Mitcham Ltd. is a public corporation that is listed on the Toronto Stock Exchange. Mitcham Ltd.'s principal business includes the manufacturing and sale of industrial equipment. The head office is located in Toronto and Mitcham Ltd. has a calendar year end and has been following a growth and diversification strategy for the past few years. The growth has been financed through the issuance of common shares and bonds. As such, management of Mitcham Ltd. wants a strong balance sheet that shows a reasonable debt- to-equity ratio.

You are a recent University graduate with an accounting major and are excited to begin working at Mitcham Ltd. while you are pursuing your CPA designation. It is now early January 2019 and John Black, the Controller has asked you to provide your analysis of the accounting issues that will impact the financial statements for the year ending December 31, 2018. The auditors are expected in the next couple of weeks and John wants to ensure the audit goes smoothly. He has provided the following information:

On January 1, 2018, Mitcham Ltd. purchased all of the outstanding shares of Alexander Lab (Alexander) for €16,500,000 Euros. Alexander was incorporated in January 2014 and commenced active operations. Common shares were issued on the date of incorporation and no new common shares have been issued since then. Alexander's main operations are located in Germany. Alexander Lab will continue to be managed and operated by the local management team. Alexander sells approximately 15% of its sales to Mitcham Ltd., 40% to companies in the United States and 45% to the local economy. In order to satisfy the extra demand from its customers, Alexander built a new distribution warehouse in 2018. The warehouse was financed with cash on hand and loan from a foreign land bank. The investment is recorded at cost in the general ledger of Mitcham Ltd.

The carrying amount of Alexander's net assets at January 1, 2018 was €14,250,000 (Euros) at the acquisition date. Mitcham Ltd. determined that fair value was equal to book value at January 1st and attributed the acquisition difference to Goodwill. During the current year, there was a goodwill impairment of €150,000. Net income for the current year was €4,000,000 and dividends of €1,500,000 were paid on September 30, 2018. This is the first international acquisition for Mitcham Ltd., and they are unsure of the accounting treatment.

Relevant exchange rates are as follows: € (Euros) to Canadian dollars:

• January 1, 2014
• January 1, 2018
• September 30, 2018
• December 31, 2018
• Average for 2018

€1 = $ 1.40 €1 = $ 1.46 €1 = $ 1.54 €1 = $ 1.56 €1 = $ 1.51

In February 2018, Mitcham identified another company, Owens Company (Owens), as a potential Investment. On May 1, 2018, Mitcham Holdco was incorporated, and Mitcham Ltd. subscribed for 25% of the common shares in Mitcham Holdco. The remaining 75% of the common shares were held by Liam O'Neill, a non-related person to Mitcham Ltd. Mitcham Holdco was formed for the sole purpose of acquiring Owens. Mitcham Holdco obtained financing of $2 million from the Bank to fund this acquisition on the condition that Mitcham Ltd. guarantees the loan such that Mitcham Ltd. will be obligated to repay the loan if Mitcham Holdco defaults on its liabilities. In addition, the shareholder agreement of Mitcham Holdco contains the following terms:

• Liam O'Neill is guaranteed a return of his investment of $600,000 and annual dividend of $30,000.
• Mitcham Ltd. is responsible for making all key operating, and financing decisions.
• Mitcham Ltd. guarantees the payment of dividends to Liam O'Neill on an annual basis. After
• dividends are paid on the common shares, Liam will receive 10% and Mitcham Holdco 90% of the undistributed profits.
• On July 1, 2018, Mitcham Ltd. received a $1,000,000 grant from a special federal government funding program. The grant was provided to help offset the costs incurred to purchase a specialized machine used in the manufacturing process. The machine is expected to have a useful life of 5 years. Management were very happy to receive the grant and have recorded the entire amount in revenue. Mitcham amortizes their machines on a straight-line basis.
• On January 1, 2016, Mitcham Ltd. acquired Fix-It Company which provides installation, repairs and maintenance services of equipment. On that date, Fix-It Company had a five-year agreement to supply such services to 3 major customers of Mitcham Ltd. At the time of the acquisition, both Fix-It Company and Mitcham Ltd. believed that these 3 major customers will renew the agreement at the end of the current contract. The acquisition difference of $1,250,000 on January 1, 2016 was allocated to a customer list. The customer list was recognized as an identifiable asset on consolidation and is amortizedover management's best estimate of 60 months. On July 1, 2018, Fix-It Company had to write off an account receivable balance from one of the 3 major customers because that customer is going through financial difficulty due to a major fraud scandal. As a result of this bad news, Fix-It Company is skeptical about the future prospect of the business of that customer and opportunities to provide its services to that customer in the future.
• In September 2018, Mitcham Ltd. shipped several pieces of equipment to Precision Drilling (PD) a major supplier to the Mining Industry. PD is a new customer based in Fort McMurray, Alberta. To make the terms of the sale attractive and to encourage future purchases, Mitcham Ltd. structured this deal so that no payment is required until the vehicles are sold to PD's customers. For this transaction, Mitcham Ltd. recorded a sale of $2,000,000 and reduced inventory by $1,200,000. Notes in the file indicate that as of November 30, 2018, PD has sold 20% of the equipment.