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Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-1

Chapter 5 Case Solutions

Part A: Hypothetical Case Studies to Practice using the Codification and

eIFRS

Case 3: Supplyrite Business Combination Case Study

Requirement A: Business Combination Accounting under US GAAP

1. List the authoritative guidance under U.S. GAAP for this transaction.

Acquisition-Related Cost [805-10-65-1]:

“Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those

costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or

consulting fees; general administrative costs, including the costs of maintaining an internal

acquisitions department; and costs of registering and issuing debt and equity securities. The

acquirer shall account for acquisition-related costs as expenses in the periods in which the costs

are incurred and the services are received, with one exception. The costs to issue debt or equity

securities shall be recognized in accordance with other applicable GAAP.”

Acquisition-Related Costs [805-10-25-23]:

Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those

costs include finder’s fees; advisory, legal, accounting, valuation, and other professional

or consulting fees; general administrative costs, including the costs of maintaining an

internal acquisitions department; and costs of registering and issuing debt and equity

securities. The acquirer shall account for acquisition-related costs as expenses in the

periods in which the costs are incurred and the services are received, with one exception. The

costs to issue debt or equity securities shall be recognized in accordance with other applicable

GAAP.

Calculation of goodwill: [805-30-30-1]:

The acquirer shall recognize goodwill as of the acquisition date, measured as the excess of

(a) over (b):

a. The aggregate of the following:

1. The consideration transferred measured in accordance with this Section, which

generally requires acquisition-date fair value (see paragraph 805-30-30-7)

2. The fair value of any noncontrolling interest in the acquiree

3. In a business combination achieved in stages, the acquisition-date fair value of the

acquirer’s previously held equity interest in the acquiree.

b. The net of the acquisition-date amounts of the identifiable assets acquired and the

liabilities assumed measured in accordance with this Topic.

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-2

Identification of intangible assets [805-20-25-4]:

The acquirer’s application of the recognition principle and conditions may result in

recognizing some assets and liabilities that the acquiree had not previously recognized as

assets and liabilities in its financial statements. For example, the acquirer recognizes the

acquired identifiable intangible assets, such as a brand name, a patent, or a customer

relationship, that the acquiree did not recognize as assets in its financial statements because it

developed them internally and charged the related costs to expense.

Measurement principle [805-20-30-1]:

The acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any

noncontrolling interest in the acquiree at their acquisition-date fair values.

Acquisition method: [805-10-25-1]:

An entity shall determine whether a transaction or other event is a business combination by

applying the definition in this Subtopic, which requires that the assets acquired and liabilities

assumed constitute a business. If the assets acquired are not a business, the reporting entity

shall account for the transaction or other event as an asset acquisition. An entity shall account

for each business combination by applying the acquisition method.

FASB 805-50-S99-1 regulates that purchase transactions that result in an entity becoming substantially

wholly owned (as defined in Rule 1-02(aa) of Regulation S-X) establish a new basis of accounting for the

purchased assets and liabilities. [SAB TOPIC 5.J, paragraph Q1 Response, sequence 83] ]

[When the form of ownership is within the control of the parent the basis of accounting for purchased

assets and liabilities should be the same regardless of whether the entity continues to exist or is merged

into the parent's operations. Therefore, Company A's cost of acquiring Company B should be "pushed

down," i.e., used to establish a new accounting basis in Company B's separate financial statements. FN5

[SAB TOPIC 5.J, paragraph Q1 Response, sequence 84] ]

2. Compute the purchase price of this transaction.

Steps of acquisition method [805 - 10 - 05 - 4] :

The acquisition method requires all of the following steps: a. Identifying the acquirer.

[8 05 - 10 - 20] acquirer: The entity that obtains control of the acquire. In this case, acquirer is Supplyrite.

b. Determining the acquisition date. [8 05 - 10 - 20] acquisition date: The date on which the acquirer obtains control of the acquiree . In this case, The acquisition date is June 30,2009.

c. Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.

d. Recognizing and measuring goodwill or a gain from a bargain purchase.

