FA4 Review Class Questions solutions

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1 Question One FA4 Review Solution FVE Method FA4 Review Class Questions solutions Purchase price 215, Paid for preferred (100,000 x 0.20) 20, Paid for common 195, Implied Value of Sub (195,000/0.70) 278, NBV: Pref 100, CS 200, RE 100, , Pref claim 100, , (21,428.57) Equipment 50, GW 28, Jan 1/X5 20X5-20X6 20X7 38, Equip 50, , , , CR a GW 28, , , , DR b (21,428.57) - - (21,428.57) c bt tax at EI - UP (50,000 x 0.20) 10, , , d BI - UP (20,000 x 0.15) 3, , e Equip GAIN UP 10, , , f Amort 20X7 2, , g 7, , , h FA4 review page 1 of 25

2 bt tax At Land Loss 20X6 DOWN 2, , I A/R + A/P 18, j mgmt fees/revenue 20, k Dividends: Preferred (.06x100,000) 6, , l Common 10, , m 16, , n a Consolidated NI Parent's NI 185, Dividends (8,200.00) n AD - Sub's NI 23, AD - BI profit 2, e EI profit (7,000.00) d Pref div (6,000.00) I Equip gain (5,250.00) h 177, , , , Pref div claim (100,000 X 0.06 X 0.20) 1, l 183, b NCI preferred I/S (6,000-1,200) 4, FA4 review page 2 of 25

3 c Consolidated ending R/E Parent's R/E 533, Add land loss 1, l Sub's R/E 63, Inception 100, decrease (37,000.00) Less EI (7,000.00) d AD - less equip gain (5,250.00) h 534, (49,250.00) 0.70 (34,475.00) 500, d NCI Common B/S NBV of Sub Pref 100, Common 200, R/E 63, Less preferred (100,000.00) 263, Less EI (7,000.00) d AD (21,428.57) Less equip gain (5,250.00) h 229, , e f A/R P 112, S 53, Adj (18,000.00) j 147, Cap assets P 905, S 429, Adj (7,500.00) h (35,000.00) a 1,291, g DIT asset 3, d 2, h (600.00) l 4, FA4 review page 3 of 25

4 h Ownership change was 0.70 now (140,000/225000) % change 0.11 Investment account reduction 17, Share of stock issue 77, GAIN 60, i) if P sold its preferred share investment, the NCI preferred amount would increase on the consolidated statements. Any gain or loss on the sale from the Parent s separate entity recording would not be recognized on the consolidated statements, rather the gain or loss would be recognized through contributed surplus or retained earnings. This is done because, from a consolidated view, the sale of preferred shares is viewed as a transaction with its shareholders. FA4 review class Question Two Solutions FVE Method Precalculations: Purchase Price 3,000,000 Implied purchase price 3,750,000 NBV of Sunrise: CS 1,000,000 R/E 2,000,000 3,000,000 3,000,000 AD allocation AD 750,000 Inventory ( ) 100,000 DR Building ( ) (20,000) CR Bonds ( ) 30,000 DR GW 640,000 FA4 review page 4 of 25

5 AD schedule Jan 1/ Dec 31/06 Inventory 100,000 (100,000) - Building (20,000) 5,000 1,250 (13,750) a Bonds 30,000 (10,000) (2,500) 17,500 b GW 640,000 (68,000) (17,000) 555,000 c 750,000 (173,000) (18,250) 558,750 d Sale of Machine Before tax tax after tax 2005 Gain on Sale - upstream ( ) 210,000 84, ,000 amort 2005 (210000/7) 30,000 12,000 18,000 Jan 1/06 180,000 72, ,000 e Amort ,000 12,000 18,000 f Dec 31/06 150,000 60,000 90,000 g Inventory sales BI - upstream (60,000) (24,000) (36,000) h EI - upstream (80,000) (32,000) (48,000) ii (2,000,000 x 0.40 x 0.10) BI - downstream 80,000 32,000 48,000 j Sales/purchases (2,000,000+1,400,000) 3,400,000 k Present Sunrise adjustment Consolidated PPE 2,100,000 3,500,000 (150,000) g (13,750) a 5,436,250 Inventory 1,400, ,000 80,000 ii 1,680,000 DIT (500,000) (300,000) 60,000 g (32,000) ii (772,000) COGS 5,900,000 4,500,000 60,000 h (80,000) j (80,000) ii (3,400,000) k 6,900,000 FA4 review page 5 of 25

