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BUSI/COMM 453 Assignment 6 Total marks 80 Question 1 (35 marks) Par Corporation of Calgary, Alberta, purchased 100% of the outstanding shares of Sub Company of France on December 31, Year 2 for 4,000,000 FCU, when FCU1 = C$0.20. At that date, the carrying values of Sub's assets and liabilities were equal to fair values. There was a goodwill impairment loss in Year 3 of FF 18,000. The fiscal Year 2 financial statements of Sub were as follows: SUB COMPANY Balance Sheet December 31, Year 2 Cash FCU 520,000 Accounts receivable 900,000 Inventory 1,180,000 Capital assets (net) 3,250,000 5,850,000 Accounts payable 750,000 Bonds payable 1,600,000 Common shares 1,800,000 Retained earnings 1,700,000 5,850,000 Par anticipated that there would be a high volume of intercompany transactions with Sub, because Sub obtained most of its raw materials from Canada and also financed its operations with borrowings from Canadian banks. Par was confident that Sub would continue to grow in the medium term with global sales, and in the near term with sales in Canada. Par uses the cost method to account for its investment in Sub. The fiscal Year 3 financial statements of Par and Sub were as follows: Balance Sheets December 31, Year 3 Par Assets Cash Accounts receivable Inventory Investment in Sub Capital assets (net) Liabilities and shareholders' equity Accounts payable Sub $ 450,000 615,000 1,235,000 800,000 3,800,000 6,900,000 FCU 410,000 960,000 1,480,000 3,500,000 6,350,000 $ 950,000 FCU 900,000 BUSI/COMM 453 A6 2016 3,000,000 2,950,000 6,900,000 Bonds payable Common shares Retained earnings 1,700,000 1,800,000 1,950,000 6,350,000 Statements of Income and Retained Earnings For the year ended December 31, Year 3 Sales Dividend income Cost of goods sold Expenses Selling and administrative Depreciation exp. Bond interest exp. Other expenses Net income Retained earnings, January 1, Year 3 Dividends Retained earnings, December 31, Year 3 Par $ 3,000,000 117,500 3,117,500 1,800,000 1,317,500 600,000 250,000 67,500 917,500 400,000 2,650,000 3,050,000 100,000 2,950,000 Sub FCU 5,000,000 5,000,000 3,200,000 1,800,000 550,000 200,000 160,000 140,000 1,050,000 750,000 1,700,000 2,450,000 500,000 1,950,000 Additional information: 1. Sub purchased inventory of FCU 3,500,000 evenly during Year 3. Opening and ending inventory were purchased evenly over the 4th quarter of Year 2 and Year 3, respectively. 2. Foreign exchange rates were as follows: January 1, Year 0 Average during 4th quarter of Year 2 December 31, Year 2 Average during Year 3 Average during 4th quarter of Year 3 December 15, Year 3 December 31, Year 3 FCU1 = C$0.180 FCU1 = C$0.190 FCU1 = C$0.200 FCU1 = C$0.220 FCU1 = C$0.230 FCU1 = C$0.235 FCU1 = C$0.240 3. Dividends for both companies were declared and paid on December 15, Year 3. 4. Ignore income taxes for purposes of this question. 2 BUSI/COMM 453 A6 2016 Required: a. Should the operations of Sub be accounted for as an integrated subsidiary (i.e. functional currency is Canadian dollars) or as a self-sustaining foreign operation (i.e. functional currency is French francs) from the perspective of Par? Provide two pieces of evidence to support your answer. b. Ignore your answer to part (a), and assume self-sustaining relationship (functional currency is French francs). Prepare the calculation for goodwill that would appear on the consolidated balance sheet at December 31, Year 3. Also prepare the calculation for the exchange gain/loss on the translation of goodwill that would be included in accumulated other comprehensive income (AOCI). c. Assume self-sustaining relationship (functional currency is French francs), that is, ignore your answer to part (a)). Prepare account balances for the liabilities and shareholders' equity portion of the consolidated balance sheet at December 31, Year 3. Your answer should include a detailed calculation of the accumulated other comprehensive income (AOCI). Hint: Total consolidated liabilities and equity = $7,739,680 d. Ignore your answers above and now assume an integrated relationship (i.e. functional currency is Canadian dollars). Calculate: i) The translation gain or loss to be recognized immediately in the current reporting period. Assume the subsidiary purchased a capital asset for FCU 450,000 on January 2, Year 3 when the rate was 0.21. ii) Translate the Cost of Goods sold Question 2 (45 marks) The Perch Falls Minor Hockey Association was established in Perch Falls in January 2005. Its mandate is to promote recreational hockey in the small community of Perch Falls. With the support of the provincial government, local business people, and many individuals, the association raised sufficient funds to build an indoor hockey arena and it also established an endowment fund for paying travel costs to tournaments on an annual basis. The following schedule summarizes the cash flows for the year ended December 31, 2005: 3 BUSI/COMM 453 A6 2016 The association wants to use the restricted fund method of accounting for contributions and to use three separate funds operating fund, capital fund, and endowment fund. All capital assets are to be capitalized and amortized, as applicable, over their estimated useful lives. Additional information 1. The new hockey arena was completed in late August 2005. The official opening was held on August 30 with a game between the Perch Falls Old-Timers and the local fire fighters. The arena is expected to have a 40-year useful life and no residual value. 2. A long-time resident of Perch Falls donated the land on which the arena was built. The land was valued at $80,000. The association gave a donation receipt to the donor. 3. A former resident of Perch Falls donated ice making and ice cleaning equipment to the association. A receipt for $54,000 was issued for the donation. The equipment has a useful life of 10 years and no residual value. 4. The donation for tournaments was contributed on January 1, 2005 with the condition that the principal amount of $50,000 be invested in 6% corporate bonds. The interest earned on the investment can be used only for travel costs for out-of-town tournaments. All investments in bonds will be held to their maturity date. 4 BUSI/COMM 453 A6 2016 5. The provincial government pledged $110,000 a year for operating costs. $90,000 of the grant was advanced throughout the year. Upon receipt of the association's annual report, the government will issue the last $20,000 of the annual grant to the association. 6. Registration fees and rental fees for the hockey arena are received at the beginning of the hockey season and cover the entire season, from September 1, 2005 to April 30, 2006. 7. At the end of the year, the association owed $9,000 for services received in the month of December. Required a. Prepare the journal entries for additional information points 1-7. Remember to provide the fund name for the journal entries (15 marks) b. Prepare a statement of financial position and statement of revenue and expenses for each of the three funds as at and for the year ended December 31, 2005. (30 marks) Hints: Excess of revenues over expenses = $(44) for Operating fund; $1,084.20 for Capital fund and $50 for endowment fund. 5