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:

1. Prepare consolidated financial statements at December 31, 20X8 under each of the following assumptions:
   
   i) the functional currency is $CAD

Answer 1

Answer

For Better View Please copy in Excel

Consolidated Statement of Financial Position
		Workings in CDN
Assets:	Note No.	Liv Ltd	Maurcus Ltd	Fin Con Balance
Noncurrent assets:
Plant and equipment, net		2,752,000	1,932,480	4,684,480
Good Will in Acquisation		2,601,240	-	2,601,240
		5,353,240	1,932,480	7,285,720
Current assets:
Inventory		1,376,000	1,180,960	2,556,960
Accounts receivable		700,000	995,520	1,695,520
Cash and cash equivalents		562,080	878,400	1,440,480
		2,638,080	3,054,880	5,692,960
Total assets		7,991,320	4,987,360	12,978,680
Shareholders’ Equity:
Share capital		1,376,000	-	1,376,000
Retained earnings		4,711,904	956,664	5,668,568
Minorilty Interest			266,432	266,432
		6,087,904	1,223,096	7,311,000
Liabilities:
Noncurrent liabilities:
Notes payable		1,860,000	1,561,600	3,421,600
Current liabilities:
Accounts payable and accrued liabilities		923,600	1,322,480	2,246,080
Total liabilities		2,783,600	2,884,080	5,667,680
Total shareholders’ equity and liabilities		8,871,504	4,107,176	12,978,680

Statement of Consolidated Income of Liv Ltd
Sales		16,472,000	19,488,000	35,960,000
Dividend income		180,080	-	180,080
		16,652,080	19,488,000	36,140,080
Cost of sales		(8,256,000)	(12,305,280)	(20,561,280)
Other expenses*		(7,124,000)	(6,403,200)	(13,527,200)
Less Amortisation of Good Will		(9,280)	-	(9,280)
		(15,389,280)	(18,708,480)	(34,097,760)
Net Income		1,262,800	779,520	2,042,320

Retained Earnings		Liv Ltd	Maurcus Co share
Retained Earnings before Adjustments		2,601,520	887,280
Less : Good will amortisation		(9,280)	-
Add: Fair Value Gain		-	195,200
Less: Fair value depreciation Adj		-	(19,520)
Dividend Income		2,119,664
		4,711,904	1,062,960	956,664
Total Retained Earnings				5,668,568

Minority Interest
Opening Share		(In FC)	CDN/FC	(In CDN)
Share capital of Marcus Co @10%		40,000	2.20	88,000
Retained earnings @10%		14,600	2.20	32,120
				120,120
Current Year
Dividend Income		16,400	2.44	40,016
Current Year Retained Earnings Share				106,296
				146,312
Minority Interest				266,432

Computation of Cost of Acquisation
	FC	CDN/FC	CDN	Rate Used
Total Net Assets excluding Inv of Marcus Co. as on Jan 01, 20X8	182,000	2.2	400,400	Opening rate
Inventory value	364,000	2.38	866,320	Opening rate
Add: Fair value adjustment of Equipment	80,000	2.2	176,000	Opening rate
Fair value of Net Assets	626,000		1,442,720
Share of Assets by LL @90% (626000*90%)	563,400	2.2	1,239,480	Opening rate
Less : Acquisation Price	623,200	2.2	1,371,040	Opening rate
Good Will In Acquisation	59,800		2,610,520
Amorisation of Goodwill	(4,000)	2.32	(9,280)	Average Rate
Net Good Will as on Dec 31, 20X8	55,800		2,601,240

What rate we should use to translate the financials statement of Marcus Co.
Assets	Closing Rate
Liabilities	Closing Rate
Equity	Closing Rate
Income	Average Rate
Expenses	Average Rate

Translation of Dec 31, 20X8 Balances of Maurcus Co.
Assets:	(in FC)	Adjustments	Final (in FC)	CDN/FC	(in CDN)
Noncurrent assets:
Equipment, net (800,000)	720,000	72,000	792,000	2.44	1,932,480
Current assets:
Inventory	484,000	-	484,000	2.44	1,180,960
Accounts receivable	408,000	-	408,000	2.44	995,520
Cash	360,000	-	360,000	2.44	878,400
	1,252,000	-	1,252,000		3,054,880
Total assets	1,972,000	72,000	2,044,000		4,987,360
Shareholders’ equity:
Share capital	400,000	-	400,000	2.44	976,000
Retained earnings	390,000	72,000	462,000	2.44	1,127,280
	790,000	72,000	862,000		2,103,280
Liabilities:
Noncurrent liabilities:
Notes payable	640,000	-	640,000	2.44	1,561,600
Current liabilities:
Accounts payable	542,000	-	542,000	2.44	1,322,480
Total liabilities	1,182,000	-	1,182,000		2,884,080
Total shareholders’ equity and liabilities	1,972,000	72,000	2,044,000		4,987,360
	( In FC)			CDN/FC	(In CDN)
Sales	8,400,000	-	8,400,000	2.32	19,488,000
Cost of sales	(5,304,000)	-	(5,304,000)	2.32	(12,305,280)
Other expenses*	(2,688,000)	(72,000)	(2,760,000)	2.32	(6,403,200)
	(7,992,000)		(8,064,000)		(18,708,480)
Net Income	408,000		336,000		779,520