Le Gourmand is one of Canada’s most famous French restaurants. Located 20 kilometers north of Toronto, it draws diners from all over the province to enjoy its fare. One of the attractions at the restaurant is its private- label brand of wines— produced, bottled, and aged by Ombre Wines Ltd., located in the Niagara Peninsula.
The owner of Le Gourmand, Francois LeClerc, decided on New Year’s Eve to increase the ties between Ombre Wines Ltd. and Le Gourmand Inc.; Le Gourmand is Ombre Wines’ largest customer. On January 2, 20X5, Le Gourmand Inc. purchased 3,000 common shares of Ombre Wines Ltd. on the open market for $ 207,000. This left very few common shares still available to the public. The preferred shares were owned by the founders of Ombre Wines, but their children owned many of the common shares and were gradually selling them because none of them wished to take over the business. Ombre Wines Ltd.’s owners’ equity at January 2, 20X5, was:
Preferred shares:
Cumulative, 6%, non- voting;
2,000 authorized, 1,000 issued................. $ 20,000
Common shares:
7,000 authorized, 6,000 issued.................... 137,000
Retained earnings...................... 170,000 $ 327,000
At January 1, 20X5, the carrying values of Ombre Wines Ltd.’ s assets approximated fair values except as follows:

In September 20X5, Ombre Wines sold one of the parcels of land that it had been holding as an investment (both lots had been put on the market but only one had sold). The proceeds were $ 18,000. The real estate market had declined badly in 20X5. The purchaser, however, had also discovered that Ombre Wines had been using the vacant lots to dump some residue from the wine processing; the land would not be ready to produce crops for at least five years. The purchaser had originally been willing to offer $ 24,000, but reduced this to $ 18,000 when the land use was confirmed by his lawyer.
Sales from Ombre Wines to Le Gourmand totaled $ 100,000 and $ 120,000 in 20X4 and 20X5, respectively. At December 31, 20X4, Le Gourmand’s inventory contained $ 45,000 of Ombre Wines’ wine. A year later, the inventory included $ 60,000 of Ombre Wines’ wine. Of the ending inventory acquired from Ombre Wines, $ 20,000 had not been paid for as at December 31, 20X5. In settlement of part of this payable, Le Gourmand sent some old office equipment to Ombre Wines. The equipment had cost $ 10,000 and had a net carrying value at December 31, 20X5, of $ 1,000. Ombre Wines agreed to accept the equipment and to forgive $ 5,000 of the receivable from Le Gourmand, leaving a balance of $ 15,000 due from the restaurant. Ombre Wines did not depreciate this office equipment during 20X5.
Ombre Wines’ most recent dividend declaration was December 31, 20X3.
The amortization policy for all capital assets is straight-line.
Francois LeClerc is looking forward to the cash flow from dividends that he hopes his company will receive from Ombre Wines Ltd. each year.
The statements of financial position of the two companies at December 31, 20X5, and the statements of comprehensive income for the year then ended are presented in Exhibit A below.
Exhibit A
Statements of Financial Position
December 31, 20X5

Describe the alternative accounting treatments available to Le Gourmand Inc. for its investment in Ombre Wines Ltd. Describe why each alternative is an option and conclude which treatment is appropriate based on your description. Calculate Le Gourmand Inc.’s net income for the year ended December 31, 20X5. Show details of allcalculations.

  • CreatedMarch 13, 2015
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