Reference no: EM131089496

Question 1:

On January 1, Year 1, the Vine Company purchased 60,000 of the 80,000 ordinary shares of the Devine Company for $80 per share. On that date, Devine had ordinary shares of $3,480,000, and retained earnings of $2,110,000. When acquired, Devine had inventories with fair values $90,000 less than carrying amount, a parcel of land with a fair value $210,000 greater than the carrying amount, and equipment with a fair value $210,000 less than carrying amount. There were also internally generated patents with an estimated market value of $410,000 and a five­year remaining life. A long­term liability had a market value $110,000 greater than carrying amount; this liability was paid off December 31, Year 4. All other identifiable assets and liabilities of Devine had fair values equal to their carrying amounts. Devine's accumulated depreciation on the plant and equipment was $510,000 at the date of acquisition.

At the acquisition date, the equipment had an expected remaining useful life of 10 years. Both companies use the straight­line method for all depreciation and amortization calculations and the FIFO inventory cost flow assumption. Assume a 40% income tax rate on all applicable items and that there were no impairment losses for goodwill.

On September 1, Year 5, Devine sold a parcel of land to Vine and recorded a total non­operating gain of $410,000.

Sales of finished goods from Vine to Devine totalled $1,010,000 in Year 4 and $2,010,000 in Year 5. These sales were priced to provide a gross profit margin on selling price of 33 1/3% to the Vine Company. Devine's December 31, Year 4, inventory contained $303,000 of these sales; December 31, Year 5, inventory contained $603,000.

Sales of finished goods from Devine to Vine were $810,000 in Year 4 and $1,210,000 in Year 5. These sales were priced to provide a gross profit margin on selling price of 40% to the Devine Company. Vine's December 31, Year 4, inventory contained $110,000 of these sales; the December 31, Year 5, inventory contained $510,000.

Vine's investment in Devine's account is carried in accordance with the cost method and includes advances to Devine of $210,000.

There are no intercompany amounts other than those noted, except for the dividends of $500,000 (total amount) declared and paid by Devine.

INCOME STATEMENTS

for Year Ending December 31, Year 5 (in Thousands of Dollars)

	Vine	Devine
sales	$11,800	$3200
Dividends, investment income, and gains	600	1,200
Total income	12,400	4,400
Cost of goods sold	8,300	1,700
Other expenses	500	500
Income taxes	200	200
Total expenses	9,000	2,400
Profit	$3,400	$2,000

STATEMENTS OF FINANCIAL POSITION

December 31, Year 5 (in Thousands of Dollars)

Total assets	$ 30,330	$12,800
Ordinary shares	$ 10,000	$3,480
Retained earnings	11,800	6,800
Long­term liabilities	6,800	1,300
Deferred income taxes	400	100
Current liabilities	1,330	1,120
Total equity and liabilities	$ 30,330	$ 12,800

Required:

(a) The allocation of the acquisition cost at acquisition and the related amortization schedule. (Leave no cells blank ­ be certain to enter "0" wherever required. Enter your answers in dollars, not in thousands of dollars. Input all values as positive numbers. Do not round gross profit percentage for intermediate computations.)

(b) Prepare a consolidated income statement with expenses classified by function. (Enter your answers in dollars, not in thousands of dollars. Input all values as positive numbers. Do not round gross profit percentage for intermediate computations.)

(c) Calculate consolidated retained earnings at December 31, Year 5. (Enter your answer in dollars, not in thousands of dollars. Do not round gross profit percentage for intermediate computations.)

(d) Prepare a consolidated statement of financial position for Vine Company at December 31, Year 5. (Negative amount should be indicated by a minus sign. Enter your answers in dollars, not in thousands of dollars. Do not round gross profit percentage for intermediate computations.)

(e) Assume that Devine's shares were trading at $75 per share shortly before and after the date of acquisition, an that this data was used to value non­controlling interest at the date of acquisition. Calculate goodwill and non­controlling interest at December 31, Year 5. (Enter your answers in dollars, not in thousands of dollars. Do not round gross profit percentage for intermediate computations.)