6 R/E of Present 2,600,000 Sunrise R/E Dec 31/06 3,000,000 Sunrise R/E - acquisition 2,000,000 1,000,000 EI loss 48,000 ii AD (191,250) d Machine sale (90,000) g adj 766,750 80% 613,400 3,213,400 INA Method Precalculations: * Purchase Price 3,000,000 Fair Value of Sunrise: NCI* (3,110,000 x Common 0.80) 622,000 Shares ,622,000 R/E NBV of Sunrise: CS 1,000,000 Inventory R/E 2,000,000 Buildings ,000,000 Bonds ,000, AD allocation AD 622,000 Inventory ( ) 100,000 DR Building ( ) (20,000) CR Bonds ( ) 30,000 DR GW 512,000 FA4 review page 6 of 25

7 AD schedule Jan 1/ Dec 31/06 Inventory 100,000 (100,000) - Building (20,000) 5,000 1,250 (13,750) a Bonds 30,000 (10,000) (2,500) 17,500 b GW 512,000 (68,000) (17,000) 427,000 c 622,000 (173,000) (18,250) 430,750 d NCI - exclude GW 110,000 (105,000) (1,250) 750 m Sale of Machine 2005 Gain on Sale - upstream Before tax tax after tax ( ) 210,000 84, ,000 amort 2005 (210000/7) 30,000 12,000 18,000 Jan 1/06 180,000 72, ,000 e Amort ,000 12,000 18,000 f Dec 31/06 150,000 60,000 90,000 g Inventory sales BI - upstream (60,000) (24,000) (36,000) h EI - upstream (80,000) (32,000) (48,000) ii (2,000,000 x 0.40 x 0.10) BI - downstream 80,000 32,000 48,000 j Sales/purchases (2,000,000+1,400,000) 3,400,000 k FA4 review page 7 of 25

8 Present Sunrise adjustment Consolidated PPE 2,100,000 3,500,000 (150,000) g (13,750) a 5,436,250 Inventory 1,400, ,000 80,000 ii 1,680,000 FIT (500,000) (300,000) 60,000 g (32,000) ii (772,000) COGS 5,900,000 4,500,000 60,000 h (80,000) j (80,000) ii (3,400,000) k 6,900,000 Consolidated R/E - Dec 31/06 R/E of Present 2,600,000 Parent AD (170,000) d adj 2,430,000 Sunrise R/E Dec 31/06 3,000,000 Sunrise R/E - acquisition 2,000,000 1,000,000 EI loss 48,000 ii Machine sale (90,000) g adj 958,000 80% 766,400 3,196,400 FA4 review page 8 of 25

9 FA4 Review Class Question Three Solutions a) FVE Method Preparatory calculations Purchase Price 800,000 Implied value 1,000,000 NBV of Sarek CS 300,000 R/E 260, , ,000 AD Allocation AD 440,000 A/R (150, ,000) 10,000 CR Inventory ( ) 20,000 DR Land ( ) 140,000 DR Building (300, ,000) 60,000 CR Current Liab (60,000-50,000) 10,000 CR LT debt (300, ,000) 50,000 DR GW 310,000 AD Schedule Jan 1/ Dec 31/03 A/R (10,000) 10,000 - Inv 20,000 (20,000) - Land 140, ,000 a Building (60,000) 6,000 6,000 (48,000) b Cur liab (10,000) 10, LT debt 50,000 (10,000) (10,000) 30,000 c GW 310, ,000 d 440,000 (4,000) (4,000) 432,000 e FA4 review page 9 of 25

