $287,250.

D) $250,000.

Answer: C 21) What is the amount of the foreign exchange gain or loss recognized on the 2016 Income Statement

as a result of revaluing the loan payable? A) A CDN$5,000 gain. C) A CDN$5,000 loss.

B) A CDN$10,000 gain. D) A CDN$10,000 loss.

Answer: A 22) By what amount (in Canadian Dollars) would XYZ have to adjust its Loan Liability on December

31, 2016 as a result of the year's foreign exchange rate fluctuations? A) A $5,000 decrease. B) A $5,000 increase. C) A $2,500 decrease D) Nil. Answer: A 23) What is the amount of interest paid (in Canadian Dollars) during 2017? A) $287,330.

B) $372,500.

C) $250,000.

D) $287,125.

Answer: D 24) What is the amount of interest expense (in Canadian Dollars) recorded for 2017? A) $287,250.

B) $250,080.

C) $249,920.

D) $287,175.

Answer: D 25) What is the amount of foreign exchange gain or loss recognized on the 2017 Income Statement as a

result of revaluing the loan payable? A) $800 loss. B) $800 gain.

C) $2,500 gain.

D) $2,500 loss.

Answer: C 26) By what amount (in Canadian Dollars) would XYZ have to adjust its Loan Liability on December

31, 2017 as a result of the year's foreign exchange rate fluctuations? A) $3,500 decrease. B) Nil. C) $2,500 increase.

D) $2,500 decrease.

Answer: D 27) Which of the following would NOT be considered a foreign exchange hedge? A) The placement of large amounts of Canadian funds with a bank in Zurich, Switzerland. B) A foreign currency futures contract. C) A forward exchange contract. D) A foreign currency option contract. Answer: A

RXN's year-end is on December 31. On November 1, 2017 when the U.S. dollar was worth CDN$1.165, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2018. On December 1, the spot rate was CDN$1.1450 and the three-month forward rate was CDN$1.1250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a contract with its bank on December 1, 2017 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.16 and the forward rate from December 31, 2017 to March 1, 2018 was CDN$1.14. On March 1, 2018, RXN received the US$300,000 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. Significant dates and exchange rates pertaining to this transaction are as follows: Transaction date: Spot rate:

November 1, 2017. US$1 = CDN$1.165.

Hedged date: Spot rate:

December 1, 2017. US$1 = CDN$1.145.

Year-end: Spot rate:

December 31, 2017. US$1 = CDN$1.16.

Settlement date: Spot rate:

March 1, 2018. US$1 = CDN$1.168.

28) Atwhat amount (in Canadian Dollars) would RXN's sale be recorded initially? A) $343,500.

B) $349,500.

C) $350,400.

D) $348,000.

Answer: B 29) What is the amount of RXN's foreign exchange gain or loss prior to its hedge? A) A CDN$4,500 gain.

B) A CDN$6,000 loss.

C) Nil.

D) A CDN$6,000 gain.

Answer: B 30) Atwhat amount (in Canadian Dollars) would the forward contract with the bank be recorded, if

recorded gross? A) $347,500.

B) $337,500.

C) $349,500.

D) $343,500.

Answer: B 31) How much (in Canadian Dollars) will RXN expect to receive from the bank when its forward

contract is settled? A) $349,500.

B) $343,500.

C) $347,500.

Answer: D

D) $337,500.

32) What is the amount of the discount on the forward contract? A) CDN$1,000.

B) CDN$6,000.

C) CDN$3,000.

D) CDN$1,500.

Answer: B 33) Assuming that the accounts receivable balance was not adjusted on December 1, 2017, what

adjustment (if any) would be required to RXN's year-end accounts receivable balance? A) A CDN$1,500 decrease. B) A CDN$3,000 decrease. C) A CDN$3,000 increase. D) No adjustment is required. Answer: A 34) What is the amount of the exchange gain or loss from the recognition of the hedge discount

recognized during 2017? A) Nil. C) A loss of CDN$4,500.

B) A gain of $ CDN4,500. D) A loss of CDN$3,000.

Answer: A

On July 1, 2017, when the spot rate was US$1 = CDN$1.1445, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of September, with payment to be made in full on November 15, 2017. 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$1.1625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplies. The merchandise was received on October 1, 2017, when the spot rate was US$1 = CDN$1.1575. On October 31, the company's year-end, the spot rate was $1.1690. North purchased the U.S. dollars to pay its supplier on November 15, 2017 when the spot rate was CDN$1.1725. The forward rate to November 15, 2017, was CDN$1.165 on October 1 and CDN$1.17 on October 31. 35) What is the journal entry required to record the ordering of North's merchandise? A) No entry is required. B)

Merchandise Inventory Accounts Payable

Debit CDN$686,700

Credit CDN$686,700

Merchandise Inventory Accounts Payable

Debit CDN$701,400

Credit CDN$701,400

Merchandise Inventory Accounts Payable

Debit CDN$697,500

Credit CDN$697,500

Answer: A 36) What is the amount of the forward contract in Canadian dollars? A) $697,500.

B) $703,500.

C) $701,400.

D) $686,700.

Answer: A 37) What is the amount of the liability to the bank recorded on the commitment date if the forward

contract is recorded using the gross method? A) CDN$697,500. B) CDN$701,400. Answer: A

C) CDN$703,500.

D) CDN$686,700.

38) 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) An asset of CDN$10,800. C) An asset of CDN$6,000.

B) A liability of CDN$6,000. D) Nil.

Answer: D 39) At what amount would North record its inventory when received from its supplier, if the exchange

gain or loss is adjusted to the value of the inventory on the transaction date? A) CDN$694,500. B) CDN$696,000. C) CDN$693,000.

D) CDN$686,700.

Answer: A 40) What is the amount of North's recognized exchange gain or loss arising from this transaction

included in its financial statements as at October 31, 2017? A) CDN$3,900 gain . B) CDN$3,000 gain. C) Nil. D) CDN$3,900 loss. Answer: D 41) What amount (in Canadian dollars) did North pay to its American supplier for the purchase of the

inventory? A) $697,500.

B) $686,700.

C) $703,500.

D) $694,500.

Answer: C 42) IAS 39 Financial Instruments: Recognition and Measurement on speculative forward exchange

contracts requires that the contract be: A) revalued at fair value throughout its life with any gains or losses to be taken into income as they occur. B) revalued using spot rates throughout its life with any gains or losses to be deferred and amortized as they occur. C) valued using spot rates throughout its life with any gains or losses to be taken into income as they occur. D) revalued at fair value throughout its life with any gains or losses to be deferred and amortized as they occur. Answer: A

ABC Inc. sells thermal compressors throughout the world. On January 1, 2016, the company sold 500 compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 = CDN$1.1750. Payment on the invoice was due by May 1, 2016. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.20 on January 2, 2016. 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 2016, the spot rate in effect was CDN$1.1825 and the forward rate to May 1, 2016 was CDN$1.1950. ABC received payment from its supplier on May 1, 2016 when the spot rate was US$1 = CDN$1.1975. 43) What is the amount of the forward contract in Canadian dollars? A) $70,950.

B) $70,500.

C) $72,000.

D) $71,850.

Answer: C 44) What amount (in Canadian dollars) should ABC expect to receive from its bank on May 1, 2016? A) $71,850.

B) $70,500.

C) $70,950.

D) $72,000.

C) $450.

D) CDN$1,500.

Answer: D 45) What is the amount of the premium on this contract? A) Nil.

B) $900.

Answer: D 46) What is the required adjustment to ABC's accounts receivable at year-end as a result of this

transaction? A) CDN$900 increase. C) CDN$450 decrease.

B) CDN$450 increase. D) Nil.

Answer: B 47) What is the required adjustment to the carrying value of the forward contract at the company's

year-end? A) Nil. C) CDN$375 increase.

B) CDN$300 increase. D) CDN$300 decrease.

Answer: D 48) Which of the following statements is NOT correct? A) 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. B) 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. C) 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. D) The gain or loss on the hedging instrument in a fair value hedge is initially recognized in other comprehensive income and transferred to profit and loss when the hedged item has be revalued for accounting purposes in accordance with IFRS. Answer: D 10

49) In which of the following situations is a gain or loss recorded on a commitment assets or liability

which would not otherwise be recorded? A) A fair value hedge of a recognized monetary item. B) A cash flow hedge of a forecasted transaction. C) A fair value hedge of a firm commitment. D) A speculative forward contract. Answer: C 50) 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 Canadian dollars with repayment due at the end of the five years. B) Borrowing in the foreign currency with annual repayments equal to the expected annual revenue cash flows. C) Borrowing in the foreign currency with repayment due at the end of the five years. D) Borrowing in Canadian dollars with annual repayments equal to the expected annual revenue cash flows. Answer: B

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

Compucat 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 2016, 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 Compucat's foreign currency denominated receivables and payables are hedged with contracts with the company's bank. Compucat's year-end is on December 31. The following transactions took place in 2016: On September 1, 2016, Compucat purchased components from its German supplier for 100,000 Euros. On that date AMC entered into a forward contract for 100,000 Euros at the 60 day forward rate of 1 Euro = CDN$1.50. The forward contract was designated as a fair value hedge of the amount payable to the German supplier. Compucat settled with the bank and paid its supplier in full on December 1, 2016. On December 1, 2016 Compucat also shipped a batch of laptop computers to an American client for US$250,000. The invoice required that Compucat receive its payment in full by January 31, 2016. On the date of the sale, the company entered into a forward contract for US$250,000 at the two-month forward rate of US$1 = CDN$1.25. 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.

