MGT 4110 Project #1 Pure Waste Systems Inc

MGT 4110 Project #1 Pure Waste Systems Inc. (PWS) is a Canadian public company. On December 31, 2020, PWS acquired common shares of Sewer Waste Corp. (SWC). Below are three independent questions based on different scenarios for the number of shares acquired and how the shares are acquired. All the scenarios share the same initial financial data. SWC’s comparative statement of financial position as at December 31, 2021, and its statement of comprehensive income for the year ended December 31, 2021 are as follows: Sewer Waste Corp. Statement of financial position As at December 31 (in ’000s)

2021 2020 Cash $ 479 $ 185 Accounts & other receivables 635 520 Inventory 460 345 Note receivable 100 0 Land 450 500 Building (net) 294 310 Equipment (net) 478 420 Patent 80 100 Total assets $2,976 $2,380 Accounts payable & accrued liabilities $ 480 $ 460 Long-term debt 900 900 Common shares 500 500 Retained earnings 1,096 520 Total liabilities and equity $2,976 $2,380

Sewer Waste Corp. Statement of comprehensive income For the year ended December 31, 2021 (in ’000s)

Sales revenue $3,160 Cost of goods sold 1,208 Gross profit 1,952 Sales, general and admin expenses 626 Interest expense 45 Depreciation and amortization expense 68 1,213 Other income 80 Earnings before income tax expense 1,293 Income tax expense 517 Net income $ 776

The fair value of each of SWC’s identifiable net assets at time of acquisition is as follows: (in $000s) (Assume that all assets have no residual values at the end of their useful lives.)

Fair value Dec. 31, 2020 Estimated remaining useful life/years to maturity Inventory $315 N/A Land $525 N/A Building (net) $380 20 years Equipment (net) $390 10 years Patent $200 5 years Long-term debt $910 4 years

Additional information: 1. Both companies pay income tax at a rate of 40%. 2. Both companies use the straight-line method of depreciation and both companies use first in, first out (FIFO) to value their inventories. 3. Assume any fair value difference on the long-term debt is amortized using the straight-line method. 4. PWS established that SWC is a cash-generating unit (CGU) subject to impairment testing. 5. On June 30, 2021, SWC sold land to PWS for $130,000. SWC’s net book value at time of sale was $50,000, which was the same as the estimated fair value at acquisition date of the associate. In consideration of the transfer, PWS paid $30,000cash and signed a note payable to SWC for the $100,000 balance. The note is payable in full on June 30, 2024. Interest at 5% is payable annually with the first payment due on June 30, 2022. 6. During 2021, PWS sold goods to SWC for $120,000 including a 30% gross profit margin; 40% of these goods remained unsold by SWC as at December 31, 2021. 7. During 2021, SWC sold goods to PWS for $170,000 including a 50% gross profit margin; 10% of these goods remained unsold by PWS as at December 31, 2021.

8. During 2021, SWC incurred management fee expense from PWS at a total cost of $25,000. Thisamount remained unpaid at year end. SWC recorded this as an SG&A expense while PWS recorded it as other income. 9. On September 1, 2021, PWS sold equipment to SWC for $100,000 cash. PWS’s carrying value of the equipment, which had a remaining useful life of ten years, was $90,000. The gain was recorded in other income. 10.Both PWS and SWC paid dividends during the year ended December 31, 2021. 11.PWS and SWC only prepare adjusting entries at year end.

QUESTION #1 (10 Marks) Assume that on December 31, 2020, PWS paid $1,300,000 cash to acquire 100% of the net assets of SWC.

Required: a) Calculate and allocate the acquisition differential including determination of thegoodwill arising on the acquisition of the net assets of SWC. (5 marks) b) Prepare PWS’s journal entry to record the acquisition. Support the journal entry with abrief explanation as to its nature. (5 marks)

QUESTION # 2 (10 marks) Now assume that on December 31, 2020, PWS issued 100,000 of its common shares to acquire 100% of the common shares of SWC. PWS’s common shares were actively traded at $13 at acquisition date. PWS disbursed $35,000 cash to pay for costs directly related to the acquisition of SWC and an additional $28,000 cash to pay for the cost of issuing the additional shares. PWS’s non-consolidated statement of financial position as at December 31, 2020, which was prepared after all PWS’s year-end adjustments had been processed but which does not include the investment made in SWC described in the points above, is as follows:

Pure Waste Systems Inc. Statement of financial position As at December 31, 2020 (in ’000s)

Cash $ 1,900 Accounts & other receivables 900 Inventory 865 Land 540 Building (net) 1,300 Equipment (net) 950 Patent 920 Total assets $ 7,375 Accounts payable & accrued liabilities $ 1,120 Long-term debt 2,500 Common shares 500 Retained earnings 3,255 Total liabilities and equity $ 7,375

Required: Prepare PWS’s consolidated statement of financial position at the December 31, 2020, acquisition date.