2. 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 reflected in the Year 4
consolidated cash flow statement.

$700,000 (minus any cash on the balance sheet of the subsidiary company) would

appear as an outflow in the investing activities section. Because the $300,000 share

issue did not affect cash, it would not appear as a separate item on the consolidated

cash flow statement. However, complete footnote disclosure would be required and

would indicate the total acquisition price, the consideration given (cash and common

shares), and a summary of the assets, liabilities, and equity interest acquired.

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

No, the subsidiary’s net assets are only measured at fair value at the date of
acquisition i.e., when the parent first obtains control of the subsidiary. When
increasing the percentage ownership from 60% to 75%, the parent’s portion of the
unamortized acquisition differential increases and the NCI’s portion decreases by the
same amount, which is the carrying amount of the portion sold by the NCI. Neither the
parent’s portion nor the NCI’s portion is remeasured at fair value as a result of this
transaction. This transaction is treated as a transaction among owners. Any difference
between the amount paid by the parent and the carrying amount sold by the NCI is
treated as an equity transaction and is charged or credited directly to shareholders’
equity.

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

The non-controlling interest is not remeasured at fair value because the parent’s
interest is not remeasured at fair value. Revaluation only occurs when the
purchaser’s position changes from not having control to having control or vice versa.
Here, the parent had control at 76% and still has control at 60%. The decrease in
the parent’s carrying amount is added to the non-controlling interest. This
transaction is treated as a transaction among owners. Any difference between the
amount received by the parent and the carrying amount sold to the NCI is treated as
an equity transaction and is charged or credited directly to shareholders’ equity.

10. 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.

Yes, assuming that the parent company does not own all of the preferred shares.
The consolidated income statement will show a non-controlling interest equal to the
non-controlling interest’s share of the subsidiary's net income applicable to the
preferred shares. The consolidated balance sheet will show an amount for
non-controlling interest equal to the non-controlling interest’s share of the total
shareholders' equity of the subsidiary that is applicable to that company's preferred
shares.

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.

Both the subsidiary and the controlled special purpose entity (SPE) are controlled.
The subsidiary is controlled by the parent whereas the SPE is controlled by the
sponsor. The main difference is the way in which the SPE is controlled. The parent
typically controls the subsidiary by owning the majority of the voting shares of the
subsidiary. The sponsor controls the SPE through governing agreements and can
have this control without owning any of the voting shares of the SPE.

4. 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.

Normally, a 62% interest in the voting shares of a company would be sufficient for
control to exist, and therefore Z would be a subsidiary. But, there could be an
agreement between Y Company and the investors who hold the other 38% that does
not give Y control over Z Company. The agreement could give joint control to Y and
one or more of the other shareholders. In this situation, Z would not be a subsidiary;
rather, it would be a joint venture. Or, there could be an agreement between the
shareholders and another party whereby the shareholders have given control of the
company to another party in return for a guaranteed return on their investment.. In this
case, Y may have to report the investment using the equity method if it had significant
influence or at fair value if it did not have significant influence.

7.Explain how the revenue recognition principle supports the recognition of a portion
of gains occurring on transactions between the venturer and the joint venture.
The revenue recognition principle states that revenues and gains should be
recognized when they are realized i.e., when a transaction has occurred with an
outside entity and consideration is received. For transactions between a venturer
and the joint venture, the portion of the gain equal to the outside interest in the joint
venture is considered to be realized because the other parties in the joint venture are
not related to the venturer and are considered to be outsiders.

13.Describe the three tests for identifying reportable operating segments.

1. A company should report information about an operating segment that meets any

ONE of the following:

a. The operating segment's reported revenue (intersegment sales plus

transfers, plus external sales) is 10% or more of the combined internal and

external revenue of the company.

b. The absolute amount of the segment's reported profit or loss is 10% or

more of the greater of:

i. the combined reported profit of all operating segments that did not

report a loss

ii. the combined reported loss of all operating segments that did

report a loss.

The segment's assets are 10% or more of the combined assets of the company.

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

A fair value hedge uses a hedging instrument to hedge the change in fair value of the hedged
item. Gains or losses are reported in profit in the period they occur for both the hedged item
and the hedging instrument. A cash flow hedge uses a hedging instrument to hedge future cash
flows. Gains or losses on the hedging instrument are reported in other comprehensive income
and are deferred as a component of shareholders’ equity until the hedged item is reported in
income.
10.What are some typical reasons for acquiring a forward exchange contract?

A forward exchange contract may be acquired to act as a hedge for either an existing
monetary position or an expected future monetary position. Alternatively, a contract
may be acquired for speculative purposes.

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

For the fair value hedge of an unrecognized firm commitment, the change in both the
fair value of the hedging instrument and the hedged item are recognized in profit as
they occur. For the cash flow hedge of an unrecognized firm commitment, the
exchange gains or losses are reported in other comprehensive income and deferred
as a separate component of shareholders’ equity until the committed transaction
occurs. It will later be transferred out of other comprehensive income and become
part of the cost or selling price of the item being hedged and reported in income when
the hedged item is reported in income.

15.What is meant by hedge accounting?

The term "hedge accounting" is used for a system of accounting that ensures that the
gains or losses from a hedged position are offset in the same accounting period by the
losses or gains from the hedging instrument. Therefore, if gains or losses from one
occur before those from the other they are deferred until the matching can take place.

7. 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?

7. A foreign operation whose functional currency is different than the parent’s

functional currency is financially and operationally independent of its Canadian

investor. In such cases, the investor’s exposure to exchange rate changes is

limited to its net investment. The PCT method is used to translate the statements

of this foreign operation.

When the functional currency is the same as the parent’s functional currency, the

foreign operation is just the opposite, in that it is financially or operationally

interdependent with its Canadian investor. In this case, the exposure is similar to
the exposure that would exist if the Canadian investor had carried out all the

transactions of its investee. The FCT method is used to translate the statements

of the foreign operation.