September 1, 2016: December 1, 2016: December 31, 2016:

Spot rate 1 Euro = CDN$1.4875 1 Euro = CDN$1.4800 US$1 = CDN$1.2600 US$1 = CDN$1.2700

Forward rate 1 Euro = CDN$1.5000 US$1 = CDN$1.2500 US$1 = CDN$1.2600

51) Prepare the 2016 journal entries to record the above transactions. In addition, prepare any adjusting

journal entries that you deem necessary. Answer:

September 1, 2016 Inventory Accounts Payable [ 100,000 Euros × 1.4875 spot rate = CDN$148,750 ]

Debit Credit $148,750 $148,750

Forward Contract Payable to Bank [ 100,000 Euros × 1.50 forward rate = CDN$150,000 ]

$150,000

December 1, 2016 Accounts Receivable Sales

$150,000

$315,000 $315,000 12

[ US$250,000 × 1.26 spot rate = CDN$315,000 ] Receivable from Bank Forward Contract [ US$250,000 × 1.25 forward rate = CDN$312,500 ]

$312,500 $312,500

Accounts payable Exchange gain [ 100,000 Euros × (1.4875 September 1 spot rate - 1.48 December 1 spot rate) ]

$750

Exchange loss Forward contract [ 100,000 Euros × (1.50 September 1 forward rate - 1.48 December 1 spot/forward rate) ]

$2,000

$750

$2,000

Payable to Bank Cash

$150,000

Cash (Euros) Forward Contract [ 100,000 Euros × 1.48 ]

$148,000

Accounts Payable Cash [ 100,000 Euros × 1.48 ]

$148,000

$150,000

$148,000

December 31, 2016 Accounts receivable Exchange gains [ US$250,000 × (1.26 December 1 spot rate - 1.27 December 31 spot rate) ] Exchange loss Forward contract [ US$250,000 × (1.25 December 1 forward rate - 1.26 December 31 forward rate) ]

$2,500 $2,500

52) Prepare the December 31, 2016 Balance Sheet Presentation of the Receivable from the American

client and the accounts associated with the hedge. Answer: Compucat Inc. Balance Sheet as at December 31, 2016 Assets Accounts Receivable [US$250,000 × 1.27 spot rate] Liabilities Forward contract

$317,500

$1,250*

* Receivable from Bank (US$250,000 @ $1.25) Less: Forward Contract (US$250,000 @ $1.26) Deferred Foreign Exchange Credit

$312,500 $315,000 $2,500

Canada Corp. sells raw lumber to a number of countries around the world. On December 1, 2016 the company shipped some lumber to a client in Japan. The selling price was established at 500,000 Yen with payment to be received on March 1, 2017. On December 3, 2016 the company 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 Corp received the payment from its Japanese client on March 1, 2017. Canada Corp's year end is on December 31. Selected spot rates were as follows: December 1, 2016: December 3, 2016: December 31, 2016: March 1, 2017:

1 Yen = CDN$1.155 1 Yen = CDN$1.155 1 Yen = CDN$1.1625 1 Yen = CDN$1.1750

The two-month forward rate on December 31, 2016 was 1Yen = CDN$1.1800.

53) Prepare any and all journal entries arising from this transaction. Answer:

December 1, 2016 Accounts Receivable Sales [ 500,000 Yen × 1.155 spot rate = CDN$577,500 ]

Debit $577,500

Receivable from Bank Forward Contract [ 500,000 Yen × 1.185 forward rate = CDN$592,500 ]

$592,500

December 31, 2016 Accounts Receivable Exchange Gain

Credit $577,500

$592,500

$3,750 $3,750

Forward contract Exchange gain

$2,500 $2,500

March 1, 2017 Accounts receivable Exchange gain

$6,250 $6,250

Forward Contract Exchange Gain

$2,500 $2,500

Cash - Yen Accounts Receivable [ 500,000 Yen × 1.175 spot rate = CDN$587,500 ]

$587,500

Forward contract Cash - Yen Cash Receivable from Bank

$587,500

$587,500 $592,500 $592,500

54) Prepare a partial Balance Sheet for Canada Corp on December 31, 2016 showing the account

receivable from the Japanese client as well as the accounts associated with the hedge. Answer: Canada Corp. Balance Sheet as at December 31, 2016 Assets Accounts Receivable [500,000 Yen × 1.1625 spot rate] Forward contract

$581,250 $1,250*

* Forward Contract Less: Receivable from Bank Deferred Foreign Exchange Debit

$590,000 $592,500 $2,500

55) Prepare the journal entries to record the receipt of the 500,000 Yen on March 1, 2017, assuming that

Canada Corp did not enter into a hedge transaction in December 2016. Answer:

Cash - Yen Exchange gain Accounts receivable

$587,500

Cash Cash -Yen

$587,500

$ 6,250 $581,250

$587,500

On January 1, 2014, GRL Inc. purchased, in U.S. Funds $500,000 of Bonds of the OBY Company. On that date, the Bonds were trading at par. These Bonds pay 10% interest annually each December 31. The Bonds mature on December 31, 2016. The following exchange rates were applicable between 2014 and 2016. The rates indicate the cost (in Canadian dollars) of purchasing 1 U.S. dollar: January 1, 2014 Average rate for 2014 December 31, 2014 Average rate for 2015 December 31, 2015 Average rate for 2016 December 31, 2016

CDN $1.4565 CDN $1.4570 CDN $1.4725 CDN $1.4600 CDN $1.4425 CDN $1.4500 CDN $1.4575

56) Prepare GRL's journal entries for each of 2014, 2015 and 2016. Answer:

January 1, 2014 Investment in Bonds Cash [ US$500,000 × 1.4565 spot rate = CDN$728,250 ] December 31, 2014 Cash Exchange loss Interest Revenue

$728,250 $728,250

$72,850 $775 $73,625

Investment in Bonds Exchange Gain [ US$500,000 × (1.4565 - 1.4725) = CDN$8,000 ] December 31, 2015 Cash Exchange gain Interest Revenue

$8,000 $8,000

$72,125 $2,125 $70,000

Exchange Loss Investment in Bonds [ US$500,000 × (1.4725 - 1.4425) = CDN$15,000 ] December 31, 2016 Cash Exchange gain Interest Revenue

$15,000 $15,000

$72,875 $375 $72,500

Investment in Bonds Exchange Gain [ US$500,000 × (1.4425 - 1.4575) = CDN$7,500 ]

$7,500 $7,500

57) Compute the carrying value of the investment at the end of each year: Answer:

2014: ($728,250 + $8,000) or ($500,000 @ $1.4725) 2015: ($736,250 - $15,000) or ($500,000 @ $1.4425) 2016: ($721,250 + $7,500) or ($500,000 @ $1.4575)

$736,250 $721,250 $728,750

Prairie Dog Inc. borrowed US$10,000,000 on January 1, 2014 at an annual rate of 8%. The loan is due December 31, 2017 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, 2014 December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017

CDN $1.4415 CDN $1.4325 CDN $1.4575 CDN $1.4435 CDN $1.4525

Assume that the average annual exchange rate was equal to the December 31st spot rates. 58) Prepare the journal entries for 2014. Answer:

January 1, 2014 Cash Loan Payable [US$10,000,000 × 1.4415 spot rate = CDN$14,415,000] December 31, 2014 Interest Expense Cash [US$10,000,000 × 8% × 1.4325 spot rate = CDN$1,146,000] Loan Payable Exchange Gain [US$10,000,000 × (1.4415 - 1.4325) = CDN$90,000]

$14,415,000 $14,415,000

$1,146,000 $1,146,000

$90,000 $90,000

59) 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. Answer:

Date January 1, 2014 December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 Total Gain (Loss)

Exchange Rate CDN $1.4415 CDN $1.4325 CDN $1.4575 CDN $1.4435 CDN $1.4525

Gain (Loss) $90,000 ($250,000) $140,000 ($90,000) ($110,000)

On July 1, 2016, Great White North (GWN) Inc. purchased merchandise from a supplier in the U.S. for US$800,000 with terms requiring full payment by October 31, 2016. On July 2, GWN entered into a forward contract to purchase US$800,000 on October 31, 2016 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, GWN paid its supplier in full. Selected dates and spot rates are shown below: July 1, 2016 July 31, 2016 October 31, 2016

CDN $1.2150 CDN $1.2175 CDN $1.22

GWN has a July 31st year end. On that date the forward rate for US dollars for three months was CDN $1.2225. 60) Prepare any and all journal entries you deem necessary to record the above transaction. Answer:

July 1, 2016 Inventory Accounts Payable [US$800,000 × 1.215 spot rate = CDN$972,000] July 2, 2016 Forward Contract Payable to Bank [US$800,000 × 1.2275 forward rate = CDN$982,000] July 31, 2016 Exchange Gains and Losses Accounts Payable

$972,000 $972,000

$982,000 $982,000

$2,000 $2,000

Exchange Gains and Losses Forward Contract

$4,000 $4,000

October 31, 2017 Exchange Gains and Losses Accounts Payable

$2,000 $2,000

Exchange Gains and Losses Forward Contract

$2,000 $2,000

Payable to Bank Cash

$982,000

Cash - U.S. Dollars Forward Contract [US$800,000 × 1.22 spot rate = CDN$976,000]

$976,000

Accounts Payable Cash - U.S. Dollars

$976,000

$982,000

$976,000

61) Prepare a July 31, 2016 Partial Trial Balance, indicating how each account balance would appear on

the company's financial statements. Answer:

Partial Trial Balance: Inventory (if not yet sold) Accounts Payable Exchange gains and losses

Debit $972,000

Forward Contract (U.S. dollars) Payable to Bank

$978,000

Totals

$6,000

Credit B/S $974,000 B/S I/S

$982,000 $1,956,000 $1,956,000

The forward contract and amount payable to the bank will be shown as a net $4,000 liability on the balance sheet at July 31, 2016.

