Comment on the quality of earnings of T Inc

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Reference no: EM132759227

Question - T Inc. is a USA public company that cultivates and harvests cannabis plants and sells cannabis products into the USA recreational and medical markets. B Inc. is a USA public company that dries and cures harvested cannabis buds and processes it into cannabis products.

The following information is relevant to the two companies:

B Inc. has 25 million common shares and 2 million convertible debentures outstanding. Each debenture can be converted into 1 common share.

T Inc. owns 3.125 million common shares of B Inc. and owns all the convertible debentures of B Inc.

The Chief Operational Officer of T Inc., Mary-Ann, is a member of the board of directors of B Inc.

The two companies signed a "tolling" agreement in 2017 whereby B Inc. would dry and cure all of T Inc.'s harvested cannabis plants (raw materials) and process it into a final product that can be sold to the final consumer. T Inc. kept ownership of the raw materials and final product throughout the process and paid B Inc. a fee for its services.

On July 1, 2019, the two companies agreed to cancel the tolling agreement. During the period July 1 to December 31, 2019, T Inc sold raw materials to B Inc. for $12 million. B Inc. processed the raw materials into a final cannabis product (the same way as it did under the tolling agreement) and sold it to T Inc. for $20 million, who in turn sold the final product for $22 million in 2020.

T Inc. recorded revenue of $36 million in 2019.

B Inc. recorded revenue of $32.5 million in 2019, consists of tolling fees of $8 million and sale of cannabis products of $24.5 million (it also sold to companies other than Dagga Inc.).

T Inc. uses FVTOCI (fair value through other comprehensive income) to account for its investment in B Inc.

Both companies have a December 31 year-end.

REQUIRED -

a. Explain in detail how T Inc. should classify its investment in B Inc. by referring to IFS10 - Consolidated Financial Statements and/or IAS28 - Investments in Associates and Joint Ventures, as applicable.

b. Explain in detail how T Inc. should account for the transactions with B Inc. in its 2019 financial statements.

c. What should T Inc. disclose regarding its transactions with B Inc. under IFRS8 - Operating Segments? Why?

d. Comment on the quality of earnings of T Inc. for 2019.

Reference no: EM132759227

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