Chapter 4

EXERCISE 4-3
The adjustments for the consolidated financial statement adjustments as at December 31, 2019
are as follows:
1a Sales -$15,000
Cost of sales - $10,000
Inventory - $5,000
Deferred tax asset + $2,000
Income tax expense - $2,000
Sales: - $15,000 as it is entirely unsold as at December 31, 2019 and only sales to external
entities should be recognized by the consolidated group. It will therefore be necessary to
reduce the sales that Addison recognized when it sold the inventory to Erin.
Cost of sales: - $10,000 as it is entirely unsold as at December 31, 2019. That is the original
cost of sales Addison recorded when it sold the inventory to Erin.
Inventory: - $5,000 as that represents the increase in cost to inventory that occurred upon the
sale from Addison to Erin ($15,000 – $10,000).
Deferred tax asset/Income tax expense: A deferred tax asset is created for $2,000 and a
corresponding decrease income tax expense for the same amount ($5,000 × 40%) as
inventory was reduced above by $5,000. This gives rise to a temporary difference and
because the carrying amount has been reduced, tax benefits are expected in the future when
the asset is sold. Hence a deferred tax asset equal to the tax rate times the change to the
carrying amount of inventory is recorded.
1b Sales - $15,000
Sales revenue and cost of sales will be reduced by- $15,000, as the sales to the external party
Olivia are the sales that will be recognized by the consolidated entity.
1c Sales - $15,000
Inventory - $2,500
Sales: - $15,000 as the sales to the external party will be recognized and the remainder is
unsold. Total sales recognized by the consolidated entity is $24,000 ($15,000 + $9,000),
however only sales of $9,000 to the external party should be recognized.
Cost of sales: - $12,500. They have recorded cost of sales of $10,000 (Addison’s original
cost) and $15,000 (the cost that Erin paid Addison) for a total of $25,000. Since one half is
sold, the cost of sales should be $12,500 therefore a reduction of $12,500 will be required.
Inventory: - $2,500. At December 31, 2019 inventory on-hand relating to intragroup
transactions was $7,500 (1/2 × $15,000) however the original cost was $5,000 ($10,000 × ½)
therefore a reduction of $2,500 to inventory is necessary.
Deferred tax asset/Income tax expense: A deferred tax asset will be created for $1,000
(40% × $2,500) and a corresponding reduction to income tax expense will be recorded.
2. Retained Earnings- beginning- $3,600

Income tax expense + $2,400
Retained Earnings beginning: - $3,600. Originally when the intragroup transaction occurred
a profit of $6,000 was eliminated as it was not to an external entity. Net of tax this was $3,600
($6,000 × (1 – .40)).
Income tax expense: + $2,400. Income tax expense will be increased by $2,400 ($6,000 ×
40%) as the inventory is being sold in the current period.
Cost of sales: - $6,000 as that was the original profit and increase to the carrying amount of
the inventory recognized. Cost of goods sold must therefore be decreased by this amount to
reflect that the cost to the consolidated entity is actually lower than what was recorded.
3. Retained earnings – beginning +3,000

Land + $5,000
Deferred tax liability + $2,000
Loans payable - $12,000
Loans receivable - $12,000
Retained earnings beginning: +3,000. Retained earnings will be increased by $5,000 and
decreased by $2,000 as the land Erin sold to Addison in 2018 is not a transaction external to
the consolidated entity.
Land: + $5,000The land is recorded by Addison at $20,000, however the actual cost to Erin is
$25,000. Therefore it will be necessary to increase the land by $5,000.
Deferred tax liability/Income tax expense: + It will be necessary to created a deferred tax
liability and recognize a corresponding income tax expense of $2,000 ($5,000 × 40%) as the
carrying amount of land was increased in the adjustment above. That created a temporary
difference between the carrying amount and the tax base. A deferred tax liability is recorded to
reflect the future tax effects.
Loans Payable and Receivable:- $12,000.It will be necessary to reduce the loan payable and
receivable between Erin and Addison as the transaction does not exist in terms of the group’s
relationship with external entities.
4. Gain on sale - $2,000

Depreciable asset carrying amount - $2,000
Deferred tax asset + $800
Income tax expense - $800
Depreciation expense - $200
Accumulated depreciation - $200
Deferred tax asset - $80
Income tax expense + $80
Gain on sale: - $2,000. Income will be reduced by $2,000 as the asset Addison sold to Erin is
not a transaction external to the consolidated entity.
Depreciable asset carrying amount:- $2,000. The cost of the asset is presently recorded at
the $12,000 amount that Erin paid, however the original cost to Addison of $10,000 is what it
should be recorded at. Therefore, it will be necessary to reduce the cost of the asset by
$2,000.
Deferred tax asset/Income tax expense: As the carrying amount of the depreciable asset
sold was reduced by $2,000, a deferred tax asset will be created for + $800 and a
corresponding - reduction to income tax expense of $800 will be recorded ($2,000 × 40%).
This is because the carrying amount of the asset was reduced n the adjustment above. That
created a temporary difference between the carrying amount and the tax base of $2,000. A
deferred tax asset is recorded to reflect the future tax effects.
Depreciation expense and accumulated depreciation on asset sold:-$200 It will be

necessary to calculate the depreciation expense on the revised cost of the asset. Since the
asset’s cost was reduced by $2,000 (see above) the depreciation expense and accumulated
depreciation should be reduced accordingly. $2,000 × 10% = $200.
Deferred tax asset/Income tax expense: It will be necessary to increase+ income tax
expense and - decrease deferred tax asset by $80 ($200 × 40%) to reflect the reduction to
accumulated depreciation expense above.
5. Retained earnings—beginning- $1,200 – $120 = - $1,080

Machinery - $2,000
++Accumulated depreciation - $400
Retained earnings—beginning: - $1,080. In the previous period, Addison recognized a profit

of $2,000 on the sale of the machinery. This sale did not involve entities external to the group
and hence must be eliminated on consolidation. A further adjustment to retained earnings is
required to reflect the tax on this profit. A net adjustment of $1,200 is then made to retained
earnings. Since the sale was made at the beginning of 2018, by the end of 2018, 1/10 has
been realized. As such, there is 9 years unrealized in the beginning retained earnings.
Machinery:- $2,000. The cost of the asset is presently recorded at the $6,000 amount that
Erin paid, however the original cost to Addison of $4,000 is what it should be recorded at.
Therefore, it will be necessary to reduce the cost of the asset by $2,000.
Deferred tax asset: + $640. As the carrying amount of the depreciable asset sold was
reduced by $2,000, a deferred tax asset will be created for $800 ($2,000 × 40%). Since 2
years has now gone by $80 × 2 = $160 has been realized which leaves a balance of $640.
Depreciation expense/ and accumulated depreciation on asset sold: It will be necessary
to calculate the depreciation expense on the revised cost of the asset. Since the asset’s cost
was reduced by $2,000 (see above) the depreciation expense and accumulated depreciation
should be reduced accordingly. $2,000 × 10% = $200/year. $200 will reduce the depreciation
expense in the current period and $200 for the prior period, to be recognized through retained
earnings, for a total decrease to accumulated depreciation of $400.
Income tax expense:+ $80. It will be necessary to increase income tax expense and
decrease deferred tax asset by $80 per year. The $400 adjustment to accumulated
depreciation changed the asset’s carrying amount, giving rise to a temporary difference
between this and the tax base.
EXERCISE 4-5
1. Loss on sale - 500
Carrying amount of plant + $500
Income tax expense + $200 – $20 = + $180
Deferred tax liability + $200 – $20 = + $180
Depreciation expense + $50
Accumulated depreciation + $50
Loss on sale: - $500 as the asset was not sold to an external third party, the entire income on
the sale should be removed as only sales with external entities should be recognized by the
consolidated entity.
Carrying amount of the plant: + $500. The cost of the machinery is presently recorded at the
$1,000 amount that Velvel paid, however the carrying amount to Campism of $1,500 is what it
should be recorded at. Therefore, it will be necessary to increase the cost of the asset by
$500.
Income tax expense/Deferred tax liability: As the carrying amount of the depreciable asset
sold was increased by $500, a deferred tax liability will be created for $200 and a
corresponding increase to income tax expense of $200 will be recorded ($500 ×40%).
Because a temporary difference between the carrying amount and the tax was created which
has to be tax effected. As the asset’s carrying amount was increased, a deferred tax liability of
$50 must be recorded.
Depreciation expense/Accumulated depreciation: + $50. It will be necessary to calculate

the depreciation expense on the revised cost of the asset. Since the asset’s cost was
increased by $500 (see above) the depreciation expense and accumulated depreciation
should be increased accordingly. $500/10 years = $50. Use the 10 year useful life as Velvel is
now using the asset.
Deferred tax asset/Income tax expense: It will be necessary to decrease - income tax
expense and - decrease deferred tax liability by $20 ($50×40%) due to the accumulated
depreciation increase. The adjustment above to increase the accumulated depreciation
changed the asset’s carrying amount giving rise to a temporary difference between this and
the tax base.
EXERCISE 4-5 (Continued)
2. Loss on sale - $200

Carrying amount of asset+ $200
Income tax expense + $80– $4 = + $76
Deferred tax liability + $80 – $4 = + $76
Depreciation expense+ $10
Accumulated depreciation+ $10
Loss on sale: - $200 as the asset was not sold to an external third party, the entire income on
the sale should be removed as only sales with external entities should be recognized by the
Carrying amount of the asset: + $200. The cost of the asset is presently recorded at the
$800 amount that Campism paid, however the original carrying amount to Velvel of $1,00 is
what it should be recorded at. Therefore, it will be necessary to increase the cost of the asset
by $200.
Income tax expense/Deferred tax liability: As the carrying amount of the depreciable asset
sold was increased by $200, a deferred tax liability will be created for $80 and a corresponding
increase to income tax expense of $80 will be recorded ($200 × 40%). Because a temporary
difference between the carrying amount and the tax was created which has to be tax effected.
As the asset’s carrying amount was increased, a deferred tax liability of $80 must be recorded.
Depreciation expense/Accumulated depreciation: + $10. It will be necessary to calculate

increased by $200 (see above) the depreciation expense and accumulated depreciation
should be increased accordingly. $200 ×10% = $20 for 6 months = $10.
Deferred tax asset/Income tax expense: It will be necessary to decrease - income tax
expense and - decrease deferred tax liability by $4 ($10 × 40%) due to the accumulated
depreciation expense increase. The adjustment above to increase the accumulated
depreciation changed the asset’s carrying amount giving rise to a temporary difference
between this and the tax base.
3. Sales revenue - $400