62) Prepare the journal entries assuming that no forward contract was entered into. Answer:

Debit July 1, 2016 Inventory Accounts Payable [US$800,000 × 1.215 spot rate = CDN$972,000] July 31, 2016 Exchange Loss Accounts Payable [US$800,000 × (1.215 - 1.2175) = CDN$2,000] October 31, 2017 Exchange Loss Accounts Payable [US$800,000 × (1.2175 - 1.22) = CDN$2,000]

Credit

$972,000 $972,000

$2,000 $2,000

Cash - U.S. Dollars Cash [US$800,000 × 1.22 spot rate = CDN$976,000]

$976,000

Accounts Payable Cash - U.S. Dollars

$976,000

Maplehauff Inc. sells lumber to a number of clients around the world. On December 1, 2015 the company shipped some lumber to a client in the U.S. The selling price was established at US$600,000 with payment to be received on March 1, 2016. On December 3, 2015 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of US$1 = CDN$1.275. The forward contract was designated as a fair value hedge of the amount due from the American customer. Maplehauff Inc. received the payment from its American client on March 1, 2016. The company's year-end 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: December 1, 2015: December 3, 2015: December 31, 2015: March 1, 2016:

US$1 = CDN$1.2355 US$1 = CDN$1.2355 US$1 = CDN$1.2455 US$1 = CDN$1.2480

63) Prepare any and all journal entries arising from this transaction. Answer:

Debit December 1, 2015 Accounts Receivable Sales [US$600,000 × 1.2355 spot rate = CDN$741,300] December 3, 2015 Receivable from Bank Forward Contract [US$600,000 × 1.275 forward rate = CDN$765,000] December 31, 2015 Accounts Receivable Exchange Gain [US$600,000 × (1.2355 - 1.2455) = CDN$6,000] Forward contract Exchange gain [US$600,000 × (1.275 - 1.255) = CDN$12,000] March 1, 2016 Accounts receivable Exchange gain [US$600,000 × (1.2455 - 1.248) = CDN$1,500] 22

Credit

$741,300 $741,300

$765,000 $765,000

$6,000 $6,000

$12,000 $12,000

$1,500 $1,500

Forward Contract Exchange Gain [US$600,000 × (1.255 - 1.248) = CDN$4,200]

$4,200

Cash - U.S. Dollars Accounts Receivable [US$600,000 × 1.248 spot rate = CDN$748,800]

$748,800

Cash Receivable from Bank [US$600,000 × 1.275 contracted forward rate = CDN$765,000]

$765,000

Forward contract Cash - U.S. Dollars [US$600,000 × 1.248 spot rate = CDN$748,800]

$748,800

$4,200

$748,800

$765,000

$748,800

64) Prepare a partial Balance Sheet for Maplehauff Inc. on December 31, 2015 showing the Account

Receivable from the American client as well as the accounts associated with the hedge. Answer: Maplehauff Inc. Balance Sheet as at December 31, 2015 Assets Accounts Receivable [US$600,000 × 1.2355] Forward contract

$741,300 $12,000*

* Forward Contract Less: Receivable from Bank Net foreign exchange position (dr)

$753,000 $765,000 $12,000

65) Prepare the journal entries to record the receipt of the US$600,000 on March 1, 2016, assuming that

Maplehauff Inc did not enter into a hedge transaction in December 2015. Answer:

Cash - U.S. Dollars [US$600,000 × 1.248 March 1 spot rate = CDN$748,800] Exchange Gain [US$600,000 × (1.248 - 1.2455) = CDN$4,200] Accounts Receivable [US$600,000 × 1.2455 December 31 spot rate = CDN$748,800]

$748,800

Cash Cash - U.S. Dollars [US$600,000 × 1.248 spot rate = CDN$748,800]

$748,800

$1,500 $747,300

$748,800

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Under the functional currency translation (FCT) method, which of the following statements is

correct? A) A net asset exposure is most likely. B) A single historic rate is used to translate all income statement items. C) Historic rates are used to translate most non-monetary items. D) The relationship of balance sheet items is best preserved. Answer: C 2) Under the presentation currency translation (PCT) method, which of the following statements is

correct? A) Income statement items are translated using average rates. B) Income statement items are translated using a mix of rates. C) Transaction exposure is greatest. D) The relationship of balance sheet items is best preserved. Answer: D 3) For a self-sustaining foreign operation (i.e., the functional currency of the foreign operation is

different than the parent), exchange gains and losses are to be included in or along with: A) the acquisition differential amortization. B) an exchange account. C) other comprehensive income. D) non-controlling interest. Answer: C 4) If the functional currency of the foreign entity is the same as the parent's functional currency, which

of the following statements is correct? A) The foreign entity is classified as self-sustaining. B) The foreign entity is classified as integrated. C) The investment in the foreign entity is classified as a non-monetary asset. D) The foreign entity is classified as a foreign affiliate. Answer: B 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) Only non-current 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) All balance sheet items are translated using the closing rate in effect at the balance sheet date. Answer: A

6) The risk exposure resulting from the translation of foreign-currency-denominated financial risks is

referred to as: A) transaction exposure. C) translation (accounting) exposure.

B) economic exposure. D) business risk.

Answer: C 7) The risk exposure resulting from the possible reduction in terms of the domestic reporting foreign

currency, of the discounted future cash flows generated from foreign investments or operations due to real changes in exchange rates is referred to as: A) business risk. B) transaction exposure. C) translation (accounting) exposure. D) economic exposure. Answer: D 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) business risk. C) economic exposure.

B) transaction exposure. D) translation (accounting) exposure.

Answer: B 9) Which of the following statements is correct? A) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is

different than the parent), non-monetary items recorded at cost must be translated using average rates. B) If an organization is considered an integrated foreign subsidiary (i.e., the functional currency of the foreign operation is the same as the parent), non-monetary items recorded at cost must be translated using closing rates. C) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), non-monetary items recorded at cost must be translated using historical rates. D) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), non-monetary items recorded at cost must be translated using closing rates. Answer: D 10) Which of the following statements is correct? A) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is

different than the parent), monetary items must be translated using closing rates. B) If an organization is considered an integrated foreign subsidiary (i.e., the functional currency of

the foreign operation is the same as the parent), non-monetary items recorded at cost must be translated using average rates. C) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), shareholders' equity must be translated using closing rates. D) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), monetary items must be translated using average rates. Answer: A 2

11) Which of the following statements is correct? A) If an organization is considered an integrated foreign subsidiary (i.e., the functional currency of

the foreign operation is the same as the parent), non-monetary items recorded at closing values must be translated using average rates. B) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), non-monetary items recorded at closing values must be translated using average rates. C) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), non-monetary items recorded at closing values must be translated using historical rates. D) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), non-monetary items recorded at closing values must be translated using closing rates. Answer: D 12) Which of the following statements is correct? A) If an organization is considered an integrated foreign subsidiary (i.e., the functional currency of

the foreign operation is the same as the parent), contributed capital must be translated using average rates. B) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), contributed capital must be translated using closing rates. C) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), contributed capital must be translated using historical rates. D) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), contributed capital must be translated using average rates. Answer: C 13) Which of the following statements is correct? A) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is

different than the parent), dividends must be translated using average rates. B) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), dividends must be translated using historical rates. C) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), dividends must be translated using closing rates. D) If an organization is considered an integrated foreign subsidiary (i.e., the functional currency of the foreign operation is the same as the parent), dividends must be translated using average rates. Answer: B

14) Which of the following statements is correct? A) If an organization is considered an integrated foreign subsidiary (i.e., the functional currency of

the foreign operation is the same as the parent), depreciation and amortization must be translated using closing rates. B) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), depreciation and amortization must be translated using closing rates. C) If an organization is considered an integrated foreign subsidiary (i.e., the functional currency of the foreign operation is different than the parent), depreciation and amortization must be translated using historical rates. D) If an organization is self-sustaining (i.e., the functional currency of the foreign operation is different than the parent), depreciation and amortization must be translated using average rates. Answer: D 15) Which of the following statements is correct with respect to the translation of cost of sales in an

integrated foreign subsidiary (i.e., the functional currency of the foreign operation is the same as the parent)? A) Opening inventory is translated using an average rate. B) Opening inventory is translated using closing rates. C) Ending inventory is translated using the rate in effect when the inventory was acquired. D) Ending inventory is translated using an average rate. Answer: C

ABC Inc. has a single wholly-owned American subsidiary called US1 based in Los Angeles, California, which was acquired January 1, 2017. US1 submitted its financial statements for 2017 to ABC. Selected exchange rates in effect throughout 2017 are shown below: January 1, 2017: December 31, 2017: Average for 2017: Date of Purchase of Inventory on Hand: Date Dividends were declared:

US $1 = US $1 = US $1 = US $1 = US $1 =

CDN $0.815 CDN $0.8175 CDN $0.825 CDN $0.83 CDN $0.8125

US1 financial results for 2017 were as follows: US1 Financial Statements at December 31, 2017 (in U.S. dollars) Income Statement: Sales

$5,000,000

Cost of Sales Depreciation Expense Bond Interest Expense

$3,500,000 $150,000 $100,000 4

Other Expense Net Income

$750,000 $500,000

Statement of Retained Earnings: January 1, 2017: Net Income Dividends December 31, 2017:

$400,000 $500,000 ($100,000) $800,000

Balance Sheet Cash Accounts Receivable Inventory Plant and Equipment (net)

Current Liabilities Bonds Payable Common Shares Retained Earnings

$1,200,000 $1,900,000 $700,000 ($500,000 January 1, 2017) $400,000 $4,200,000 $400,000 $2,000,000 $1,000,000 $800,000 $4,200,000

US1 is considered to be a self-sustaining subsidiary (i.e., the functional currency of the foreign operation is different than the parent). 16) Which of the following rates would be used to translate the company's income statement items? A) US$1 = CDN$0.815

B) US$1 = CDN$0.8175

C) US$1 = CDN$0.83

D) US$1 = CDN$0.825

Answer: D 17) Which of the following rates would be used to translate the company's Retained Earnings at the start

of the year? A) US$1 = CDN$0.815 C) US$1 = CDN$0.83

B) US$1 = CDN$0.8175 D) US$1 = CDN$0.825

Answer: A 18) Which of the following rates would be used to translate the company's Dividends paid during the

year? A) US$1 = CDN$0.825 C) US$1 = CDN$0.8125

B) US$1 = CDN$0.83 D) US$1 = CDN$0.815

Answer: C

19) Which of the following rates would be used to translate the company's Assets and Liabilities? A) US$1 = CDN$0.825

B) US$1 = CDN$0.815

C) US$1 = CDN$0.83

D) US$1 = CDN$0.8175

Answer: D 20) Which of the following rates would be used to translate the company's Common Shares? A) US$1 = CDN$0.83

B) US$1 = CDN$0.815

C) US$1 = CDN$0.825

D) US$1 = CDN$0.8175

Answer: B 21) What is the amount of the gain or loss arising from translation? A) A CDN$750 loss.

