Ada Vidal established Exotic Bean Bags Inc. (EBBI) in 20X2 to distribute exotic bean bags featuring colourful ethnic motifs and designs. EBBI also customizes its bean bags to match the decor and design requirements of individual customers and businesses. Ada designs the bags in Canada, but the bags are manufactured in the Republic of Chola (Chola). A parent-created subsidiary in Chola, EBB Chola Ltd. (EBBCL), is responsible for all manufacturing-related activities, such as inviting bids from manufacturers, choosing a manufacturer, and ensuring quality. Once EBBCL receives the manufactured bags from the manufacturer(s), it ships them to EBBI€™s warehouse in Calgary.

Until the end of 20X7, EBBI sold the bags through two of its own company-owned retail outlets in the Calgary area, as well as (1) through many other retail stores across Canada; (2) online via its website, www.exoticbeanbags.com , and; (3) for custom orders, directly to individuals or businesses.

Late in 20X7, Ada realized that her core competency lay in designing bean bags and in obtaining contracts for customized bean bags from businesses and individuals. Therefore, she decided to sell the two retail outlets to a prospective buyer. Erin Mazur, a wealthy acquaintance of Ada, agreed to buy the two retailing facilities from EBBI. EBBI created a company called Exotic Retailing Inc. (ERI) on December 31, 20X7, and transferred the two retail outlets to ERI on that date. EBBI Canada sold 80% of the shares of ERI to Erin on December 31, 20X7, while retaining the remaining 20%. Erin paid EBBI $1,200,000 for her 80% share ownership of ERI.

The agreement between EBBI and ERI stipulates the following:

–  EBBI will be the exclusive bean bags supplier to ERI. All bean bags sold by ERI must be EBBI bean bags. However, ERI is free to sell products other than bean bags that are supplied by other companies.

–  For 20X8 only, EBBI will guarantee that ERI€™s income before taxes as a percentage of sales is equal to or greater than EBBI€™s 20X8 income before taxes as a percentage of sales on its consolidated SCI. If not, EBBI must pay ERI the deficiency.
–  To preserve the monopoly of ERI in the Calgary area, EBBI is prohibited from selling its bags to other retailers in Calgary.

–  In determining EBBI€™s profit percentage, a qualified professional accountant must prepare EBBI€™s consolidated statement of comprehensive income under IFRS.

It is now January 20X9, and Ada wants to obtain a loan from EBBI€™s bank so that she can fund the expansion of EBBI€™s wholesale operations as well as the expansion of EBBI€™s sales of customized bean bags to individuals and businesses directly. The bank has asked Ada to provide EBBI€™s consolidated statement of comprehensive income for 20X8, prepared following international standards by a qualified accountant. Together, Ada and Erin approached a partner of Accounting Experts LLP (AE) to prepare the consolidated statement of comprehensive income of EBBI for 20X8. Ada and Erin provided AE with the additional information shown below, including the separate-entity financial statements for EBBI, EBBCL (translated into Canadian dollars), and ERI.

You recently joined AE as a staff accountant. The AE partner has assigned you the responsibility of preparing the EBBI consolidated statement and then drafting a report with recommendations to Ada and Erin.

Additional Information:
–  The relevant financial statements of EBBCL, converted into Canadian dollars, are provided in Exhibit E.
–  Erin notes that ERI€™s profit before taxes as a percentage of sales is less than the comparable figure on EBBI€™s separate-entity SCI. She had assumed that if such a comparison were to be made using the consolidated SCI of EBBI instead, the result would be similar. They need to understand the reasons for any difference and they also need to know if they should adjust their operating agreement for the future.
–  EBBCL makes all of its sales to EBBI. EBBCL remits excess cash as dividends to EBBI in four equal instalments, each instalment at the end of each quarter.
–  Ada thinks it is good for her business that the Chola kas has depreciated in value significantly vis-à-vis the Canadian dollar. This has reduced her cost of goods sold while having no impact on her sale prices in Canada, since EBBI has no competition in its niche in Canada. She does not expect the kas to recover in value compared with the Canadian dollar any time soon.

