Question 3 (22 marks) Meeks Penguin Corp. (MPC) is a Canadian company that reports its financial results in accordance with IFRS. On December 31, 20X6, MPC paid $720,000 cash to acquire 70% of Zoebug Supply Inc.s (ZSI) outstanding common shares. ZSIs comparative statement of financial position as at December 31, 20X7, and its statement of comprehensive income for the year ended December 31, 20X7, follow: Zoebug Supply Inc. Statement of financial position As at December 31 (in 000s) 20X7 20X6 Cash $ 175 $ 61 Accounts receivable and accruals 521 406 Inventory 192 183 Note receivable 150 0 Land 80 220 Building (net) 228 240 Equipment (net) 120 160 Trademark 100 100 Total assets $1,566 $1,370 Accounts payable and accruals $ 235 $ 264 Long-term debt 600 600 Common shares 300 300 Retained earnings 431 206 Total liabilities and equity $1,566 $1,370 Zoebug Supply Inc. Statement of comprehensive income For the year ended December 31, 20X7 (in 000s) Sales revenue $1,820 Cost of goods sold 845 Gross profit 975 Sales, general, and administrative expenses 533 Interest expense 30 Depreciation and amortization expense 52 360 Other income 190 Earnings before income tax expense 550 Income tax expense 165 Net income $ 385 Advanced Financial Reporting Project 1 7 / 12 The fair value of ZSIs identifiable net assets at time of acquisition differed from its book value as indicated below (in $000s): Book value Dec. 31, 20X6 Fair value Dec. 31, 20X6 Estimated remaining useful life/term to maturity Estimated residual value Inventory 183 213 N/A N/A Land 220 390 N/A N/A Building (net) 240 200 20 years $0 Equipment (net) 160 176 4 years $0 Trademark 100 300 N/A $0 Long-term debt 600 620 4 years N/A Additional information: 1. Both companies pay income tax at a rate of 30% 2. Both companies use the FIFO cost-flow assumption to value their inventories. 3. Both companies depreciate their depreciable assets on a straight-line basis. 4. The fair value increment on the long-term debt is amortized using the straight-line method. 5. For impairment-testing purposes, MPC established that ZSI is a CGU. MPC tested the CGU for impairment on December 31, 20X7. Goodwill, as calculated using the identifiable net assets (INA) method, was found to be impaired by $18,000. 6. On December 31, 20X7, ZSI sold land to MPC for $155,000. ZSIs net book value at time of sale was $140,000, which was the same as the estimated fair value at acquisition date of the subsidiary (December 31, 20X6). In consideration of the transfer, MPC paid $5,000 cash and signed a note payable to ZSI for the $150,000 balance. The note is payable in full on December 31, 20X9. Interest at 4% per annum, payable annually, is first payable on December 31, 20X8. This is the market rate of interest for a note of this length. 7. During 20X7, MPC sold goods to ZSI for $200,000 with a 40% gross profit margin; 10% of these goods remained unsold by ZSI as at December 31, 20X7. 8. During 20X7, ZSI sold goods that it had purchased for $100,000 to MPC for $140,000; 25% of these goods remained unsold by MPC as at December 31, 20X7. Advanced Financial Reporting Project 1 8 / 12 9. During 20X7, ZSI rented office space from MPC at a total cost of $50,000. This amount remained unpaid at year end. 10.MPC purchased new equipment on January 1, 20X7 and immediately sold it to ZSI for $40,000 cash. MPCs cost of the equipment, which had a useful life of five years, was $36,000. 11.MPC and ZSI only prepare accruals and other adjusting entries at year end. MPCs non-consolidated comparative statement of financial position as at December 31, 20X7, and its non-consolidated statement of comprehensive income for the year ended December 31, 20X7, are set out below: Meeks Penguin Corp. Statement of financial position As at December 31 (in 000s) 20X7 20X6 Cash $ 313 $ 8 Accounts receivable and accruals 1,020 968 Inventory 466 422 Land 790 640 Building (net) 989 1,041 Equipment (net) 474 632 Trademark 650 650 Investment 720 720 Total assets $5,422 $5,081 Accounts payable and accruals $ 722 $ 669 Long-term debt 1,875 1,950 Note payable 150 0 Common shares 500 500 Retained earnings 2,175 1,962 Total liabilities and equity $5,422 $5,081 Advanced Financial Reporting Project 1 9 / 12 Meeks Penguin Corp. Statement of comprehensive income For the year ended December 31, 20X7 (in 000s) Sales revenue $2,498 Cost of goods sold 647 Gross profit 1,851 Sales, general, and administrative expenses 1,174 Interest expense 90 Depreciation and amortization expense 215 372 Other income 218 Earnings before income tax expense 590 Income tax expense 177 Net income $ 413 Required: a) Use the acquisition method to allocate the acquisition differential and determine goodwill arising on acquisition, assuming that MPC uses the INA method to value the non-controlling interest (NCI). (2 marks) b) Use the acquisition method to allocate the acquisition differential and determine goodwill arising on acquisition, assuming that MPC uses the fair value enterprise (FVE) method to value the NCI. (2 marks) c) Based on the solution to part (a) (where MPC uses the INA method to value the NCI), prepare an acquisition differential amortization and impairment schedule for 20X7. Provide references for each line in the AD schedule that will be used to reference through to the consolidated financial statements. (2 marks) d) Prepare a list of all intercompany transactions and balances that are pertinent to the case facts and should be eliminated upon consolidation. Hint: There are six intercompany transactions that should be eliminated, five of which have two applicable parts (for example, note receivable/note payable = one intercompany transaction). (0.5 marks) e) Calculate all unrealized and realized intercompany profits. (3.5 marks) Advanced Financial Reporting Project 1 10 / 12 Provide references for each line in both the schedule of intercompany transactions and the schedule of unrealized/realized intercompany profits that will be used to reference through to the consolidated financial statements. Include a calculation of the total deferred tax asset/liability. Indicate whether the calculated figure is an asset or a liability. For parts (f) through (i), assume that MPC uses the INA method to value the NCI. Calculations done in earlier sections of Question 3 do not need to be redone on these worksheets. f) Prepare MPCs consolidated statement of comprehensive income for the year ended December 31, 20X7. Show the allocation between the parent and NCI. Include references to your supporting calculations, which will typically be the references in the supporting schedules prepared in parts (a) through of Question 3. (6 marks) Note: From the Project Data file, copy and paste the template in the worksheet titled Q3 Consolidated SCI 20X7 found in the Prep-AFR-ASN06-W00.DAT.1.G Excel file into your project submission. g) Prepare MPCs consolidated statement of retained earnings for the year ended December 31, 20X7. (1 mark) h) Calculate the NCI on the statement of financial position as at December 31, 20X7. (1 mark) i) Prepare MPCs consolidated statement of financial position as at December 31, 20X7. Include references to your supporting calculations, which will typically be the references in the supporting schedules prepared in parts (a) through (h) of Question 3. (4 marks) Note: From the Project Data file, Prep-AFR-ASN06-W00.DAT.1.G, copy and paste the template in the worksheet titled Q3 Consolidated SFP 20X7 into your project submission file. Do not show your work in the Project Data file.