Metro Utility Workers۪ Union (MUWU) is a registered not-for-profit organization that represents the workers of Metro Gas, a natural gas distribution company serving a metropolitan area in southern Alberta. The MUWU chief economist has retained Fran̤oise Dubois to provide accounting advice in preparation for the union۪s forthcoming spring 20X9 labour contract negotiations. The chief economist has provided Ms. Dubois with the information that follows.

MUWU has provided you with the separate entity financial statements of Metro Utility for 20X8 and also for a natural gas€“producing company, Oshkosh Utility. Metro Utility has a 40% ownership in Oshkosh. These financial statements had been provided to MUWU by Metro Utility in good faith prior to the start of negotiations. Metro Utility made its investment in OshKosh Utility at the end of 20X5. Metro Utility has not yet issued its annual report for 20X8. Therefore, the separate entity financial statements of Metro Utility are preliminary and not necessarily what will eventually be released to the public. Metro Utility made its investment in Oshkosh Utility at the end of 20X5. Metro Utility€™s top management earns bonuses as a percentage of the net income for the year. One of the eight board members of Oshkosh Utility is a Metro Utility representative.

Metro Utility has typically purchased 70% of the natural gas produced by Oshkosh Utility, selling the gas to its customers throughout the metropolitan area. However, recently, competition for natural gas has been heating up due to rising demand. Since natural gas can be piped from southern Alberta to the northwestern USA, it will become relatively easy for Oshkosh Utility to sell its natural gas to other customers in North America who are willing to pay a higher price.

Both Metro Utility and Oshkosh Utility are public companies trading on the TSX. Both utilities pay regular dividends; many of the investors in both companies are retired individuals.

Information relating to Oshkosh Utility at the time of Metro Utility€™s 40% investment is as follows:

–  Metro Utility paid $180,000 for its investment in Oshkosh Utility.

–  At the end of 20X5, when Metro Utility made its investment in Oshkosh Utility, the capital assets had a useful life on average of 10 years, while the patents had a useful life of five years.
Oshkosh Utility€™s financial statements for 20X6€“20X8 are as shown below:

–  A capital asset that had a net book value of $50,000 was sold to Metro Utility for $70,000 at the end of 20X7. At the time of this sale the asset had a future life of five more years. This asset had a carrying value equal to fair market value at the time of acquisition. Metro Utility€™s cost-based preliminary separate-entity financial statements are as follows:

–  The beginning inventory of Metro Utility in 20X8 includes $55,000 worth of goods at sale price from Oshkosh Utility.

–  Half of Metro Utility€™s ending inventory of $95,000 in 20X8 was purchased from Oshkosh Utility.

Required
Françoise Dubois has asked you to provide a report that covers the following:

–  Statement of comprehensive income and statement of financial position for MetroUtility for the current year€”that is, 20X8€”appropriately accounting for its investment in Oshkosh Utility under IFRS

–  A clear explanation for your choice of accounting for Metro Utility€™s investment in Oshkosh Utility

–  Analysis of the resulting financial statements and advice on the financial situation of Metro Utility such that MUWU is properly prepared to get the best wage settlement from Metro Utility. Ms. Dubois also wants you to discuss the different motivating factors (users, objectives, etc.) and the impact these might have on how Metro Utility will account for its affairs in the consolidated financial statements that it will issue shortly.

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20X5 Year-End Cost 20X5 Year-End FMV Cash Accounts receivable Inventory Capital assets Patents Current liabilities Long-term liabilities $ 50,000 $ 50,000 75,000 75,000 65,000 97,500 200,000 280,000 50,000 40,000 40,000 200,000 200,000 20X6 20X7 20X8 Revenues $200,000 $225,000 $275,000 Production cost of gas sold Gross profit 135,000 185,000 200,000 65,000 40,000 75,000 Depreciation 30,000 25,000 25,000 Other expenses 15,000 20,000 18,000 Interest expense 16,000 16,000 16,000 Gain/loss on sale of capital asset 20,000 Net income before taxes Income taxes Net income and comprehensive income Retained earnings, January 1 $ 4,000 ($1,000) $ 16,000 1,200 4,800 $ 2,800 ($1,000) $ 11,200 85,000 77,800 56,800 Dividends (10,000) (20,000) (20,000) Retained earnings, December 31 $ 77,800 $ 56,800 $ 48,000