Additional information pertaining to Exotic Bean Bags Chola Ltd.:
–  All sales made to EBB Inc. Canada by EBB Chola Ltd. are made at the same gross profit percentage on sales.

Additional information pertaining to Exotic Bean Bags Inc.:
–  EBBI Canada had no inventory on January 1, 20X8, since the entire inventory received from EBB Chola Ltd. was in ER Inc.€™s retail facilities on that date.
–  All sales made to ER Inc. by EBBI Canada are made at the same gross profit percentage on sales.
The carrying and fair values of ER€™s net identifiable assets on January 1, 20X8, were as shown in Exhibit G.

Additional information pertaining to Exotic Retailing Inc.:
–  The buildings and furniture and fixtures had a further useful life of 15 years on January 1, 20X8. They are being depreciated on a straight-line basis assuming no salvage value.
–  No dividends were declared by ER during the year.

Required
Draft a report for the AE partner that includes the required financial statements, all associated calculations, and the analysis and recommendations for Ada and Erin.

Transcribed Image Text:

Exhibit E Financial Statements for EBB Chola Ltd. Statement of Comprehenslve Income Year Ended December 31, 20X8 Cans $ 2,343,750 Sales Cost of goods sold 1,771,758 Gross profit 571,992 Salaries 164,063 Rent 235,726 Depreciation on furniture & fixtures 115,000 Overheads 98,438 Exchange loss on net monetary assets 68,814 Net income before taxes (110,048) Local income taxes 83,320 S (193,368) Net income and comprehensive income Statement of Changes In Shareholders' Equity–Retalned Earnings Section Year Ended December 31, 20X8 Cans S 771,032 Retained earnings, December 31, 20X7 Comprehensive income (loss) for the year (193,368) Dividends for the year (343,536) $ 234,128 Retained earnings, December 31, 20X8 Statement of Financlal Postion December 31, 20X8 ASSETS Cans $ 247,148 Cash Inventory 170,625 Pre-paid rent 29,167 Furniture & fixtures (net) 920,000 TOTAL ASSETS $1,366,940 LIABILITIES AND SHAREHOLDERS' EQUITY $ 182,813 Accounts payable Common shares 950,000 Retained earnings 234,128 TOTAL LIABILITIES AND SHAREHOLDERS' EQUuITY $1,366,940 Exhibit F Financial Statements for Exotic Bean Bags Inc. (Canada) Statement of Comprehenslve Income Year Ended December 31, 20X8 Cans $ 2,734,375 1,640,625 1,093,750 240,625 Sales Cost of goods sold Gross profit Salaries Depreciation, building Depreciation, furniture & fixtures 337,500 225,000 Overheads 142,188 Dividend income from EBB Chola Ltd. 343,536 Net income before taxes 491,974 Canadian income taxes 93,729 Net income and comprehensive income $ 398,245 Statement of Changes In Shareholders' Equity–Retalned Earnings Section Year Ended December 31, 20X8 Cans $ 4,911,905 398,245 Beginning retained earnings Comprehensive income (loss) for the year Dividends for the year Ending retained earnings $ 5,310,150 Statement of Financlal Positlon December 31, 20X8 Can ASSETS Cash $ 635,150 Inventory Furniture & fixtures (net) 703,125 1,350,000 Buildings (net) 2,025,000 Investment in EBB Chola Ltd. 950,000 Investment in Exotic Retailing Inc. 300,000 TOTAL ASSETS $5,963,275 LIABILITIES AND SHAREHOLDERS' EQUITY Expenses and salaries payable $ 153,125 Common shares 500,000 Retained earnings 5,310,150 $ 5,963,275 TOTAL LIABILITIES AND OWNERS' EQUITY