Cost of sales - $300
Inventory - $100
Accounts payable - $100
Accounts receivable - $100
Sales revenue: - $400. As the asset was sold to an internal party, the entire amount of the
sales revenue should be removed as only sales made to entities external to the group should
be recognized by the consolidated entity.
Cost of sales: - $300. Velvel recorded cost of sales of $200 and Campism recorded cost of
sales of $200 (50% × $400). Recorded cost of sales then totals $400. The cost of the sales to
the entities external to the group is $100 (50% × $200 original cost of the goods to Velvel).
Cost of sales must then be reduced by $300 ($400 – $100).
Inventory: - $100. At December 31, 2019 inventory on-hand relating to intragroup transactions
was $200 (1/2 ×$400 cost Campism paid for the goods) however the original cost was $100
($200 cost to Velvel ×½) therefore a reduction of $200 ($400 – $200) to inventory is
necessary.
Deferred tax asset/Income tax expense: + $40. As the inventory has been reduced above by
$100, it gives rise to a temporary difference and because the carrying amount has been
reduced, tax benefits are expected in the future when the asset is sold. Hence a deferred tax
asset, equal to the tax rate times the change to the carrying amount of inventory (40% × $100),
of $40 is recorded along with a corresponding reduction to income tax expense.
Accounts payable/Accounts receivable: - $100. As the amounts are still owing and
receivable between the two companies and the transaction was not with entities external to the
consolidated entity, the amounts receivable and payable should be eliminated upon
consolidation.
4. Dividend payable - $3,000

Dividend declared - $3,000
Dividend revenue - $3,000
Dividend receivable - $3,000
Dividend payable: - $3,000. To reflect that no dividends will economically be paid by Velvel to
Campism that need to be recorded as the consolidated financial statements should show only
the effects of dividends paid/payable and received/receivable from entities outside the
consolidated group.
Dividend declared: - $3,000. To reflect that no dividends will economically be paid by Velvel
to Campism that need to be recorded as the consolidated financial statements should show
only the effects of dividends paid/payable and received/receivable from entities outside the
consolidated group.
Dividend revenue: - $3,000. To reflect that no dividends will economically be paid by Velvel to
the effects of dividends paid/payable and received/receivable from entities outside the
consolidated group.
Dividend receivable: - $3,000. To reflect that no dividends will economically be paid by Velvel
to Campism that need to be recorded as the consolidated financial statements should show
only the effects of dividends paid/payable and received/receivable from entities outside the
consolidated group.
5. Dividend revenue - $1,500
Dividend paid - $1,500
Dividend revenue: - $1,500. To reflect that no dividends will economically be paid by Velvel to
the effects of dividends paid and received from entities outside the consolidated group.
Dividend paid: - $1,500. To reflect that no dividends will economically be paid by Velvel to
the effects of dividends paid and received from entities outside the consolidated group.
6. Retained earnings—beginning - $180

Retained earnings beginning: - $180. The total profit recognized from this sale was $1200
($6,000×.2). As 25% still remains, 25% of the $1200 profit should be eliminated from retained
earnings—beginning as it relates to a prior period sale. From the $300, 40% tax needs to be
removed $120 total = [$1200 × (1 – .40)] x .25.
Income tax expense: + $120. The tax effect of the adjustment relating to the reduction in
inventory is 40% × $1200 = $480 x 25%.
-+
7. Retained earnings beginning - $2,400

Land - $4,000
Retained earnings: (beginning) - $2,400. The prior period profit recognized by Velvel was
$4,000 ($20,000 – $16,000) and the net amount after tax was $2,400 [$4,000 × (1 – .40)].
Deferred tax asset: + $1,600. The deferred tax asset recognized upon the sale was $1,600
($4,000 × 40%). As the carrying amount of land was reduced (see below) a temporary
difference was created between the carrying amount and the tax base.
Land: - $4,000. The land that was sold to Campism originally cost Velvel $16,000 and that is
the amount that the land should be carried at by the consolidated entity, therefore an
adjustment to reduce the carrying amount of the land by $4,000 is necessary ($20,000 –
$16,000).
8. Rent revenue - $150

Rent expense - $150
Rent revenue: - $150. To reduce the rental revenue for the amount paid to Velvel from
Campism as it is not a transaction involving entities external to the consolidated entity.
Rent expense: - $150. To reduce the rental expense for the amount paid to Velvel from
Campism as it is not a transaction involving entities external to the consolidated entity.
EXERCISE 4-6
At January 1, 2016 (acquisition date):

Consideration transferred: $300,000
Net fair value of identifiable assets and liabilities: $270,000
Goodwill: $30,000
Goodwill + 30,000
Retained earnings - 70,000
Share capital - 200,000
Investment account - 300,000
Adjustments for intragroup transactions subsequent to the acquisition date:
1. Bonds payable - $100,000

Bonds in Excelate - $100,000
Revenue—Debenture interest - $7,000
Interest expense - $7,000
Bonds: - $100,000. It will be necessary to reduce the debenture liability between Excelate and
Tryon as this is not a transaction with external entities.
Bonds in Excelate: - $100,000. It will be necessary to reduce the debenture receivable

between Excelate and Tryon as this is not a transaction with external entities.
Revenue—Debenture interest: - $7,000. It will be necessary to reduce the debenture

revenue recognized between Excelate and Tryon as this is not a transaction with external
entities. $100,000 ×7% = $7,000.
Interest expense: - $7,000. It will be necessary to reduce the debenture expense recognized
between Excelate and Tryon as this is not a transaction with external entities. $100,000 ×7% =
$7,000.
2. Accounts receivable (owed to Excelate) - $1,000

Accounts payable (owing by Tryon) - $1,000
Accounts receivable (owed to Excelate): - $1,000. It will be necessary to reduce the

accounts receivable owed to Excelate by Tryon as this is not a transaction with external
entities.
Accounts payable (owing by Tryon): - $1,000. It will be necessary to reduce the accounts
payable owing by Tryon to Excelate as this is not a transaction with external entities.
3. Revenue—Services fees - $8,000

Advertising expenses - $8,000
Revenue—Services fees: - $8,000. It will be necessary to reduce the revenue recognized by

Tryon for the advertising campaign it undertook on behalf of Excelate during the year as it is
not a transaction with external entities.
Advertising expenses: - $8,000. It will be necessary to reduce the expense recognized by
Tryon for the advertising campaign it undertook on behalf of Excelate during the year as it is
not a transaction with external entities.
4. Retained earnings: beginning - $700

Income tax expense + $300 + - $120 = + $180
Cost of sales - $5,500 + -$600 + -$400 + +$200 + + $200 = - $6,100
Sales- $5,500 (- $3,000 + - $2,500)

Inventory - $400
Retained earnings—beginning: - $700. The net effect to retained earnings for the beginning
inventory adjustment is $700 [$1,000 ($600 profit Excelate and $400 profit Tryon) – $300 (×
30% income tax expense)].
Income tax expense: + $300. There will be an income tax adjustment. $1,000 × 30% = $300
for the realized profit and a decrease of $120 on the unrealized profit (see below).
Cost of sales: - $6,100. As there was $1,000 of profit relating to intragroup inventory on hand
at the beginning of the period that was then subsequently sold during the year, it is necessary
to reduce cost of sales ($600 pertaining to Excelate and $400 pertaining to Tryon). It is also
necessary to eliminate the intragroup purchases of $5,500 and to remove the profit on the
intragroup profit at the end of the period of $400.
Sales:- $5,500. During the year there were $3,000 and $2,500 of intragroup sales made.
Inventory: - $400. At the end of the year, there is $400 of inventory on hand for which the
original cost is lower (Excelate $500 – $300 = $200 and Tryon $900 – $700 = $200). Therefore
it will be necessary to reduce the carrying amount of the inventory within the consolidated
entity.
Deferred tax asset/Income tax expense: + $120. Under tax-effect accounting, temporary
differences arise where an asset’s carrying amount differs from its tax base. In the adjustment
above, inventory is reduced by $400. This then gives rise to a temporary difference, and
because the carrying amount has been reduced, tax benefits are expected in the future when
the inventory is sold. Hence a deferred tax asset, equal to the tax rate times the change to the
carrying amount of inventory ($400 × 30%), of $120, is recorded.
5. Gain on sale - $2,000

Plant & machinery - $2,000
Deferred tax asset + $600 – $60 = + $540
Income tax expense - $600 – $60 = - $540
Accumulated depreciation - $200
Gain: - $2,000. As the sale was not made to an entity external to the consolidated entity, it will
be necessary to reduce the sales revenue that arose when Excelate sold an item to.
Plant & machinery: - $2,000. The carrying amount of the asset to Tryon was the price it paid
of $6,000. However the original carrying amount of the asset to Excelate was $4,000.
Therefore a reduction in the carrying amount of the asset of $2,000 ($6,000 – $4,000) will be
necessary.
Deferred tax asset: + $600. As the carrying amount of the asset was reduced by $2,000 it will
be necessary to recognize a deferred tax asset associated with this of $600 ($2,000 × 30%).
Income tax expense: - $600. Upon recognizing the deferred tax asset above, income tax
expense will be reduced.
Depreciation expense/Accumulated depreciation: - $200. It will be necessary to calculate

decreased by $2,000 (see above), the depreciation expense and accumulated depreciation
should be reduced accordingly. $2,000/10 years = $200.
Deferred tax asset/Income tax expense: It will be necessary to increase+ income tax
expense and - decrease deferred tax asset by $60 ($200 × 30%) due to the depreciation
expense decrease.
6. Dividend revenue - $63,000

