Reference no: EM131215349
Question 1
On January 1, 2015, Portia Ltd. issued shares worth $1,120,000 to Storm Ltd. to acquire 80% of Storm's outstanding shares. On the acquisition date, Storm's statement of financial position shows share capital of $420,000 and retained earnings of $777,000. At the acquisition date, all of Storm's identifiable assets and liabilities equaled their fair values with the exception of the following:
Inventories (fair value exceeded book value by $14,000)
Investments (fair value exceeded book value by $14,000)
Equipment (fair value exceed net book value by $105,000)
At the acquisition date, Storm's accumulated amortization account for the equipment had a balance of $805,000. As of the acquisition date, Storm's equipment had a remaining useful life of 10 years.
Additional information:
• Portia records its investments using the cost method.
• Portia uses the entity theory method of consolidation.
• In 2017, Portia sold all its investments for a gain of $63,000.
• In 2018, Portia purchased equipment from Storm for $127,400. At the sale date, Storm's net book value of the equipment was $98,000. Storm had originally purchased the equipment for $140,000. After the purchase, Portia amortized the equipment at a rate of $18,200 per year for the remaining 7 years of its useful life, taking a full year of amortization in 2018.
• During 2019, Storm purchased goods from Portia. At the end of 2019, Storm still had $28,000 of these goods in inventory. Portia had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.
• During 2019, Portia purchased goods from Storm. At the end of 2019, Portia still had $140,000 of these goods in inventory. Storm had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.
• During 2020, Portia sold goods of $140,000 to Storm. Portia earned a gross profit of $56,000 on this sale. At the end of 2020, Storm still had $56,000 worth of goods in inventory.
• During 2020, Storm sold goods of $980,000 to Portia at a gross margin of 40%. At the end of 2020, Portia still had 10% of the goods in inventory.
• During 2020, Portia received $126,000 in royalties from Storm. Between January 1, 2015 and December 31, 2019, Portia received $700,000 in royalties from Storm.
The financial statements for Portia and Storm for the year ended December 31, 2020 are presented on the following pages.
Statement of Financial Position
As of December 31, 2020
Portia Ltd. Storm Ltd.
Assets:
Current assets:
Cash $ 70,000 $ 28,000
Accounts receivable 210,000 224,000
Inventory 252,000 140,000
532,000 392,000
Noncurrent assets:
Land 140,000 -
Equipment 7,000,000 3,780,000
Accumulated amortization, equipment (2,478,000) (1,736,000)
Investment in Storm 1,120,000 ____-___
5,782,000 2,044,000
Total assets $ 6,314,000 $ 2,436,000
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable $ 630,000 $ 280,000
Noncurrent liabilities:
Loan payable 420,000 700,000
1,050,000 980,000
Shareholders' equity:
Share capital 1,680,000 420,000
Retained earnings 3,584,000 1,036,000
5,264,000 1,456,000
$ 6,314,000 $ 2,436,000
Condensed Statement of Comprehensive Income
For the year ended December 31, 2020
Portia Ltd. Storm Ltd.
Revenue:
Sales $ 2,804,200 $ 2,100,000
Royalties 210,000 -
Dividends 100,800 ___-___
3,115,000 2,100,000
Expenses:
Cost of sales 1,680,000 1,260,000
Other 784,000 575,400
2,464,000 1,835,400
Net and comprehensive income $ 651,000 $ 264,600
Statement of Changes in Equity - Retained Earnings Section
For the year ended December 31, 2020
Portia Ltd. Storm Ltd.
Retained earnings, beginning of the year $ 3,353,000 $ 897,400
Net income 651,000 264,600
Dividends declared (420,000) (126,000)
Retained earnings, end of year $ 3,584,000 $1,036,000
Required:
Prepare Portia's consolidated financial statements for the year ended December 31, 2020. Be sure to show all your supporting calculations.
Question 2
In 2015, Corbus Co., a Canadian company, created a foreign subsidiary called Snazzy Ltd. by investing $2,000,000 CAD (800,000 FC) in return for all of Snazzy's common shares. In preparing to start operations, Snazzy acquired equipment for 960,000 FC and took out a 320,000 FC loan. Snazzy is committed to repaying the loan in 3 years. In 2016, Snazzy acquired a tract of land for 320,000 FC. All dividends were paid on December 31 of the years in which they were declared.
Snazzy's financial statements for its first 2 years of operations are presented below.
Snazzy Ltd.
Statement of Financial Position
As of December 31
(in FC)
2016 2015
Assets:
Current assets:
Cash $ 48.000 $ 256,000
Accounts receivable 64,000 48,000
112,000 304,000
Noncurrent assets:
Land 320,000 -
Equipment 960,000 960,000
Accumulated amortization (192,000) (96,000)
1,088,000 864,000
Total assets $ 1,200,000 $ 1,168,000
Liabilities and shareholder's equity:
Current liabilities:
Accounts payable 16,000 32,000
Noncurrent liabilities:
Loan payable 320,000 320,000
336,000 352,000
Shareholder's equity:
Share capital 800,000 800,000
Retained earnings _64,000 _16,000
864,000 816,000
Total liabilities and shareholder's equity $ 1,200,000 $ 1,168,000
Snazzy Ltd.
Statement of Comprehensive Income
For the year ended December 31
(in FC)
2016 2015
Revenue $ 480,000 $ 352,000
Expenses:
Amortization 96,000 96,000
Interest 64,000 64,000
Other expenses 192,000 128,000
352,000 288,000
Net and comprehensive income $ 128,000 $ 64,000
Snazzy Ltd.
Statement of Changes in Equity - Retained Earnings Section
For the year ended December 31
(in FC)
2016 2015
Retained earnings, beginning of year $ 16,000 $ -
Net income 128,000 64,000
Dividends declared (80,000) (48,000)
Retained earnings, end of year $ 64,000 $ 16,000
Selected exchange rates
when the equipment was purchased 1FC = $2.30 CAD
when the loan was negotiated 1FC = $2.40 CAD
when the land was purchased 1FC = $1.90 CAD
average during 2015 1FC = $2.20 CAD
December 31, 2015 1FC = $2.00 CAD
Average during 2016 1FC = $1.70 CAD
December 31, 2016 1FC = $1.50 CAD
Required:
a) Assume that Snazzy's functional currency is the Canadian dollar.
i) Translate Snazzy's 2015 financial statements using the appropriate method.
ii) Independently calculate the translation gain/loss.
iii) Repeat (i) and (ii) for 2016.
b) Assume that Snazzy's functional currency is the FC.
i) Translate Snazzy's 2015 financial statements using the appropriate method.
ii) Independently calculate the translation gain/loss.
iii) Repeat (i) and (ii) for 2016.