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

1. 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

• 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