Reference no: EM132719805

On January 1, 20X4, Robinson Corp. (RC) and Bedford Ltd. (BL) formed a joint venture they named Pontefract UK Inc. (PUK). All three companies report their financial results in accordance with IFRS and have a December 31 year end. The income tax rate for all three companies is 20%.

On the January 1, 20X4, the day the joint venture was formed, RC contributed land and buildings with a fair value of $1,000,000 in exchange for a 70% interest in PUK. At the date of contribution:

1. The fair value and carrying value of the land was $480,000.
2. The fair value of the building was $520,000. It originally cost $600,000 and its carrying value was $430,000.
3. The remaining useful life of the building at the time of contribution was 15 years and the estimated residual value of the building was $0.

Select financial information for 20X5 and 20X4 for PUK follows. The fair value of PUK's identifiable net assets did not differ from their net book value.

Pontefract UK Inc.
Select financial information
As at December 31 / year ended December 31

                                                                              20X5                     20X4
Accounts receivable - due from RC             $ 42,000            $ 68,000
Accounts payable - due to RC                    79,000              12,000
Common shares                                     1,000,000           1,000,000
Retained earnings                                    265,000              200,000
Net income                                             215,000                 200,000

During 20X4 and 20X5, the following intercompany inventory transactions took place between PUK and RC:

Year20X4

Sale amount $100,000
Gross margin 25%
Inventory unsold at year end $40,000
Type of sale Upstream - PUK to RC

Year20X5

Sale amount 60,000
Gross margin 22%
Inventory unsold at year end 18,000
Type of sale Upstream - PUK to RC

• Both PUK and RC use the first in, first out (FIFO) cost method to value their inventories.
• On December 28, 20X5, RC sold equipment having a fair value of $62,000 to PUK for $62,000 cash. The book value at the time of sale was $58,000 and the original cost was $70,000. recognized on assets in the month they are acquired. A full month's depreciation is recognized on assets in the month they are disposed of.
• All transactions between PUK and RC were deemed to have commercial substance. RC has already calculated the income tax expense for the year, and therefore any tax effects will have to be recorded separately.

Required:

Problem a) Prepare the journal entry to record RC's initial investment in PUK on January 1, 20X4. Include a journal entry to record the tax deferral required. For all entries, provide a brief explanation as to the nature of the entry.

Problem b) Prepare journal entries to reflect all events during 20X5 that affect the net balance of RC's investment in PUK account. Ensure that you provide support for your calculations. Also remember to provide a brief explanation for each journal entry as to its nature.