Reference no: EM133148843
Question 1 - Xtra Corp. (XTC) previously acquired 100% of the common shares of New Tech Inc. (NTI). At time of acquisition the fair values of the NTI's identifiable net assets equaled their carrying values. XTC uses the cost method to account for its investment in NTI.
Your junior accountant has prepared draft consolidated financial statements for the year ended December 31, 2014, replicated below.
Xtra Corp. Consolidated statement of comprehensive income Year ended December 31, 2014
Sales and other income $3,000,000
Cost of sales $1,800,000
Gross margin $1,200,000
Depreciation expense $235,000
Other expenses $385,000
Income tax expense $250,000
Consolidated net income $330,000
Xtra Corp. Consolidated statement of financial position As at December 31, 2014
Assets
Cash $150,000
Accounts receivable and accruals $275,000
Inventory $450,000
Loan receivable $300,000
Property, plant and equipment - net $1,400,000
Goodwill $75,000
$2,650,000
Liabilities and shareholders' equity
Current liabilities $650,000
Long-term debt $1,000,000
Common shares $250,000
Retained earnings $750,000
$2,650,000
When reviewing the draft statements, you determine that there were some intercompany transactions and balances that were not eliminated during consolidation: XTC charged NTI an annual management fee of $25,000. $5,000 of this amount remained unpaid at year end.
XTC sold $200,000 of inventory to NTI and purchased $150,000 of inventory from NTI during the year. The transferred inventory was all resold to third parties during the year.
XTC loaned NTI $300,000, payable on demand on January 1, 2011. The $300,000 remained outstanding at year end. 4% interest is payable annually on January 1 each year.
NTI rents out a warehouse to XTC for $5,000 per month.
Required - Amend the consolidated financial statements to properly reflect the elimination of intercompany transactions and balances.
Question 2 - Rachel Ltd. owns 75% of Daniel Corp.'s common shares and accounts for its investment using the cost method. On June 30, 2012, Rachel sold Daniel a parcel of land for $300,000 that it had originally paid $200,000 for. On August 31, 2014, Daniel resold this land to an outside party for $350,000. Other information of note:
Both companies have a December 31 year end and the tax rate for both companies are 30%.
The land parcel mentioned above is the only land owned by the consolidated entity.
Neither company reported a deferred tax asset or liability on its stand-alone SFP for the years ended December 31, 2011 to December 31, 2014.
Required -
a) Prepare a schedule that sets out the unrealized intercompany profit on the sale of the land on both a pre-tax and after-tax basis.
b) What amount will be reported for land on Rachel's consolidated SFP as at each of December 31, 2011, 2012, 2013 and 2014?
c) What amount will be reported as a deferred tax asset on Rachel's consolidated SFP as at each of December 31, 2011, 2012, 2013 and 2014?
d) What amount will be reported as the pre-tax and after-tax gain on sale of land on the consolidated SCI for each of the years ended December 31, 2012, 2013 and 2014? For each year, how much of this is attributable to Rachel and how much is attributable to Daniel?
e) Assume that the initial sale of land was an upstream sale, and that Rachel subsequently sold the land to an outside party for $350,000. For the year ended December 31, 2014, how much of the after-tax gain sale on land is attributable to each of Rachel and Daniel.