Naya Ltd. is a public company that manufactures components used in cellular telephones and other mobile devices. Its head office is in Mississauga, Ontario, and its year end is December 31. It is currently January 5, 2014, and you, Controller, CA, have just been called into the office of Renald Ménard, the Vice-President of Finance, for a meeting to discuss two transactions that have just taken place. He is particularly concerned with the effects that these transactions will have on the year-end financial statements. Refer to Exhibit 5-2(a) for Naya Ltd.’s December 31, 2013 year-end financial statements. The details are as follows:
1. On November 1, 2013, Naya Ltd. acquired an 80% interest in Mac Enterprises, a company in a similar line of business as Naya, for $575,000. This is the first time that Naya has obtained control of another company without purchasing 100% of it and as such, Mr. Ménard is unsure of what the repercussions are. The share capital and retained earnings of Mac Enterprises at the date of acquisition were $100,000 and $325,000, respectively. The net assets were equal to their acquisition date fair market values. There were two exceptions. The first was inventory, which had a fair market value $10,000 higher than its book value and was expected to be sold by December 31, 2013. The second exception was property, plant, and equipment, with a remaining useful life of five years, which had a fair market value $50,000 higher than its book value. Mac Enterprises earns income evenly over the year.
2. Naya sold 10% of its wholly owned subsidiary Icebreaker Inc. on December 31, 2013, for $25,000. Naya will retain control. This 100%-owned company was acquired three years ago for $400,000. At that time, its share capital was $100,000 and its retained earnings were $125,000. Its book values were equal to fair market value, with the exception of inventory, whose fair market value was $20,000 higher and was sold within one year, and property, plant, and equipment, whose fair market value was $100,000 higher and had a remaining useful life of 10 years at the time. Naya has recorded a gain of $5,000 on its December 31, 2013 statement of comprehensive income (45,000 - 10% × 400,000).
Prepare a report to Renald Ménard, the Vice-President of Finance, that discusses the repercussions of the two transactions and addresses his concerns. As well, address how the above transactions will affect the statement of changes in equity at December 31, 2013. Ignore the effects of income taxes.

  • CreatedJune 09, 2015
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