Introduction- The History Playmaker Inc (PI) was incorporated in the early 1950's and in 1975 became a publicly traded company on the Toronto and New York stock exchanges. PI is a manufacturer of hockey equipment and has seen exceptional growth in the last number of years especially in its sales to teams in the NHL. They have been lucky enough to recently sign an exclusive contract with the Montreal Canadiens and were also named as the official manufacturer for Team Canada's men and women hockey teams. While PI managed to become the leader in the supply of hockey equipment for players, they have yet to be able to crack into the market of selling goalie gear. While they have attempted many times over the years to compete with the market giants such as RBK, Bauer and CCM, to date they have been unsuccessful. Management has just discovered that a company called Stop the Puck Limited (STPL) (a manufacturer of goalie gear in St. John's, NL) is becoming well known for producing quality goalie gear. Goalies are very particular about their gear, and the owner of this five-year-old company, Jason Chase, played for the Detroit Red Wings for seven years before a career ending injury forced him to hang up the pads and the skates! He was quite good at saving money and decided to use his money and his experience to start a company that would manufacture "game ready" goalie gear. STPL has been extremely successful and some prominent goalies in American Hockey League and the NHL are using the goalie gear. The company is experiencing growth that Jason cannot handle so he is considering selling a controlling interest in his company. He is entirely fed up with the snow that St. John's has been experiencing so he would like to take his money and move to a tropical Island where he would not have to endure another winter in Newfoundland. He would like to continue to own some of the shares but 30% is the most he would like to own. Playmaker Inc. approached Jason and on January 1, 2015, PI purchased 70 % of the outstanding voting common shares of Stop the Puck Limited for $990,000. At that Copyright . Pauline Downer, Memorial University. Unauthorized distribution prohibited. date, STPL had common shares of $20,000 and retained earnings of $200,000. STPL owned a patent on the new goalie pads it had developed but this asset was not shown on the books of STPL on January 1, 2015 because the cost had been written off by the date of the acquisition. Patent law in Canada allows a 20-year life for a patent so at the date of acquisition of shares of STPL, the patent had a remaining life of fifteen years under Canadian law. The fair value of this patent has been determined to be $150,000 at the date of acquisition. At the date of acquisition, the only other assets that had fair value different from book value were as follows: Book Value Fair Value Inventory $425,000 $475,000 Building (net) $2,200,000 $2,700,000 Land $150,000 $124,000 Long term liabilities $30,000 $40,000 At the acquisition date, the building had a remaining life of twenty years and straight-line amortization was being used by STPL. Both companies have December 31st year-ends. Long term liabilities had a remaining life at acquisition of four years. The company's inventory turns over 4 times in a year. You are now entering a time machine that is being piloted by Dr. Emmitt "Doc" Brown, and you now are now in 2024. Things have certainly changed. STPL is the leading manufacturer of goalie equipment, and PI is the leader in manufacturing of player gear. Hockey is still Canada's favourite past time, Don Cherry was fired, but started manufacturing his well-known flowery jackets.., Don Mclean is still the face of Hockey Night in Canada. You are also surprised to learn that against all odds, the Toronto Maple Leafs actually won the 2022 Stanley Cup in a series against the Montreal Canadiens. Good things come to those who wait. You have been hired by PI to prepare the consolidated financial statements for the December 31, 2024 year end. You have been provided with additional information [Appendix I) and the trial balances of PI and STPL at December 31, 2024 (Appendix II).Appendix I - Additional Information Impairment tests: Over the years, as required under IFRS, PI annually evaluated the goodwill and tested it for impairment as required under IFRS. In 2019, STPL was the defendant in a lawsuit started by a former teammate of Jason's who claimed that the pads, block and scoop that the company made famous was designed by him. The case was