Part 1 . Sobeys Inc.'s balance sheet reports the asset Cost in Excess of Net Assets of Purchased Businesses. Assume that Sobeys acquired another company, which carried these figures:
Carrying amount of net assets .................................................................. $3.8 million
Fair value of assets .................................................................................... 4.1 million
Requirements
1. What is the term used in Canadian financial reporting for the asset Cost in Excess of Net Assets of Purchased Businesses?
2. Record Sobeys Inc.'s purchase of the other company for $5.3 million cash.
3. Assume that Sobeys determined that the asset Cost in Excess of Net Assets of Purchased Businesses increased in value by $800,000. How would this transaction be recorded?
Then, suppose Cost in Excess of Net Assets of Purchased Businesses decreased in value by $800,000. How would this transaction be recorded? Discuss the basis for your decision in each case.
Part 2. Suppose Ford paid $2.6 million for a patent related to an integrated system, including hands-free cell phone, GPS, and iPod connectivity. The company expects to install this system in its automobiles for four years. Ford will sell this as an "extra" for $1,500. In the first year, 10,000 units were sold. All costs per unit totalled $835.
Requirements
1. As the CFO, how would you record transactions relating to the patent in the first year?
2. Prepare the income statement for the integrated system's operations for the first year. Evaluate the profitability of the integrated system's operations. Use an income tax rate of 38%.
3. Explain what items were recorded as assets and why.