B) A CDN$3,750 gain.

C) A CDN$5,000 loss.

D) A CDN$307 loss.

Answer: A

US $1 = CDN $0.815 US $1 = CDN $0.8175 US $1 = CDN $0.825 US $1 = CDN $0.83 US $1 = CDN $0.8125

US1 Financial Results for 2017 were as follows: US1 Financial Statements, December 31, 2017 (in U.S. dollars) Income Statement: Sales

$5,000,000

Cost of Sales Depreciation Expense Bond Interest Expense Other Expense Net Income

$3,500,000 $150,000 $100,000 $750,000 $500,000

Statement of Retained Earnings: January 1, 2017: Net Income Dividends

$400,000 $500,000 ($100,000) 6

December 31, 2017: Balance Sheet Cash Accounts Receivable Inventory Plant and Equipment (net)

Current Liabilities Bonds Payable Common Shares Retained Earnings

$800,000

$1,200,000 $1,900,000 $700,000 ($500,000 January 1, 2017) $400,000 $4,200,000 $400,000 $2,000,000 $1,000,000 $800,000 $4,200,000

US1 is considered to be an integrated foreign subsidiary (i.e., the functional currency of the foreign operation is the same as the parent). 22) Which of the following rates would be used to translate the company's sales? A) US$1 = CDN$0.815

B) US$1 = $0.83 CDN

C) US$1 = CDN$0.8175

D) US$1 = CDN$0.825

Answer: D 23) If the company had no capital asset additions or disposals in 2017, which of the following rates

would be used to translate the company's depreciation expense for the year? A) US$1 = CDN$0.825 B) US$1 = CDN$0.83 C) US$1 = CDN$0.815 D) US$1 = CDN$0.8175 Answer: C 24) If the bonds were outstanding throughout the year, which of the following rates would be used to

translate the company's bond interest expense for the year? A) US$1 = CDN$0.8175 B) US$1 = CDN$0.825 C) US$1 = CDN$0.83 D) US$1 = CDN$0.815 Answer: B 25) Which of the following rates would be used to translate the company's other expenses? A) US$1 = CDN$0.8175

B) US$1 = CDN$0.815

C) US$1 = CDN$0.825

D) US$1 = CDN$0.83

Answer: C

26) Which of the following rates would be used to translate the company's beginning retained earnings? A) US$1 = CDN$0.83

B) US$1 = CDN$0.825

C) US$1 = CDN$0.815

D) US$1 = CDN$0.8175

Answer: C 27) Which of the following rates would be used to translate the company's dividends? A) US$1 = CDN$0.825

B) US$1 = CDN$0.815

C) US$1 = CDN$0.83

D) US$1 = CDN$0.8125

Answer: D 28) Which of the following rates would be used to translate the company's cash? A) US$1 = CDN$0.825

B) US$1 = CDN$0.8175

C) US$1 = CDN$0.815

D) US$1 = CDN$0.83

Answer: B 29) Which of the following rates would be used to translate the company's accounts receivable? A) US$1 = CDN$0.83

B) US$1 = CDN$0.815

C) US$1 = CDN$0.825

D) US$1 = CDN$0.8175

Answer: D 30) Which of the following rates would be used to translate the company's inventory? A) US$1 = CDN$0.83

B) US$1 = CDN$0.8175

C) US$1 = CDN$0.815

D) US$1 = CDN$0.825

Answer: A 31) If there were no additions or disposals of plant and equipment in 2017, which of the following rates

would be used to translate the company's plant and equipment? A) US$1 = CDN$0.83 B) US$1 = CDN$0.815 C) US$1 = CDN$0.8175 D) US$1 = CDN$0.825 Answer: B 32) Which of the following rates would be used to translate the company's current liabilities? A) US$1 = CDN$0.815

B) US$1 = CDN$0.8175

C) US$1 = CDN$0.83

D) US$1 = CDN$0.825

Answer: B 33) Which of the following rates would be used to translate the company's bonds payable? A) US$1 = CDN$0.83

B) US$1 = CDN$0.815

C) US$1 = CDN$0.8175

D) US$1 = CDN$0.825

Answer: C 34) Which of the following rates would be used to translate the company's common shares? A) US$1 = CDN$0.8175

B) US$1 = CDN$0.83

C) US$1 = CDN$0.825

D) US$1 = CDN$0.815

Answer: D

35) For the sake of simplicity, assume once again that US1's cost of sales was calculated to be

CDN$3,000,000. What is the amount (in Canadian dollars) of US1's net income? A) $301,500. B) $300,000. C) $412,500. D) $302,500. Answer: A 36) For the sake of simplicity, assume once again that US1's cost of sales was calculated to be

CDN$3,000,000. What is the amount (in Canadian dollars) of US1's retained earnings at December 31, 2017? A) $547,250. B) $546,250. C) $660,000. D) $545,000. Answer: B 37) Which of the following statements is correct? A) If a foreign currency weakens with respect to the Canadian dollar, both self-sustaining and

integrated foreign subsidiaries will show a foreign exchange loss. B) If a foreign currency weakens with respect to the Canadian dollar, both self-sustaining and integrated foreign subsidiaries will show a foreign exchange gain. C) If a foreign currency weakens with respect to the Canadian dollar, a self-sustaining subsidiary will show a foreign exchange loss while an integrated foreign subsidiary will show a foreign exchange gain. D) If a foreign currency weakens with respect to the Canadian dollar, a self-sustaining subsidiary will show a foreign exchange gain while an integrated foreign subsidiary will show a foreign exchange loss. Answer: C 38) Which of the following statements is FALSE? A) If a subsidiary is an integrated foreign subsidiary, the method of valuation of assets and

liabilities is of no consequence in the translation because all of the assets are translated at the closing rate. B) If a subsidiary is self-sustaining, the method of valuation of assets and liabilities is of no consequence in the translation because all of the assets are translated at the closing rate. C) If a subsidiary is an integrated foreign subsidiary, a write-down to market may be required in the translated financial statements. D) If a subsidiary is an integrated foreign subsidiary, no write-down is required in the foreign currency financial statements. Answer: A 39) According to IAS 29 Financial Reporting in Hyperinflationary Economies, the term

"hyper-inflationary" means: A) a cumulative inflation rate of 100% over a 3-5 year period. B) an annual inflation rate of 50%. C) an annual inflation rate of 100%. D) it does not establish an absolute rate which is deemed to be hyper-inflation. Answer: D

40) Which of the following is an indication that the functional currency of a foreign subsidiary is not the

Canadian dollar? A) Only goods imported from the parent are sold by the subsidiary. B) Intercompany transactions account for a high proportion of the subsidiary's overall activities. C) The parent dictates the subsidiary's operating procedures. D) Cash to pay obligations is generated by local operations or borrowed from local lenders. Answer: D

Maker Ltd., an American company, acquired US$200,000 of capital assets on January 1, 2015, 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, 2016, 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, 2017, 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, 2015 to December 31, 2017 were: January 1, 2015 January 1, 2016 Average for 2016 December 31, 2016 March 1, 2017 Average for 2017 December 31, 2017

US $1.00 = CDN $1.05 US $1.00 = CDN $1.06 US $1.00 = CDN $1.0625 US $1.00 = CDN $1.065 US $1.00 = CDN $1.068 US $1.00 = CDN $1.07 US $1.00 = CDN $1.075

41) If Maker is considered to be a self-sustaining foreign subsidiary (i.e., the functional currency of the

foreign operation is different than the parent), what amount will be shown for capital assets (net) on its translated Canadian dollar financial statements as at December 31, 2016? A) $170,400. B) $168,000. C) $170,000. D) $169,600. Answer: A 42) If Maker is considered to be a self-sustaining foreign subsidiary (i.e., the functional currency of the

foreign operation is different than the parent), what amount will be shown for capital assets (net) on its translated Canadian dollar financial statements as at December 31, 2017? A) $212,500. B) $228,438. C) $224,430. D) $225,830. Answer: B 43) If Maker is considered to be a self-sustaining foreign subsidiary (i.e., the functional currency of the

foreign operation is different than the parent), what amount will be shown for amortization expense on its translated Canadian dollar financial statements as at December 31, 2016? A) $21,000. B) $21,250. C) $20,000. D) $21,200. Answer: B 10

44) If Maker is considered to be a self-sustaining foreign subsidiary (i.e., the functional currency of the

foreign operation is different than the parent), what amount will be shown for amortization expense on its translated Canadian dollar financial statements as at December 31, 2017? A) $29,425. B) $27,500. C) $29,010. D) $29,210. Answer: A 45) If Maker is considered to be an integrated foreign subsidiary (i.e., the functional currency of the

foreign operation is the same as the parent), what amount will be shown for capital assets (net) on its translated Canadian dollar financial statements as at December 31, 2016? A) $170,400. B) $169,600. C) $168,000. D) $170,000. Answer: B 46) If Maker is considered to be an integrated foreign subsidiary (i.e., the functional currency of the

foreign operation is the same as the parent), what amount will be shown for capital assets (net) on its translated Canadian dollar financial statements as at December 31, 2017? A) $224,430. B) $225,830. C) $228,438. D) $212,500. Answer: B 47) If Maker is considered to be an integrated foreign subsidiary (i.e., the functional currency of the

foreign operation is the same as the parent), what amount will be shown for amortization expense on its translated Canadian dollar financial statements as at December 31, 2016? A) $21,200. B) $21,250. C) $20,000. D) $21,000. Answer: A 48) If Maker is considered to be an integrated foreign subsidiary (i.e., the functional currency of the

foreign operation is the same as the parent), what amount will be shown for amortization expense on Holdings consolidated income statements for the year ended on December 31, 2017? A) $29,425. B) $29,010. C) $29,210. D) $27,500. Answer: C 49) If Maker is considered to be a self-sustaining foreign subsidiary (i.e., the functional currency of the