Dividend paid - $63,000
Dividend revenue: - $63,000. To reflect that no dividends will economically be paid by Tryon
to Excelate that need to be recorded as the consolidated financial statements should show
only the effects of dividends received from entities outside the group.
Dividend paid: - $63,000. To reflect that no dividends will economically be paid by Tryon to
Excelate that need to be recorded as the consolidated financial statements should show only
the effects of dividends paid to entities outside the group.
PROBLEM 4-2
On July 1, 2017 Summer Corp. acquired the shares of Keira Ltd.
Net fair value of identifiable assets and liabilities of $48,000

Keira Ltd.: Equity
Common shares $44,000
Retained earnings $4,000
Fair value adjustments at the acquisition date: $10,500

Inventory $3,000 ×(1–30%) = $2,100
Land $10,000 ×(1–30%) = $7,000
Machinery $2,000 ×(1–30%) = $1,400
Total net fair value of identifiable assets and liabilities $58,500

of Keira Ltd. At the acquisition date:
Goodwill: $1,500
Pre-acquisition adjustment:
Investment in Keira Ltd. ↓- $60,000
Common Shares ↓- $44,000

Retained earnings ↓- $4,000
Analyze each fair value adjustment from the acquisition date and decide when it will be written
off:
Fair Value Adjustment Net income Beg.R/E Stmt. Of Fin. Position
(a) Inventory - (2,100) -
(b) Machinery/depreciation (400) (280) 2,000–800=1,200
(c) Land - (7,000) -
(d) Income tax exp/ FITL 120 (360)
(e) Goodwill - - 1,500
Total (280) (9,380) 2,340
PROBLEM 4-2 (Continued)

Additional Information Adjustments:
2a. Profit in opening inventory:
Retained earnings beginning - $280
Retained earnings beginning: - $280. In the previous period, a before tax profit of $400 was
recorded, or $280 after-tax profit, on the sale of inventory within the group. Because the sale
did not involve external entities, the profit must be eliminated upon consolidation.
Income tax expense: + $120. At the end of the prior period, in the consolidated statement of
financial position, a deferred tax asset of $120 was recorded because of the difference in cost
of the inventory recorded by the legal entity and that recognized by the group. This deferred
tax asset is reversed when the asset is sold. The adjustment to income tax expense reflects
the reversal of the deferred tax asset recorded at the end of the prior period.
Cost of sales: - $400. In the current period, the inventory that was sold within the group is
sold to external entities. Cost of sales was recorded at $400 greater than its actual cost to the
group. Therefore, cost of sales is to be reduced by $400.
2b. Sales and profit in closing inventory:

Sales revenue - $17,000
Inventory - $200
Sales revenue: - $17,000. Intragroup sales totalled $17,000 (Summer to Keira $14,000 and
Keira to Summer $3,000). Since these sales were not made to entities external to the
consolidated entity, they will be eliminated upon consolidation as only sales to entities outside
the group should be recognized.
Cost of sales: - $16,800. The sales gave rise to a profit of $200, which is still on hand.
Therefore cost of sales should be reduced by $16,800 ($17,000 – $200 = $16,800).Cost of
sales should only reflect the original cost of inventory that is sold to entities outside the
Inventory: - $200. Inventory should be reduced by this amount as it is still remaining on hand
at the end of the year and that was the profit component. The cost of the inventory to the
purchasing entity was therefore increased by this $200 profit component and should be
reduced accordingly upon consolidation.
Deferred tax asset/Income tax expense: In the adjustment above, inventory is reduced by
$200, which will give rise to a temporary difference. Because the carrying amount has been
reduced, tax benefits are expected in the future when the asset is sold. Therefore, a deferred
tax asset, equal to the tax rate times the change to the carrying amount of inventory (30%
×$200), of $60, is recorded. This will give rise to a corresponding decrease in income tax
expense.
3a. Sale of Machinery—current period:

Gain on sale of machinery - $500
Machinery - $500
Accumulated depreciation—machinery - $50

Proceeds on sale of machinery: - $10,000. The profit on the sale of the machinery to Keira
was $500. This sale did not involve entities external to the group, and hence must be
eliminated on consolidation.
Carrying amount of machinery sold: - $9,500. The cost of the carrying amount of the
machinery sold to Summer was $9,500. As this sale did not involve entities external to the
group and hence must be eliminated on consolidation.
Machinery: - $500. By selling the asset to Summer at an amount higher than Keira’s cost, it is
now recorded at an amount higher than the cost to the group. It must therefore be reduced by
$500 so that the consolidated statement of financial position shows the asset at the original
cost to the group.
Deferred tax asset/Income tax expense: + $150. As the carrying amount of the machinery
sold was decreased by $500, a temporary difference between the carrying amount and the tax
base was created, which has to be tax-effected. As the asset’s carrying amount was
decreased, a deferred tax asset of $150 ($500 ×30%) is recorded and a corresponding
decrease to income tax expense is recorded.
Depreciation expense/Accumulated depreciation—machinery: - $50. As the group

depreciation expense is $50 a year less than the recorded depreciation expense by $50,
depreciation expense and accumulated depreciation should be reduced by $50. The
unrealized gain is being amortized over 10 years = $50 per year.
Income tax expense/Deferred tax asset: + $15/- $15. The $50 adjustment to accumulated
depreciation changes the asset’s carrying amount, giving rise to a temporary difference
between this and the tax base. The deferred tax liability will be increased by $15 ($50 ×30%)
with a corresponding increase to income tax expense to reflect that the depreciation being
charged by the legal entity is higher than that to the group.
3b. Sale of Machinery-prior period:
Machinery + $500
Retained earnings—beginning + $350 – 35 = 315
Deferred tax liability—ending + $105
Depreciation expense + $100
Accumulated depreciation + $150
Machinery: + $500. The cost of the asset is presently recorded $500 less than its original cost
to Summer. It is therefore necessary to increase the carrying amount of the machinery by $500
to reflect the original carrying amount to Summer.
Retained earnings- beginning: + $350 –$35= $315.In the prior period, the total loss
recognized from this sale was $500. There was originally an adjustment for tax at the tax rate
of 30% ($150), for a net increase to retained earnings of $350 originally. However as .5 years
have elapsed, $315 is remaining.
Deferred tax liability: + $150 – $30 – $15=$105. As the carrying amount of the machinery
sold was increased, a deferred tax liability will be created to reflect the difference between the
carrying amount and the tax base due to the negative future tax effects. However as 1.5 years
have elapsed, $105 is remaining.
Depreciation expense/Accumulated depreciation—machinery: As the group depreciation

expense is $100 a year more than the recorded depreciation expense, depreciation expense
and accumulated depreciation should be increased by $100 of depreciation expense for the
current period, decrease retained earnings by $50 for the prior period additional depreciation
expense and total increase to accumulated depreciation of $150 . The unrealized gain is being
amortized at 20% = $100 per year. The income tax expense on this amount is 30% x 100 = 30
4. Loan payable - $5,000
Loan receivable - $5,000
Interest revenue - $125

Interest expense - $125
Interest receivable - $125
Interest payable - $125
Consolidated adjustments are necessary in relation to these intra-group borrowings and

interest as these transactions create assets and liabilities and revenues and expenses that do
not exist in terms of the group’s relationship with external entities.
1. Royalty fee expense - $1,000

Royalty fee revenue - $1,000
From the group’s perspective there has been no royalty revenue or expense made to entities
external to the group. Therefore, it is necessary to adjust from what has been recorded by the
legal entities to the group’s perspective in the consolidated adjustments so a reduction to
royalty fee expense and revenue is necessary.
Trial Balance
Consolidated
Credits
64,0
Share capital 64,000 00
39,6
Retained earnings (1/7/2018) 32000+21000-4000+315-9380-280 55
33,2
Current liabilities 21400+17000-5000-125 75
76,8
Revenue 43000+52000-17000-125-1000 75
34,6
Accumulated depreciation-machinery 12200+22300-50+150 00
1,0
Gain/loss on sale of machinery 1000+500-500 00
249,125
Debits
110,7
Machinery 38000+71500+1200+500-500 00
Investment in Keira 60000-60000 -

35,2
Inventory 19000+16400-200 00
5500+8300-5000- 8,6
Receivables 125 75
1,5
Goodwill 1,500 00
Cost of sales 20600+30900-400+200-17000 34,3
00
8,2
Selling expenses 3200+6000-1000 00
7,8
Administrative expenses 5300+2700-125 75
4,2
Depreciation/amortization expenses 1200+2600+400-50-+100 50
11,8
Income tax expense 7400+4700-120+120-60-150+15-30 75
11,4
Deferred tax assets 5400+6300-360+60+150-15-105 30
15,4
Plant (net of depreciation) 8000+7400 00
249,405
SUMMER CORP.
Consolidated Statement of Comprehensive Income
For the Year Ended June 30, 2019
Revenue $76,875
Cost of sales 34,300
Gross profit 42,575
Selling expenses 8,200
Administrative expenses 7,875
Depreciation/amortization expenses 4,250
(Gain) loss on sale of machinery (1,000)
Income before income tax 22,250
Income tax expense 11,875
Net income $11,375
SUMMER CORP.
Consolidated Statement of Changes in Equity
For the Year Ended June 30, 2019
Retained earnings, balance as at July 1, 2018 $39,655

Profit for the period 11,375
Retained earnings, balance as at June 30, 2019 $51,030
SUMMER CORP.
Consolidated Statement of Financial Position
As at June 30, 2019
Assets
Current Assets
Receivables $8,675
Inventory 35,200
Total Current Assets 43,875
Non-Current Assets
Machinery 110,700
Accumulated depreciation—machinery (34,600)
Plant (net of depreciation) 15,400
Deferred tax assets 11,430
Goodwill 1,500
Total Non-Current Assets 104,430
Total Assets $148,305
Liabilities and Shareholder’s Equity

