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
- 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:
- 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. - 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.
- 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.
- 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.
- CAR received a $25,000 endowment contribution from Dr. Koe for a scholarship fund.
- 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.
- 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.
- 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.
- 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.
- 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
- 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 |
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