Meek's Penguin Corp.
Meek's Penguin Corp. (MPC) is a Canadian company that reports its financial results in accordance with IFRS. On December 31, 20X6, MPC acquired ordinary shares of Zoebug Supply Inc. (ZSI). Four independent questions based on different quantities of shares acquired, but using the same financial results for ZSI, are set out below.
ZSI's comparative statement of financial position as at December 31, 20X7 and its statement of comprehensive income for the year ended December 31, 20X7 follow:
Zoebug Supply Inc.
Statement of financial position
As at December 31 (in '000s)
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20X7
Cash $175
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20X6
$61
|
|
Accounts receivable and accruals 521
|
406
|
|
Inventory 192
|
183
|
|
Note receivable 150
|
0
|
|
Land 80
|
220
|
|
Building (net) 228
|
240
|
|
Equipment (net) 120
|
160
|
|
Trademark 100
|
100
|
|
Total assets $1,566
|
$1,370
|
|
Accounts payable and accruals $235
|
$264
|
|
Long-term debt 600
|
600
|
|
Ordinary shares 300
|
300
|
|
Retained earnings 431
|
206
|
|
Total liabilities and equity $1,566
Zoebug Supply Inc.
Statement of comprehensive income
|
$1,370
|
|
For the year ended December 31, 20X7 (in '000s)
Sales revenue $1,820
Cost of goods sold 845
Gross profit 975
Sales, general and administrative expenses 563
Depreciation and amortization expense 52
360
Other income 190
Earnings before income tax expense 550
Income tax expense 165
Net income $ 385
|
The fair value of ZSI's identifiable net assets at time of acquisition differed from its book value as indicated below (in $000s):
|
|
Book value
Dec. 31, 20X6
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Fair value
Dec. 31, 20X6
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Estimated remaining useful life/term to maturity
|
Estimated residual value
|
|
Inventory
|
183
|
213
|
N/A
|
N/A
|
|
Land
|
220
|
390
|
N/A
|
N/A
|
|
Building (net)
|
240
|
200
|
20 years
|
$0
|
|
Equipment (net)
|
160
|
176
|
4 years
|
$0
|
|
Trademark
|
100
|
300
|
N/A
|
$0
|
|
Long-term debt
|
600
|
620
|
4 years
|
N/A
|
Additional information:
1. Both companies pay income tax at a rate of 30%.
2. Both companies use the first in, first out (FIFO) cost-flow assumption to value their inventories.
3. Both companies depreciate their depreciable assets on a straight-line basis.
4. The fair value increment on the long-term debt is amortized using the straight-line method.
5. Both companies account for share-issuance costs using the retained-earnings method.
6. For impairment-testing purposes, MPC established that ZSI is a cash-generating unit (CGU).
7. On December 31, 20X7, ZSI sold land to MPC for $150,000. ZSI's net book value at time of sale was $140,000, which was the same as the estimated fair value at acquisition date of the associate (December 31, 20X6). In consideration of the transfer, MPC signed a note payable to ZSI for $150,000. The note is payable in full on December 31, 20X9. Interest at 4% per annum, payable annually, is first payable on December 31, 20X8.This is the market rate of interest for a note of this length.
8. During 20X7, MPC sold goods to ZSI for $200,000 including a 40% gross profit margin; 10% of these goods remained unsold by ZSI as at December 31, 20X7.
9. During 20X7, ZSI sold goods that it had purchased for $100,000 to MPC for $140,000; 25% of these goods remained unsold by MPC as at December 31, 20X7.
10. During 20X7, ZSI rented office space from MPC at a total cost of $50,000. This amount remained unpaid at year end.
11. MPC and ZSI only prepare accruals and other adjusting entries at year end.
Question 1
On December 31, 20X6, MPC paid $200,000 cash to acquire 20% of ZSI's outstanding ordinary shares. This level of investment provides MPC with significant influence over ZSI.
MPC tested the CGU for impairment on December 31, 20X7. MPC's investment was found to be impaired by $7,600.