Current liabilities $33,275
Shareholder’s equity
Share capital 64,000
Retained earnings 51,030
Total Shareholder’s Equity 115,030
Total Liabilities and Shareholder’s Equity $148,305

PROBLEM 4-5
On January 1, 2019 Sienna acquired the shares of Danon
Net fair value of identifiable assets and liabilities $156,000

of Danon: Equity
Share capital $120,000
Other components of equity $4,000 ($2,000+
$2,000)

Inventory $1,000 × (1–40%) = $600
R&D $8,000 × (1–40%) = $4,800
Contingent liability $7,000 × (1–40%) = ($4,200)
Total net fair value of identifiable assets and $157,200

liabilities of Danonat the acquisition date:
Goodwill: $2,800
Investment in Danon - $160,000
Share capital - $120,000

Retained earnings - $32,000
Cumulative other comprehensive - $4,000
income
off:
1. Fair Value Adjustment Net income Stmt. Of Fin. Position
(a) Inventory/COGS (1,000) -
(b) R&D (2,000) 6,000
(c) Contingent liability (7,000)
Income tax 400 +800 -

DIT Asset - 2800 -(2400)
(d) Goodwill - 2,800
Total (1,800) 2,200
2. Bonds in Danon- $60,000

Mortgage bonds payable- $60,000
Interest revenue ($60,000 × 5%) - $3,000

Interest expense ($60,000 × 5%) - $3,000
Consolidated adjustments are necessary in relation to these intra-group borrowings and

interest as these transactions create assets and liabilities and revenues and expenses that do
not exist in terms of the group’s relationship with external entities.
3. Profit in Ending Inventory—Unrealized

Sales - $40,000
Inventory - $2,000
Cost of goods sold - $38,000

Sales: - $40,000. The members of the group have recorded sales for intragroup transactions
and only sales to entities outside the group should be recognized. Therefore, upon
consolidation it is necessary to reduce sales by $40,000.
Inventory: - $2,000. At December 31, 2019, there is inventory on-hand relating to this
intragroup transaction, however the carrying amount of the inventory should be based on the
original cost of the inventory and not the intragroup transferred cost. Therefore it is necessary
to reduce inventory by $2,000 [($40,000 × 1/4 still on hand = $10,000 present recorded cost) –
($32,000 cost of intragroup sale × 1/4 still on hand = $8,000)].
Cost of goods sold: - $38,000. Cost of sales recorded was $30,000 ($40,000 ×1/4) + $32,000
($40,000/1.25) = $62,000. The cost of sales to entities external to the group is $24,000
($32,000 × 3/4). Therefore it is necessary to reduce cost of goods sold by $38,000.
$2,000, which will give rise to a temporary difference. Because the carrying amount has been
tax asset, equal to the tax rate times the change to the carrying amount of inventory (40% ×
$2,000), of $800, is recorded. This will give rise to a corresponding decrease in income tax
expense.
4. Land - $6,000
Gain on sale of land - $6,000
Land: - $6,000. The land is recorded at a cost of $30,000 by Sienna, however the cost to the
group is $24,000 therefore the carrying amount of the land must be decreased by $6,000 to
reflect this.
Gain on sale of land: - $6,000.Danon recorded a gain of $6,000 ($30,000 – $24,000) upon the
sale of the land to Sienna. Because the sale did not involve entities external to the group, the
gain on sale must be eliminated. The tax expense is reduced by 40% x 6,000 = 2,400
Deferred tax asset/Income tax expense: + $2,400. As the carrying amount of the land sold was
decreased by $6,000, a temporary difference between the carrying amount and the tax base is
created. This has to be tax-effected. A deferred tax asset of $2,400 (40% × $6,000) must be
recorded to reflect the future tax benefits expected to be realized.
5. Dividend payable - $7,200

Dividend declared - $7,200 + $9,800 = - $17,000
Dividend revenue - $7,200 + $9,800 = - $17,000
Dividend payable: - $7,200. To reflect that no dividends will economically be paid by Danon to
Sienna that need to be recorded as the consolidated financial statements should show only the
effects of dividends payable to entities outside the group.
Dividend declared: - $17,000. To reflect that no dividends will economically be paid by Danon
to Sienna that need to be recorded as the consolidated financial statements should show only
the effects of dividends payable to entities outside the group.
Dividend revenue: - $17,000. To reflect that no dividends will economically be paid by Danon
the effects of dividends receivable from entities outside the group.
Dividend receivable: - $7,200. To reflect that no dividends will economically be paid by Danon
SIENNA
Consolidated Financial Statements as at December 31, 2019
Sienna Danon Adjustments Consolidated
Sales Revenue $234,800 $190,000 ($40,000)(3) $384,800
Dividend revenue 17,000 - (17,000)(5)
(6,000)(4) -
Other income 6,600 10,000 (3,000)(2) 7,600
Total revenue 258,400 200,000 392,400
Cost of sales 123,000 120,000 (38,000)(3) 206,000

+1,000(1A)
Other expenses 34,600 20,000 (3,000)(2) 53,600

2,000(1B)
Profit before income 100,800 60,000 132,800
tax
Income tax expense 32,000 20,000 (2,400)(4) 47,600
(800)(3)
(1200)(1)
Profit for the year $68,800 $40,000 $85,200
Retained earnings 76,000 32,000 (32,000)(1) 76,000
(1/1/2019)
Total available for 144,800 72,000 161,200
appropriation
Interim dividend paid (34,000) (9,800) 9,800(5) (34,000)
Dividend declared (16,000) (7,200) 7,200(5) (16,000)
Retained earnings $94,800 $55,000 $111,200
(12/31/2019)
Current assets
Cash $1,000 $40 - $1,040
Receivables 27,000 12,100 (7,200)(5) 31,900
AFDA (500) (300) - (800)
Financial assets 20,000 10,000 - 30,000
Inventory 48,000 47,000 (2,000)(3) 93,000
Total current assets 95,500 68,840 155,140
Non-current assets
Plant & machinery 100,000 70,000 - 170,000
Accumulated depr. (40,000) (26,000) - (66,000)
Land 99,300 190,000 (6,000)(4) 283,300
R&D - - 6,000(1B) 6,000
Goodwill - - 2,800(1D) 2,800
Bonds in Danon 60,000 - (60,000)(2) -
Invt. In Danon 160,000 - (160,000) -
- -
Total non-current assets 379,300 234,000 396,100
Total assets $474,800 $302,840 $551,240
Current liabilities
Dividend payable 16,000 7,200 (7,200)(5) 16,000
Provisions 12,000 8,800 - 20,800
Bank overdraft - 14,840 - 14,840
Current tax liabilities 11,000 10,000 - 21,000
Total current liabilities 39,000 40,840 72,640
Non-current liabilities
Contingent liability - - 7,000(1) 7,000
5% mortgage bonds - 80,000 (60,000)(2) 20,000
Deferred tax liabilities 13,000 5,000 ( 800)(3)

(2,400)(4)
(2,800)(1)
2,400(1) - 14,400
Total non-current 13,000 85,000 41,400

liabilities
Total liabilities 52,000 125,840 114,040
Net assets $422,800 177,000 $437,200
Equity
Share capital 320,000 120,000 (120,000)(1) 320,000
Retained earnings 94,800 55,000 per above 111,200
Cumulative Other comp. income8,000 2,000 (4,000)(1) 6,000
Total equity $422,800 $177,000 $437,200
SIENNA
For the Year Ended December 31, 2019
Sales Revenue $384,800

Other income 7,600
Total income 392,400
Cost of goods sold 206,000
Gross profit 186,400
Other expenses 53,600
Profit before income tax 132,800
Net income $85,200
SIENNA
Retained earnings, balance as at January 1, 2019 $76,000

Dividends declared (50,000)
Retained earnings, balance as at June 30, 2019 $111,200
SIENNA
As at December 31, 2019
Assets
Current Assets
Cash $1,040
Receivables 31,900
Allowance for doubtful accounts (800)
Financial assets 30,000
Inventory 93,000
Total Current Assets 155,140
Non-Current Assets
Plant & Machinery 170,000
Accumulated depreciation—machinery (66,000)
Land 283,300
R&D 6,000
Goodwill 2,800
Total Non-Current Assets 396,100


Current liabilities
Dividend payable $16,000
Provisions 20,800
Bank overdraft 14,840
Current tax liabilities 21,000
Total current liabilities $72,640
Contingent liability 7,000
5% Mortgage bonds 20,000
Deferred tax liability 14,400
Total non-current liabilities 41,400
Total liabilities $114,040
Share Capital $320,000
Cumulative other comprehensive income 6,000
Total Shareholder’s Equity 437,200

PROBLEM 4-6
On January 1, 2019 Coltron acquired the shares of Tara

of Tara: Equity
Fair value adjustments at the acquisition date: $280

Inventory $400 × (1–30%) = $280

liabilities of Tara at the acquisition date:
Goodwill: $3,720
Investment in Tara - $17,000

off:
The December 31, 2019 consolidation adjustments pertaining to the acquisition date fair value
adjustments should be determined.
Fair Value Adjustment Net income Stmt. Of Fin. Position
(a) Inventory/COGS (360) 40
Income tax 108 -
DIT Liability - (12)

Goodwill (1,860) 1,860
Total (2,112) 1,888
2 Profit in Ending Inventory—Unrealized

Sales - $5,000
Inventory - $1,000

Inventory: - $1,000. At December 31, 2019, there is inventory on-hand relating to this
intragroup transaction, however the carrying amount of the inventory should be based on the
original cost of the inventory and not the intragroup transferred cost. Therefore it is necessary
to reduce inventory by $1,000 (the profit component).
Cost of goods sold: - $4,000. Cost of sales recorded was $4,000. The cost of sales to entities
external to the group is $0. Therefore it is necessary to reduce cost of goods sold by $4,000.
$1,000, which will give rise to a temporary difference. Because the carrying amount has been
$1,000), of $300, is recorded. This will give rise to a corresponding decrease in income tax
expense.
3 Other income - $500

