Preprep's Essay: Accounting For Goods Purchase And Forward Contract.

Journal Entries for Preprep Co.

On December 15, 20X8, Preprep Co., a Canadian company, entered into a contract to purchase goods from Mega-Lu Ltd., a foreign corporation. The terms of the contract call for the goods to be delivered to Preprep’s Edmonton location on March 31, 20X9. The cost of the goods is FC500,000, to be settled on April 30, 20X9.

On December 15, 20X8, Preprep Co. also arranged for a forward contract through its bank for FC500,000. The goods were delivered on time and Preprep settled with Mega-Lu on April 30. Preprep has a February 28 year-end.

The spot and forward rates are as follows:
                                                                                           Spot Rate             Forward Rate
            December 15, 20X8                                    FC1 = $1.40 CDN    FC1 = $1.44 CDN
            February 28, 20X9                                                   $1.42                          $1.46

March 31, 20X9                                                        $1.43                          $1.47 

April 30, 20X9                                                           $1.48                          $1.48

Required:

Prepare Preprep’s journal entries to reflect the above, assuming
a)  the hedge is a cash flow hedge, and

200. b) the hedge is a fair value hedge.
     
     Problem 2                                                                                                                (60 marks)
     
     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 MC’s 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, MC’s 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:

1. 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.
   
   
2. Assume that LL is a private company and reports under ASPE. LL uses the equity method to report its investment in MC. LL’s functional currency is $CAD. Calculate LL’s Investment in Marcus Co.’s account at December 31, 20X8.  There is no need to prepare financial statements. 

Problem 3                                                                                                                 (20 marks)

Community Assist for Refugees (CAR) is a not-for-profit organization that assists refugees with various services including language and cultural training, transportation, a food bank, and translation services. Some selected transactions for CAR are presented below.

1. CAR received a $5,000 cheque from a local radio station. The letter that came with the donation says that it can be used by CAR on whatever is most urgent.
   
   
2. CAR received a $10,000 donation from the Literacy Fund for a homework assistance project. The project is expected to start in a few months.
   
   
3. CAR received a $25,000 endowment contribution from Dr. Koe for a scholarship fund.
   
   
4. CAR received a donation of 50 student desks for its homework assistance project from City Office Supplies Ltd. The desks are valued at $10,000 and are expected to last 10 years.
   
   
5. The city donated a tract of land, valued at $30,000 to CAR. CAR plans to raise funds to construct a new centre on the land.
   
   
6. Assume that the homework assistance program is underway. The $10,000 donation in part (b) has been spent on materials and a part-time instructor.
   
   
7. Assume that at the end of the year, the endowment contribution in part (c) earned $500 in interest. Dr. Koe had specified that interest must be spent on future scholarships. CAR will wait until there is at least $2,000 in accumulated interest before distributing any scholarships.
   
   
8. At the end of the year, CAR records depreciation on the desks, using the straight-line method.

Required: 

Prepare journal entries to record the above transactions on CAR’s books using

 i)  the deferral method, and

1. ii) the restricted fund method.