Required:
In worksheet Q1(a) JEs and calcs
a) Prepare journal entries to record MPC's acquisition of ZSI and all events during 20X7 that affect MPC's Investment in ZSI account. Ensure that you provide support for your calculations. Also remember to provide a brief explanation for each journal entry as to its nature.
In worksheet Q1(b) JEs and calcs
b) Independent of part (a), assume that the balance of MPC's Investment in ZSI account on December 31, 20X9, was $280,000. This balance includes the results of all of ZSI's activities during 20X9. Three independent scenarios follow. In each one, the amount paid or received represents the fair market value of the ownership stake purchased or sold. Prepare the journal entries that MPC would record for each of these independent scenarios. Remember to support the journal entries with a brief explanation as to their nature.
i) On December 31, 20X9, MPC sold 25% of its investment in ZSI to an outside party for $65,000 cash. This transaction reduced MPC's remaining ownership by 5%, from 20% to 15%. MCP no longer has significant influence over ZSI.
ii) On December 31, 20X9, MPC purchased an additional 15% of the outstanding ordinary shares of ZSI for $200,000 cash. This transaction increased MPC's ownership stake to 35%.
iii) On December 31, 20X9, MPC purchased an additional 40% of the outstanding ordinary shares of ZSI for $510,000 cash. This transaction increased MPC's ownership stake to 60%.
Question 2
Independent of Question 1, assume that on December 31, 20X6, MPC paid $1,000,000 cash to acquire 100% of the net assets of ZSI.
Required:
In worksheet Q2 AD schedule
a) Calculate and allocate the acquisition differential including determination of the goodwill arising on the acquisition of the net assets of ZSI.
b) Prepare MPC's journal entry to record the acquisition. Support the journal entry with a brief explanation as to its nature. (3 marks)
Question 3
Independent of Questions 1 and 2, assume that on December 31, 20X6, MPC issued 100,000 of its ordinary shares to acquire 100% of the ordinary shares of ZSI. MPC's ordinary shares were actively traded at $10 at acquisition date.
MPC disbursed $23,000 cash to pay for costs directly related to the acquisition of ZSI and an additional $18,000 cash to pay for the cost of issuing the additional shares.
MPC's non-consolidated statement of financial position as at December 31, 20X6, which was prepared after all MPC's year-end adjustments had been processed but which does not include the investment made in ZSI described in the points above, is as follows:
Meek's Penguin Corp.
Statement of financial position As at December 31, 20X6 (in $000s)
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Cash
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$
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728
|
|
Accounts receivable and accruals
|
|
968
|
|
Inventory
|
|
422
|
|
Land
|
|
640
|
|
Building (net)
|
|
1,041
|
|
Equipment (net)
|
|
632
|
|
Trademark
|
|
650
|
|
Total assets
|
$
|
5,081
|
|
Accounts payable and accruals
|
$
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669
|
|
Long-term debt
|
|
1,950
|
|
Ordinary shares
|
|
500
|
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Retained earnings
|
|
1,962
|
|
Total liabilities and equity
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$ 5,081
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Required:
In worksheet Q3 Consol. SFP 20X6
Refer to the acquisition differential allocation schedule that you prepared in Question 2. Use this information, together with the two companies' SFPs at December 31, 20X6, and the information provided in this question, to prepare MPC's consolidated statement of financial position at the December 31, 20X6, acquisition date. Provide a brief explanation of all adjustments made to arrive at the consolidated SFP figures.
(Note: From the Project Data file, copy and paste the template in the worksheet titled "Q3 Consolidated SFP 20X6" into your project submission file. Do not show your work in the Project Data file.)
Question 4
Independent of Questions 1 to 3, assume that on December 31, 20X6, MPC paid $720,000 cash to acquire 70% of ZSI's outstanding ordinary shares.
MPC tested the CGU for impairment on December 31, 20X7. Goodwill was found to be impaired by $18,000.
