Problem 2

On January 1, 20X8, Liv Ltd. (LL), a Canadian company, acquired 90% of Marcus Co. (MC), a foreign company for FC 623,200. At the acquisition date, the carrying value of MCs net assets equaled their fair value except for the equipment, which had a carrying value of FC 800,000 and a fair value of FC 880,000. At the acquisition date, MCs equipment had a remaining useful life of 10 years. There was an FC 4,000 impairment of the goodwill which occurred evenly throughout 20X8.

Selected financial statements for LL and MC are presented below.

Liv Ltd. Statement of Financial Position As of December 31, 20X8 (in $ CDN)

Assets: Noncurrent assets: Plant and equipment, net 2,752,000 Investment in Marcus Co. 1,371,040 4,123,040 Current assets: Inventory 1,376,000 Accounts receivable 700,000 Cash and cash equivalents 562,080 2,638,080 Total assets 6,761,120 Shareholders Equity: Share capital 1,376,000 Retained earnings 2,601,520 3,977,520 Liabilities: Noncurrent liabilities: Notes payable 1,860,000 Current liabilities: Accounts payable and accrued liabilities 923,600 Total liabilities 2,783,600 Total shareholders equity and liabilities 6,761,120

Liv Ltd. Statement of Income For the year ended December 31, 20X8 (in $ CDN)

Sales 16,472,000 Dividend income 180,080 16,652,080 Cost of sales 8,256,000 Other expenses* 7,124,000 15,380,000 Net income 1,272,080

*includes depreciation

LL declared and paid dividends of $928,000 CDN on December 31, 20X8.

Marcus Co. Statement of Financial Position (in FC)

Dec. 31, Jan. 1 20X8 20X8 Assets: Noncurrent assets: Equipment, net 720,000 800,000 Current assets: Inventory 484,000 364,000 Accounts receivable 408,000 280,000 Cash 360,000 164,000 1,252,000 808,000 Total assets 1,972,000 1,608,000

Shareholders equity: Share capital 400,000 400,000 Retained earnings 390,000 146,000 790,000 546,000 Liabilities: Noncurrent liabilities: Notes payable 640,000 640,000 Current liabilities: Accounts payable 542,000 422,000 Total liabilities 1,182,000 1,062,000 Total shareholders equity and liabilities 1,972,000 1,608,000

Marcus Co. Statement of Income For the year ended December 31, 20X8 (in FC)

Sales 8,400,000 Cost of sales 5,304,000 Other expenses* 2,688,000 7,992,000 408,000 *includes depreciation

Marcus Co. Statement of Changes in Equity Retained Earnings Section For the year ended December 31, 20X8 (in FC)

Retained earnings, January 1, 20X8 146,000 Net income 408,000 Dividends declared (164,000) Retained earnings, December 31, 20X8 390,000

MC declared and paid FC164,000 in dividends on December 31, 20X8.

Selected Exchange Rates

January 1, 20X8 FC1 = $2.20 CDN December 31, 20X8 FC1 = $2.44 CDN Date when ending inventory was purchased FC1 = $2.38 CDN Average rate for 20X8 FC1 = $2.32 CDN

Required:

a) Prepare consolidated financial statements at December 31, 20X8 under each of the following assumptions:

i) the functional currency is $CAD, and ii) the functional currency is the FC.

b) Assume that LL is a private company and reports under ASPE. LL uses the equity method to report its investment in MC. LLs functional currency is $CAD. Calculate LLs Investment in Marcus Co.s account at December 31, 20X8. There is no need to prepare financial statements.