Other expenses - $500
Other income: - $500. To reduce the revenue for the amount paid Tara from Coltron as it is not
a transaction involving entities external to the consolidated entity.
Other expenses: - $500. To reduce the expense for the amount paid Tara from Coltron as it is
not a transaction involving entities external to the consolidated entity.
4 Sale of Machinery—current period:

Gain on sale of machinery - $2,000
Machinery - $2,000


Gain on sale of machinery: - $2,000. The profit on the sale of the machinery to Coltron was
$2,000. This sale did not involve entities external to the group, and hence must be eliminated
on consolidation.
Machinery: - $2,000. By selling the asset to Coltron at an amount higher than Tara’s cost, it is
now recorded at an amount higher than the cost to the group. It must therefore be reduced by
$2,000 so that the consolidated statement of financial position shows the asset at the original
cost to the group.
Deferred tax asset/Income tax expense: + $600. As the carrying amount of the machinery sold
was decreased by $2,000, a temporary difference between the carrying amount and the tax
base was created, which has to be tax-effected. As the asset’s carrying amount was
decreased, a deferred tax asset of $600 ($2,000 × 30%) is recorded and a corresponding

depreciation expense is $200 a year less than the recorded depreciation expense by $200,
depreciation expense and accumulated depreciation should be reduced by $200. The
unrealized gain is being amortized over 5 years = $400 per year × 6 months for the current
year = $200.
Income tax expense/Deferred tax asset: + $60 / - $60. The $200 adjustment to accumulated
depreciation changes the asset’s carrying amount, giving rise to a temporary difference
between this and the tax base. The deferred tax liability will be increased by $60 ($200 × 30%)
with a corresponding increase to income tax expense to reflect that the depreciation being
charged by the legal entity is higher than that to the group.
5 The financial assets acquired by Coltron increased during the year by $1,000 and those of
Coltron increased by $650. This will need to be reflected in other comprehensive income on
their statements as they took the election and therefore no consolidation adjustment is
required.
6 Intragroup dividends:
Dividend declared: - $1,000. To reflect that no dividends will economically be paid by Tara to
Coltron that need to be recorded as the consolidated financial statements should show only the
effects of dividends payable to entities outside the group.
Dividend revenue: - $1,000. To reflect that no dividends will economically be paid by Tara to
Coltron that need to be recorded as the consolidated financial statements should show only the
effects of dividends receivable from entities outside the group.
(a) Prepare the consolidated statement of comprehensive income for Coltron and its subsidiary
Tara for the year ended December 31, 2019.
Coltron Tara Adjs. Consolidated

Sales Revenue $25,000 $23,600 (5,000)(2) 43,600
Dividend revenue 1,000 - (1,000)(6) -
Other income 1,000 2,000 (500)(3) 2,500
Gain on sale of PPE 1,000 2,000 (2,000)(4) 1,000
Total revenue 28,000 27,600 47,100
Cost of sales 21,000 18,000 (4,000)(2)
360(1) 35,360
Other expenses 3,000 1,000 (200)(4) 5,160
(500)(3)
1,860(1)
Total expenses 24,000 19,000 40,520
Profit before income tax 4,000 8,600 (6,020) 6,580
Income tax expense 1,350 1,950 60(4) 2,352
(600)(4)
(300)(2)
(108)(1)
Profit for the period $2,650 $6,650 $4,228
Retained earnings 6,000 3,000 (3,000) 6,000
(1/1/2019)
Dividend paid (2,500) (1,000) (1,000)(6) (2,500)
Retained earnings $6,150 $8,650 $7,728
(12/31/2019)
COLTRON
Sales revenues $43,600

Gain on sale of property, plant, and equipment 1,000
Other income 2,500
47,100
Other comprehensive income: Gains on financial assets 1,650(5)
Comprehensive income for the period $5,878
(b)
 Realization occurs on involvement with an external entity in a transaction.
 Sale of inventory: Realization of the sale will occur when the inventory is sold to an external
party. See adjustment #2 where an adjustment was made for unrealized profits in ending
inventory.
 Sale of machinery: Realization occurs as the plant is used by the purchasing entity and the
benefits are received. See adjustment #4 where an adjustment was made for an intragroup
sale of machinery during the period. Note that the gain on the sale is considered to be fully
unrealized but as the asset is depreciated the profit is realized, the decrease to depreciation
expense in adjustment #4 results in an increase in profit.
PROBLEM 4-7
On January 1, 2018 Jasmine acquired the shares of Lessard
Net fair value of identifiable assets and liabilities of $46,800

Lessard: Equity

Inventory $500 × (1–30%) = $350
Plant & equipment $1,000 × (1–30%) = $700
Total net fair value of identifiable assets and liabilities $47,850

of Lessard at the acquisition date:
Goodwill: $2,150
Investment in Lessard - $50,000

off:
1. Fair Value Adjustment Current Profit R/E Stmt. Of Fin. Position
(a) Inventory - (350) -

(b) Plant & equipment/depn (200) (140) 1,000–400= 600
Income tax 60 - -
DIT Liability - - (180)
Goodwill - - 2,150
Total (140) (490) 2,570
2. Intragroup dividends:
Dividend payable - $2,400
Dividend declared: - $4,400. To reflect that no dividends will economically be paid by Lessard
to Jasmine that need to be recorded as the consolidated financial statements should show only
Dividend revenue: - $4,400. To reflect that no dividends will economically be paid by Lessard
Dividend payable: - $2,400. To reflect that no dividends will economically be paid by Lessard to
Jasmine that need to be recorded as the consolidated financial statements should show only
Dividend receivable: - $2,400. To reflect that no dividends will economically be paid by Lessard
3. Profit in Beginning Inventory

Retained earnings - $350
Retained earnings: - $350. In the previous period, a before tax profit of $500 ($2,000/1.333)
was recorded, or $350 after-tax profit, on the sale of inventory within the group. Because the
sale did not involve external entities, the profit must be eliminated upon consolidation.
Income tax expense: + $150. At the end of the prior period, in the consolidated statement of
financial position, a deferred tax asset of $120 was recorded because of the difference in cost
of the inventory recorded by the legal entity and that recognized by the group. This deferred
tax asset is reversed when the asset is sold. The adjustment to income tax expense reflects
the reversal of the deferred tax asset recorded at the end of the prior period.
Cost of sales: - $500. In the current period, the inventory that was sold within the group is sold
to external entities. Cost of sales was recorded at $500 greater than its actual cost to the
group. Therefore, cost of sales is to be reduced by $500.
4. Profit in Ending Inventory—Unrealized.

Sales - $10,000 ($5,600 + $4,400)
Inventory - $910

Inventory: - $910. At December 31, 2019, there is inventory on-hand relating to this intragroup
transaction, however the carrying amount of the inventory should be based on the original cost
of the inventory and not the intragroup transferred cost. Therefore it is necessary to reduce
inventory by $910 (the profit component = $10,000/1.10 = $9,090 was the cost of the goods
sold, $10,000 – $910 = $9,090).
Cost of goods sold: - $9,090. Cost of sales recorded was $9,090 ($10,000/1.10). The cost of
sales to entities external to the group is $0. Therefore it is necessary to reduce cost of goods
sold by $9,090.
$910), of $273, is recorded. This will give rise to a corresponding decrease in income tax
expense.
5. Sale of Office Furniture—previous period:

Retained earnings - beginning - $350
Office furniture - $500
Deferred tax asset + $150-15 = 135
Retained earnings - beginning: - $350. The gain net of tax on the sale of the office furniture to
Jasmine was $3,000. This sale did not involve entities external to the group, and hence must
be eliminated on consolidation.
Office furniture: - $500. By selling the asset to Jasmine at an amount higher than Lessard’s
cost, it is now recorded at an amount higher than the cost to the group. It must therefore be
reduced by $500 so that the consolidated statement of financial position shows the asset at the
original cost to the group.
Deferred tax asset/Income tax expense: + $150-15 = 135. As the carrying amount of the office
furniture sold was decreased by $500, a temporary difference between the carrying amount
and the tax base was created, which has to be tax-effected. As the asset’s carrying amount
was decreased, a deferred tax asset of $150 ($500 × 30%) is recorded. Since one year has
passed $15 is now realized..
Depreciation expense/Accumulated depreciation—machinery: - $50. As the group depreciation

expense is $50 a year less than the recorded depreciation expense, depreciation expense and
accumulated depreciation should be reduced by $50. The unrealized gain is being amortized
over 10 years = $50 per year for the current year.
6. Rental income - $7,000

Rental expense - $7,000
Rental income: - $7,000. To reduce the revenue for the amount paid to Lessard from Jasmine
as it is not a transaction involving entities external to the consolidated entity.
Rental expense: - $7,000. To reduce the expense for the amount paid to Lessard from
Jasmine as it is not a transaction involving entities external to the consolidated entity.
Prepare the consolidated statement of comprehensive income for Jasmine and its subsidiary
Lessard for the year ended December 31, 2019.
Jasmine Lessard Adjs. Consolidated

Sales Revenue $78,000 $40,000 (10,000)(4) 101,000
(7,000)(6)
Proceeds from sale of - 3,000 3,000
office furniture
Dividend revenue 4,400 1,600 (4,400)(2) 1,600
Total income 82,400 44,600 105,600
Cost of sales 60,000 30,000 (500)(3) 80,410
(9,090)(4)
Other expenses 10,800 7,500 (50)(5) 11,450

(7,000)(6)
200(1B)
Total expenses 70,800 37,500 91,860
Profit before income tax 11,600 7,100 (5,060) 13,740
Income tax expense 3,000 2,200 150(3) 5,032
(273)(4)
15(5)
(60)(1B)
Profit for the period 8,600 4,900 8,708
Retained earnings 14,500 2,800 (350)(3)
(350)(5) 9,310
(1/1/2019) (490)(1)
(6,800)(1)
Total retained earnings available
for appropriation 23,100 7,700 (12,382) 18,018
Dividend paid (4,000) (2,000) (2,000)(2) (4,000)
Dividend declared (8,000) (2,400) (2,400)(2) (8,000)
Retained earnings $11,100 $3,300 ($7,982) $6,018
(12/31/2019)
JASMINE
Sales Revenues $101,000

