Toronto Cricket Property Inc. (TPI) has been incorporated with the purpose of build and operate a world-class cricket stadium outside Toronto. The land on which the stadium will be build is currently owned by Wickets Inc. (WI) WI acquired the land 15 years ago for $3.5 million. The current fair value of the land is $6 million. WI will contribute the land to TPI in return for 30% share in TPI’s common shares. Third Slip Inc. (TSI), will contribute $14 million for the other 70% of TPI’s common shares. WI is 100% owned by Mr. Rambo and TSI is 100% owned by Mr. Smith.

According to the terms of TPI’s shareholders’ agreement, Mr. Rambo and Mr. Smith must agree on all major operating, financing and investment decisions of TPI. If not, the property and development will be sold on the open market and TPI will be wound up.

Mr. Rambo has approached you to advise him on how WI should account for its investment in TPI. He was considering using the cost method. The bank that will provide the debt financing to WI requires a debt-to-equity ratio of no more than 3:1.

Questions:

1. How should WI’s investment in TPI be reported on the financial statements of WI? Provide arguments to support your recommendations.

2. How should WI account for the contribution of the land to TPI?

3. What impact will the adoption of the reporting method have on TPI’s debt-to-equity ratio, relative to using the cost method? Explain.

Answer rating: 100% (QA)

a Mr Ram bo should account for WI s investment in T PI using the equity method The equity method is a reporting method used when one company has a sig... View the full answer