10 EI-upstream BT Tax AT (100,000 x 0.3 x 0.1) 3,000 1,200 1,800 f EI-downstream (80,000 x 0.5) 40,000 16,000 24,000 g BI-downstream (100,000-40,000) x ,000 4,800 7,200 h Sales/Purchases 280,000 ii Land sale-upstream 2002 Loss on sale (180, ,000) 30,000 12,000 18,000 j 2003 Building sale - upstream Loss on sale 24,000 9,600 14,400 k amort (1/2 year) (24,000/8 x 6/12) 1, l Dec 31/03 22,500 9,000 13,500 m Dividends (75,000 x 0.80) 60,000 n FA4 review page 10 of 25

11 Income Statement and Retained Earnings Picard Sarek Adjustments Consolidated Sales 3,000, ,000 (280,000) ii 3,675,000 COGS 2,100, ,000 (280,000) ii (12,000) h 2,491,000 3,000 f 40,000 g Amort 110,000 60,000 (6,000) b 1,500 l 165,500 Interest - 49,000 10,000 c 59,000 Other expenses 160,000 6, ,600 Loss on sale - 24,000 (24,000) k - Income tax expense 260,000 50,400 4,800 h (1,200) f 307,000 (16,000) g 9,000 m Other income 65,000 - (60,000) n 5,000 NCI (note 1) 26,540 o 26, ,360 Retained Earnings Jan 1 (note 2) 3,914,000 Dividends 200,000 75,000 (75,000) 200,000 Retained Earnings Dec 31 4,178,360 Note 1 - NCI NI of Sarek 125,000 Less EI profit (1,800) f AD (4,000) e Add loss on equip 13,500 m 132,700 20% 26,540 o Note that NCI under the INA method for the income statement would be the same as no GW impairment. FA4 review page 11 of 25

12 Note 2 - R/E Picard R/E - Jan 1 3,830,000 Less BI profit (7,200) h 3,822,800 Sarek R/E Jan 1 360,000 Sarek R/E acquisition 260, ,000 AD (4,000) e Land loss 18,000 j 114,000 80% 91,200 3,914,000 Balance sheet Picard Sarek adjustments cash 145, ,000 Consolidated temp invest 50, ,000 A/R 870, ,000 50,000 Inv 1,640, ,000 (3,000) f 1,115,000 (40,000) g 1,797,000 Land 650, ,000 30,000 j 140,000 a 1,120,000 B & E 3,000,000 1,000,000 (60,000) b 24,000 k 3,964,000 A/A (1,270,000) (700,000) 12,000 b (1,500) l (1,959,500) Goodwill 310,000 d 310,000 6,766,500 FA4 review page 12 of 25

13 Current liab 276, ,000 DIT 44,000 35,000 (16,000) g 431,000 (1,200) f 82,800 12,000 j 9,000 m LT debt 370,000 (30,000) c NCI (note 3) 234, ,000 Common Shares 234,340 R/E 1,500,000 4,178,360 6,766,500 Note 3 - NCI CS 300,000 R/E 410, ,000 EI profit (1,800) f AD 432,000 e Land loss 18,000 j Equipment loss 13,500 m 1,171,700 20% 234,340 b) Journal entries Investment account 84,000 R/E ( ) to update opening R/E 84,000 Investment account 109,360 equity earnings 109,360 share of sub's adjusted NI (125,000-1,800+13,500)x0.8 Dividend Revenue 60,000 Investment account 60,000 to reverse cost method recording of dividends Equity earnings 4,000 Investment account 4,000 AD amortization Investment account 7,200 equity earnings 7,200 downstream beginning inventory Equity earnings 24,000 Investment account 24,000 downstream ending inventory FA4 review page 13 of 25