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-3

Acquistion Cost (cash paid and note issued) 37,500,000 10,000,000 $47,500,000

Fair Value of Assets Received

Fixed Assets

Land 1,250,000

Buildings 3,475,000

Transport ation Equipment 750,000

computer Equipment 675,000

Furniture 55,000 6,205,000

Intangible Assets

Customer Relat ionships 8,675,000

Trade Name 2,325,000

Non-compet e Agreement 1,295,000 12,295,000

Current Assets

Accounts Receivabl e 17,000,000

Inventory 21,500,000

Prepai d Assets 189,500

Other Assets 350,000

Cash 35,500 39,075,000

Total Assets Received $57,575,000

Current Li abili ties

Notes Payable 4,000,000

Accounts Payable 10,390,000

Accrued Expenses 3,710,000

Deferred Compensation 5,600,000 23,700,000 $23,700,000

Total N et Assets Received ($33,875,000)

Net Goodwill Valuation $13,625,000

Supplyrite Case

Calculation of Goodwill

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-4

a. Prepare Equipco’s opening balance sheet as of July 1, 20X9, starting with the June 30, 20X9 closing balance sheet and including any adjustments necessary.

Equipco

Opening Balance Sheet Allocation

July 1, 20X9

Adj ust ed

Opening F air Val ue Opening

Balance Adjustments Bal ance

Assets

Current Assets

Cash $ 35,500 $ $ 35,500

Accounts receivable 17,000,000 17,000,000

Inventory 19,000,000 (1) 2,500,000 21,500,000

P repaid expenses 189,500 189,500

Total current asset s 36,225,000 38,725,000

Property and Equi pment

Land 500,000 (2) 750,000 1,250,000

Buildings 2,250,000 (2) 1,225,000 3,475,000

T ransportat ion Equipment 900,000 (2) (150,000) 750,000

Computer Equipment 535,000 (2) 140,000 675,000

F urniture and Fixtures 150,000 (2) (95,000) 55,000

4,335,000 6,205,000

Less accumul ated depreciat ion 3,100,000 (2) (3,100,000) -

1,235,000 6,205,000

Goodwill 8,000,000 (3) (8,000,000) 13,625,000

(7) 13,625,000

Intangible Assets

Customer relationships - (4) 8,675,000 8,675,000

T radename - (4) 2,325,000 2,325,000

N on-compete agreements - (4) 1,295,000 1,295,000

- 12,295,000

Other assets 350,000 350,000

$ 45,810,000 $ $ 71,200,000

Liabilities and Stockholders' Equity

Current Li abili ties

N ote payable, bank $ 4,000,000 $ $ 4,000,000

N ote payable, former shareholder, Equi pco - (5) 2,000,000 2,000,000

Accounts payable 10,390,000 10,390,000

Accrued expenses 3,710,000 3,710,000

Total current liabilities 18,100,000 20,100,000

Long-term liabiliti es

N ote payable, former shareholder, Equi pco - (5) 8,000,000 8,000,000

D eferred Compensation 5,600,000 5,600,000

5,600,000 13,600,000

Stockholders' Equity

Common stock 10,000 10,000

Additional paid in capital 13,000,000 (6) 24,490,000 37,490,000

Retained earnings 9,100,000 (6) (9,100,000) -

22,110,000 37,500,000

$ 45,810,000 $ $ 71,200,000

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-5

Acquisiti on Accoun ti ng Entry Expl an ations:

(1) T o write up inventory t o fair value (i.e., eliminate LIFO reserves).

(2) T o adjust propert y and equipment to fair value, based upon appraisal s recei ved by the Company.

(3) T o write off previously recorded goodwill.

(4) T o record amortizable inta ngibl e assets identified as part of the purchase.

(5) T o record the note payable due to Eqipco's former owners.

(6)

(7) T o record goodwil l once all other intangi bles are identifi ed, val ued and recorded.