Date	Particulars		Amount	Amount
15/12/X8	Call Option A/c.		720000
		Cash A/c.		720000
30/4/X9	Cash A/c.		740000
		Call Option A/c.		720000
		Profit on Hedge Activity A/c.		20000
30/4/X9	Inventory A/c.		740000
		Cash A/c.		740000
	Profit on Hedge Activity A/c.		20000
		Other Comprehensive Income A/c.		20000
			Dr.	Cr.
Date	Particulars		Amount	Amount
15/12/X8	Call Option A/c.		720000
		Cash A/c.		720000
28/2/X8	Loss on Hedge Activity A/c.		10000
		Call Option A/c.		10000
	Other Comprehensive Income A/c.		10000
		Loss on Hedge Activity A/c.		10000
30/4/X9	Cash A/c.		740000
		Call Option A/c.		710000
		Profit on Hedge Activity A/c.		30000
30/4/X9	Inventory A/c.		740000
		Cash A/c.		740000
	Profit on Hedge Activity A/c.		30000
		Other Comprehensive Income A/c.		30000
							Consolidation Entries:
Carrying Amount	Fair Value	Net Fair Value					Date	Particulars		Amount	Amount
400000		400000						Equipment A/c.		80000
146000		146000							BCVR A/c.		80000
800000	880000	80000
								Depreciation Expense A/c.		8000
		626000							Equipment A/c.		8000
		623200						Share Capital A/c.		360000
		62600						Retained Earnings A/c.		131400
		685800						Goodwill A/c.		59800
								BCVR A/c.		72000
		59800							Investment in Marcus Co. A/c.		623200
								Share Capital A/c.		40000
Liv Ltd.								Retained Earnings A/c.		14600
in $CDN	Exchnage Rate	in FC	Marcus LTd.	Adjustments	Group			BCVR A/c.		8000
									NCI A/c.		62600
16472000	2.32	7100000	8400000		15500000
180080	2.44	73803		-147600	-73797			Dividend Revenue A/c.		147600
16652080		7173803	8400000		15573803			NCI A/c.		16400
-8256000	2.32	-3558621	-5304000		-8862621				Dividend Paid A/c.		164000
-7124000	2.32	-3070690	-2688000	-8000	-5766690
				-4000	-4000			Impairment Loss A/c.		4000
1272080		544493	408000		940493				Goodwill A/c.		4000
1329440	2.2	604291	146000	-146000	604291
			164000	-164000	0
2601520		1148784	390000		1544784
Liv Ltd.
in $CDN	Exchnage Rate	in FC	Marcus LTd.	Adjustments	Group
2752000	2.32	1186207	800000	72000	2058207
1371040	2.2	623200		-623200	0
				55800	55800
4123040		1809407	800000		2114007
1376000	2.38	578151	364000		942151
700000	2.32	301724	280000		581724
562080	2.44	230361	164000		394361
2638080		1110236	808000		1918236
6761120		2919643	1608000		4032243
1376000	2.2	625455	400000	-400000	625455
2601520	2.44	1066197	146000		1544784
		28164			-446023
				46200	46200
3977520		1719815	546000		1770415
1860000	2.32	801724	640000		1441724
923600	2.32	398103	422000		820103
2783600		1199828	1062000		2261828
6761120		2919643	1608000		4032243
Acquisition Analysis:								Consolidation Entries:
Particulars	Carrying Amount	Fair Value	Net Fair Value	Exchage Rate	Net Fair Value			Date	Particulars		Amount	Amount
			In FC		In CDN						in CDN	in CDN
Share Capital	400000		400000	2.2	880000				Equipment A/c.		176000
Retained Earnings	146000		146000	2.2	321200					BCVR A/c.		176000
Equipment	800000	880000	80000	2.2	176000
									Depreciation Expense A/c.		17600
Net Fair Value of Identifiable Assets & Liabilities			626000		1377200					Equipment A/c.		17600
Purchase Consideration			623200	2.2	1371040				Share Capital A/c.		792000
Add: Non-Controlling Interest			62600		137720				Retained Earnings A/c.		289080
Total Value of MC			685800		1508760				Goodwill A/c.		131560
									BCVR A/c.		158400
Goodwill			59800		131560					Investment in Marcus Co. A/c.		1371040
Income Statement:									Share Capital A/c.		88000
	Marcus Ltd.								Retained Earnings A/c.		32120
Particulars	In FC	Exchnage Rate	In CDN	Liv Ltd.	Adjustments	Group			BCVR A/c.		17600
