Question

On January 1, 20X8, Liv Ltd. (LL), a Canadian company, acquired 90% of Marcus Co. (MC), a foreign company for FC 623,200. At the acquisition date, the carrying value of MC’s net assets equaled their fair value except for the equipment, which had a carrying value of FC 800,000 and a fair value of FC 880,000. At the acquisition date, MC’s equipment had a remaining useful life of 10 years. There was an FC 4,000 impairment of the goodwill which occurred evenly throughout 20X8.

Selected financial statements for LL and MC are presented below.

Liv Ltd.
Statement of Financial Position
As of December 31, 20X8
(in $ CDN)

   Assets:
   Noncurrent assets:
       Plant and equipment, net                   2,752,000
       Investment in Marcus Co.                   1,371,040
                                       4,123,040
   Current assets:
       Inventory                           1,376,000
       Accounts receivable                       700,000
       Cash and cash equivalents               562,080
                                       2,638,080
    Total assets                               6,761,120
  
Shareholders’ Equity:
       Share capital                           1,376,000
        Retained earnings                       2,601,520
                                       3,977,520
   Liabilities:
   Noncurrent liabilities:
       Notes payable                       1,860,000
   Current liabilities:
       Accounts payable and accrued liabilities           923,600
   Total liabilities                           2,783,600
   Total shareholders’ equity and liabilities               6,761,120

Liv Ltd.
Statement of Income
For the year ended December 31, 20X8
(in $ CDN)

       Sales                           16,472,000
       Dividend income                   180,080
                                   16,652,080
       Cost of sales           8,256,000
       Other expenses*       7,124,000       15,380,000
       Net income                       1,272,080

       *includes depreciation

LL declared and paid dividends of $928,000 CDN on December 31, 20X8.

Marcus Co.
Statement of Financial Position
(in FC)

                           Dec. 31,       Jan. 1
                           20X8       20X8
Assets:
Noncurrent assets:
   Equipment, net               720,000       800,000
Current assets:
   Inventory                   484,000       364,000
   Accounts receivable               408,000       280,000
   Cash                       360,000       164,000
                           1,252,000       808,000
Total assets                       1,972,000       1,608,000

Shareholders’ equity:
   Share capital                   400,000       400,000
    Retained earnings               390,000       146,000
                           790,000       546,000
Liabilities:
Noncurrent liabilities:
   Notes payable               640,000       640,000
Current liabilities:
   Accounts payable               542,000       422,000
Total liabilities                   1,182,000       1,062,000
Total shareholders’ equity and liabilities       1,972,000       1,608,000

Marcus Co.
Statement of Income
For the year ended December 31, 20X8
(in FC)

       Sales                               8,400,000
       Cost of sales               5,304,000
       Other expenses*           2,688,000       7,992,000
                                       408,000
       *includes depreciation

Marcus Co.
Statement of Changes in Equity – Retained Earnings Section
For the year ended December 31, 20X8
(in FC)

       Retained earnings, January 1, 20X8           146,000
       Net income                           408,000
       Dividends declared                   (164,000)
       Retained earnings, December 31, 20X8           390,000

MC declared and paid FC164,000 in dividends on December 31, 20X8.

Selected Exchange Rates

       January 1, 20X8                   FC1 = $2.20 CDN
       December 31, 20X8                   FC1 = $2.44 CDN
       Date when ending inventory was purchased   FC1 = $2.38 CDN
       Average rate for 20X8               FC1 = $2.32 CDN

Required:

a)   Prepare consolidated financial statements at December 31, 20X8 under each of the following assumptions:

i) the functional currency is $CAD, and
ii) the functional currency is the FC.

b)   Assume that LL is a private company and reports under ASPE. LL uses the equity method to report its investment in MC. LL’s functional currency is $CAD. Calculate LL’s Investment in Marcus Co.’s account at December 31, 20X8. There is no need to prepare financial statements

Answer 1

Solution:

a) Required statement is prepared below.

b) LL's Investment in Marcus Co.'s account is $2,601,240.

.

Step-by-step explanation

a) Required statements:

Formula table showing the above calculation is as follows:

b)

LL's Investment in Marcus Co.'s account is $2,601,240,

Formula table showing the above calculation is as follows: