Question

Skyline Corp. (Skyline) is a profitable, medium-sized private company that provides marketing services. In 2020, Skyline's board of directors approved a growth strategy that involves acquiring smaller marketing companies. Skyline's first acquisition took place on December 31, 2020, with the acquisition of 100% of the shares of

Limitless Inc. (LI) for $650,000.

It is now January 20, 2021, and Skyline is preparing for its December 31 year-end audit. You have been hired to provide advice on a number of issues as part of the audit preparation. Skyline's bookkeeper, Susan, outlined below the areas where she would like your assistance. For the issues identified, Susan has asked that you draft any journal entries that are necessary.

Your firm is not the auditor of Skyline. Skyline reports its financial statements in accordance with accounting standards for private enterprises (ASPE).

Question 1)

The journal entry recorded for the LI acquisition was as follows:

DR Investment in LI shares 650,000

CR Cash 650,000

LI's balance sheet as of the date of acquisition was as follows:

Cash $110,000

Accounts receivable $85,000

Furniture and fixtures, net $95,000

Total assets $290,000

Accounts payable $ 50,000

Long-term debt $115,000

Common shares $10,000

Retained earnings $115,000

Total liabilities and equity $290,000

For the assets and liabilities reported above, fair value is equal to book value, except for the furniture and fixtures, which have a fair value of $40,000 and a remaining useful life of four years.

The primary reason Skyline acquired LI was to gain access to its customer list. The customer list, although not reported on LI's balance sheet because it was internally generated, is LI's most valuable asset at an estimated $350,000. It has an estimated useful life of five years.

LI and Skyline use the taxes payable method of accounting for income taxes.

Susan understands that there are options available under ASPE to account for investments, and she would like you to explain each of these options to her. She is not sure which option is best for Skyline, but the CFO told her that it will be important for the board to be able to review the combined results of Skyline and its acquired companies. After you explain each of the options available to account for the new investment, provide a recommendation as to which one Skyline should use.

Question 2

Susan has been pulling together support for Skyline's audit, including materials on LI's financial statements. The auditors have requested documentation on LI's subsequent events. Specifically, they are interested in the minutes from LI's board meetings.

However, LI's record keeping, including board meeting minutes, has proven to be weak. In addition, there is a lot of tension with management because the controller of LI is not happy about the acquisition and some of the changes that Skyline plans to implement. LI's controller has indicated that he will not let Skyline's auditors speak to LI's lawyers.

Susan is worried about what might happen if the auditors are unable to obtain the evidence they ask for. She would like you to explain how Skyline's audit report may be impacted if the auditors are unable to obtain the evidence they've requested, and provide a recommendation on how to proceed.

Question 3

Skyline engaged in two transactions in U.S. dollars in the year:

• On December 1, 2020, Skyline purchased office furniture from a U.S. supplier for US$6,000. Skyline has not yet made payment to the supplier.
• During the first two weeks of December 2020, Skyline provided marketing services to a client in Bermuda for total fees of US$10,000, invoiced December 15, 2020. Skyline expects to collect payment from the customer in late January.

Exchange rates for relevant dates are as follows:

December 1 spot rate: US$1 = C$1.31

Average December rate: US$1 = C$1.32

December 31 spot rate: US$1 = C$1.34

Susan is not sure what to do with the transactions, so she has yet to record them in the financial statements. Perform an analysis of this issue and recommend the appropriate accounting treatment (including the required journal entries) for both transactions to Susan.

Question 4

In December 2020, Skyline entered into a purchase agreement with a U.S. supplier for a new data analytics program at a cost of US$1,000,000, with a delivery and payment due date of January 15, 2021.

Following predictions that the Canadian dollar will continue to weaken relative to the U.S. dollar in 2021, management became concerned about potential foreign exchange losses on this significant purchase. As a result, just before year end, management decided to mitigate the financial risk and hedge against this possible future loss by entering into a forward contract to buy US$1,000,000 on January 15, 2021, for C$1,360,000.

Management understands the requirements to apply hedge accounting, and you do not need to discuss these. They would, however, like to know how this transaction would be recorded if hedge accounting is elected, and whether there will be any impact on the December 31, 2020, financial statements. Note that the fair value of the forward contract did not change between when it was purchased and year end. The spot rate on January 15 was C$1.38.