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Question 1 (18 marks – 62 minutes)

Agro Inc. is a diversified company that is traded on the Toronto Stock Exchange.
Investment in Malo
On January 1st, 2018, Agro acquired 70% of the outstanding common shares of Malo Limited (Malo). The
NCI of Malo is valued at $3,600,000 on that date. Malo was an important supplier of services to Agro’s
online operations. The consideration given to Malo shareholders was $5,600,000 in cash.
The fair values of Malo’s assets and liabilities on January 1 st, 2018, are provided in Exhibit 1.
Intra-group Transactions in 2018
During 2018, Agro became Malo’s largest customer as it purchased $4,000,000 of raw materials from
Malo. At the end of 2018, Agro had raw materials in inventory that were purchased from Malo at a cost
(to Agro) of $600,000. Malo’s gross margin was 35% in 2018.
Intra-group Transactions in 2019
The inventory on hand for Malo at the end of 2018 was sold in 2019.
On January 1st, 2019, to better integrate Agro and Malo’s operations, Agro sold equipment to Malo for
$100,000 cash. The equipment had a net book value of $40,000 and a remaining useful life of 4 years.
Exhibit 2 shows Agro’s and Malo’s income statements and balance sheets for the year ended on
December 31, 2019.

Other Information
 Both companies pay tax at the rate of 25%.
 Malo’s equipment remaining useful life, as of December 31 st, 2017 is 10 years. Inventories on
hand are typically sold within a few weeks. There was no impairment of goodwill.
 Half of Malo’s land, that was there at the day of acquisition, was sold in 2019 for an overall gain
of $100,000.
 Agro uses the Full Goodwill method of accounting for non-controlling interest.

Required:

1. Prepare the acquisition analysis. Calculate the goodwill, at acquisition, belonging to the parent
and the non-controlling interest.
2. Calculate the fair value adjustments and the intragroup transaction adjustments for the year ended
2019.
3. Calculate the following account balances in the Consolidated Statement of Changes in Equity for
the year ending December 31, 2019:
a. Retained Earnings: Retained Earnings January 1, 2019, Net Income, dividends.
b. Non-controlling interest: NCI January 1, 2019, NCI – net income, NCI –
dividends.

4. Assume, instead, that Agro acquired 40% of the shares of Malo on January 1, 2018 for
$3,200,000.All other case fact are the same. The 40% interest is reported as an Associate.
Calculate:
a. The Share of Malo’s net income that Agro would report on its financial statement
for the year ending December 31, 2019.

b. The balance in the Investment in Malo account that would be reported on the
Agro balance sheet as at December 31, 2019.
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Exhibit 1
Malo Ltd.
Fair Value Information
January 1, 2018 (in $000’s)

Book Value Fair Value January 1, 2018

January 1, 2018
Accounts receivable 500 500
Inventories 400 440
Equipment (net) 2,100 2,400
Land 300 340
$3,300

Accounts payable 700 700

Future Income Taxes 200 200
Common shares 900
Retained earnings 1,500
$3,300

Exhibit 2
Income Statements for the year ended December 31, 2019(in $000’s)

Agro Malo
Sales and other income 40,000 17,000

Dividend from Malo 630

Cost of goods sold 20,000 10,000

Expenses 10,590 2,000

Amortization 5,000 2,000

Net income before taxes 5,040 3,000

Income taxes 2,250 1,200

Net income 2,790 1,800

Retained earnings -01/01/19 7,910, 1,800
Dividend paid 400 900
Shares outstanding 620 600
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Question 2 (17 marks; 58 minutes)

In accordance with its intention to position itself in the growing international markets, ABD, a Canadian
public company, purchased a company in Brazil, South America, Clion. The local currency in Brazil is
the Brazilian (REAL). The intent is to develop an internet-based company that will sell locally produced
products and services in the country’s capital city, Brazilia. To secure government approval and licenses
for the system, ABD agreed to invest CAD $50 million in the company. The government has agreed to
provide subsidies for the purchase of the hardware. These subsidies will become repayable if Clion does
not meet government-imposed quotas for hiring local employees to service the system. ABD computer
engineers will design the system and ABD will provide the programing. ABD engineers have been hired
to oversee the design stage of the project. The computer system is expected to be fully operational in
February 2021.

The local government must approve all stages of design. Once the system is complete, Clion will operate
it; however, the goods and services provided would be rate-regulated by local government. The local
government will also approve site licences. ABD agreed to allow government officials to review all books
and records of Clion at the convenience of the government. ABD expects that Clion will barely break
even or incur losses in the start-up of the operations. ABD records its $5 million investment in Clion at
cost.
ABD purchased 100% of the shares of Clion on December 31, 2018. The financial statements for Clion
are:

Clion
Statement of Financial Position
As at December 31,

2020 2019

Cash REAL 75,000 REAL 60,000

Intellectual property 230,000 150,000
Inventory 510,000 340,000
Computer equipment– net 1,350,000 1,500,000
REAL 2,165,000 REAL2,050,000

Current Liabilities REAL 65,000 REAL 45,000

Long-term debt 600,000 600,000
Common shares 500,000 500,000
Retained earnings 1,000,000 905,000
REAL2,165,000 REAL2,050,000

Clion
Income Statement
For the year ended December 31, 2020

Revenues REAL1,900,000
Cost of goods sold (1,100,000)
Operating expenses (375,000)
Amortization (150,000)
Interest expense (40,000)
Income tax expense (90,000)
Net income REAL 145,000
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Additional Information:

1. Relevant exchange rates are:

December 31, 2018 1REAL = $0.37 CAD

November 30, 20191REAL = $0.376 CAD
December 31, 2019 and January 1, 2020 1REAL = $0.374 CAD
Average – 2019 1REAL = $0.377 CAD
November 30, 20201REAL = $0.378 CAD
December 31, 2020 1REAL = $0.38 CAD
Average – 2020 1REAL = $0.375 CAD

2. Revenues and expenses (including purchases) occur evenly over the year.
3. All of the computer equipment was bought on January 1, 2019 and is being depreciated over 10 years.
4. $80,000 of the intellectual property was developed on January 1, 2020 and the rest was developed by
January 1, 2019. The intellectual property has an indeterminate life.
5. The December 31, 2019 inventories were purchased on average on November 30, 2019 and the
December 31, 2020 inventories were purchased on average on November 30, 2020.
6. Dividends are declared on December 31 of every year.
7. The 2019 net income was REAL120,000 and the 2019 dividends were REAL40,000.

Required:

1. Assume the functional currency of Clion is the Canadian dollar and the presentation currency for
the consolidated group is the Canadian dollar. Calculate the following balances on the translated
statements of Clion that will be used in the consolidation with ABD as at December 31, 2020:
i) Translated Cost of Goods Sold
ii) The foreign exchange gain or loss for the year. State where the gain or loss would appear
on the consolidated financial statements.
iii) Intellectual property

2. Assume the functional currency of Clion is the REAL, and the presentation currency for the
consolidated group is the Canadian dollar. Calculate the following balances on the translated
statements of Clion that will be used in the consolidation with ABD as at December 31, 2020:
i) Translation gain/loss in Other Comprehensive Income
ii) Intellectual property
iii) Retained earnings

3. Using case facts, discuss the functional currency of Clion.

4. On January 1, 2020, ABD borrowed REAL 200,000, long term, due in 10 years. Interest of 4% is
payable annually in REAL on December 31st. Calculate the following balances on the ABD financial
statement as at December 31, 2020:

i. Long term debt

ii. Interest expense
iii. Foreign currency (I/S)

5. Using the case facts, discuss the hedging opportunities that are available to the parent company.