50) A foreign subsidiary is considered to be an integrated foreign operation (i.e., the functional currency

of the foreign operation is the same as the parent), and its income is earned evenly over the year. It paid its income taxes for the year in two instalments, half on June 30 and half on December 31. What rate(s) should be used to translate the company's income tax expense into Canadian dollars when preparing translated financial statements for the year? A) Half at the rate at June 30 and half at the rate at December 31. B) All at the closing rate for the year. C) All at the opening rate for the year. D) All at the average rate for the year. Answer: D SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

On December 31, 2016, Hilman Enterprises of Montreal paid $12,000,000 for 100% of the outstanding shares of Wilsen Corp of the United States. Wilsen's fair values approximated its book values on that date. Wilsen's comparative balance sheets for 2016 and 2017 are shown below: Balance Sheet as at December 31 (in U.S. Dollars) 2017 2016 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 Bonds Payable (due Dec 31, 2022) Common Shares Retained Earnings Total Liabilities and Equity

$1,100,000 $2,300,000 $5,000,000 $5,000,000 $4,000,000 $4,000,000 $1,400,000 $1,000,000 $11,500,000 $12,300,000

Income Statement for the Year ended December 31, 2017 Sales

$5,200,000

Inventory, January 1, 2017 Purchases Inventory, December 31, 2017 Depreciation Expense Other Expenses

$3,000,000 $3,000,000 ($2,000,000) $300,000 $400,000 $4,700,000 12

Net Income

$500,000

Other Information: Exchange Rates: December 31, 2016: September 30, 2017: December 31, 2017: Average for 2017:

US $1 = CDN $1.1850 US $1 = CDN $1.1975 US $1 = CDN $1.20 US $1 = CDN $1.19

Wilsen paid US$100,000 in dividends on September 30, 2017.The inventories on hand at the end of 2017 were purchased when the exchange rate was US$1 = CDN$1.195. 51) Compute Wilsen's exchange gain or loss for 2017 if Wilson is considered to be an integrated

subsidiary (i.e., the functional currency of the foreign operation is the same as the parent). Answer:

U.S. Dollars Balance, Jan 1, 2016 ($7,500 - $2,300 - $5,000) Changes - 2017 Sales Purchases Other Expenses Dividends

CDN Dollars

$200,000 × 1.185

$237,000

$5,200,000 × 1.19 ($3,000,000) × 1.19 ($400,000) × 1.19 ($100,000) × 1.1975

$6,188,000 ($3,570,000) ($476,000) ($119,750)

Calculated Monetary Position:

Actual Position, Dec 31, 2017 ($8,000 - $1,100 - $5,000)

$2,259,250

$1,900,000

Exchange Gain - 2017

× 1.20

$2,280,000 $20,750

52) Translate Wilsen's 2014 Income Statement if Wilsen is considered to be an integrated subsidiary

(i.e., the functional currency of the foreign operation is the same as the parent). Answer:

Sales Inventory, January 1, 2017 Purchases Inventory, December 31, 2017 Depreciation Expense Exchange Gain Other Expenses

Net Income

U.S. Dollars $5,200,000 × 1.19

CDN Dollars $6,188,000

$3,000,000 × 1.185 $3,000,000 × 1.19 ($2,000,000) × 1.195 $300,000 × 1.185

$3,555,000 $3,570,000 ($2,390,000) $355,500 ($20,750) $476,000 $5,545,750

$400,000 × 1.19 $4,700,000 $500,000

$642,250

53) Translate Wilsen's December 31, 2017 Statement of Retained Earnings if Wilsen is considered to be

an integrated subsidiary (i.e., the functional currency of the foreign operation is the same as the parent). Answer:

Balance, January 1, 2017 Add: Net Income Less: Dividends

U.S. Dollars $1,000,000 × 1.185 $500,000 ($100,000) × 1.1975

Retained Earnings

$1,400,000

CDN Dollars $1,185,000 $642,250 ($119,750) $1,707,500

54) Translate Wilsen's December 31, 2017 Balance Sheet if Wilsen is considered to be an integrated

foreign operation (i.e., the functional currency of the foreign operation is the same as the parent). Answer: Balance Sheet as at December 31, 2017 U.S Dollars CDN Dollars Current Monetary Assets $8,000,000 × 1.20 $9,600,000 Inventory $2,000,000 × 1.195 $2,390,000 Plant and Equipment (Net) $1,500,000 × 1.1850 $1,777,500 Total Assets $11,500,000 $13,767,500 Current Liabilities Bonds Payable (due Dec 31, 2022) Common Shares Retained Earnings Total Liabilities and Equity

$1,100,000 × 1.20 $5,000,000 × 1.20 $4,000,000 × 1.185 $1,400,000 $11,500,000

$1,320,000 $6,000,000 $4,740,000 $1,707,500 $13,767,500

55) Calculate the exchange gain or loss that would result from the translation of Wilsen's Financial

Statements if Wilsen was considered to be a self-sustaining foreign operation (i.e., the functional currency of the foreign operation is different than the parent). Answer:

Net Assets, Dec 31, 2016 Net Income - 2017 Dividends - 2017 Calculated Net Assets, Dec 31, 2017 Actual Net Assets Exchange Gain: (Other Comprehensive Income)

U.S. Dollars $5,000,000 × 1.185 $500,000 × 1.19 ($100,000) × 1.1975 $5,400,000 × 1.20

CDN Dollars $5,925,000 $595,000 ($119,750) $6,400,250 $6,480,000 $79,750

56) Translate Wilsen's 2017 Income Statement if Wilsen was considered to be a self-sustaining foreign

operation (i.e., the functional currency of the foreign operation is different than the parent). Answer:

Sales Inventory, January 1, 2017 Purchases Inventory, December 31, 2017 Depreciation Expense Other Expenses

Net Income

U.S. Dollars $5,200,000 × 1.19

CDN Dollars $6,188,000

$3,000,000 × 1.19 $3,000,000 × 1.19 ($2,000,000) × 1.19 $300,000 × 1.19 $400,000 × 1.19 $4,700,000

$3,570,000 $3,570,000 ($2,380,000) $357,000 $476,000 $5,593,000

$500,000 × 1.19

$595,000

57) Translate Wilsen's December 31, 2017 Statement of Retained Earnings if Wilsen was considered to

be a self-sustaining foreign operation (i.e., the functional currency of the foreign operation is different than the parent). Answer:

U.S. Dollars $1,000,000 × 1.185

CDN Dollars $1,185,000

Add: Net Income Less: Dividends

$500,000 ($100,000) × 1.1975

$595,000 ($119,750)

Retained Earnings

$1,400,000

$1,660,250

Balance, January 1, 2017

58) Translate Wilsen's December 31, 2017 Balance Sheet if Wilsen was considered to be a

self-sustaining foreign operation (i.e., the functional currency of the foreign operation is different than the parent). Answer: Balance Sheet as at December 31, 2017 U.S Dollars $8,000,000 × 1.2 $2,000,000 × 1.2 $1,500,000 × 1.2 $11,500,000

Current Monetary Assets Inventory Plant and Equipment (Net) Total Assets Current Liabilities Bonds Payable (due Dec 31, 2022) Common Stock Retained Earnings Cumulative Other Comprehensive Income Total Liabilities and Equity

$1,100,000 × 1.2 $5,000,000 × 1.2 $4,000,000 × 1.185 $1,400,000 --$11,500,000

CDN Dollars $9,600,000 $2,400,000 $1,800,250 $13,800,000 $1,320,000 $6,000,000 $4,740,000 $1,660,250 $79,750 $13,800,000

On January 1, 2017, 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$1,000 occurred during 2017. Martin's January 1, 2017 Balance Sheet is shown below (in U.S. dollars): Current Monetary Assets Inventory Plant and Equipment Total Assets

$50,000 $40,000 $25,000 $115,000

Current Liabilities Bonds Payable (maturity: January 1, 2022) Common Shares Retained Earnings Total Liabilities and Equity

$45,000 $20,000 $30,000 $20,000 $115,000

The following exchange rates were in effect during 2017: 17

January 1, 2017: Average for 2017: Date when Inventory Purchased: December 31, 2017:

US $1 = CDN $1.3250 US $1 = CDN $1.3350 US $1 = CDN $1.34 US $1 = CDN $1.35

Dividends declared and paid December 31, 2017. The financial statements of Larmer (in Canadian dollars) and Martin (in U.S. dollars) are shown below: Balance Sheets Larmer

Martin

Current Monetary Assets Inventory Plant and Equipment Investment in Martin (at Cost) Assets

$42,050 $60,000 $23,500 $66,250 $191,800

$65,000 $50,000 $20,000 --$135,000

Current Liabilities Bonds Payable (maturity: January 1, 2022) Common Shares Retained Earnings Net Income Dividends Liabilities and Equity

$50,000 $48,000 $35,000 $20,000 $60,000 $30,000 $30,000 $20,000 $28,800 $27,000 ($12,000) ($10,000) $191,800 $135,000

Income Statements Sales Dividend Income Cost of Sales Depreciation Other expenses Net Income

Larmer $80,000 $10,800 ($40,000) ($10,000) ($12,000) $28,800

Martin $50,000 ---($15,000) ($5,000) ($3,000) $27,000

59) Compute Martin's exchange gain or loss for 2017 if Martin is considered to be an integrated foreign

subsidiary (i.e., the functional currency of the foreign operation is the same as the parent). Answer: Current monetary position U.S. Dollars

CDN Dollars

Balance, Jan 1, 2017 ($50,000 - $45,000 - $20,000)

($15,000) × 1.325

($19,875)

Changes - 2017 Sales Purchases Other Expenses Dividends

$50,000 × 1.335 ($25,000) × 1.335 ($3,000) × 1.335 ($10,000) × 1.35

$66,750 ($33,375) ($4,005) ($13,500)

Calculated Monetary Position:

($4,005)

Actual Position, Dec 31, 2017 ($65,000 - $48,000 - $20,000)

($3,000) × 1.35

Exchange Loss - 2017

($4,050) $45

60) Translate Martin's 2017 Income Statement into Canadian dollars if Martin is considered to be an

integrated foreign subsidiary (i.e., the functional currency of the foreign operation is the same as the parent). Answer:

U.S. Dollars $50,000 × 1.335 ($15,000) ($ 5,000) × 1.325 ($3,000) × 1.335 $27,000