Gain on sale of office furniture 3,000
Dividend revenue 1,600
Total revenues $105,600
Total expenses 91,860
Profit for the period $ 8,708
PROBLEM 4-8
On April 1, 2019 Abbots acquired the shares of Evion

of Evion: Equity

Inventory $2,000 × (1–40%) = $1,200
Plant $3,000 × (1–40%) = $1,800
Goodwill of Evion ($2,000)

liabilities of Evion at the acquisition date:
Goodwill: $5,000
Investment in Evion - $96,000

off:
The March 31, 2020 consolidation adjustments pertaining to the acquisition date fair value
Consolidation adjustments at March 31, 2020
Fair Value Adjustment Current Profit Stmt.Of Fin. Position
(a) Inventory (2,000) -
(b) Plant (600) 3,000–600=2,400
Income tax expense 800 -

240
Deferred tax liability - (960)
Goodwill 1,500 5,000-500 = 4,500
Total (60) 5,940
1. Intragroup dividends
Dividend declared: - $9,000. To reflect that no dividends will economically be paid by Evion to
Abbots that need to be recorded as the consolidated financial statements should show only the
effects of dividends paid to entities outside the group.
Dividend revenue: - $9,000. To reflect that no dividends will economically be paid by Evion to
Abbots that need to be recorded as the consolidated financial statements should show only the
effects of dividends received from entities outside the group.
2. Profit in Ending Inventory (Sold to Evion by Abbots)

Sales - $40,000
Cost of goods sold: - $40,000. Cost of sales recorded was $40,000 (cost to Evion) +
$30,000(cost to Abbots) = $70,000. The cost of sales to entities external to the group is
$30,000. Therefore it is necessary to reduce cost of goods sold by $40,000.
3. Profit in Ending Inventory (Sold to Abbots by Evion)

Sales - $10,000
Inventory - $500

Inventory: - $500. At March 31, 2020, there is inventory on-hand relating to this intragroup
inventory by $500 (the profit component).
Cost of goods sold: - $9,500. Cost of sales recorded was $6,000(cost to Evion) + $8,500 (cost
to Abbots = $10,000 – $1,500 remaining on hand)=$14,500. The cost of sales to entities
external to the group is $5,000(original cost to Evion of goods on hand). Therefore it is
necessary to reduce cost of goods sold by $9,500.
$500), of $200, is recorded. This will give rise to a corresponding decrease in income tax
expense.
4. Sale of non-current asset—current period (6 months elapsed) :

On October 1, 2019, Abbots sold an item, regarded by Abbots as a non-current asset, to
Evion. At the time of sale, the item’s carrying amount to Abbots was $28,000, and it was sold
to Evion for $30,000. Abbots was using a 10% p.a. depreciation rate applied to cost.
Gain on sale of non-current asset - $2,000

Cost of non-current asset - $2,000


Gain on sale of non-current asset: - $2,000. The gain on the sale of the non-current asset to
Abbots was $2,000. This sale did not involve entities external to the group, and hence must be
eliminated on consolidation.
Deferred tax asset/Income tax expense: + $800. As the carrying amount of the non-current
asset sold was decreased by $2,000, a temporary difference between the carrying amount and
the tax base was created, which has to be tax-effected. As the asset’s carrying amount was
decreased, a deferred tax asset of $800 ($2,000 × 40%) is recorded and a corresponding

depreciation expense is $200 a year less than the recorded depreciation expense, depreciation
expense and accumulated depreciation should be reduced by $200 x .5 = 100. The unrealized
gain is being amortized at 10% per year = $200 per year x one half year for the current year.
-
Prepare the consolidated statement of comprehensive income for Abbots and its subsidiary Evion for
the year ended March 31, 2020.
ABBOTS
For the Year Ended March 31, 2020
Sales Revenues 146,000 + 120,000 -40,000 3 - 10,0004 $216,000

Cost of sales 88,000 +68,000 – 40,0003 -9,5004 + 2,0001 108,500
Other expenses 16,000 +19,000 +6001-1005 - 15001 34,000
Profit before income tax $73,500
Income tax expense 12,000 +14,000 -8001 -2401 -2004 – 8005 +405 24,000
Profit $49,500
PROBLEM 4-9
On December 31, 2015 Lara acquired the shares of Jade

of Jade: Equity
Share capital $100,000 (200,000 × $0.50)
Retained earnings$45,000

Plant& machinery $5,000 ×(1–30%)

liabilities of Jade at the acquisition date:
Goodwill: $11,500
Investment in Jade - $160,000

off:
Consolidation adjustments at December 31, 2019
Fair Value Adjustment Current Profit Beg R/E SFP
(A) Plant/depreciation (500) (1,050) 5,000–2,000=3,000
Income tax/ FITL 150 (900)
Goodwill - - 11,500
Total (350) (1,050) 13,600
1. Intragroup dividends
Dividend declared: - $8,000. To reflect that no dividends will economically be paid by Jade to
Lara that need to be recorded as the consolidated financial statements should show only the
effects of dividends paid to entities outside the group.
Dividend revenue: - $8,000. To reflect that no dividends will economically be paid by Jade to
Lara that need to be recorded as the consolidated financial statements should show only the
effects of dividends received from entities outside the group.
2. Profit in Ending Inventory—Unrealized

Sales - $20,000
Inventory - $900

and only sales to entities outside the group should be recognized. Therefore, upon consolidation
it is necessary to reduce sales by $20,000.
Inventory: - $900. At December 31, 2019, there is inventory on-hand relating to this intragroup
inventory by $900 (the profit component = $1,800 × ½ sold = $900).
Cost of sales: - $19,100. Cost of sales recorded was $28,200 ($18,200 + $20,000/2). The cost
of sales to entities external to the group is $9,100 ($18,200 × ½ sold). Therefore it is necessary
to reduce cost of sales by $19,100.
Deferred tax asset/Income tax expense: In the adjustment above, inventory is reduced by $900,
which will give rise to a temporary difference. Because the carrying amount has been reduced,
tax benefits are expected in the future when the asset is sold. Therefore, a deferred tax asset,
equal to the tax rate times the change to the carrying amount of inventory (30% × $900), of
$270, is recorded. This will give rise to a corresponding decrease in income tax expense.
4. Sale of plant—July 2016 (3.5 years elapsed)

Retained earnings—beginning - $5,250 – $1,313 = - $3,937
Deferred tax asset + $2,250 – $788 = + $1,463
Plant net- $7,500 – $2,625 = - $4,875

Retained earnings begining: - $3,937. In the period when the sale occurred, a profit of $7,500
($25,000 – $17,500) was recognized. Net of tax this was $5,250 ($7,500 × (1-30%)) as 2.5
years have elapsed, the amount remaining in beginning retained earnings is $3,937.
Deferred tax asset: + $1,462. As the carrying amount of the plant was reduced (See below), a
temporary difference arises and it is necessary to recognize a deferred tax asset. $7,500 × 30%
= $2,250. As 3.5 years have elapsed, the amount of the deferred tax asset is $1,462.
Plant: - $4,875. It is necessary to reduce the carrying amount of the plant sold to the original
cost of the group.
Accumulated depreciation: - $2,625. As the group depreciation expense has been less than the
recorded depreciation expense, accumulated depreciation must be decreased ($7,500/10 years
× 3.5 years).
Depreciation expense: - $750. It is necessary to reduce the recorded depreciation expense to

reflect the lower carrying value of the plant. ($7,500/10 years × 1 years).
Income tax expense: + $225. As the depreciation expense has been decreased and therefore
increasing the carrying value of the asset, a temporary difference has been created which will
give rise to a deferred tax liability/decrease to deferred tax asset. In the current year, the
adjustment was $750 × 30% = $225.
5. Sale of Land on January 1, 2017 (3 years have elapsed).

Property plant and equipment + $5,000
Retained earnings + $3,500
Deferred tax liability + $1,500
PPE + $5,000. The land is presently recorded at a cost of $50,000 (the inter-company sale
price), however the cost to the group is $55,000. Therefore, the land carrying value should be
increased by $5,000 so that the consolidated statement of financial position shows assets at
cost to the group.
Retained earnings: + $3,500. In the period of the sale, a loss of $5,000 ($50,000 – $55,000) was
recorded. This sale did not involve entities external to the group, and hence must be eliminated
on consolidation. A further adjustment to retained earnings is required to reflect the tax on this
loss. A net adjustment of $3,500 is then made to retained earnings.
Deferred tax liability: + $1,500. The increase to the carrying amount of the land creates a
temporary difference between the carrying amount and the tax base. A deferred tax liability is
recorded to reflect the future tax effects when the asset is sold.
Prepare the consolidated financial statements for Lara and its subsidiary Jade for the year ended
December 31, 2019.
LARA
Sales revenue [$250,000+$120,000–$20,000] $350,000

Other revenue [$20,000+$5,000–$8,000] 17,000
Total revenue $367,000
Cost of sales [$188,000+$80,000–$19,100] 248,900
Other expenses [$28,000+$5,000+$500–$750] 32,750
Loss on sale of property, plant and equipment 9,000
Income tax expense [20,000 + 10,000 -150-270+225] 29,805
Profit $ 46,545
LARA
Retained earnings, balance as at January 1, 2019 90,000+86,000-45,000-1050-

3937+3500 $129,513
Profit for the period
46,545
Dividends declared
(10,000)
Retained earnings, balance as at December 31, 2019
$166,058
LARA
As at December 31, 2019
Assets
Current Assets
Cash 46,900 +5,990 $52,890
Receivables 25,000+7,310 32,310
Financial assets 60,000+40,000 100,000
Inventory 106,440+72,000-900 177,540
Total current assets 362,740
Non-Current Assets
P & E –net 125,000+76,000+3,000-4,875+5,000 204,125
Motor vehicles-net 124,200+52,600 176,800
Goodwill 11,500
Deferred tax assets 12,700+6,300+270+1,463 20,733
Total non-current assets 413,158