14 Investment account balance = 800,000 84, ,360 (60,000) (4,000) 7,200 (24,000) 912,560 c) INA Method Preparatory calculations Purchase Price 800,000 NCI (1,090, ,000) x ,000 Implied value 938,000 NBV of Sarek CS 300,000 R/E 260, , ,000 AD 378,000 AD Allocation A/R (150, ,000) 10,000 CR Inventory ( ) 20,000 DR Land ( ) 140,000 DR Building (300, ,000) 60,000 CR Current Liab (60,000-50,000) 10,000 CR LT debt (300, ,000) 50,000 DR GW 248,000 AD Schedule Jan 1/ Dec 31/03 A/R (10,000) 10,000 - Inv 20,000 (20,000) - Land 140, ,000 a Building (60,000) 6,000 6,000 (48,000) b Cur liab (10,000) 10, LT debt 50,000 (10,000) (10,000) 30,000 c GW 248, ,000 d 378,000 (4,000) ( 4,000) 370,000 e FA4 review page 14 of 25

15 Note 3 - NCI - INA method CS 300,000 R/E 410, ,000 EI profit (1,800) f AD 122,000 e-d Land loss 18,000 j Equipment loss 13,500 m 861,700 20% 172,340 a Question Four FA4 Review solutions Foreign Transaction Method Step One: Calculation of Goodwill in $CND and Purchase Price Discrepancy Schedule Implied Value (700,000*1.22) / , ,778 BV of SF: (350, ,000)* , , , ,000 AD 180, ,778 allocation: Inventory (5,000 x 1.22) 6,100 5,000 Capital assets (50,000 x 1.22) -61,000-50,000 Land (50,000 x 1.22) 61,000 50,000 GW 174, ,778 Amortization or Impairment Dec 31/02 amortization of AD: Jan 1/02 Inventory 6,100-6,100 0 Capital asset (5 years) -61,000 12,200-48,800 Land 61, ,000 Goodwill 174,189-12, , ,289-6, ,189 FA4 review page 15 of 25

16 Step Two: Calculation of Translation Gain/Loss Net monetary position: Jan 1 position (-220,000 x 1.22) -268,400 Changes during the year: Sales (300,000 x 1.23) 369,000 Purchases (125,000-50,000+85,000) x ,800 Purchases Equip (60,000 x 1.24) -74,400 Other Expenses (120,000 x 1.23) -147,600 calculated current monetary position -318,200 actual current monetary position ( )x ,600 Translation loss -9,400 Step Three: Translated Financial Statements Translated Income Statement Sales 369,000 COGS: BI (50,000 x 1.22) 61,000 Purchases 196,800 EI (85,000 x 1.25) -106, ,550 Amortization (60,000/10*.5*1.24) + 100,000 x 1.22) 125,720 Other expenses 147,600 Translation loss 9,400 NI -65,270 Translated Balance Sheet Cash + A/R (120,000 x 1.26) 151,200 Inventory (85,000 x 1.25) 106,250 Capital assets (400,000 x 1.22) 488,000 Equipment (57,000 x 1.24) 70,680 Land ( x 1.22) 366,000 Total 1,182,130 Current Liab (70,000 x 1.26) 88,200 Other current liab (50000 x 1.26) 63,000 LT debt (260,000 x 1.26) 327,600 Common Shares (350000x 1.22) 427,000 R/E Jan 1 341,600 NI -65,270 1,182,130 FA4 review page 16 of 25

17 Step Four: Consolidated Financial Statements Consolidated Income Statement Sales 1,169,000 COGS (350, , ) 507,650 Amortization (150, ,720-12,200) 263,520 Goodwill impairment 12,200 Other 347,600 Translation loss 9,400 NI 28,630 NCI (10% x (-65,270+6,100)) -5,917 Consolidated NI 34,547 Consolidated Balance Sheet Cash + A/R 301,200 Inventory 186,250 Capital assets 999,200 Equipment 450,680 Land 473,000 GW 161,989 Total 2,572,319 Current liab 178,200 Other current liab 138,000 LT debt 827,600 NCI* 88,972 CS 1,000,000 R/E Jan 1 385,000 NI 34,547 Dividends -80,000 2,572,319 *NCI 10% of FV: 94,889 Net Income -5,917 88,972 FA4 review page 17 of 25

