Quint’s Fly Tying Corp. (QFT) and Marshall’s Kiteboard Corp. (MKC) entered into a joint venture (JV) agreement on January 1, 20X3, that resulted in the creation of Live Life to Its Fullest Ltd. Other pertinent facts follow:
1. At the time of inception, QFT contributed land and buildings with a fair value of $600,000 in exchange for a 60% interest in the JV. The transaction was deemed to have commercial substance. Relevant information is as follows:
Cost Accumulated Fair value Est. residual
depreciation (at the date of transfer) value
Land $210,000 — $250,000 N/A N/A
Building 400,000 $100,000 350,000 $— 10 years
Select financial information for LLF follows. The fair value of LLF’s identifiable net assets did not differ materially from their net book value.
Live Life to Its Fullest Ltd.
Select financial information
As at December 31 // year ended December 31
20X5 20X4
Accounts receivable — due from QFT $ 45,000 $ 36,000
Accounts payable — due to QFT 86,000 79,000
Common shares 1,000,000 1,000,000
Retained earnings 369,000 223,000
Net income 346,000 163,000
There were no intercompany transactions between the JV (LLF) and the venturers, QFT and MKC, in 20X4 and 20X5 other than transactions pertaining to inventory as detailed below.
Year Sale amount Gross margin Inventory unsold
at year-end Type of sale
20X4 $70,000 30% $10,000 Downstream QFT to LLF
20X5 90,000 30% 35,000 Downstream QFT to LLF
20X5 40,000 40% 5,000 Upstream LLF to QFT
2. All companies report their financial results in accordance with IFRS and have a common year-end of December 31.
3. All companies use the first-in, first-out (FIFO) cost formula to value their inventories.
4. All companies depreciate their depreciable assets on a straight-line basis.7. The income tax rate for all
companies is 25%.
Required:
a) Prepare the journal entry to record QFT’s initial investment in LLF on January 1, 20X3. Include a journal entry to record any tax deferral required. For all entries shown, include a brief explanation as to the nature of the entry.
b) Prepare journal entries to reflect all events during 20X5 that affect the net balance of QFT’s investment in the LLF account. Ensure that you provide support for your calculations. Also, remember to provide a brief explanation for each journal entry as to its nature.