Reference no: EM131277847

Meek's Penguin Corp.

Meek's Penguin Corp. (MPC) is a Canadian company that reports its financial results in accordance with IFRS. On December 31, 20X6, MPC acquired ordinary shares of Zoebug Supply Inc. (ZSI). Four independent questions based on different quantities of shares acquired, but using the same financial results for ZSI, are set out below.

ZSI's 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                                Cash                                                                             $175	20X6 $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
Ordinary shares                                                             300	300
Retained earnings                                                         431	206
Total liabilities and equity                                         $1,566 Zoebug Supply Inc. Statement of comprehensive income	$1,370
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                                563                                      Depreciation and amortization expense                                          52 360                                   Other income                                                                                   190                                     Earnings before income tax expense                                            550                                   Income tax expense                                                                       165                                   Net income                                                                                 $   385

The fair value of ZSI's 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 first in, first out (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. Both companies account for share-issuance costs using the retained-earnings method.

6. For impairment-testing purposes, MPC established that ZSI is a cash-generating unit (CGU).

7. On December 31, 20X7, ZSI sold land to MPC for $150,000. ZSI's net book value at time of sale was $140,000, which was the same as the estimated fair value at acquisition date of the associate (December 31, 20X6). In consideration of the transfer, MPC signed a note payable to ZSI for $150,000. 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.

8. During 20X7, MPC sold goods to ZSI for $200,000 including a 40% gross profit margin; 10% of these goods remained unsold by ZSI as at December 31, 20X7.

9. 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.

10. During 20X7, ZSI rented office space from MPC at a total cost of $50,000. This amount remained unpaid at year end.

11. MPC and ZSI only prepare accruals and other adjusting entries at year end.

Question 1

On December 31, 20X6, MPC paid $200,000 cash to acquire 20% of ZSI's outstanding ordinary shares. This level of investment provides MPC with significant influence over ZSI.

MPC tested the CGU for impairment on December 31, 20X7. MPC's investment was found to be impaired by $7,600.

Required:

In worksheet Q1(a) JEs and calcs

a) Prepare journal entries to record MPC's acquisition of ZSI and all events during 20X7 that affect MPC's Investment in ZSI account. Ensure that you provide support for your calculations. Also remember to provide a brief explanation for each journal entry as to its nature.

In worksheet Q1(b) JEs and calcs

b) Independent of part (a), assume that the balance of MPC's Investment in ZSI account on December 31, 20X9, was $280,000. This balance includes the results of all of ZSI's activities during 20X9. Three independent scenarios follow. In each one, the amount paid or received represents the fair market value of the ownership stake purchased or sold. Prepare the journal entries that MPC would record for each of these independent scenarios. Remember to support the journal entries with a brief explanation as to their nature.

i) On December 31, 20X9, MPC sold 25% of its investment in ZSI to an outside party for $65,000 cash. This transaction reduced MPC's remaining ownership by 5%, from 20% to 15%. MCP no longer has significant influence over ZSI.

ii) On December 31, 20X9, MPC purchased an additional 15% of the outstanding ordinary shares of ZSI for $200,000 cash. This transaction increased MPC's ownership stake to 35%.

iii) On December 31, 20X9, MPC purchased an additional 40% of the outstanding ordinary shares of ZSI for $510,000 cash. This transaction increased MPC's ownership stake to 60%.

Question 2

Independent of Question 1, assume that on December 31, 20X6, MPC paid $1,000,000 cash to acquire 100% of the net assets of ZSI.

Required:

In worksheet Q2 AD schedule

a) Calculate and allocate the acquisition differential including determination of the goodwill arising on the acquisition of the net assets of ZSI.

b) Prepare MPC's journal entry to record the acquisition. Support the journal entry with a brief explanation as to its nature. (3 marks)

Question 3

Independent of Questions 1 and 2, assume that on December 31, 20X6, MPC issued 100,000 of its ordinary shares to acquire 100% of the ordinary shares of ZSI. MPC's ordinary shares were actively traded at $10 at acquisition date.

MPC disbursed $23,000 cash to pay for costs directly related to the acquisition of ZSI and an additional $18,000 cash to pay for the cost of issuing the additional shares.

MPC's non-consolidated statement of financial position as at December 31, 20X6, which was prepared after all MPC's year-end adjustments had been processed but which does not include the investment made in ZSI described in the points above, is as follows:

Meek's Penguin Corp.

Statement of financial position As at December 31, 20X6 (in $000s)

Cash	$	728
Accounts receivable and accruals		968
Inventory		422
Land		640
Building (net)		1,041
Equipment (net)		632
Trademark		650
Total assets	$	5,081
Accounts payable and accruals	$	669
Long-term debt		1,950
Ordinary shares		500
Retained earnings		1,962
Total liabilities and equity	$ 5,081

Required:

In worksheet Q3 Consol. SFP 20X6

Refer to the acquisition differential allocation schedule that you prepared in Question 2. Use this information, together with the two companies' SFPs at December 31, 20X6, and the information provided in this question, to prepare MPC's consolidated statement of financial position at the December 31, 20X6, acquisition date. Provide a brief explanation of all adjustments made to arrive at the consolidated SFP figures.

(Note: From the Project Data file, copy and paste the template in the worksheet titled "Q3 Consolidated SFP 20X6" into your project submission file. Do not show your work in the Project Data file.)

Question 4

Independent of Questions 1 to 3, assume that on December 31, 20X6, MPC paid $720,000 cash to acquire 70% of ZSI's outstanding ordinary shares.

MPC tested the CGU for impairment on December 31, 20X7. Goodwill was found to be impaired by $18,000.

MPC's 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:

Meek's 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
Ordinary shares	500		500
Retained earnings	2,175		1,962
Total liabilities and equity	$ 5,422		$ 5,081
Meek's 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			1264
Depreciation and amortization expense			215
			372
Other income			218
Earnings before income tax expense			590
Income tax expense			177
Net income			$ 413

Required:

In worksheet Q4 AD schedules

a) Use the acquisition method to allocate the acquisition differential and determine goodwill arising on acquisition, assuming that MPC uses the identifiable net assets (INA) method to value the non-controlling interest (NCI).

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.

c) Based on the solution to part (a) (where MPC uses the INA method to value the NCI), prepare an acquisition differential 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.

In worksheet Q4 Interco transactions

d) Prepare a listing of intercompany transactions and balances eliminated upon consolidation.

e) Calculate all unrealized and realized intercompany profits.

- 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.

In worksheet Q4 Consol. SCI & RE

f) Prepare MPC's consolidated statement of comprehensive income for the year ended December 31, 20X7, assuming that MPC uses the INA method to value the NCI. 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 (e) of Question 4.

(Note: From the Project Data file, copy and paste the template in the worksheet titled "Q4

Consolidated SCI 20X7" into your project submission. Do not show your work in the Project Data file.)

g) Prepare MPC's consolidated statement of retained earnings for the year ended December 31, 20X7, assuming that MPC uses the INA method to value the NCI.

In worksheet Q4 Consol. SFP & NCI

h) Calculate the NCI on the statement of financial position as at December 31, 20X7, assuming that MPC uses the INA approach to value the NCI.

i) Prepare MPC's consolidated statement of financial position as at December 31, 20X7, assuming that MPC uses the INA method to value the NCI. Include references to your supporting calculations, which will typically be the references in the supporting schedules prepared in parts (a) through (h) of Question 4.

(Note: From the Project Data file, copy and paste the template in the worksheet titled "Q4 Consolidated SFP 20X7" into your project submission file. Do not show your work in the Project Data file.)