18 b Foreign Operation Calculation of Translation Gains/Losses Net assets - jan 1 ( )* ,600 Changes: Net Income (-48,000 x 1.23) -59,040 Calculated net asset position 709,560 Net assets - Dec. 31 ( ) x ,320 Gain -23,760 Purchase Price Discrepancy Amortization Schedule AD schedule Impairment/ Jan 1/02 x 1.22 Amortization x 1.23 Dec 31/02 x 1.26 Inventory 5,000 6,100 5,000 6, Capital assets -50,000-61,000-10,000-12,300-40,000-50,400 Land 50,000 61, ,000 63,000 GW 142, ,189 10,000 12, , , , ,289 6, ,900 translation gain/loss on AD 01-Jan ,289 Amort 6,150 Calc. Balance 174, Dec ,900 Gain -5,761 NCI share -576 Consolidated Financial Statements ci Land 46, ,000 63, ,000 cii Capital assets, net 560, ,000-50,400 1,013,600 ciii Inventory 80, , ,100 civ Amortization expense 150, ,690-12, ,390 FA4 review page 18 of 25

19 Question Five FA4 review page 19 of 25

20 Question Six FA4 review page 20 of 25

21 Question Seven A Dec 1/04 A/R 130,000 Sales 130,000 Dec 20/04 Raw Materials Inventory 101,250 A/P 75,000 x ,250 Receivable from Bank (75,000 x 1.33) 99,750 Payable to Bank 99,750 Dec 31/04 A/R ( ) x ,000 Gain on Foreign Exchange 2,000 A/P ( ) x ,250 Gain on Foreign Exchange 2,250 Gain of Foreign Exchange ( ) 75,000 1,500 Receivable from Bank 1,500 March 1/05 Loss on Foreign Exchange 2,000 A/R ( ) x 100,000 2,000 Cash (100,000 x 1.30) 130,000 A/R 130,000 April 20/05 A/P ( ) x 75, Gain on Foreign Exchange 750 No change in forward rate = no gain or loss Payable to Bank 99,750 Cash 99,750 Cash 75,000 x Receivable from Bank 98,250 A/P 98,250 Cash 98,250 B GAAP views the purchase transaction separate from the financing transaction. By doing this the historical cost principle is preserved as the cost of items will not be affected by the exchange rate fluctuations. FA4 review page 21 of 25

22 Question Eight a. i) DJM should report its investment in TPC as an available-for-sale investment at fair value. It plans to hold its shares in TPC for the long-term, and it does not exercise significant influence over TPC (holding only 15% of its shares and having no members on the board of directors). ii) Available-for-sale investments ,000 Cash ,000 Dividends receivable... 15,000 Investment income ($100,000 15%)... 15,000 Loss on AFS - Other comprehensive income... 42,000 Available-for-sale investments [12,000 ($12.50 $9.00)]... 42,000 Reserve 42,000 Loss on AFS - OCI 42,000 b.2008 i) Accounting income before income taxes $ 500,000 Permanent differences Non-deductible fines 10,000 Non-taxable dividends (40,000) Timing differences Amortization vs. CCA ($12,000 $15,300) 1 (3,300) Taxable income $ 466,700 ii) Temporary differences December 31, 2007 Net book value ($60,000 $60,000 / 5 10/12) $ 50,000 Undepreciated capital cost [$60,000 ($60,000 30% 0.50)] 51,000 Temporary difference deductible 1,000 Tax rate 45% DIT asset $ 450 Temporary differences December 31, 2008 Net book value ($50,000 $12,000) $ 38,000 Undepreciated capital cost [$51,000 ($51,000 30%)] 35,700 Temporary difference taxable 2,300 Tax rate 40% DIT liability $ 920 Income tax expense ,050 DIT ,370 Income taxes payable ($466,700 40%) , ,000 / 5 {[60,000 (60, )] 0.30} FA4 review page 22 of 25