CDN Dollars $66,750 ($19,375) ($6,625) ($45) ($4,005) $36,700

Cost of Sales is calculated as follows: U.S. Dollars Inventory, January 1, 2017 $40,000 × 1.325 Add: Purchases $25,000 × 1.335 Less: Inventory, Dec 31, 2017 ($50,000) × 1.34 Cost of Sales $15,000

CDN Dollars $53,000 $33,375 ($67,000) $19,375

Sales Cost of Sales Depreciation Exchange loss Other expenses Net Income

61) Translate Martin's December 31, 2017 Balance Sheet into Canadian dollars if Martin is considered

to be an integrated foreign subsidiary (i.e., the functional currency of the foreign operation is the same as the parent). Answer:

Current Monetary Assets Inventory Plant and Equipment Assets Current Liabilities Bonds Payable (maturity: Jan. 1, 2022) Common Stock Retained Earnings Net Income Dividends Liabilities and Equity

U.S. Dollars $65,000 × 1.35 $50,000 × 1.34 $20,000 × 1.325 $135,000

CDN Dollars $87,750 $67,000 $26,500 $181,250

$48,000 × 1.35 $20,000 × 1.35 $30,000 × 1.325 $20,000 × 1.325 $27,000 ($10,000) × 1.35 $135,000

$64,800 $27,000 $39,750 $26,500 $36,700 ($13,500) $181,250

62) Prepare Larmer's December 31, 2017 Consolidated Balance Sheet if Martin is considered to be an

integrated foreign subsidiary (i.e., the functional currency of the foreign operation is the same as the parent). Answer: Larmer Inc. Consolidated Balance Sheet As at December 31, 2017 Current Monetary Assets Inventory Plant and Equipment ($23,500 + $26,500 + $5,300) Goodwill ($6,500 × 1.325) Assets

$129,800 $127,000 $55,300 $8,613 $320,713

Current Liabilities Bonds Payable (maturity: January 1, 2022) Non-Controlling Interest Common Stock Retained Earnings Liabilities and Equity

$114,800 $62,000 $20,673 $60,000 $63,240 $320,713

63) Compute Martin's exchange gain or loss for 2017 if Martin is considered to be a self-sustaining

foreign subsidiary (i.e., the functional currency of the foreign operation is different than the parent). Answer: Current monetary position

Net assets Net income: 2017 Dividends

U.S. Dollars $50,000 × 1.325 $27,000 × 1.335 ($10,000) × 1.35

CDN Dollars $66,250 $36,045 ($13,500)

$67,000 × 1.35

$88,795 $90,450

Calculated net assets: Actual net assets: Exchange Gain - 2017 (other comprehensive income)

$1,655

64) Translate Martin's 2017 Income Statement into Canadian dollars if Martin is considered to be a

self-sustaining foreign subsidiary (i.e., the functional currency of the foreign operation is different than the parent). Answer:

Sales Cost of sales Depreciation Other expenses Net income

U.S. Dollars $50,000 × 1.335 ($15,000) × 1.335 ($ 5,000) × 1.335 ($3,000) × 1.335 $27,000

CDN Dollars $66,750 ($20,025) ($6,675) ($4,005) $36,045

65) Calculate Larmer's Consolidated Net Income for 2017 if Martin is considered to be a self-sustaining

foreign subsidiary (i.e., the functional currency of the foreign operation is different than the parent). Answer: Calculation of Consolidated Net Income: Larmer - Net income

$28,800

Less: Dividends from Martin (as recorded) Less: Amortization of acquisition differenial Less: Goodwill impairment

($10,800) ($1,335) ($1,335)

Add: Martin's net income

$36,045

Net income:

$51,375

Attributable to: Shareholders of Parent Non-controlling interest

$43,632 $7,743

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 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 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. C) Endowments are provided as donations which only allow a not-for-profit organization to invest in other not-for-profit organizations only. D) 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. Answer: A 2) Which of the following statements is correct? A) Unrestricted resources can be used for any purposes that are consistent with the goals and

objectives of the not-for-profit organization. B) Both restricted and unrestricted funds must be used in accordance with the wishes of the

contributor. C) Restricted resources can only be used in the case of a serious financial deficit situation. D) Unrestricted resources can be used for any purposes by a not-for-profit organization. Answer: A 3) Which of the following statements is NOT correct? A) A contribution receivable should be recognized as an asset when the amount can be reasonable

estimated and the ultimate collection is reasonably assured. B) Government grants may qualify as contributions receivable. C) A contribution receivable should be recognized as an asset when the amount can be reasonable estimated or the ultimate collection is reasonably assured. D) A contribution receivable is one where in the contributor receives nothing directly in return for his or her contribution. Answer: C 4) Which of the following is NOT an acceptable way of reporting for a not-for-profit entity over which

an organization has control? A) By providing the disclosure set out in paragraph 4450.22 of the Handbook. B) If the controlled organization is one of a large number of individually immaterial organizations, by adhering to the disclosure requirements set out in paragraph 4450.26 of the CPA Canada Handbook. C) By consolidating the controlled organization in its financial statements. D) By using the equity method. Answer: D

5) How may a not-for-profit organization account for a portfolio investment it has made in

profit-oriented entity? A) By using the equity method. B) By using fair value or the cost method. C) By consolidating the results of the profit-seeking entity with its own. D) By using proportionate consolidation. Answer: B 6) Which of the following was NOT a common argument against the Accounting Standards Board's

proposal that all capital acquisitions be capitalized and amortized? A) It would change the nature of the operating statement from one that reflects the cost of resources used to one that reflects resources spent. B) Small not-for-profit organizations' financial statement users are only interested in seeing what money has been spent and what money is left over. C) It would change the nature of the operating statement from one that reflects resources spent to one that reflects the cost of resources used. D) Capitalization and amortization would be costly to apply. Answer: A 7) The maximum amortization period specified by Section 4431 with respect to capital assets is: A) 10 years. B) 5 years. C) 20 years. D) no maximum amortization period is specified. Answer: D 8) Bequests are normally not recorded until: A) the person making the bequests dies. B) the will has been probated and the time for appeal has passed. C) the beneficiaries of the estate decide to pay out the bequest. D) 10 years after the death of the person making the bequest after which period of time the other

parties interested in the estate cannot legally challenge the bequest. Answer: B 9) Section 4431 contains a compromise applicable to not-for-profit organizations whose two-year

average annual revenues are less than $500,000. These organizations must disclose all of the following EXCEPT: A) accounting policy for capital assets. B) an appraised listing of the organizations capital assets, showing book values and appraised market values. C) the amount expensed in the current period if their policy is to expense capital assets when acquired. D) information about capital assets not shown in the balance sheet. Answer: B

10) 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) 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. B) They are protected, cared for, and preserved. C) They are held for public exhibition, education, or research. D) It must be possible to establish a useful life for the works and an appropriate amortization period. Answer: D 11) Which of the following financial statements are NOT required by not-for-profit organizations for

external reporting purposes? A) A Statement of Cash Flows. B) A Statement of Operations. C) A Statement of Financial Position. D) A Statement of Changes in Members' Equity. Answer: D 12) How would the not-for-profit organization report each controlled profit-oriented enterprise? A) By using the cost method together with appropriate note disclosure. B) It is not required to report its interest in profit-oriented subsidiaries. C) By consolidating the controlled enterprise into its own financial statements or by using the

equity method and disclosing additional financial information. D) By disclosure in the notes to the financial statements of the not-for-profit organization. Answer: C 13) Section 4431 of the CPA Canada Handbook contains a provision applicable to not-for-profit

organizations which grants an exemption from capitalizing and amortizing all their fixed assets. The exemption is applicable to: A) not-for-profit organizations that are unincorporated. B) not-for-profit organizations with fewer than ten employees. C) not-for-profit organizations whose two-year average annual revenues in their statement of operations are less than $500,000. D) not-for-profit organizations that have assets less than $1 million. Answer: C

Do-Good Inc. is a newly formed not-for-profit organization. On January 1, 2018, its first day of operations, Do-Good 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. The equipment was purchased from a restricted fund contribution of $8,400. 14) In which fund would the purchase and amortization of the asset be recorded? A) The General Fund.

B) The Capital Fund.

C) The Operating Fund.

D) The Encumbrance Fund.

Answer: B 15) What would be the carrying value of the equipment on December 31, 2018? A) $6,000.

B) $8,000.

C) $6,300.

D) $8,400.

Answer: A 16) What would be the balance in the Capital Fund on December 31, 2018? A) $4,400.

B) $400.

C) ($1,600).

D) $6,400.

Answer: D

Do-Good Inc. is a newly formed not-for-profit organization. On January 1, 2018, its first day of operations, Do-Good 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. The equipment was purchased from an unrestricted contribution of $8,000. 17) In which fund would the purchase of the asset be recorded? A) The Operating Fund.

B) The Encumbrance Fund.

C) The General Fund.

D) The Capital Fund.

Answer: D 18) In which fund would the receipt of the unrestricted contribution be recorded? A) The Encumbrance Fund.

B) The Endowment Fund.

C) The General Fund.

D) The Capital Fund.

Answer: C 19) What would be the balance in the Capital Fund on December 31, 2018? A) ($1,600).

B) $6,400.

C) $6,000.

D) $8,400.

Answer: C 20) What would be the balance in the General Fund on December 31, 2018? A) $8,000.

B) $0.

C) $6,400.

Answer: B

D) $6,000.

21) A not-for-profit organization is required to record the donation of capital assets at: A) net realizable value. B) replacement cost. C) fair value. D) the original cost to the donor of the capital asset. Answer: C 22) Where should be endowment contributions presented in the financial statements of a not-for-profit

organization under the deferral method? A) They are used to effect a reduction to a related expense account. B) They are reflected in the notes to the financial statements. C) They are reflected in the statement of changes in net assets. D) They are shown in the statement of operations. Answer: C 23) Net assets could be broken down into any of the following categories EXCEPT: A) unrestricted net assets. B) internally restricted and other externally restricted net assets. C) net assets maintained permanently in endowments. D) net assets invested in operations. Answer: D 24) Which of the following is NOT a type of contribution as identified by the Handbook? A) Endowment.

