Question 1 -
Sara Lighting Ltd. paid $2,700,000 for all the shares of Chad Lamps Ltd. at the beginning of its fiscal year. Sara will be preparing consolidated financial statements. The following information pertains to Chad' s assets and liabilities at the acquisition date:
|
Book Value
|
Fair Value
|
Tax Basis
|
|
Inventory
|
$ 180,000
|
$ 180,000
|
$ 180,000
|
|
Accounts Receivable
|
225,000
|
225,000
|
|
|
Land
|
338,400
|
450,000
|
450,000
|
|
Building (net)
|
666,000
|
675,000
|
450,000
|
|
Equipment (net)
|
603,000
|
562,500
|
450,000
|
|
Accounts payable
|
157,500
|
157,500
|
157,500
|
Both Sara and Chad have a tax rate of 50%. Chad has not established any deferred tax asset or liability accounts on its books.
Required:
a. Calculate the goodwill that should be presented on Sara's consolidated balance sheet.
b. Determine if a deferred tax asset or deferred tax liability should be presented on Sara's consolidated balance sheet. If so, calculate the amount and identify if it is an asset or a liability. If no deferred tax asset or liability should be presented, explain why.
c. Explain the difference between a taxable temporary difference and a deductible temporary difference, and describe how they are treated for accounting purposes.
Question 2 -
Canadian Premium Seafood Ltd. (CPS) sells fresh seafood to a large number of international clients. On September 1, 20X3, CPS entered into a contract to sell goods to a foreign customer for FC 600,000. CPS delivered the goods to the customer on October l, 20X3 and received payment on November 30, 20X3. On September 1, CPS also entered into a forward contract to deliver FC 600,000 on November 30 at a rate ofFC 1 = $ 1.70 CAD. CPS had designated this as a fair value hedge on a firm commitment. On October 1, the forward rate on FCs to November 30 was FC 1= $1.72 CAD. At CPS's October 31, 20X3 year-end, the forward rate for FCs was FC1 = $1.74 CAD.
September 1, 20X3 FC 1 = $1.67 CAD
October 1, 20X3 FC 1 = $1.70 CAD
October 31, 20X3 FC 1 = $1.72 CAD
November 30, 20X3 FC 1 = $1.69 CAD
Required:
a. Prepare dated journal entries to record the hedging transactions using the gross method.
b. Explain how the premium paid on a forward contract to hedge a firm commitment to purchase inventory is reported in income when the inventory is purchased
i. for cash, and
ii. on account.
Question 3 -
On April 1, 20X7, Rona Ltd., a Canadian company, established a wholly-owned foreign subsidiary called Tim Ltd. Tim issued shares to Rona in exchange for cash. On May 31, 20X7, Tim received an interest-free loan from Lorry Inc., another subsidiary of Rona. Tim anticipates that at least half of its sales will be to Lorry. With the loan, Rona helped Tim acquire inventory and a tract of land on June 30, 20X7. Tim plans to construct a building on the land in 3 years. In the meantime, Rona is allowing Tim to use some of its surplus space rent- free.
On January 1, 20X8, Tim acquired a packing machine. Because of some regulatory issues, Tim was not able to begin operations until 20X8. Additional purchases of inventory were made evenly throughout the year. The goods in ending inventory were purchased on November 30, 20X8.
Selected exchange rates for the local currency, FC, to the Canadian dollar are as follows:
April 1, 20X7 FCI = $2.00
May 31, 20X7 FCI = $1.98
June 30, 20X7 FCI = $2.00
December 31, 20X7 FCI = $2.30
November 30, 20X8 FCI = $2.45
December 31. 20X8 FCI = $2.50
20X7 average FCI = $2.15
20X8 average FCI = $2.40
Tim has provided the following financial information, denominated in FC:
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Tim Ltd. Statement of Financial Position Years ended December 31 (in FC)
|
|
|
20X8
|
20X7
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
|
|
138,600
|
158,400
|
|
Accounts receivable
|
|
99,000
|
|
|
Inventory
|
|
79,200
|
158,400
|
|
|
316,800
|
316,800
|
|
Non-current assets:
|
|
|
|
|
Land
|
|
316,800
|
316,800
|
|
Packing machine
|
237,600
|
|
|
|
Accumulated amortization
|
(39,600)
|
198,000
|
|
|
Total assets
|
|
514,800
|
316,000
|
|
Liabilities and shareholder's equity Liabilities:
|
|
831.600
|
633,600
|
|
Accounts payable - current
|
|
174,240
|
39,600
|
|
Loan payable - long-term
|
|
198,000
|
198,000
|
|
|
372,240
|
237,600
|
|
Shareholder's equity:
|
|
|
|
|
Common shares
|
|
396,000
|
396,000
|
|
Retained earnings
|
|
63,360
|
|
|
|
459,360
|
396,000
|
|
Total liabilities and shareholder's equity
|
|
831,600
|
633,600
|
|
Tim Ltd. Statement of Net and Comprehensive Income Year ended December 31, 20X8 (in FC)
|
|
Sales
|
|
475,200
|
|
Cost of sales:
|
|
|
|
Opening inventory
|
158,400
|
|
|
Purchases
|
237,600
|
|
|
Ending inventory
|
(79,200)
|
316,800
|
|
Gross profit
|
|
158,400
|
|
Expenses:
|
|
|
|
Amortization
|
39,600
|
|
|
Other
|
55,440
|
95,040
|
|
|
63,360
|
Net and comprehensive income
Required:
a. There are a number of indicators that a Canadian business should consider in determining the functional currency for its foreign subsidiary. Identify two of these indicators and provide an example of a condition that would indicate that the Canadian dollar is the functional currency.
b. Assume that the functional currency is the Canadian dollar in the above scenario.
i. What type of foreign subsidiary is Tim?
ii. Calculate Tim's translation gain/loss at December 31, 20X7.
iii. Prepare translated financial statements for 20X8.
iv. Prepare an independent calculation (analysis) of the 20X8 translation gain/loss to prove the balance.
c. Assume that the functional currency is not the Canadian dollar in the above scenario.
i. What type of foreign subsidiary is Tim?
ii. Calculate Tim's translation gain/loss at December 31, 20X7.
iii. Prepare translated financial statements for 20X8.
iv. Prepare an independent calculation (analysis) of the 20X8 translation gain/loss to prove the balance.
Remember to show all your work.
Question 4 -
Diana Healhy is a not-for-profit organization that provides respite care for patients with dementia. Over the years, Aron Enterprises Ltd. has become a very big supporter of Diana Healthy. This year, Aron surprised Diana Healthy by donating a building and the land that it stands on. The building has a fair value of $1,800,000 and an estimated remaining useful life of 25 years. The land has a fair value of $270,000. Diana Healthy uses straight-line amortization and expects the building to have a $180,000 residual value. Its accounting policy requires it to take a full year of amortization in the year of acquisition. Diana Healthy will be moving to the new building and will sell their current building to finance its operations.
Required:
a. Prepare Diana Healthy journal entries relating to the above donation by Aron Enterprises for the current year assuming that
i. Diana Healthy uses the deferral method to record contributions.
ii. Diana Healthy uses the restricted fund method to record contributions.
b. Diana Healthy sometimes receives endowment contributions. Explain what an endowment contribution is, and describe how Diana Healthy should record it under the restricted fund method.