Naya Ltd. is a public company that manufactures components used in cellular telephones and other mobile devices. Its head office is in Mississauga, Ontario, and its year end is December 31. It is currently January 5, 2014, and you, Controller, CA, have just been called into the office of Renald Ménard, the Vice-President of Finance, for a meeting to discuss two transactions that have just taken place. He is particularly concerned with the effects that these transactions will have on the year-end financial statements. Refer to Exhibit 5-2(a) for Naya Ltd.€™s December 31, 2013 year-end financial statements. The details are as follows:

1. On November 1, 2013, Naya Ltd. acquired an 80% interest in Mac Enterprises, a company in a similar line of business as Naya, for $575,000. This is the first time that Naya has obtained control of another company without purchasing 100% of it and as such, Mr. Ménard is unsure of what the repercussions are. The share capital and retained earnings of Mac Enterprises at the date of acquisition were $100,000 and $325,000, respectively. The net assets were equal to their acquisition date fair market values. There were two exceptions. The first was inventory, which had a fair market value $10,000 higher than its book value and was expected to be sold by December 31, 2013. The second exception was property, plant, and equipment, with a remaining useful life of five years, which had a fair market value $50,000 higher than its book value. Mac Enterprises earns income evenly over the year.

2. Naya sold 10% of its wholly owned subsidiary Icebreaker Inc. on December 31, 2013, for $25,000. Naya will retain control. This 100%-owned company was acquired three years ago for $400,000. At that time, its share capital was $100,000 and its retained earnings were $125,000. Its book values were equal to fair market value, with the exception of inventory, whose fair market value was $20,000 higher and was sold within one year, and property, plant, and equipment, whose fair market value was $100,000 higher and had a remaining useful life of 10 years at the time. Naya has recorded a gain of $5,000 on its December 31, 2013 statement of comprehensive income (45,000 - 10% × 400,000).

Required

Prepare a report to Renald Ménard, the Vice-President of Finance, that discusses the repercussions of the two transactions and addresses his concerns. As well, address how the above transactions will affect the statement of changes in equity at December 31, 2013. Ignore the effects of income taxes.

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EXHIBIT 5-2(a) Financial Statement Information as at December 31, 2013 Naya Ltd Mac Enterprises Icebreaker Ltd Assets Current assets Cash Accounts receivable Inventory Total current assets $ 421,203 372,631 811,283 $1,605,117 $219,230 172,611 201,920 $593,761 $109,203 201,937 301,006 $612,146 Non-current assets Investment in Mac Enterprises Investment in Icebreaker Ltd Property, plant, and equipment Total non-current assets Total assets $575,000 400,000 671,321 $1,646,321 $3,251,438 250,191 $250,191 $843,952 221,902 $221,902 $834,048 Liabilities and Shareholder's Equity Current liabilities Non-current liabilities Total liabilities $615,231 1,052,012 $1,667,243 $176,029 117,923 $293,952 $199,280 249,465 $448,745 Shareholder's equity Share capital Retained earnings beginning Net income during the year Retained earnings (12131/2013) Total shareholder's equity Total liabilities and shareholder's equity $200,000 $ 908,072 476,123 1,384,195 $1,584,195 $3,251,438 $100,000 $325,000 125,000 450,000 $550,000 $843,952 $100,000 $209,103 76,200 285,303 $385,303 $834,048