Current liabilities
Payables 22,000+14,000 $36,000
Current tax liabilities 22,000+38,000 60,000
Total current liabilities $96,000
Deferred tax liability 6,240+5,200+900+1500 13,840
Total non-current liabilities 13,840
Total liabilities $109,840
Total shareholder’s equity 666,058

WRITING ASSIGNMENT 4-2
Side 1) That Whitewater falsified the financial statements by not reflecting the
fact that the funds were given to Blackwell and Greenberg.
 There is no mention in the financial statements that the funds were
subsequently advanced to intragroup companies.
 The funds were loaned to Whitewater from the Roymont Bank to finance
Whitewater operations. Advancing the funds to the other entities is not
necessarily in accordance with the purpose that Roymont Bank loaned
Whitewaer the funds.
Side 2) Whitewater consolidated in accordance with GAAP and eliminated

intragroup loans and therefore did not do anything misleading.
 It is necessary in accordance with GAAP to eliminate intragroup

transactions to remove the effects of the transactions so that the
consolidated group position in relation to external entities is reported. This
is in accordance with what Whitewater did.
In order to increase transparency, additional note disclosures could be provided

for which would potentially satisfy the needs of the bank. However, it should be
ensured that the bank agrees with Whitewater advancing funds to the other two
intragroup entities.
CASE 4-2
Aquatic Biotechnology Inc.
Have been asked by the partner to prepare a memo that summarizes the relevant
accounting issues in preparation for their up-coming meeting with ABI.
The Business Development Bank is a new user of their financial statements and
will be using them to ensure compliance with the covenant, namely the current
ratio and ensuring that it is above one. It will be especially important to ensure
items that affect the current ratio (current assets and current liabilities) are
accurately stated.
Accounting Issues to Discuss Pertaining to ABI
Revenue recognition
Jim Gibbins would like to recognize revenue associated with scallops that are
being grown using new methods but have not yet been harvested. We need to
ensure that we are comfortable with the revenue recognition methods chosen for
the scallop production and that all the conditions for the recording of revenue have
been fulfilled. We need to examine what the contract is with the customer and
what the specific performance obligation is. ABI must delver the scallops. Is the
obligation to delver or to harvest?
 There is a history of inventory losses. ABI has tried unsuccessfully in the

past to grow scallops with prototype systems, and there is no firm basis to
support the likelihood of success in this endeavor.
 Strong tides and bacteria have destroyed crops in the past. Although the
stock is currently at 75% maturity, a repetition of the same conditions could
destroy the crop.
 The aquaculture expert has provided no assurance that the crop will reach
full maturity.
 There is no certainty that the sales orders will translate into actual sales,
as there is no firm commitment on the part of the purchaser.
 Although the current market price is $20 per kilogram, the price may
fluctuate significantly before harvest and processing and supply may affect
the market price.
The client may attempt to argue that the long growth cycle of the aquaculture
industry justifies the obligations as being growth over time. However, this method
of revenue recognition may be difficult to support for ABI because the costs of the
crop are difficult to estimate due to the lack of experience with the current
production process, and the revenue is difficult to measure reliably due to market
instability.
We may also argue that ultimate collection is questionable, despite a ready

market, since the inventory could easily be lost before reaching a 100%
completion stage.
The client is strongly motivated to recognize revenue early due to the Business
Development Bank loan covenants. However, in view of the lack of history of
success with the current method, the lack of assurance from the aquaculture
specialist as to the likelihood of success, as well as a history of losses with
previous methods, I recommend revenue be recognized only at the date of
harvest, if there are sales orders to support recognition. If there are no sales
orders, I recommend that revenue be recognized at the date of sale.
Scallop inventory
The unaudited 2019 statements include Inventory – scallops at $1.425 million,

which are the costs to date of the current crop on hand. Of the $1.425 million, only
$1.2 million was incurred in fiscal 2019. Our 2017-year end audited financial
statements assigned no inventory value to scallops. Recording the entire $1.425
million as an inventory asset has likely resulted in an overstatement of income for
2019 by reversing costs that had previously been expensed. It would appear that
ABI has changed its accounting policy with regard to inventory valuation due to the
incentive to maximize current assets.
We must determine the value of the scallop inventory. There has been history of
losses with previous methods, as well as the lack of comfort provided by the
aquaculture specialist. On the other hand, we must also consider the new process
and the fact that the scallops have achieved 75% maturity, indicating that some
value may be appropriate.
IAS 41 Agriculture can be looked at for guidance on how to account for the scallop
inventory. (Per IAS 41.6, agricultural activity covers a diverse range of activities;
for example, raising livestock, forestry, annual or perennial cropping, cultivating
orchards and plantations, floriculture, and aquaculture (including fish farming).
The fair value of an agricultural asset is based on its present location and
condition. As a result, the fair value of the scallops is the price for the scallops in
the relevant market less the transport and other costs of getting the scallops to that
market. There is an active market for scallops, but only for the harvested scallops.
If there is another quoted price in that market for developing scallops it would be
the appropriate basis for determining the fair value of that asset. However, a
market-determined price or value may not be available for 75% mature scallops. In
this circumstance, the present value of expected net cash flows from the asset
discounted at a current market-determined pre-tax rate is used in determining fair
value (IAS 41.20).
Paragraph 21 states: “The objective of a calculation of the present value of

expected net cash flows is to determine the fair value of a biological asset in its
present location and condition. An entity considers this in determining an
appropriate discount rate to be used and in estimating expected net cash flows.
The present condition of a biological asset excludes any increases in value from
additional biological transformation and future activities of the entity, such as those
related to enhancing the future biological transformation, harvesting, and selling.”
CASE 4-2 (Continued)
In this case, the scallops are at 75% of their maturity. As estimate of the expected
cash flows for this % development should be prepared. If this isn’t possible, then
“… that biological asset shall be measured at its cost less any accumulated
depreciation and any accumulated impairment losses. Once the fair value of such
a biological asset becomes reliably measurable, an entity shall measure it at its fair
value less estimated point-of-sale costs.”
Because a market price is difficult to determine for scallops and because there is
uncertainty as to whether they will even reach maturity based on the historical
experience, I recommend that the scallop inventory be measured at its costs less
any accumulated depreciation and any accumulated impairment losses.
The fact that the inventory was never recorded in the past can not be considered a
change in accounting policy, as the application of IAS 41 is not optional. If the
assets now meet the recognition criteria and didn’t in the past, there is an
immediate gain recognition.
Research and development

ABI has capitalized over $3 million in costs in the current year related to the
development of the scallop cages. To meet the requirements for capitalization
under IFRS, these costs must be development costs that can be expected to
provide future value in the form of increased revenues, and not research costs.
IAS 38 Intangible Assets, paragraph 57 states: “An intangible asset arising from
development (or from the development phase of an internal project) shall be
recognised if, and only if, an entity can demonstrate all of the following:
(a) the technical feasibility of completing the intangible asset so that it will be
available for use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
(d) how the intangible asset will generate probable future economic benefits.
Among other things, the entity can demonstrate the existence of a market for the
output of the intangible asset or the intangible asset itself or, if it is to be used
internally, the usefulness of the intangible asset.
(e) the availability of adequate technical, financial and other resources to complete
the development and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the intangible asset
during its development.”
Although the marketability of the product is not an issue here (there is clearly a
market for scallops), it may not be appropriate to capitalize these costs, for the
following reasons:
 The technical feasibility of the process has not been clearly established.
 Given the current liquidity problems, the company may not have the funds
to complete the project, if this year’s stock fails or if the bank calls its loan.
The adoption of an aggressive accounting policy again demonstrates management
bias to maximize assets and net income. I recommend expensing the cost of the
cages until the technical feasibility of the new method is more clearly established.
Research and development expenditures associated with the cage development
may qualify for SR&ED tax incentives and will therefore need to be fully
documented and supported for tax purposes. Also, additional audit work may be
required to support any tax claim.
Acquisition of Bay Mussels Limited

The acquisition of Bay Mussels Limited (BML) and ABI’s accounting for the
transaction also raise some issues that need to be addressed. The purchase price
for the BML acquisition resulted in a ‘gain’ of $377,294 ($4,700,000 – $5,077,294),
being recorded on the financial statements. The account line item is appropriately
termed, ‘'excess of acquirer's interest in the net fair value of the acquiree's
identifiable assets, liabilities and contingent liabilities”, on the basis that a bargain
purchase was made.
Paragraph 36 of IFRS 3 Business Combinations states that “Before recognizing a

gain on a bargain purchase, the acquirer shall reassess whether it has correctly
identified all of the assets acquired and all of the liabilities assumed and shall
recognize any additional assets or liabilities that are identified in that review. The
acquirer shall then review the procedures used to measure the amounts this IFRS
requires to be recognized at the acquisition date for all of the following:
(a) the identifiable assets acquired and liabilities assumed;
(b) the non-controlling interest in the acquiree, if any;
(c) for a business combination achieved in stages, the acquirer’s previously
held equity
interest in the acquiree; and
(d) the consideration transferred.
The objective of the review is to ensure that the measurements appropriately

reflect consideration of all available information as of the acquisition date.” ABI
should go through this review before recognizing the gain.
The acquisition will also need to be detailed in the notes to the consolidated
statements for the upcoming year. The difference between the tax treatment and
the accounting treatment of the $345,000 may have an impact on future income
taxes.
We need to determine whether BML was audited at the date of acquisition to