eventually thrown out, but it did hurt the image of the company. The impairment booked on consolidation was $15,000. In 2024 an additional amount of $10,000 was determined to be the impairment loss in 2024. Intercompany inventory sales: The December 31, 2023 inventories of Playmaker Inc contained $350,000 of inventory purchased from STPL. Gross profits on sales from STPL to PI were priced to realize a gross profit on sales of 35%. These were sold to an unrelated party early in 2024. During 2024, STPL sales to PI totalled $200,000. These sales were made at a gross profit on sales of 25%. PI's ending inventory at December 31, 2024 included 30% of the merchandise purchased from STPL. At December 31, 2024 PI had not paid for any of this purchase. As a result, interest was charged by STPL in the amount of $4,500. This amount was also unpaid at the year end. During 2024, PI recorded sales of $78,000 to SPL. These goods were priced at a sales price that was 25% above cost. At December 31, 2024, 60% of the inventory remained in the inventory of SPL. In 2023, PI had sold inventory to STPL for a sales price of $102,000. The goods were sold at a price that was 50% above cost. At December 31, 2023 only 18% of the inventory sold to STPL had been sold outside. At the end of 2024, 5% remained in the ending inventory of STPL. STPL has determined that there is no problem with the inventory valuation and it will be sold in the next fiscal year. Also, in 2020, PI had sold inventory to STPL for $90,000 that had originally cost $80,000. 20% of this inventory was sold in 2020, 35% of it in 2021 and 35% in 2022. The remaining inventory was not sold outside the consolidated group until 2024. Inter-company land sales The land on STPL books at the date of acquisition (book value $150,000 and fair value of $124,000), was sold outside the consolidated group in the 2019 fiscal year for total proceeds of $324,000. Copyright . Pauline Downer, Memorial University. Unauthorized distribution prohibited. 5 Also, in 2020 STPL sold land that it had acquired in 2016 at a cost of $67,000 to PI for proceeds totalling $47,500. In the 2024 fiscal year, the land values where this property was located increased significantly and PI sold it outside the consolidated group for proceeds totalling $164,000 and recorded an $116,500 gain on sale. The only other intercompany land sale between PI and STPL happened in 2024 when PI sold land it had purchased for $75,000 to STPL for $125,000. Intercompany sales of equipment On January 1, 2016, STPL purchased equipment for $280,000. At the time the decision was made to amortize the asset on a straight-line basis over 20 years. On January 1, 2020, STPL sold equipment to PI for $324,000. The equipment had a net book value of $224,000 at the date of the sale. The remaining useful life of the equipment on January 1, 2020 was sixteen years. Both companies use the straight- line method of depreciation. Other information related to the 2024 Fiscal Year 1. Other expenses include depreciation expense and patent amortization expense but not any interest expense. 2. PI provides management services to various companies including STPL. In 2024, STPL paid $30,000 of management fees to Playmaker Inc. 3. The tax rate for both companies every year since 2015 is 25%.Copyright @ Pauline Downer, Memorial University. Unauthorized distribution prohibited. Appendix II - Trial Balances Trial Balances at December 31, 2024 DEBITS Playmaker Inc. Stop the Puck Limited Cash 128,620 85,230 Accounts Receivable 425,000 416,850 Inventory 879,000 986,000 Land 125,000 Building (net) 2,350,850 1,750,000 Equipment (net) 735,000 38,000 Patents (net) 65,000 Investment in Stop the Puck Limited 990,000 Trademarks (net) 26,000 54,000 Cost of goods sold 1,950,000 1,137,500 Other expenses 320,000 220,000 Management fee expense 30,000 Repairs and maintenance 30,000 22,000 Utilities 46,860 15,792 Travel expenses 10,950 4,300 Professional fees 8,000 3,500 Interest expense 75,060 25,028 Income tax expense 799,260 545,000 Dividends declared and paid 120,000 80,000 Total Debits 8,959,600 6,138,200 CREDITS Accounts payable 457,000 380,000 Long term debt 300,000 435,000 Bonds payable 220,000 Common shares 30,000 20,000 Retained earnings, Jan. 1 2,847,600 2,027,950 Sales 4,875,000 3,250,000 Dividend revenue 60,000 Gain on sale of assets 120,000 Interest revenue 20,000 25,250 Management fee revenue 30,000 Total Credits 8,959,600 6,138,200 Copyright . Pauline Downer, Memorial University. Unauthorized distribution prohibited