Notes:

1. Apply the provi sions of SFAS 141R (ASC 805), Business Combinations t o this transaction.

2. Equipco's total purchase price = $47,500,000 (cash of $37,500,000, note payable issued of $10,000,000).

Note: Write down accounts receivable and inventory reserves to zero and make other, appropri ate

adj ust ments. No reserves appear on opening balance sheet, since assets should be recorded at their fai r

value.

T o adjust equity to the tot al amount of cash consideration paid for Eqipco's stock.

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-6

Equipco

Opening Balance Sheet Allocation

July 1, 20X9

Adjusted

Opening Fair Value Opening

Balance Adjustments Balance

Assets

Current Assets

Cash $ 35,500 $ $ 35,500

Accounts receivable 17,000,000 17,000,000

Inventory 19,000,000 (1) 2,500,000 21,500,000

Prepaid expenses 189,500 189,500

Total current assets 36,225,000 38,725,000

Property and Equipment

Land 500,000 (2) 750,000 1,250,000

Buildings 2,250,000 (2) 1,225,000 3,475,000

Transportation Equipment 900,000 (2) (150,000) 750,000

Computer Equipment 535,000 (2) 140,000 675,000

Furniture and Fixtures 150,000 (2) (95,000) 55,000

4,335,000 6,205,000

Less accumulated depreciation 3,100,000 (2) (3,100,000) -

1,235,000 6,205,000

Goodwill 8,000,000 (3) (8,000,000) 13,625,000

(7) 13,625,000

Intangible Assets

Customer relationships - (4) 8,675,000 8,675,000

Tradename - (4) 2,325,000 2,325,000

Non-compete agreements - (4) 1,295,000 1,295,000

- 12,295,000

Other assets 350,000 350,000

Total Assets $ 45,810,000 $ $ 71,200,000

Liabilities and Stockholders' Equity

Current Liabilities

Note payable, bank $ 4,000,000 $ $ 4,000,000

Note payable, former shareholder, Equipco - (5) 2,000,000 2,000,000

Accounts payable 10,390,000 10,390,000

Accrued expenses 3,710,000 3,710,000

Total current liabilities 18,100,000 20,100,000

Long-term liabilities

Note payable, former shareholder, Equipco - (5) 8,000,000 8,000,000

Deferred Compensation 5,600,000 5,600,000

5,600,000 13,600,000

Stockholders' Equity

Common stock 10,000 10,000

Additional paid in capital 13,000,000 (6) 24,490,000 37,490,000

Retained earnings 9,100,000 (6) (9,100,000) -

22,110,000 37,500,000

Total Liabilities and Stockholders' Equity $ 45,810,000 $ $ 71,200,000

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-7

Acquisition Accounting Entry

Explanations:

Note: Write down accounts receivable and inventory reserves to zero and make other, appropriate adjustments. No

reserves appear on opening balance sheet, since assets should be recorded at their fair value.

(1) To write up inventory to fair value (i.e., eliminate LIFO reserves).

(2) To adjust property and equipment to fair value, based upon appraisals received by the Company.

(3)

To write off previously

recorded goodwill.

(4) To record amortizable intangible assets identified as part of the purchase.

(5) To record the note payable due to Equipco's former owners.

(6) To adjust equity to the total amount of cash consideration paid for Equipco's stock.

(7) To record goodwill once all other intangibles are identified, valued and recorded.

Notes: 1. Apply the provisions of SFAS 141R (ASC 805), Business Combinations to this transaction.

