Quint’s Fly Tying Corp. (QFT) and Marshall’s Kiteboard

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. (LLF).

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 depreciation

Fair value

(at the date of transfer)

Est. residual 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

4. All companies report their financial results in accordance with IFRS and have a common year-end of December 31.

5. All companies use the first-in, first-out (FIFO) cost formula to value their inventories.

6. 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.