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.

Answer rating: 100% (QA)

a Journal entry for investment by QFT Land ac 250000 Building ac 350000 Income Tax expense 22500 Sha... View the full answer