Question: Nici Limited NL is a Canadian public company that operates

Nici Limited (NL) is a Canadian public company that operates in the swimsuit industry. They design, develop, and manufacture swimsuits that are then sold to retail stores across Canada. In the past, the manufacturing and delivery to retail stores was outsourced by NL to Chin Enterprises (CE). However, during the current year, NL acquired 55% of CE by acquiring the shares so that NL can have more control over the entire process, instead of outsourcing. The remaining 45% was acquired by another company, Gil Incorporated, as NL will not be able to use all of the manufacturing facilities and capabilities.
The total acquisition price was $3,200,000 with NL paying $1,760,000 and Gil paying $1,440,000. The fair market values as at the acquisition date were $1,750,000 for the warehouse, $800,000 for the machinery and equipment, and $200,000 for the delivery vehicles. The corresponding book values and useful lives were $1,200,000 and 10 years for the warehouse, $500,000 and 5 years for the machinery and equipment, and $100,000 and 3 years for the delivery vehicles.
NL recognized its 55% share of the investment on its balance sheet as Investment in CE and they plan to use the equity method to account for the investment, arguing that it is a joint venture, with Gil being the other venturer.
The owner of CE had recently passed away and there was no succession plan in place. CE had no liabilities at the time of the sale of the shares. NL will have first priority over manufacturing availabilities and its company president and the vice president of finance will be overseeing CE's operations. Gil's controller will be assisting with CE's accounting function and will be able to appoint two of the six seats of the board of directors, while NL can appoint the remaining four seats.
NL's bank agreed to help finance this acquisition; however, as part of the agreement, NL agreed to allow a consultant appointed by the bank to examine the details of the acquisition in order to determine if it was accounted for correctly. You are the consultant and have obtained the relevant information from NL's controller. After discussions with NL's controller, it was also revealed that NL employees are entitled to an annual bonus based on net income.
Prepare a report that analyzes the transaction and how it was accounted for by NL in net income. Discuss the effect on the bonus calculation as a result of the presentation chosen for the transactions.

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  • CreatedJune 09, 2015
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