2. Equipco's total purchase price = $47,500,000 (cash of $37,500,000, note payable issued of $10,000,000).

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-8

Requirement B: Business Combination Accounting under IFRS

4. Reformat Equipco’s June 30, 20X9, balance sheet into an IFRS statement of financial position.

June 20X9

Unadjusted

Balance

Non-current Assets

Property plant and equipment

Land $500,000

Buildings and improvements 2,250,000

Transport ation Equipment 900,000

Computer Equi pment 535,000

Furniture and Fi xtures 150,000

4,335,000

Less accumul ated depreci ation 3,100,000

1,235,000

Goodwill 8,000,000

Other non-current assets 350,000

Total non-current assets 9,585,000

Current assets

Cash 35,500

Account s recei vable 17,000,000

Inventory 19,000,000

Prepai d expenses 189,500

Total current assets 36,225,000

Total assets $45,810,000

Current liabilities

Not e payable, bank 4,000,000

Account s payabl e 10,390,000

Accrued expenses 3,710,000

Total current liabilities 18,100,000

Non-current liabilit ies

Deferred Compensation 5,600,000

Total non-current l iabil ities 5,600,000

Total li abil ities 23,700,000$

Net Assets $22,110,000

Stockholders' equit y

Share Capital $10,000

Share Premium 13,000,000

Retained earnings 9,100,000

Total stoc kholders' equity $22,110,000

Equipco

IFRS

Statement of Financial Position

June 30, 20X9

5. List the authoritative guidance under IFRS for this transaction.

IFRS 3R has converged with US GAAP. See question 1 for discussion of related paragraphs.

6. Compute the purchase price of this transaction.

IFRS 3R has converged with US GAAP. See question 2 for allocation.

7. Prepare Equipco’s opening statement of financial position as of July 1, 20X9, starting with the June 30, 20X9 closing statement of financial position from requirement 4 above. Include necessary

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-9

adjustments. Note: For case study purposes, prepare the statement of financial position using the

required method under U.S. GAAP.

Adj ust ed

June30, 20X9 July 1, 20X9

Unadjusted Fair Value Opening

Balance Adj ust ments Bal ance

Non-current Assets

Property plant and equipment

Land $500,000 (2) 750,000 1,250,000$

Buildings and improvements 2,250,000 (2) 1,225,000 3,475,000

Transport ation Equipment 900,000 (2) (150,000) 750,000

Computer Equi pment 535,000 (2) 140,000 675,000

Furniture and Fi xtures 150,000 (2) (95,000) 55,000

4,335,000 6,205,000

Less accumul ated depreci ation 3,100,000 (2) (3,100,000) -

1,235,000 6,205,000

Goodwill 8,000,000 (3) (8,000,000) 13,625,000

(7) 13,625,000

Intangible Assets

Customer relationships - (4) 8,675,000 8,675,000

Tradename - (4) 2,325,000 2,325,000

Non-compete a greements - (4) 1,295,000 1,295,000

- 12,295,000

Other non-current assets 350,000 350,000

Total non-current assets 9,585,000 32,475,000

Current assets

Cash 35,500 - 35,500

Account s recei vable 17,000,000 17,000,000

Inventory 19,000,000 (1) 2,500,000 21,500,000

Prepai d expenses 189,500 189,500

Total current assets 36,225,000 38,725,000

Total assets $45,810,000 71,200,000$

Current liabilities

Not e payable, bank 4,000,000 4,000,000

Not e payable, former shareholder, Equipco 0 (5) 2,000,000 2,000,000

Account s payabl e 10,390,000 10,390,000

Accrued expenses 3,710,000 3,710,000

Total current liabilities 18,100,000 20,100,000

Non-current liabilit ies

Not e payable, former shareholder, Equipco (5) 8,000,000 8,000,000

Deferred Compensation 5,600,000 5,600,000

Total non-current l iabil ities 5,600,000 13,600,000

Total li abil ities 23,700,000$ 33,700,000$

Net Assets $22,110,000 $37,500,000

Stockholders' equit y

Share Capital $10,000 - 10,000

Share Premium 13,000,000 (6) 24,490,000 37,490,000

Retained earnings 9,100,000 (6) (9,100,000) -

Total stoc kholders' equity $22,110,000 37,500,000$

Equipco

IFRS

Statement of Financial Position

July 1, 20X9

Acquisition Accounting Entry

Explanations:

Note: IFRS disallows push-down accounting. For comparability with Requirement A, ignore that fact. Write down

accounts receivable and inventory reserves to zero and make other, appropriate adjustments. No reserves appear on opening

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-10

balance sheet, since assets should be recorded at their fair value.

(1) To write up inventory to fair value (i.e., eliminate LIFO reserves).

(2) To adjust property and equipment to fair value, based upon appraisals received by the Company.

