Question

Question 3                                                                                    

Prints Galore Ltd., a Canadian company, acquired 100% of Sculptures Ltd. for FC 300,000 on January 1, 2014. Prints Galore’s functional currency is the Canadian dollar and Sculpture’s functional currency is the FC. Selected exchange rates are presented below:

                             January 1, 2014                       FC1 = $1.6993 CAD

                             December 31, 2015                  FC1 = $1.7182 CAD

                             December 31, 2016                  FC1 = $1.7233 CAD

Assume that the average rate for 2014, 2015, and 2016 is FC 1 = $1.7201 CAD.

Required:

At the time of acquisition, the fair value of Sculpture’s net assets was FC 200,000. There has been no impairment of goodwill.

Calculate the amount of goodwill that should be presented on Prints Galore’s December 31, 2016 consolidated statement of financial position.

Calculate the amount of exchange gain/loss, if any, that should be reported on Prints Galore’s 2016 consolidated statement of income under other comprehensive income.

Assume that at the time of acquisition, the fair value of Sculpture’s net assets is FC 300,000. All of the net assets equaled their carrying value with the exception of some machinery which exceeded its carrying value by FC 100,000. The machinery has a remaining useful life of 5 years. Both Prints and Sculpture use straight-line amortization.

At the end of 2016, what amount, if any, of the acquisition differential should be added to the net book value of the equipment?

Calculate the amortization expense, if any, related to the acquisition differential that should be included in Prints’ consolidated statement of comprehensive income for 2016.

Calculate the ending balance of the cumulative exchange gain, cumulative OCI.

Answer 1

the amount of goodwill that should be presented on Prints Galore’s December 31, 2016 consolidated statement of financial position

The amount given as a consideration at the time of acquisition is FC 3,00,000 and the Fair Value of of Sculpture’s net assets was FC 200,000.The Goodwill amount becomes as FC 100,000 (FC 300,000 - FC 200,000)

Now the amount of goodwill that should be presented on Prints Galore’s December 31, 2016 consolidated statement would based on the Closing Exchange rate i.e. FC1 = $1.7233 CAD

Amount of Goodwill = 100,000 * 1.7233 = $172,330 CAD

Calculate the amount of exchange gain/loss which should be reported on Prints Galore’s 2016 consolidated statement of income under other comprehensive income

Amount of Gain under Comprehensive Income is Closing Goodwill (Closing Rate - Opening Rate)

i.e. FC 100,000 ( $1.7233 CAD - $1.7182 CAD)

i.e. $510 CAD

At the end of 2016 the amount of the acquisition differential which should be added to the net book value of the equipment

The Exceeded amount of some machinery is FC 100,000

Depreciation using straight-line amortization = FC 100,000 / 5 = FC 20,000

Total Depreciation for 3 years ( Starting from 2014 till end of 2016 ) = FC 20,000 * 3 = FC 60,000

Depreciation amount in Canadian Dollar = FC 60,000 *1.7201 (average rate for 2014, 2015, and 2016 is FC 1 = $1.7201 CAD ) = $103,206 CAD

Amount to be added back to the Net Book Value of Equipment is ( 100,000 * 1.7233 ) - $ 103,206 i.e. $ 69,124 CAD

The amortization expense related to the acquisition differential that should be included in Prints’ consolidated statement of comprehensive income for 2016

The Amortisation expenses to be included in Prints’ consolidated statement of comprehensive income for 2016

FC 20,000 * 1.7233 = $34,466 CAD