Question 2:

The following balance sheets have been prepared as at December 31, Year 5, for Kay Corp. and Adams Co. Ltd.:

Cash	Kay $      67,000	Adams $      33,500
Accounts receivable	94,000	180,500
Inventory	617,500	410,500
Property and plant	1,414,000	910,500
Investment in Adams	367,000	0
	$2,559,500	$1,535,000
Current liabilities	$  407,000	$  157,000
Bonds payable	508,750	607,000
Common shares	928,000	464,000
Retained earnings	715,750	307,000
	$2,559,500	$1,535,000

Additional Information
- Kay acquired its 40% interest in Adams for $367,000 in Year 1, when Adams's retained earnings amounted to $177,000. The acquisition differential on that date was fully amortized by the end of Year 5.
- In Year 4, Kay sold land to Adams and recorded a gain of $67,000 on the transaction. Adams is still using this land.
- The December 31, Year 5, inventory of Kay contained a profit recorded by Adams amounting to
$42,000.
- On December 31, Year 5, Adams owes Kay $36,000.
- Kay has used the cost method to account for its investment in Adams.
- Use income tax allocation at a rate of 40%, but ignore income tax on the acquisition differential.

Required:

(a) Prepare three separate balance sheets for Kay as at December 31, Year 5.

(i) Assuming that the investment in Adams is a control investment.

(ii) Assuming that the investment in Adams is a joint venture investment, and is reported using proportionate consolidation.

(iii) Assuming that the investment in Adams is a significant influence investment.

(b) Calculate the debt­to­equity ratio for each of the balance sheets in Part (a). (Round your answers to 2 decimal places.)

Question 3:

Hull Manufacturing Corp. (HMC), a Canadian company, manufactures instruments used to measure the moisture content of barley and wheat. The company sells primarily to the domestic market, but in Year 3, it developed a small market in Argentina. In Year 4, HMC began purchasing semi­finished components from a supplier in Romania. The management of HMC is concerned about the possible adverse effects of foreign exchange fluctuations. To deal with this matter, all of HMC's foreign currency-denominated receivables and payables are hedged with contracts with the company's bank. The year­end of HMC is December 31.

The following transactions occurred late in Year 4:

- On October 15, Year 4, HMC purchased components from its Romanian supplier for 812,000 Romanian leus (RL). On the same day, HMC entered into a forward contract for RL812,000 at the 60­day forward rate of RL1 = $0.420. The Romanian supplier was paid in full on December 15, Year 4.

- On December 1, Year 4, HMC made a shipment to a customer in Argentina. The selling price was 2,512,000 Argentinean pesos (AP), with payment to be received on January 31, Year 5. HMC immediately entered into a forward contract for AP2,512,000 at the two­month forward rate of AP1 = $0.238.

During this period, the exchange rates were as follows:

                               Spot rates          Forward rates
October 15, Year 4     RL1 = $0.407
December 1, Year 4    AP1 = $0.261
December 15, Year 4   RL1 = $0.399
December 31, Year 4   AP1 = $0.245       AP1 = $0.234

Hedge accounting is not adopted.

Required:

(a) Prepare the Year 4 journal entries to record the transactions described above and any adjusting entries necessary.

Date General Journal Debit Credit October 15, Year 4

Record the purchase of inventory.

December 1, Year 4

December 15, Year 4

December 31, Year 4

Record the forward contract.

Record the sales transaction.

Record the forward contact.

Record the exchange gain and losses.

Record the exchange gain and losses.

Record the payment to the bank.

Record the receipt from bank.

Record the payment to accounts payable.

Record the exchange gain and losses.

Record the exchange gain and losses.

(b) Prepare the December 31, Year 4, balance sheet presentation of the receivable from the Argentinean customer, and the accounts associated with the forward contract.

Hull Manufacturing Corp.

Balance Sheet

as at December 31, Year 4

Assets

Account receivable $

Forward contract $