23 Case 8-2 Both the CFO and controller are wrong. The transaction is an equity transaction between shareholders of Stiff. Since Prince controlled Stiff both before and after this transaction, the valuation of Stiff s assets and liabilities for consolidation purposes will not change. Only the parent s and non-controlling interests share of the consolidated net assets will change. Any difference between the amount paid by Prince and the carrying amount given up by the non-controlling interest will not be reported in profit but will be reported as an adjustment to shareholders equity. For this transaction, the difference is $660,000 calculated as follows: Acquisition cost (108 x 100,000 x 20%) 2,160,000 Carrying amount of Stiff shares acquired (70 x 100,000 x 20%) 1,400,000 Carrying amount of acquisition differential acquired (500,000 x 20%) 100,000 1,500,000 Excess 660,000 The $660,000 will be reported as a reduction to contributed surplus, if any exists, or a reduction to retained earnings. Even if the acquisition differential were allocated to assets and liabilities, the entire amount would not have been allocated to goodwill. $260,000 (20% x $1,300,000) should be allocated to the patents in order to recognize the value of the patents. The remaining amount would be allocated to goodwill. Then, the goodwill would have to be assessed for impairment at the end of Year 13 and all subsequent years by determining the fair value of Stiff s shares. The recent trading price of $100 is not necessarily a true indication of the fair value of the shares. It represents the exchange price for the parties exchanging shares on that particular date. To acquire control of Stiff, investors may be willing to pay more or less than $100 per share. An independent business valuation could determine the fair value of the shares. If the fair value is less than $108 per share, the goodwill will have to be written down to reflect the impairment in value. For example, if the fair value of the shares were only $105 per share, the purchase price would have been inflated by $60,000 ($3 x 100,000 x 20%). In turn, goodwill would have been overstated by $60,000 and would have to be written down by $60,000 in Year 13. The $260,000 allocated to the patent would have to be amortized over the useful life of the FA4 review page 23 of 25

24 patent commencing in Year 14. Given a useful life of 4 years, the amortization expense would be $65,000 ($260,000 / 4) per year and would cause a decrease in income of $65,000 for Year 14. Case 12-1 In theory, accounting for a pledge is a relatively straightforward process. A receivable is established (at present value if not to be received for a year) along with an adequate allowance for doubtful collections. However, in practice, the process might be much more complicated. In this case, for example, was a pledge actually made or was this just a superfluous statement spoken at a moment of overwhelming emotions? Is this a promise to give or an intention to give? Can the donor change his mind? Does this potential donor really own land in Alberta and can it be sold for $15 million? How can an adequate allowance be determined for this pledge? If the indivdiual's mother should die, would he lose interest in supporting the hospital? If the $5 million is reported as a receivable and then is not collected, what is the impact on the readers of the financial statements? How much time and energy should the hospital invest in attempting to arrive at a proper method of financial reporting? The accountant must address all of these questions (and more) to determine the appropriate accounting treatment. At a minimum, hospital officials need to contact this donor and have a long discussion. He needs to understand their reasons for attempting to establish a valuation of this promise. In class discussion, students can be asked to identify questions that should be posed to this person. They would probably include the following: Does he really plan to give $5 million to the hospital? When does he project that the land will be sold and the gift made? How did he establish a $15 million price? Could the land be sold for less and, if so, how will that impact on the gift to the hospital? How does he want the $5 million to be used? Is there any chance that he will change his mind? What other charities has he supported? Has he previously made such large gifts? Would he be willing to furnish financial statements as well as a list of references who could verify his intentions and his ability to carry out those intentions? Does the hospital have legal recourse for the promise that is in writing and signed? FA4 review page 24 of 25

25 If this individual has supported other charities over the years, is committed to the work of Beaucoup Hospital, has adequate financial resources, and if the land appears to be worth $15 million, the hospital should report the pledge as a receivable. However, a large allowance should probably still be established simply because of the uncertainties involved with this amount of money over an extended period of time. Conversely, if too much uncertainty exists (a value for the land cannot be determined or the gentleman refuses to give information about his ability to meet this commitment), the hospital may decide that this is not a pledge at all but merely the promise of a possible future pledge the donor intends to give. In that case, the Hospital could disclose some information related to the pledge in the notes to the financial statements. FA4 review page 25 of 25