Question

The statements of financial position of Prime Inc. and Variable Ltd. on December 31,
Year 11, were as follows:
Variable's manufacturing facility is old and very costly to operate. For the year ended December 31, Year 11, the company lost money for the first time in its history. Variable does not have the financial ability to refurbish the plant. It musteither cease operations or find a partner to carry on operations.
On January 1, Year 12, Prime agreed to provide an interest-free loan of $200,000 to Variable on the following terms and conditions:
• Prime Inc. would be hired by Variable to refurbish the manufacturing facility at a fixed cost of $200,000 and would be retained to manage the business.
• Prime Inc. would have full authority to make all major operating, investing, and financing decisions related to Variable.
• The ordinary shares of Variable were valued at $208,000 as at January 1, Year 12.
Prime has the option to buy the shares of Variable at any time after January 1, Year 17, at $208,000 plus any dividends in arrears.
• The existing shareholders of Variable would be guaranteed a cumulative dividend of 8% a year on the value of their shares. Prime would receive the residual profits after the dividends were paid to the ordinary shareholders.
Variable earned income of $200,000 and paid dividends of $50,000 over the five-year period ended December 31, Year 16. The statements of financial Variable earned income of $200,000 and paid dividends of $50,000 over the five-year period ended December 31, Year 16. The statements of financial position of Prime Inc. and Variable Ltd. on December 31, Year 16 were as follows:
Assume that Variable is a variable interest entity and Prime is the primary beneficiary. The manufacturing facility had an estimated remaining useful life of 10 years as at January 1, Year 12. The long-term debt matures on December 31, Year 21. Prior to Year 12, Prime had no business relations with Variable.
Required:
(a) Calculate consolidated retained earnings at December 31, Year 16.
(b) Prepare a consolidated statement of financial position for Prime at December 31, Year 16.
(c) Use the definition of a liability to explain the rationale for including the liabilities of the variable interest entity on the consolidated statement of financial position for the primary beneficiary.


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  • CreatedJune 08, 2015
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