Assignment 3

This assignment should be completed after Chapter 12. It contributes 10% toward your final grade. Remember to show all your work as partial marks may be awarded.

Question 1 (15 marks)

On June 1, 2014, Fleming Co. sold goods to BFF Ltd. for FC 200,000 and entered into a 90-day forward contract with a financial institution to deliver FC 200,000. Fleming expects to collect payment from BFF in 90 days. Fleming has a July 31 year-end.

Selected exchange rates are presented below: Spot Rate Forward rate to August 30

June 1, 2014 FC1= $1.5717 CAD FC1= $1.5702 CAD

July 31, 2014 FC1= $1.5600 CAD FC1= $1.5594 CAD

August 30, 2014 FC1= $1.5500 CAD

Required:

Prepare dated journal entries for Fleming to reflect the above transactions using the current method. Do not use hedge accounting.

Prepare dated journal entries for Fleming to reflect the above transactions using the net method. Do not use hedge accounting.

Explain how your journal entry on the settlement date would change if the receivable was hedged.

Question 2 (55 marks)

In 2015, Corbus Co., a Canadian company, created a foreign subsidiary called Snazzy Ltd. by investing $2,000,000 CAD (800,000 FC) in return for all of Snazzys common shares. In preparing to start operations, Snazzy acquired equipment for 960,000 FC and took out a 320,000 FC loan. Snazzy is committed to repaying the loan in 3 years. In 2016, Snazzy acquired a tract of land for 320,000 FC. All dividends were paid on December 31 of the years in which they were declared.

Snazzys financial statements for its first 2 years of operations are presented below.

Snazzy Ltd.

Statement of Financial Position

As of December 31

(in FC)

2016 2015

Assets:

Current assets:

Cash $ 48.000 $ 256,000

Accounts receivable 64,000 48,000

112,000 304,000

Noncurrent assets:

Land 320,000 -

Equipment 960,000 960,000

Accumulated amortization (192,000) (96,000)

1,088,000 864,000

Total assets $ 1,200,000 $ 1,168,000

Liabilities and shareholders equity:

Current liabilities:

Accounts payable 16,000 32,000

Noncurrent liabilities:

Loan payable 320,000 320,000

336,000 352,000

Shareholders equity:

Share capital 800,000 800,000

Retained earnings _64,000 _16,000

864,000 816,000

Total liabilities and shareholders equity $ 1,200,000 $ 1,168,000

Snazzy Ltd.

Statement of Comprehensive Income

For the year ended December 31

(in FC)

2016 2015

Revenue $ 480,000 $ 352,000

Expenses:

Amortization 96,000 96,000

Interest 64,000 64,000

Other expenses 192,000 128,000

352,000 288,000

Net and comprehensive income $ 128,000 $ 64,000

Snazzy Ltd.

Statement of Changes in Equity Retained Earnings Section

For the year ended December 31

(in FC)

2016 2015

Retained earnings, beginning of year $ 16,000 $ -

Net income 128,000 64,000

Dividends declared (80,000) (48,000)

Retained earnings, end of year $ 64,000 $ 16,000

Selected exchange rates

when the equipment was purchased 1FC = $2.30 CAD

when the loan was negotiated 1FC = $2.40 CAD

when the land was purchased 1FC = $1.90 CAD

average during 2015 1FC = $2.20 CAD

December 31, 2015 1FC = $2.00 CAD

Average during 2016 1FC = $1.70 CAD

December 31, 2016 1FC = $1.50 CAD

Required:

Assume that Snazzys functional currency is the Canadian dollar.

Translate Snazzys 2015 financial statements using the appropriate method.

Independently calculate the translation gain/loss.

Repeat (i) and (ii) for 2016.

Assume that Snazzys functional currency is the FC.

Translate Snazzys 2015 financial statements using the appropriate method.

Independently calculate the translation gain/loss.

Repeat (i) and (ii) for 2016.

Question 3 (15 marks)

Prints Galore Ltd., a Canadian company, acquired 100% of Sculptures Ltd. for FC 300,000 on January 1, 2014. Prints Galores functional currency is the Canadian dollar and Sculptures 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 Sculptures net assets was FC 200,000. There has been no impairment of goodwill.

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

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

Assume that at the time of acquisition, the fair value of Sculptures 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.

Question 4 (15 marks)

Senior Immigrants (SI) is an NFPO established a few years ago to help senior immigrants learn English and integrate into Canadian society. SI has some paid staff supported by a large group of volunteers. The organization is funded by government grants and private donations. During the current year, the following events occurred:

SI was awarded a $1,000,000 government grant. The terms of the grant are:

$380,000 for the acquisition of four mini-buses

$120,000 for rent for the next 2 years

$500,000 for SIs operations and programs

In the current year, SI received $750,000$380,000 for the mini-buses, $120,000 for the rent, and $250,000 for its operations and programs. The remaining $250,000 will be released next year.

During the current year, SI paid actual rental costs of $55,000.

A local car dealership that has made substantial donations to SI in the past supplied the mini-buses and customized them to SIs requirements. The customized vehicles have a fair value of $500,000, but the car dealership sold the vehicles to SI for $425,000. SI took delivery of the vehicles in the summer of the current year.

The vehicles are expected to have a 10-year useful life. SIs policy is to take a full years of amortization in the year of acquisition.

In the current year, SI paid salaries of $150,000. $25,000 of the salaries related to fundraising for endowments and the rest was related to operations and SIs annual fundraising projects.

In the current year, SI paid $10,000 for a training seminar for volunteers.

In the spring of the current year, SI held a karaoke fundraiser that raised $50,000. SI incurred $21,000 in costs related to this fundraiser. The funds raised have been designated by the donor for SIs Canadian cooking program.

SIs participation in an annual local television telethon resulted in pledges of $235,000. $169,000 had been collected by the end of the current year.

On July 1 of the current year, SI received an endowment of $250,000 from a refugee who became a successful business person in Canada. The investment income from this endowment can be used by SI as it sees fit. The funds were invested in bonds that have an annual yield of 3%.

Required: Prepare the necessary journal entries for the current year using

the deferral method

and

the restricted fund method.

Be sure the account names you use clearly identify the type of account or fund.