Question: The treatment of an unrealized intercompany

> Total Protection Limited (TPL) was incorporated on January 1, Year 1, by five homebuilders in central Canada to provide warranty protection for new-home buyers. Each shareholder owns a 20% interest in TPL. While most homebuilders provide one-year warrant

> It is now mid-September Year 3. Growth Investments Limited (GIL) has been owned by Sam and Ida Growth since its incorporation under the Canada Business Corporations Act many years ago. The owners, both 55 years of age, have decided to effect a corporate

> BIO Company is a private company. It employs 30 engineers and scientists who are involved with research and development of various biomedical devices. All of the engineers and scientists are highly regarded and highly paid in the field of biomedical rese

> It is September 15, Year 8. The partner has called you, CPA, into his office to discuss a special engagement related to a purchase agreement. John Toffler, a successful entrepreneur with several different businesses in the automotive sector, is finalizin

> Lauder Adventures Limited (LAL) was incorporated over 40 years ago as an amusement park and golf course. Over time, a nearby city has grown to the point where it borders on LAL's properties. In recent years LAL's owners, who are all members of one family

> When Valero Energy Corp. acquired Ultramar Diamond Shamrock Corp. (UDS) for US$6 billion, it created the second-largest refiner of petroleum products in North America, with over 23,000 employees in the United States and Canada, total assets of $10 billio

> Briefly explain why the Canadian AcSB decided to create a separate section of the CPA Canada Handbook for private enterprises.

> Factory Optical Distributors (FOD) is a publicly held manufacturer and distributor of high-quality eyeglass lenses located in Burnaby, British Columbia. For the past 10 years, the company has sold its lenses on a wholesale basis to optical shops across C

> On December 31, Year 7, Maple Company issued preferred shares with a fair value of $1,200,000 to acquire 24,000 (60%) of the common shares of Leafs Limited. The Leafs shares were trading in the market at around $40 per share just days prior to and just a

> Planet Publishing Limited (Planet) is a medium-sized, privately owned Canadian company that holds exclusive Canadian distribution rights for the publications of Typset Daily Corporation (TDC). Space Communications Ltd. (Space), an unrelated privately own

> How are translation exchange gains and losses reflected in financial statements if the foreign operation's functional currency is the Canadian dollar? Would the treatment be different if the foreign operation's functional currency were not the Canadian d

> What translation method should be used for a subsidiary that operates in a highly inflationary environment? Why?

> What difference does it make whether the foreign operation's functional currency is the same or different than the parent's presentation currency? What method of translation should be used for each?

> What should happen if a foreign subsidiary's financial statements have been prepared using accounting principles different from those used in Canada?

> Define a foreign operation as per IAS 21.

> How are gains and losses on financial instruments used to hedge the net investment in a foreign operation reported in the consolidated financial statements when the PCT method is used to translate the foreign operation?

> Explain how the acquisition cost is determined for a reverse takeover.

> Why might a company want to hedge its balance sheet exposure? What is the paradox associated with hedging balance sheet exposure?

> What are the three major issues related to the translation of foreign currency financial statements?

> Would hedge accounting be used in a situation in which the hedged item and the hedging instrument were both monetary items on a company's statement of financial position? Explain.

> If the sales of a foreign subsidiary all occurred on one day during the year, would the sales be translated at the average rate for the year or the rate on the date of the sales? Explain.

> When translating the financial statements of the subsidiary at the date of acquisition by the parent, the exchange rate on the date of acquisition is used to translate plant assets rather than the exchange rate on the date when the subsidiary acquired th

> Explain how the FCT method produces results that are consistent with the normal measurement and valuation of assets and liabilities for domestic transactions and operations.

> "If the translation of a foreign operation produced a gain under the FCT method, the translation of the same company could produce a loss if the operation were translated under the PCT method." Do you agree with this statement? Explain.

> The amount of the accumulated foreign exchange adjustments appearing in the translated financial statements of a subsidiary could be different from the amount appearing in the consolidated financial statements. Explain how.

> Does the FCT method use the same unit of measure as the PCT method? Explain.

> The FCT and PCT methods each produce different amounts for translation gains and losses due to the items at risk. Explain.

> When will the premium paid on a forward contract to hedge a firm commitment to purchase inventory be reported in income under a cash flow hedge? Explain.

> List some ways that a Canadian company could hedge against foreign currency exchange rate fluctuations.

> Differentiate between the accounting for a fair value hedge and a cash flow hedge.

> Differentiate between a spot rate and a closing rate.

> Describe when to use the closing rate and when to use the historical rate when translating assets and liabilities denominated in a foreign currency. Explain whether this practice is consistent with the way we normally measure assets and liabilities.