confirm opening balances. If it was not audited, we may need to qualify our report
since the acquisition is material to the financial statements. We also need to
review the purchase agreement to ensure there are no contingencies or additional
details that require disclosure. Finally, we need to obtain evidence as to the
adequacy of the values provided for BML at the date of acquisition and the
allocation of the purchase price.
Sale of trout division
If ABI decides to sell the trout division, it will be necessary to determine the
appropriate disclosure in the financial statements. Since the sale would occur
subsequent to year-end, we would need to decide whether the sale should be
disclosed as an event after the balance sheet date (IAS 10Events After the
Reporting Period). Paragraph 3 refers to two types of events that can be
identified:
(a) those that provide evidence of conditions that existed at the balance sheet date
(adjusting events after the balance sheet date); and
(b) those that are indicative of conditions that arose after the balance sheet date
(non-adjusting events after the balance sheet date).
The sale of the division would have a significant effect on the assets and liabilities
and future operations of ABI. In this case the situation would be described as a
non-adjusting event since the conditions will have arisen after the balance sheet
date, even though the negotiations for the sale of the trout division began in
November.
It should be disclosed in the current financial statements as an event after the

balance sheet date only if management decides to proceed with the sale in
accordance with Paragraph 21 “If non-adjusting events after the balance sheet
date are material, non-disclosure could influence the economic decisions of users
taken on the basis of the financial statements. Accordingly, an entity shall disclose
the following for each material category of non-adjusting event after the balance
sheet date:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot
be made.”
We will also need to determine whether the division should be reported as an

asset held for sale as per paragraph 6 of IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations — i.e. “An entity shall classify a non-current asset
(or disposal group) as held for sale if its carrying amount will be recovered
principally through a sale transaction rather than through continuing use.” For the
asset group related to the trout operations to be reported as “held for sale”, “ the
asset (or disposal group) must be available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of such
assets (or disposal groups) and its sale must be highly probable.” There is nothing
to indicate from the information provided that the assets cannot be sold
immediately. The question is whether the sale is probable since the offer is set to
expire November 30th.
According to paragraph 8 of IFRS 5, “for the sale to be highly probable, the

appropriate level of management must be committed to a plan to sell the asset (or
disposal group), and an active programme to locate a buyer and complete the plan
must have been initiated. Further, the asset (or disposal group) must be actively
marketed for sale at a price that is reasonable in relation to its current fair value. In
addition, the sale should be expected to qualify for recognition as a completed sale
within one year from the date of classification and actions required to complete the
plan should indicate that it is unlikely that significant changes to the plan will be
made or that the plan will be withdrawn.”
Based on the information available, there appears to be a plan for disposing of the
division as management has entered into discussions with a potential purchaser.
However, there is no information as to how formal that plan is and as to the price
ABI wants for the trout division. The offer amount of $2.8 million appears low
relative to profits generated by the division. However, this may be due to ABI’s
immediate need for cash.
Based on the information available, it would appear that the trout division currently
meets the requirements for classification as an asset held for sale, however more
information should be obtained to confirm this. If reclassified on the balance sheet
as an asset held for sale, the assets would no longer be depreciated.
The (potential) sale of the trout division may be an additional source of cash,
alleviating ABI’s immediate cash flow problem. However, the sale of the trout
division should be discussed with management since it may affect the profitability
and the potential for the firm in the future. ABI’s strategy of vertical integration and
diversification within the aquaculture industry suggest that the sale might be a
desperate move to raise cash in the short run. The sale increases ABI’s reliance
on the successful harvest of the scallop stocks and therefore increases the risk
faced by ABI. If the client is looking to sell in order to generate cash flow, we
should suggest alternative methods of generating cash flow such as additional
financing or the sale of non-essential equipment as opposed to selling a profitable
division. As well, the $2.8 million selling price seems low compared to the
profitability of the division. We might suggest to the client that the trout division is
likely worth more than $2.8 million.
Debt/debt refinancing costs
The disclosure of the terms of the favorable debt needs to be considered. The fair
value of the debt is probably less than $5 million, since there is an interest-free
period of some duration. The debt should be recorded at its fair value. The debt
interest and payment terms need to be disclosed.
The loan arrangement fee of $500,000 should be deferred and amortized over the
term of the loan for accounting purposes. IFRS supports capitalization of the
financing costs through a reduction of the debt balance, and amortization using the
effective interest method.
The costs have currently been expensed in the 2019 financial statements. This
change, to defer and amortize these borrowing costs, would meet management’s
objective of increasing net income.
Debt refinancing costs would be expensed over five years for tax purposes.
Intragroup Transactions with Marine Tech Limited

Marine Tech Limited (MTL) provides nearly all the supplies, repairs, and
maintenance for the corporation. ABI owns it and it will be necessary to ensure
that these inter-company transactions are properly accounted for and eliminated.
Specifically, any intragroup revenues, expenses, payables and receivables.
Recast financial statements/going concern
Based on the preliminary analysis of the financial statements of ABI, a number of

accounting adjustments appear to be necessary to more fairly reflect the
operations of ABI. I have attached as Appendix I, a revised income statement
based on the primary adjustments identified in this report, resulting in a revised net
income of $120,300 million. The profitability of ABI is overstated for the year
ended 2019, and the interest-free requirement of maintaining a net income at $1
million or more is not met. This situation may have a significant impact on the
cash flows of ABI.
In addition to the adjustments to net income, current assets remain at $8,301

million as the adjustment for the cages would not affect current assets. The current
ratio = $8,301/$8,052 = 1.03 which is right at the requirement of 1. However, the
potential reduction to inventory would cause the current ratio to be even worse.
The client is at risk of having its debt recalled, which presents some risk that ABI
may have a going concern problem. ABI is already in a weak cash flow position,
and any further demands on cash will cause substantial difficulties. It may be
appropriate for ABI to meet with the bank to renegotiate the debt covenants or
terms of the loan. ABI should seek to obtain a letter from the bank indicating that it
will not call the loan. In the longer term, ABI’s cash flow will have to become even
stronger as the repayments on the $5 million loan commence.
The current cash flow difficulties of ABI may be only short term in nature if the
scallop crop matures and is successfully harvested in the upcoming year.
However, the history of failure during the winter months suggests that the next few
months of the winter are the highest risk period. If the loss of the scallop crop
would cause ABI to fail, then we must consider disclosing this significant risk in the
financial statements. In general, the uncertainties associated with ABI place it in a
highly risky position, but the risk will be alleviated if the scallops reach maturity and
are harvested. At a minimum, there will have to be disclosure of a going concern
issue based on the levels of risk identified.
Summary
Overall, the aggressive reporting and increased risk levels of the current year’s
audit merit additional testing and attention to detail. We should stay in constant
communication with the client regarding the status of the scallop crop and must
carry out additional analysis as to the impact of loss of the scallops on the firm.
APPENDIX I
Recast Income Statement

For the year ended October 31, 2019
(unaudited)
Net income per unaudited financial statements $1,415,000
Adjustments:
Inventory – scallops – reduce to cost (per conclusion) (XXX)
Deferred costs – scallop cages (2,507,000)
Gain on BML acquisition (-)
Loan arrangement fee -
Estimated reduction in income taxes 1,212,300
Adjusted net income $120,300

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EXERCISE 4-3

2. Retained Earnings- beginning- $3,600

3. Retained earnings – beginning +3,000

4. Gain on sale - $2,000

Depreciation expense and accumulated depreciation on asset sold:-$200 It will be

5. Retained earnings—beginning- $1,200 – $120 = - $1,080

Retained earnings—beginning: - $1,080. In the previous period, Addison recognized a profit

Depreciation expense/Accumulated depreciation: + $50. It will be necessary to calculate

EXERCISE 4-5 (Continued)

2. Loss on sale - $200

Depreciation expense/Accumulated depreciation: + $10. It will be necessary to calculate

3. Sales revenue - $400

4. Dividend payable - $3,000

6. Retained earnings—beginning - $180

7. Retained earnings beginning - $2,400

8. Rent revenue - $150

At January 1, 2016 (acquisition date):

Adjustments for intragroup transactions subsequent to the acquisition date:

1. Bonds payable - $100,000

Bonds in Excelate: - $100,000. It will be necessary to reduce the debenture receivable

Revenue—Debenture interest: - $7,000. It will be necessary to reduce the debenture

2. Accounts receivable (owed to Excelate) - $1,000

Accounts receivable (owed to Excelate): - $1,000. It will be necessary to reduce the

3. Revenue—Services fees - $8,000

Revenue—Services fees: - $8,000. It will be necessary to reduce the revenue recognized by

4. Retained earnings: beginning - $700

Sales- $5,500 (- $3,000 + - $2,500)

Deferred tax asset + $120

5. Gain on sale - $2,000

Depreciation expense/Accumulated depreciation: - $200. It will be necessary to calculate

6. Dividend revenue - $63,000

On July 1, 2017 Summer Corp. acquired the shares of Keira Ltd.

Consideration transferred: $60,000

Net fair value of identifiable assets and liabilities of $48,000

Fair value adjustments at the acquisition date: $10,500

Total net fair value of identifiable assets and liabilities $58,500

Investment in Keira Ltd. ↓- $60,000

Common Shares ↓- $44,000

Fair Value Adjustment Net income Beg.R/E Stmt. Of Fin. Position

(a) Inventory - (2,100) -

(b) Machinery/depreciation (400) (280) 2,000–800=1,200

(c) Land - (7,000) -

(d) Income tax exp/ FITL 120 (360)

(e) Goodwill - - 1,500

Total (280) (9,380) 2,340

PROBLEM 4-2 (Continued)

2b. Sales and profit in closing inventory:

3a. Sale of Machinery—current period:

Accumulated depreciation—machinery - $50

Depreciation expense/Accumulated depreciation—machinery: - $50. As the group

Depreciation expense/Accumulated depreciation—machinery: As the group depreciation

Interest revenue - $125

Consolidated adjustments are necessary in relation to these intra-group borrowings and

1. Royalty fee expense - $1,000

Investment in Keira 60000-60000 -

Retained earnings, balance as at July 1, 2018 $39,655

Total Assets $148,305

Liabilities and Shareholder’s Equity

Total Liabilities and Shareholder’s Equity $148,305

On January 1, 2019 Sienna acquired the shares of Danon

Consideration transferred: $160,000

Net fair value of identifiable assets and liabilities $156,000

Fair value adjustments at the acquisition date: $1,200

Total net fair value of identifiable assets and $157,200