										NCI A/c.		137720
Sales	8400000	2.32	19488000	16472000		35960000
Dividend Income				180080	-360144	-180064			Dividend Revenue A/c.		360144
Total Income	8400000		19488000	16652080		36140080			NCI A/c.		40016
Cost of Sales	-5304000	2.32	-1.2E+07	-8256000		########				Dividend Paid A/c.		400160
Other Expenses	-2688000	2.32	-6236160	-7124000	-17600	########
Impairment Loss					-9280	-9280			Impairment Loss A/c.		9280
Net Income	408000		946560	1272080		2191760				Goodwill A/c.		9280
Add: Retained Earnings (1/1/X8)	146000	2.2	321200	1329440	-321200	1329440
Less: Dividend Paid	164000	2.44	400160		-400160	0
Retained Earnings (31/12/x8)	390000		867600	2601520		3521200
Balance Sheet:
	Marcus Ltd.
Particulars	In FC	Exchnage Rate	In CDN	Liv Ltd.	Adjustments	Group
Assets:
Non-Current Assets:
Plant & Equipment,net	800000	2.32	1856000	2752000	158400	4766400
Investment in Marcus Co.				1371040	-1371040	0
Goodwill, net					122280	122280
	800000		1856000	4123040		4888680
Current Assets:
Inventory	364000	2.38	866320	1376000		2242320
Accounts Receivable	280000	2.32	649600	700000		1349600
Cash & Cash Equivalents	164000	2.44	400160	562080		962240
	808000		1916080	2638080		4554160
Total Assets	1608000		3772080	6761120		9442840
Shareholder's Equity:
Share Capital	400000	2.2	880000	1376000	-880000	1376000
Retained Earnings	390000	2.44	951600	2601520		3521200
Foreign Curreny Translation Reserve			-523360			-799504
Non-Controlling Interest					97704	97704
	790000		1308240	3977520		4195400
Liabilities:
Non-Current Liabilities:
Notes Payable	640000	2.32	1484800	1860000		3344800
Current Liabilities:
Accounts Payable & Accrued liabilities	422000	2.32	979040	923600		1902640
Total Liabilities	1062000		2463840	2783600		5247440
Total Shareholder's Equity & Liabilities	1852000		3772080	6761120		9442840
Particulars	Amount	Exchange Rate	Amount
	(in FC)		(in CDN)
Initial Investment in Marcus Co.	623200	2.2	1371040
Add: Dividend Revenue	147600	2.44	360144
Investment Value in Marcus Co.			1731184
		Dr.	Cr.					Dr.	Cr.
Particulars		Amount	Amount		Date	Particulars		Amount	Amount
Cash A/c.		5000				Cash A/c.		5000
	Deferred Contribution- Urgent Fund A/c.		5000				Contribution - Unrestricted Fund A/c.		5000
Cash A/c.		10000				Cash A/c.		10000
	Deferred Contribution- Homework Assistance Project A/c.		10000				Contribution - Restricted for Homework Assitance Project A/c.		10000
Cash A/c.		25000				Cash A/c.		25000
	Deferred Contribution- Scholarship Fund A/c.		25000				Contribution - Restricted for Scholarship Fund A/c.		25000
Cash A/c.		10000				Cash A/c.		10000
	Deferred Capital Contribution- Homework Assistance Project A/c.		10000				Contribution - Restricted for Homework Assitance Project A/c.		10000
Land A/c.		30000				Land A/c.		30000
	Deferred Capital Contribution- New Centre A/c.		30000				Contribution - Restricted for Homework Assitance Project A/c.		30000
Furniture-Desks A/c.		10000				Furniture-Desks A/c.		10000
	Cash A/c.		10000				Cash A/c.		10000
Deferred Capital Contribution- Homework Assistance Project A/c.		10000				Contribution - Restricted for Homework Assitance Project A/c.		10000
	Contribution Revenue A/c.		10000				Contribution - Unrestricted Fund A/c.		10000
Cash A/c.		500				Cash A/c.		500
	Deferred Contribution- Scholarship Fund A/c.		500				Contribution - Restricted for Scholarship Fund A/c.		500
Depreciation Expenses A/c.		1000				Depreciation Expenses A/c.		1000
	Accum Depreciation - Furniture A/c.		1000				Accum Depreciation - Furniture A/c.		1000