> How are foreign-currency-denominated assets and liabilities measured on the transaction date? How are they measured on a subsequent balance sheet date?

> Differentiate between a spot rate and a forward rate.

> You read in the newspaper, "One U.S. dollar can be exchanged for 1.15 Canadian dollars." Is this a direct or an indirect quotation? If your answer is indirect, what is the direct quotation? If your answer is direct, what is the indirect quotation?

> What is the difference between pegged and floating exchange rates?

> What is meant by hedge accounting?

> What is the suggested financial statement presentation of hedge accounts recorded under the gross method? Why?

> When long-term debt hedges a revenue stream, a portion of the long-term debt becomes exposed to the risk of changes in exchange rates. Why is this?

> How does the accounting for a fair value hedge differ from the accounting for a cash flow hedge of an unrecognized firm commitment?

> Explain the application of lower of cost and net realizable value to inventory that was purchased from a foreign supplier.

> If a foreign-currency-denominated payable has been hedged, why is it necessary to adjust the liability for balance sheet purposes?

> What are some typical reasons for acquiring a forward exchange contract?

> Briefly summarize the accounting issues arising from foreign-currency-denominated transactions.

> A parent company has recently acquired a subsidiary. On the date of acquisition, both the parent and the subsidiary had unused income tax losses that were unrecognized in their financial statements. How would this affect the consolidation figures on the

> X Company recently acquired control over Y Company. On the date of acquisition, the fair values of Y Company's assets exceeded their tax bases. How does this difference affect the consolidated balance sheet?

> Explain how the revenue recognition principle supports the recognition of a portion of gains occurring on transactions between the venturer and the joint venture.

> A venturer invested non-monetary assets in the formation of a new joint venture and did not receive any monetary consideration. The fair value of the assets invested was greater than the carrying amount in the accounting records of the venturer. Explain

> Briefly outline how the presentation of assets and liabilities on the statement of financial position of a government differs from the presentation shown on the balance sheet of a typical business enterprise.

> Y Company has a 62% interest in Z Company. Are there circumstances where this would not result in Z Company being a subsidiary of Y Company? Explain.

> Explain how to account for an interest in a joint operation.

> Explain how the definitions of assets and liabilities can be used to support the consolidation of special-purpose entities.

> What is a reverse takeover, and why is such a transaction entered into?

> Explain how the use of the information provided in segment disclosures can aid in the assessment of the overall profitability of a company.

> What sort of reconciliations are required for segmented reporting?

> In accordance with IFRS 8 Operating Segments, answer the following: (a) What information must be disclosed about business carried out in other countries? (b) What information must be disclosed about a company's products or services? (c) What information

> For each of its operating segments that require separate disclosure, what information must an enterprise disclose?

> Describe the three tests for identifying reportable operating segments.

> Explain how the definition of a liability supports the recognition of a deferred income tax liability when the fair value of an asset acquired in a business combination is greater than the tax base of this asset.

> Governments are different from business organizations and NFPOs in many respects and yet in some respect they are similar. Explain.

> Explain how it is possible to have a deferred tax liability with regard to the presentation of a subsidiary's assets in a consolidated balance sheet, whereas on the subsidiary's balance sheet the same assets produce a deferred tax asset.

> What is the difference between a deductible temporary difference and a taxable temporary difference?

> Explain the similarities and differences between a subsidiary and a controlled special purpose entity and between a majority shareholder for a subsidiary and a sponsor for a controlled special-purpose entity.

> If a gain or a loss is realized by a parent company as a result of the sale of a portion of the investment in a subsidiary, should the gain or loss be eliminated in the preparation of the consolidated income statement? Explain..

> A parent company will realize a loss or a gain when its subsidiary issues common shares at a price per share that differs from the carrying amount per share of the parent's investment, and the parent's ownership percentage declines. Explain why this is s

> When a parent decreases its investment in a subsidiary from 76 to 60%, should the non controlling interest be re measured at fair value? Explain.

> When a parent increases its investment in a subsidiary from 60 to 75%, should the acquisition differential from the 60% purchase be re measured at fair value? Explain.

> When should the change in accounting for a long-term investment from the cost method to the equity method be accounted for retroactively, and when should it be accounted for prospectively?

> Why are dividend payments to non-controlling shareholders treated as an outflow of cash in the consolidated cash flow statement but not included as dividends paid in the consolidated retained earnings statement?

> Why is the amortization of the acquisition differential added back to consolidated net income to compute net cash flow from operating activities in the consolidated cash flow statement?

> Explain the meaning of the account "net assets invested in capital assets" and describe how it is used under the two methods of accounting for contributions.