(3)

To write off previously

recorded goodwill.

(4) To record amortizable intangible assets identified as part of the purchase.

(5)

To record the note payable due to Equipco's

former owners.

(6) To adjust equity to the total amount of cash consideration paid for Equipco's stock.

(7) To record goodwill once all other intangibles are identified, valued and recorded.

Notes: 1. Apply the provisions of IFRS 3(R), Business Combinations to this transaction.

2. Equipco's total purchase price = $47,500,000 (cash of $37,500,000, note payable issued of $10,000,000).

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-11

Case 4: Mesa Building Products Impairment Case Study

Requirement A: Impairment Analysis under U.S. GAAP

1. List the authoritative U.S. GAAP guidance that needs to be followed to address the auditors concerns regarding the potential impairment of certain asset classes held by La Paz.

2. Prepare a U.S. GAAP impairment analysis of La Paz’s intangible assets as of December 31, 20X8.

La Paz Home Renovations

ASC 350 and IAS 36 Impairment Analysis

12/31/20X8

Step 1 - Compare the fair value of th e re portin g un it/ CGU to th e carrying value of th e rep ortin g uni t/ CGU.

F air value of La P az H ome Renovations 30,000,000

Carrying val ue of La Paz Home Renovati ons 35,850,000

S ince fair market value i s less than book value, La P az has failed step one of ASC 350 (5,850,000)

This is the impairment under IAS 36's one st ep impairment process

Current assets 28,175,000

P roperty & equipment 5,500,000

Ot her asset s 350,000

Current l iabil ities (15,375,000)

Long-term liabilities (9,200,000)

Net assets before considering int angibl es 9,450,000

Net assets before considering intangibles 9,450,000

F air value of cust omer relati onships 7,500,000

F air value of the tradename 3,000,000

F air value of the covenant not to compete (includes write-down to fair market value) 250,000

Implied fair value of identifiable assets 20,200,000

Implied fair value of La Paz 30,000,000

Implied Goodwill 9,800,000

Goodwil l as recomputed 9,800,000

Goodwil l currently recorded 18,040,000

Impairment charge (8,240,000)

Step 2 - Perform a purchase pri ce allocati on as of th e impai rment analysis date to d etermi ne how much goodw ill

is impaired

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-12

3. Prepare La Paz’s balance sheet as of December 31, 20X8, including any adjustments necessary based on the valuation and appraisal discussed above. Please show the unadjusted December 31, 20X8 balance sheet,

along with a column and detail of all adjustments deemed necessary, which cross-foots to the final adjusted

December 31, 20X8 balance sheet.

La Paz Home Renovations Balance Sheet

December 31, 20X8 Balance Balance

Unadjusted Adjustments Adjusted Assets Current assets

Cash $ 75,000 $ 75,000

Accounts receivable 12,000,000 12,000,000

Inventory 16,000,000 16,000,000

Prepaid expenses 100,000 100,000

Total current assets 28,175,000 28,175,000

Property and equipment Land 1,000,000

1,000,000 Buildings and improvements 3,500,000

3,500,000 Transportation Equipment 885,000

885,000 Computer Equipment 125,000

125,000 Furniture and Fixtures 175,000

175,000 5,685,000

5,685,000 Less accumulated depreciation 950,000

950,000 4,735,000

4,735,000 Goodwill 18,040,000

(2) (8,240,000) 9,800,000 Intangible assets

Customer relationships, net of accumulated amortization of $2,125,000 6,375,000 6,375,000

Tradename, net of accumulated amortization of $500,000 2,000,000 2,000,000

Non-compete agreements, net of accumulated amortization of $1,000,000 750,000 (1) (500,000) 250,000