MPC's non-consolidated comparative statement of financial position as at December 31, 20X7, and its non-consolidated statement of comprehensive income for the year ended December 31, 20X7, are set out below:
Meek's Penguin Corp.
Statement of financial position As at December 31 (in '000s)
|
|
|
|
|
|
|
20X7
|
|
20X6
|
|
Cash
|
$ 313
|
|
$ 8
|
|
Accounts receivable and accruals
|
1,020
|
|
968
|
|
Inventory
|
466
|
|
422
|
|
Land
|
790
|
|
640
|
|
Building (net)
|
989
|
|
1,041
|
|
Equipment (net)
|
474
|
|
632
|
|
Trademark
|
650
|
|
650
|
|
Investment
|
720
|
|
720
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Total assets
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$ 5,422
|
|
$ 5,081
|
|
|
|
|
|
|
Accounts payable and accruals
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$ 722
|
|
$ 669
|
|
Long-term debt
|
1,875
|
|
1,950
|
|
Note payable
|
150
|
|
0
|
|
Ordinary shares
|
500
|
|
500
|
|
Retained earnings
|
2,175
|
|
1,962
|
|
Total liabilities and equity
|
$ 5,422
|
|
$ 5,081
|
|
Meek's Penguin Corp.
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Statement of comprehensive income
For the year ended December 31, 20X7 (in '000s)
|
|
Sales revenue
|
$ 2,498
|
|
Cost of goods sold
|
647
|
|
Gross profit
|
1,851
|
|
Sales, general and administrative expenses
|
1264
|
|
Depreciation and amortization expense
|
215
|
|
|
372
|
|
Other income
|
218
|
|
Earnings before income tax expense
|
590
|
|
Income tax expense
|
177
|
|
Net income
|
$ 413
|
Required:
In worksheet Q4 AD schedules
a) Use the acquisition method to allocate the acquisition differential and determine goodwill arising on acquisition, assuming that MPC uses the identifiable net assets (INA) method to value the non-controlling interest (NCI).
b) Use the acquisition method to allocate the acquisition differential and determine goodwill arising on acquisition assuming that MPC uses the fair value enterprise (FVE) method to value the NCI.
c) Based on the solution to part (a) (where MPC uses the INA method to value the NCI), prepare an acquisition differential and impairment schedule for 20X7. Provide references for each line in the AD schedule that will be used to reference through to the consolidated financial statements.
In worksheet Q4 Interco transactions
d) Prepare a listing of intercompany transactions and balances eliminated upon consolidation.
e) Calculate all unrealized and realized intercompany profits.
- Provide references for each line in both the schedule of intercompany transactions and the schedule of unrealized/realized intercompany profits that will be used to reference through to the consolidated financial statements.
- Include a calculation of the total deferred tax asset/liability. Indicate whether the calculated figure is an asset or a liability.
In worksheet Q4 Consol. SCI & RE
f) Prepare MPC's consolidated statement of comprehensive income for the year ended December 31, 20X7, assuming that MPC uses the INA method to value the NCI. Show the allocation between the parent and NCI. Include references to your supporting calculations, which will typically be the references in the supporting schedules prepared in parts (a) through (e) of Question 4.
(Note: From the Project Data file, copy and paste the template in the worksheet titled "Q4
Consolidated SCI 20X7" into your project submission. Do not show your work in the Project Data file.)
g) Prepare MPC's consolidated statement of retained earnings for the year ended December 31, 20X7, assuming that MPC uses the INA method to value the NCI.
In worksheet Q4 Consol. SFP & NCI
h) Calculate the NCI on the statement of financial position as at December 31, 20X7, assuming that MPC uses the INA approach to value the NCI.
i) Prepare MPC's consolidated statement of financial position as at December 31, 20X7, assuming that MPC uses the INA method to value the NCI. Include references to your supporting calculations, which will typically be the references in the supporting schedules prepared in parts (a) through (h) of Question 4.
(Note: From the Project Data file, copy and paste the template in the worksheet titled "Q4 Consolidated SFP 20X7" into your project submission file. Do not show your work in the Project Data file.)