B) Unrestricted.

C) Donated.

D) Restricted.

Answer: C 25) If a not-for-profit organization has revenues in excess of $500,000, how must it report its capital

assets? A) All capital assets must be capitalized and amortized. B) All asset purchases must be immediately and entirely expensed. C) All capital assets must be capitalized but not amortized. D) All capital assets must be disclosed in a note to the financial statements. Answer: A 26) If a not-for-profit organization that usually has had annual revenues well below $500,000,

subsequently has (for two years or more) revenues significantly higher than $500,000, how must it report its Capital Assets? A) It must capitalize, but not amortize, retroactively. B) It must capitalize and amortize retroactively. C) It must capitalize and amortize prospectively. D) It must continue following the same policy. Answer: C

27) If a not-for-profit organization that has had annual revenues above $500,000 for a number of years,

subsequently has revenues (for two years or more) significantly lower than $500,000, how must it report its Capital Assets? A) It may choose to expense future capital assets at the date of their acquisition. B) It must continue to capitalize and amortize its capital assets. C) It must derecognize capital assets recognized in past periods. D) It may choose to capitalize but not amortize future capital asset additions. Answer: B 28) Which of the following is NOT among the choices available to a not-for-profit organization with

two-year average annual revenues of less than $500,000? A) Make no entries when capital assets are acquired. B) Capitalize and amortize capital assets. C) Capitalize and not amortize capital assets. D) Expense capital assets when acquired. Answer: A 29) Which of the following is NOT a requirement for a not-for-profit organization to record donated

materials and services? A) The materials or services would normally have been used in the organization's operations. B) The not-for-profit organization would have purchased the goods or services if they had not been donated. C) The organization uses the deferred contribution method of revenue recognition. D) The fair value of the donation can be determined. Answer: C 30) If a not-for-profit organization uses the restricted fund method of reporting and has an endowment

fund, how should an endowment contribution be reported? A) As revenue in the endowment fund. B) As a direct increase in net assets in the general fund. C) As revenue in the general fund. D) As a direct increase in net assets in the endowment fund. Answer: A 31) If a not-for-profit organization uses the restricted fund method of reporting and has a capital fund,

how should a donation of cash restricted to the purchase of land be reported? A) As a direct increase in net assets in the capital fund. B) As revenue in the general fund. C) As a direct increase in net assets in the general fund. D) As revenue in the capital fund. Answer: D

32) How should investment income earned on donation revenue be accounted for if the donation

revenue was a restricted contribution and the not-for-profit organization used the restricted fund method and had a fund for the purpose for which the donation was intended? A) As a direct increase in net assets in the restricted fund. B) As investment income in the restricted fund. C) As donation revenue in the restricted fund. D) As investment income in the general fund. Answer: B 33) How should that portion of investment income earned from the investment of endowment

contributions that is required to be used to maintain the purchasing power of the endowment be accounted for if the not-for-profit organization uses the restricted fund method of reporting and has an endowment fund? A) As a direct increase in net assets in the endowment fund. B) As investment income in the general fund. C) As investment income in the endowment fund. D) As a direct increase in net assets in the general fund. Answer: C 34) How should that portion of investment income earned from the investment of endowment

contributions that is required to be used to maintain the purchasing power of the endowment be accounted for, if the not-for-profit organization uses the deferred contribution method of accounting? A) As a direct increase in net assets. B) As investment income. C) As donation revenue. D) As a deferred contribution. Answer: A 35) How should investment income earned from the investment of endowment contributions be

accounted for if the not-for-profit organization uses the deferred contribution method of accounting and the use of the investment income is restricted to a specific purpose? A) As investment income. B) As a direct increase in net assets. C) As donation revenue. D) As a deferred contribution. Answer: D 36) How should investment income earned from the investment of endowment contributions be

accounted for if the not-for-profit organization uses the restricted fund method of accounting and the use of the investment income is restricted to a specific purpose for which the not-for-profit organization has a restricted fund? A) As a deferred contribution. B) As investment income in the endowment fund. C) As investment income in the general fund. D) As investment income in the specific restricted fund. Answer: D

37) A not-for-profit organization receives a restricted contribution of $20,000 to be used for a specific

project. During the current year, $14,000 is spent toward the project with the balance to be spent next year. How much donation revenue should the not-for-profit organization recognize in the current year, if the organization uses the deferred contribution method of reporting? A) $14,000. B) $20,000. C) $6,000. D) $34,000. Answer: A 38) A not-for-profit organization receives a restricted contribution of $20,000 to be used for a specific

project. During the current year, $14,000 is spent toward the project with the balance to be spent next year. What should be the balance in the deferred contribution account at the end of the year, if the organization uses the deferred contribution method of reporting? A) $6,000. B) $20,000. C) $14,000. D) Nil. Answer: A 39) A not-for-profit organization receives a restricted contribution of $20,000 to be used for a specific

project. During the current year, $14,000 is spent toward the project with the balance to be spent next year. How much donation revenue should the not-for-profit organization recognize in the current year, if the organization uses the restricted fund method for reporting and had a fund for this project? A) $14,000. B) $6,000. C) Nil. D) $20,000. Answer: D 40) A not-for-profit organization receives a restricted contribution of $20,000 to be used for a specific

project. During the current year, $14,000 is spent toward the project with the balance to be spent next year. What will the net asset balance in the restricted fund be at the end of the year if the organization uses the restricted fund method for reporting and had a fund for this project? A) $14,000. B) $6,000. C) Nil. D) $20,000. Answer: B 41) A not-for-profit organization receives a restricted contribution of $20,000 to be used for a specific

project. During the current year, $14,000 is spent toward the project with the balance to be spent next year. How much donation revenue should the not-for-profit organization recognize in the current year, if the organization uses the restricted fund method of reporting and did not have a fund for this project? A) $34,000. B) $20,000. C) $6,000. D) $14,000. Answer: D

42) 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)

Pledges Receivable Provision for Uncollectible Pledges Donation Revenue

Debit Credit $200,000 $10,000 $190,000

Cash Donation Revenue

Debit Credit $190,000 $190,000

Pledges Receivable Donation Revenue

Debit Credit $190,000 $190,000

Pledges Receivable Donation Revenue Bad Debt Expense Provision for Uncollectible Pledges

Debit Credit $200,000 $200,000 $10,000 $10,000

Answer: A 43) What reporting choices are given to Canadian non-governmental and not-for-profit organizations? A) They may report under the Accounting Standards for Private Enterprises (ASPE) without

modification. B) They may continue to report in accordance with the Canadian standards for not-for-profit

enterprises that existed prior to 2011-2012. 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) They may report under the Accounting Standards for Private Enterprises (ASPE) modified by the standards found in Part III of the CPA Canada Handbook. Answer: D

44) How should a not-for-profit organization value inventories which are held for distribution at no

charge or for a nominal charge or for consumption in the production process of goods which will be distributed at no charge or for a nominal charge? A) At the lower of cost and net realizable value. B) At fair value. C) At cost. D) At the lower of cost and current replacement cost. Answer: D 45) When a not-for-profit organization uses the deferred contribution method of revenue recognition

and receives a donation restricted to the purchase of land, when should the donation be recognized as revenue? A) When the land is purchased. B) When the land is put into service by the organization. C) When the cash is received. D) It should not be recognized as revenue at all. Answer: D 46) 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 income statement. B) The statement of cash flows. C) The statement of financial position. D) The statement of changes in shareholders' equity. Answer: D SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 47) The following are selected transactions from Helpers Cooperative which uses the restricted fund

method. Helpers has an operating fund, a capital fund and an endowment fund: Pledges amounting to $400,000 were received, 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 offer Helpers a full-page ad. This had an estimated value of $5,000. 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. 10

Answer:

Operating Fund: Pledges Receivable Allowance for Uncollectible Pledges Contribution Revenue Deferred Contribution Revenue

$400,000 $8,000 $313,600 $78,400

Capital Fund: Office Equipment Cash

$6,000

Operating Fund: Cash Pledges Receivable

$300,000

$6,000

$300,000

Allowance for Uncollectible Pledges Pledges Receivable

$4,000

Advertising Expense Contribution Revenue - donated

$5,000

Cash Interest and Dividend Revenue

$15,000

$4,000

$5,000

$15,000

Capital Fund: Depreciation Expense Accumulated Depreciation

$40,000 $40,000

The following are selected transactions for HELP-ON-US, an NFPO for 2017. On January 1, the organization purchased fixed assets at a cost of $10,000. The assets were estimated to have a useful life of 5 years with no residual value. Straight-line amortization is used. 48) Assuming that the assets were purchased from a restricted fund contribution in the amount of

$11,000, prepare the required journal entries for 2017, indicating the fund or funds to be used. Answer:

Capital Fund: Cash Contribution Revenue

$11,000 $11,000

Equipment Cash

$10,000

Amortization Expense Accumulated Amortization

$2,000

$10,000

$2,000

49) Assuming that the assets were purchased from unrestricted fund sources, prepare the required

journal entries for 2017, indicating the fund or funds to be used. Answer:

General Fund: Cash Contribution Revenue Transfer to Capital Fund Cash Capital Fund: Cash Transfer from General Fund Equipment Cash Amortization Expense Accumulated Amortization

$10,000 $10,000 $10,000 $10,000

$10,000 $10,000 $10,000 $10,000 $2,000 $2,000

The purchase could also be recorded in the Capital Fund as: Capital Fund: Equipment Transfer from General Fund

$10,000 $10,000

50) Prepare journal entries for these transactions, using the deferred contribution method, assuming that

the assets were purchased using restricted funds in the amount of $11,000. Answer:

Cash Deferred Contributions-Fixed Asset Purchases

$11,000

Equipment Cash

$10,000

Deferred Contribution - Equipment Purchases Deferred Contribution - Fixed Assets

$10,000

Amortization Expense Accumulated Amortization

$2,000

Deferred Contributions - Fixed Assets Contribution Revenue

$2,000

$11,000

$10,000

$2,000

51) XYZ is a local charity that commenced operations on January 1, 2017. XYZ uses an encumbrance

system to manage costs. For the following partial data provided, prepare the journal entry to record that transaction. In addition, specify which fund or funds must be used to record the entry. a) Revenue deferred earlier in the year in the amount of $5,000 was recognized. b) Pledges receivable in the amount of $10,000 were collected in full. c) Accounts payable and wages payable amounting to $10,000 and $5,000 were paid. d) Government grants amounted to $50,000, half of which was received. The balance is expected by late 2018. The grants may be applied to any of the organization's programs. e) Total Wage costs amounted to $60,000 which breaks down as follows: Program A Program B Administration

$40,000 $10,000 $10,000

25% of these expenses are still payable at the end of 2017. f) A wealthy local businessman donated $100,000 to be held in endowment, with the interest earned to be unrestricted. g) The investments in an endowment fund earned interest in the amount $3,000. h) Amortization expense for the year amounted to $10,000.