9,125,000 8,625,000

Other assets 350,000 350,000

Total Assets $ 60,425,000 $ 51,685,000

Liabilities and stockholders' equity Current Liabilities

Note payable, bank $ 8,000,000 $ 8,000,000

Note payable, former shareholder, La Paz 2,000,000 2,000,000

Accounts payable 3,000,000 3,000,000

Accrued expenses 2,375,000 2,375,000

Total current liabilities 15,375,000 15,375,000

Long-term liabilities Note payable, former shareholder, La Paz 4,000,000

4,000,000 Deferred Compensation 5,200,000

5,200,000 9,200,000

9,200,000 Stockholders' equity

Common stock 10,000 10,000

Additional paid in capital 41,340,000 41,340,000

Retained earnings (5,500,000) (1) (500,000) (14,240,000)

(2) (8,240,000)

35,850,000 27,110,000

Total liabilities and stockholders' equity $ 60,425,000 $ 51,685,000

Adjustment Explanations: (1) To adjust non-compete agreement to fair value ( SFAS 142; ASC 350, IAS 36) (2) To adjust goodwill to fair value based on impairment analysis (SFAS 142; ASC 350, IAS 36)

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-13

Requirement B: Impairment Analysis under IFRS

4. List the authoritative IFRS guidance that needs to be followed to address the auditors concerns regarding the potential impairment of certain asset classes held by La Paz.

5. Prepare an IFRS impairment analysis of La Paz’s intangible assets as of December 31, 20X8.

See solutions for numbers 1 and 2 above.

Mastery of Financial Accounting Research System Through Cases 2e, Chapter 5 Ch 5-14

Prepare La Paz’s statement of financial position as of December 31, 20X8, including any adjustments necessary

based on the valuation and appraisal discussed above. Show the unadjusted December 31, 20X8, statement of

financial position, along with a column and detail of all adjustments deemed necessary, which cross-foots to the

final adjusted December 31, 20X8 statement of financial position.

Dec 31, 20X8 Dec 31, 20X8

Unadjusted Balance

Balance Adjustments Adjusted

Non-current Assets

Property plant and equipment

Land $1,000,000 1,000,000$

Buildings and improvements 3,50 0,00 0 3,500,000

Transportation Equi pment 88 5,00 0 885,000

Computer Equipment 12 5,00 0 125,000

Furniture and Fixtures 17 5,00 0 175,000

5,685,000 5,685,000

Less accumulated depreciation 950,000 950,000

4,735,000 4,735,000

Goodwill 18,040,000 (1) (5,850,000) 12,190,000

Intangible Assets

Customer relationships, net of accumulated a mortization of $2,125,000 6,37 5,00 0 6,375,000

Tradename, net of accumulated amort ization of $500,000 2,00 0,00 0 2,000,000

Non-compete agreements, net of accumulated amortization of $500,000 75 0,00 0 (2) (500,000) 250,000

9,125,000 8,625,000

Other non-current assets 350,000 350,000

Total non-current assets 32,250,000 25,900,000

Current assets

Cash 75,000 75,000

Accounts receivable 12,000,000 12,000,000

Invent ory 16,000,000 16,000,000

Prepaid expenses 100,000 100,000

Total current assets 28,175,000 28,175,000

Total assets $60,425,000 54,075,000$

Current liabilities

Note pa yable, bank 8,000,000 8,000,000

Note pa yable, former shareholder, La Paz 2,000,000 2,000,000

Accounts payable 3,000,000 3,000,000

Accrued expenses 2,375,000 2,375,000

Total current liabilities 15,375,000 15,375,000

Non-current liabilit ies

Note pa yable, former shareholder, La Paz 4,000,000 4,000,000

Deferred Compensation 5,200,000 5,200,000

9,200,000 9,200,000

Total li abil ities 24,575,000$ 24,575,000$

Net Assets $35,850,000 29,500,000$

Stockholders' equit y

Share capital $10,000 10,000

Share premi um $41,340,000 41,340,000

Ret ained earnings (5,500,000) (1) (5,850,000) (11,850,000)

(2) (500,000)

Total stoc kholders' equity 35,850,000$ 29,500,000$

A djustment Ex planations:

(2) To adjust goodwill to fair value based on impairment analysis (IA S 36)

(1) To adjust non-compete agreement to fair value (IAS 36)

La Paz Home Renovations

Statement of Financial Position

December 31, 20X8