Guelph Auto Parts (GAP) is a manufacturer of car parts for various automobile manufacturers. Consistent with a growth strategy, GAP has purchased some investments during the 2019 fiscal year. Jane Ford, the sole owner of GAP has big plans for the Company and has recently started to think about taking GAP public in the next few years.

Jane has recently hired you as a consultant. As GAP has not had any investments in prior years, Jane does not want any surprises during the upcoming December 31, 2019, year-end financial statement audit. She has hired you to look at the accounting for these investments as prepared by Liam Mitchell, GAP's Chief Accountant, and let her know if the accounting was done correctly and completely. She would like you to provide her with a memo that includes a complete analysis of the accounting for these investments and, where the information is available, any correcting journal entries that will need to be done before the external auditors arrive. If the information is not available to provide the correcting journal entry, she would like to know what information you require.

You meet with Jane and Liam on February 8, 2020, to get some details about these investments. At the meeting, Jane provided you with a copy of GAP's unaudited Statement of Financial Position on December 31, 2019 (Appendix I) prepared in accordance with IFRS as requested by one of the key lenders. The minutes from the meeting with Jane and Liam are included in Appendix II.

Assets

Cash

Accounts receivable (net) Investments, see note 1 Research & development Goodwill

Building (net)

Machinery & Equipment (net) Total Assets

Liabilities

Accounts payable and accrued liabilities Accrued interest payable

Loans payable

Total Liabilities

Shareholders' Equity

Share capital

Retained earnings

Total shareholders' equity

Total liabilities and shareholders' equity

As at December 31, 2019 (draft)

1,670,000 100,000 19,860,000 1,000,000 4,150,000 5,850,000 5,000,000 37,630,000

2,500,000 150,000 20,000,000 22,650,000

1,000 14,979,000 14,980,000 37,630,000

Appendix I

GUELPH AUTO PARTS STATEMENT OF FINANCIAL POSITION

           NOTE 1 (partial extract from the note to the financial statement)

 Investment

Investment in Watson Inc.

Investment in Alexander Car Parts Ltd. Investment in Milton Auto Parts

Carrying Value

 $

660,000 15,000,000 4,200,000

19,860,000

Accounts receivable Inventory

Machinery & equipment Accounts payable

Carrying Value (IFRS)

1,795,000 2,450,000 9,340,000

(2,115,000) 11,470,000

Fair Value (per independent appraiser)

1,795,000

2,450,000 10,020,000 (2,115,000) 12,150,000

Appendix II

EXTRACTS FROM MINUTES OF MEETING WITH JANE FORD & LIAM MITCHELL ON FEBRUARY 8, 2020

GAP purchased 6,600 common shares of Watson Inc. (Watson) during 2019 for $100 per share. Watson is a private company with 30,000 common shares issued and outstanding. Liam informed you that he was unsure how to account for the investment, so he just debited "Investment in Watson" and credited cash for the amount paid since it is shared in a private company.

In August 2019, GAP acquired all of the shares of Oshawa Electric Inc. (OEI), a start-up company specializing in electric cars. The purchase price of these shares was $1,000,000 cash. While Oshawa is expected to be operational by January 2021, Jane is nervous about this investment given how much the competition has increased in the electric car industry over the past 6 months.

Since OEI is in the start-up phase, Liam posted the investment to the research & development account.

On October 4, 2019, GAP acquired all of the net assets of a competitor, Alexander Car Parts Ltd. (Alexander), for $15 million cash. On this date, the carrying values and fair values of Alexander's assets and liabilities are as follows:

 The purchase also included Alexander's proprietary software to track job costing for the manufacturing process. The fair market value of this software is estimated to be $1.4 million. Similar job-costing software is available in the market. Although GAP could sell the software, it was retained for GAP's exclusive use. As part of the acquisition, GAP retained all Alexander's employees, its management and accounting systems, and all existing customers and contracts. Jane is not worried about Alexander setting up a competitor down the street. The owners have told her that they are looking forward to traveling around the world on their new sailboat for the next two years.

This acquisition was made to support GAP's expansion into value-added services and to diversify. Alexander's services include engineering, design, installation, and multi-year maintenance agreements.

4. On November 11, 2019, GAP acquired 100% of the common shares of Milton Auto Parts (MAP) for $4.2 million cash. At the acquisition date, the purchase price was allocated as follows:

Purchase price

Less: FV of net identifiable assets: Machinery

Termination costs

Goodwill

Notes:

$4,200,000 550,0001

-500,0002

50,000 $4,150,0003

machinery.

Other information

1. 1. MAP is being sued by one of its employees. No accrual for this contingent liability was set up by MAP as of the acquisition date. Based on this premise, Liam did not allocate anything for the lawsuit when he calculated goodwill above. In October 2019 a court awarded the employee $200,000 in damages but MAP is currently appealing this ruling. GAP's legal counsel is of the view that there is a 60% chance of MAP winning on appeal and a 40% chance that the $200,000 in damages will be upheld.
2. 2. At the acquisition date, MAP had a research project that they were working on. MAP feels that it is within one year of developing a prototype for a state-of-the-art engine for an electric car. If this engine can ever be patented, it could be worth hundreds of thousands of dollars for the next 10 years. An independent valuation specialist valued this research at $200,000. Liam said he did not allocate anything to the purchase price since, according to what he learned in accounting class when he was at school, "research costs must always be expensed".