Answer: a)

General Fund Deferred Revenue Revenue

$5,000 $5,000

b) General Fund Cash Pledges Receivable

$10,000 $10,000

c) General Fund Accounts Payable Wages Payable Cash

$10,000 $5,000 $15,000

d) General Fund Cash Government Grants Receivable Revenue - Government Grant

$25,000 $25,000 $50,000

e) General Fund Expenses - Program A Expenses - Program B Expenses - Administration Cash Wages Payable

$40,000 $10,000 $10,000 $45,000 $15,000

f) Endowment Fund Cash Revenue - Contribution

$100,000 $100,000

g) 15

General Fund Cash Revenue - Investment Income

$3,000 $3,000

h) Capital Fund Amortization Expense Accumulated Amortization

$10,000 $10,000

Buana Fide is a local charity which received the following donations during 2016: • A local radio station donated air time valued at $20,000. If the air time had not been donated, Buana Fide would have purchased it. • 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 spend roughly 1,000 hours soliciting donations from the public. The minimum hourly wage rate in Buana Fide's main area of operation is $8.00 per hour. 52) Prepare the necessary journal entries to record these transactions assuming that the deferral method

of accounting for contributions is used. Answer: Donation of air-time: Advertising Expense Contribution Revenue

$20,000 $20,000

Donation of Land and Machinery: Land Net assets - donated land

$50,000

Machinery Deferred Contributions - Capital Assets

$4,000

$50,000

Fundraising by volunteers: No entry required.

$4,000

53) 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. Answer: Donation of air-time: General Fund Advertising Expense Contribution Revenue

$20,000 $20,000

Donation of Land and Machinery: Capital Fund Land Contributions - Donated Land Machinery Contributions - Donated Machinery

$50,000 $50,000 $4,000 $4,000

Fundraising by volunteers: No entry required. 54) A capital asset (equipment) with a fair value of $1,500,000 and a remaining useful life of ten years

and land with a fair value of $2,000,000 is donated to a not-for-profit organization. The organization will use the equipment in its operations. 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 The machinery has a ten year useful life. Answer: a) If the deferral method is being used and the asset is subject to amortization, the journal entry recording the donation of the equipment is: Equipment Deferred contributions - capital assets

$1,500,000 $1,500,000

The following entries will be prepared each year to record the annual amortization and recognition of the deferred contribution: Amortization expense Accumulated amortization

$150,000

Deferred contributions - capital assets Contribution revenue

$150,000

Land Net assets - donated land

$2,000,000 $2,000,000

No deferral of land as no expenses associated with it. Reflected in the statement of net assets. b) If the restricted fund method is being used, the fair value of the donated capital asset is recorded as revenue in the capital fund: Capital Fund Equipment Contribution revenue - donated equipment Land Contribution revenue - donated land

$1,500,000 $1,500,000 $2,000,000 $2,000,000

The following entry will be prepared each year to record the annual amortization Amortization expense Accumulated amortization

$150,000 $150,000

55) Describe what fund accounting is and why is it used for not-for-profit organizations. Answer: Fund accounting comprises the collective accounting procedures resulting in a self-balancing

set of accounts for each fund established by legal, contractual or voluntary actions of an organization. Elements of a fund can include assets, liabilities, net assets, revenues and expenses (and gains and losses where appropriate). Fund accounting involves an accounting segregation, although not necessarily a physical segregation, of resources. It has been used successfully to keep track of restricted resources and to convey information through financial statements about the restrictions placed on an organization's resources. Given that not-for-profit organizations often have a stewardship role over assets, fund accounting has facilitated the reporting, implementation and execution of this stewardship role. The Rift Valley Minor Hockey Association was established in the village of Rift Valley in early 2015. It was established to promote hockey in the village and surrounding territory. With the support of the provincial government, local business people 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 the restricted fund method of accounting but will account for restricted donations using the deferred contribution method of accounting. The first set of financial statements will cover the eighteen month period from the establishment of the association to June 30, 2016. 18

From the bank statements, you determine the following: Cash receipts: Government grant for operating purposes Government grant for construction of the arena Corporate donations for the construction of the arena Minor hockey player registration fees Endowment fund contributions Ice rental and concession revenue Interest income received

$ 60,000 400,000 520,000 70,000 100,000 90,000 6,000 $1,246,000

Payments: Cost of construction of arena Operating expenses - minor hockey program Purchases of inventory for the concession Other operating costs Investment of endowment fund contributions Maintenance costs

$920,000 90,000 60,000 50,000 100,000 3,000

Bank balance, June 30, 2016

1,223,000 $ 23,000

Additional information: 1. The new arena was completed and officially opened on Canada Day (July 1) of 2015. 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 2016. (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 annual financial statements to the government. 19

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 2016-2017 season. 6. An inventory count was taken at the concession stand at the end of June 2016 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, 2016, unpaid invoices were $3,000 for concession purchases, $2,000 for hockey clinics held and $1,000 for miscellaneous other costs. 56) Prepare a statement of operations for the Rift Valley Minor Hockey Association for the eighteen

month period ended June 30, 2016. Answer: Rift Valley Minor Hockey Association Statement of Operations For the eighteen month period to June 30, 2016 Revenues: Government grant for operations (8 × $10,000) Hockey player registrations ($70,000 - $10,000) Rental and concession revenue Interest income Deferred contributions recognized ($23,000 + $11,000 + $3,000) Expenses: Operating expenses - minor hockey ($90,000 + $2,000) Cost of sales - concessions ($60,000 + $3,000 - $6,000) Other operating costs ($50,000 + $1,000) Maintenance costs Amortization of arena and equipment ($23,000 + $11,000) Excess of revenues over expenses

$80,000 60,000 90,000 1,000 37,000 $268,000

$92,000 57,000 51,000 3,000 34,000

237,000 $31,000

57) Prepare a statement of financial position for the Rift Valley Minor Hockey Association as at June

30, 2016. Answer: Rift Valley Minor Hockey Association Statement of Financial Position as at June 30, 2016 Assets: Cash ($1,226,000 - $1,203,000) Grant receivable ($80,000 - $60,000) Investments Inventory Capital assets: Land Arena Ice-making equipment Less: accumulated amortization Total Assets

$ 23,000 20,000 100,000 6,000 $120,000 920,000 66,000 ( 34,000)

Liabilities and Net Assets: Accounts payable Fees received in advance

1,072,000 $1,221,000

$ 6,000 10,000

Deferred contributions: Arena Ice-making equipment Maintenance

897,000 55,000 2,000 970,000

Net assets: Unrestricted Restricted: donated land Endowment Total Liabilities and Net Assets

$ 31,000 120,000 100,00 0

251,000 $1,221,000

On January 1, 2016, 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 a wealthy 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 21

between all programs undertaken by the Association. 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 considered to be 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, 2016, the organization incurred the following costs.

Wages and salaries Ice skates Skiing equipment Other equipment and supplies Transportation Rent Other expenses

Ice Skating Program $ 193,000 8,000 --58,000 43,000 15,000 35,000 $352,000

Skiing Program $ 81,000 --9,000 75,000 35,000 15,000 39,000 $254,000

At December 31, 2016, 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 deferred contribution method to account for restricted donations and uses programmatic reporting to report the results of its activities. 58) Prepare journal entries to record the transactions of the Kiterup Winter Sports Association for the

year ended June 30, 2016. Closing entries are not required. Answer:

Cash Net assets - endowment

$200,000

Investment in bonds Cash

$200,000

Cash Investment income

$ 8,000

$200,000

$ 8,000 22

Cash Contribution revenue - skating programs Contribution revenue - skiing programs

$750,000

Pledges receivable Allowance for doubtful pledges Restricted contributions - next year's programs

$150,000

Cash Deferred contributions - skates Deferred contributions - skis

$ 40,000

Program costs - skating program Program costs - skiing program Cash Accounts payable

$352,000 $254,000

$375,000 $375,000

$ 20,000 $130,000

$ 25,000 $ 15,000

$576,000 $ 30,000

Deferred contributions - skates Deferred contributions - skiing Contribution revenue - skating programs Contribution revenue - skiing programs

$ 8,000 $ 9,000 $ 8,000 $ 9,000

59) Prepare a statement of operations for the Kiterup Winter Sports Association for the year ended

December 31, 2016. Answer: Kiterup Winter Sports Association Statement of Operations For the year ended December 31, 2016 Ice Skating Programs Revenues: Contributions Interest income Expenses: Excess of revenues over expenses

Skiing Programs

Total

$383,000 4,000 387,000 352,000

$384,000 4,000 $388,000 254,000

$767,000 8,000 $775,000 606,000

$ 35,000

$134,000

$169,000

60) Prepare a statement of financial position of the Kiterup Winter Sports Association as at December

31, 2016. Statements for the individual programs are not required. Answer: Kiterup Winter Sports Association Statement of Financial Position As at December 31, 2016 Assets: Cash Pledges receivable (net) Investments Total Assets

$222,000 130,000 200,000 $552,000

Liabilities and Net Assets: Accounts payable Deferred contributions - 2017 programs Deferred contributions - skates Deferred contributions - skiing equipment Net assets: Unrestricted Endowment Total Liabilities and Net Assets

$ 30,000 130,000 17,000 6,000 183,000 $169,000 200,000

369,000 $552.000