> A parent company acquired a 75% interest in a subsidiary company in Year 4. The acquisition price was $1,000,000, made up of cash of $700,000 and the parent's common shares with a current market value of $300,000. Explain how this acquisition should be r

> What are some of the main differences between IFRS and ASPE for business combinations?

> When the parent company uses the cost method, an adjustment must be made to its retained earnings on consolidation in every year after the year of acquisition. Why is this entry necessary? Why is a similar entry not required when the parent utilized the

> What is the major consolidation problem associated with indirect shareholdings?

> Explain the difference in the calculation of consolidated net income attributable to shareholders of parent and consolidated retained earnings depending on whether the preferred shares of a subsidiary are cumulative or non-cumulative.

> Explain how the non-controlling interest in the net assets and net income of a subsidiary is calculated and reported when the parent owns 90% of the subsidiary's common shares and 30% of the subsidiary's cumulative preferred shares.

> Explain how an acquisition differential from an investment in preferred shares should be reflected in the consolidated financial statements.

> A company's net income for the year was $17,000. During the year, the company paid dividends on its non-cumulative preferred shares amounting to $12,000. Calculate the amount of the year's net income that "belongs to" the common shares.

> The shareholders' equity of a subsidiary company contains preferred and common shares. The parent company owns 100% of the subsidiary's common shares. Will the consolidated financial statements show non-controlling interest? Explain.

> Is the consolidated cash flow statement prepared in the same manner as the consolidated balance sheet and income statement? Explain.

> Is it possible that an organization would be required to use certain aspects of the deferral method even though it reports using the restricted fund method? Explain.

> "There should never be a gain on an intercompany sale of equipment when the selling company uses the revaluation model under lAS 16 and the equipment is sold at fair value." Is this statement true or false? Explain.

> When a company sells equipment that had previously been re measured to fair value under the revaluation model of lAS 16, it transfers the revaluation surplus from accumulated other comprehensive income directly to retained earnings. What adjustments must

> When there has been an intercompany sale of a used depreciable asset (i.e., accumulated depreciation has been recorded for this asset), it is necessary to gross up the asset and accumulated depreciation when preparing the consolidated financial statement

> If an intercompany sale of a depreciable asset has been made at a price above carrying amount, the beginning retained earnings of the seller are reduced when preparing each subsequent consolidation. Why does the amount of the adjustment change from year

> Why does an intercompany sale of a depreciable asset (such as equipment or a building) require subsequent adjustments to depreciation expense within the consolidation process?

> An intercompany gain on a depreciable asset resulting from a sale by the parent company is subsequently realized by an adjustment to the subsidiary's depreciation expense in the preparation of consolidated income statements. Should this adjustment be tak

> An intercompany inventory profit is realized when the inventory is sold outside the entity. Is this also the case with respect to an intercompany profit in a depreciable asset? Explain.

> "The realization of intercompany inventory and depreciable asset profits is really an adjustment made in the preparation of consolidated income statements to arrive at historical cost numbers." Explain.

> Explain how the matching principle supports the recognition of deferred income tax expense when a gain is recognized on the elimination of intercompany bond holdings.

> Explain how the recognition of gains on the elimination of intercompany bond holdings is consistent with the principle of recording gains only when they are realized.

> Name the two methods of accounting for contributions, and explain how the methods differ from each other.

> "Some intercompany gains (losses) are realized for consolidation purposes subsequent to their actual recording by the affiliates, while others are recorded by the affiliates subsequent to their realization for consolidation purposes." Explain and refer t

> The adjustment for the holdback of an intercompany gain in assets requires a corresponding adjustment to a consolidated deferred tax asset. The adjustment for a gain from intercompany bond holdings requires a corresponding adjustment to a consolidated de

> An interest elimination gain (loss) does not appear as a distinguishable item on a consolidated income statement. Explain.

> Four approaches could be used to allocate gains (losses) on the elimination of intercompany bond holdings in the preparation of consolidated financial statements. Outline these four approaches. Which approach is conceptually superior? Explain.

> Explain how an intercompany gain of $2,700 on the sale of a depreciable asset is held back on the consolidated income statement in the year of sale and realized on subsequent consolidated income statements. What income tax adjustments should be made in e

> "Intercompany losses recorded on the sale of assets to an affiliate within the consolidated entity should always be eliminated when consolidated financial statements are prepared." Do you agree with this statement? Explain.

> A parent company rents a sales office to its wholly owned subsidiary under an operating lease requiring rent of $2,000 a month. What adjustments to consolidated income tax expense should accompany the elimination of the parent's $24,000 rent revenue and