Ronen Corporations Year 2 financial statements disclosed the following transaction with MIL, a nonconsolidated special purpose entity

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Ronen Corporation’s Year 2 financial statements disclosed the following transaction with MIL, a nonconsolidated special purpose entity (SPE) that was formed by Ronen: 

In June Year 2, MIL purchased dark fibre optic cable from Ronen for a purchase price of $100 million. MIL paid Ronen $30 million in cash and the balance in an interest-bearing note for $70 million. Ronen recognized $67 million in pretax earnings in Year 2 related to the asset sale. 

Investigators later discovered that MIL was in many ways controlled by Ronen. By selling goods to SPEs that it controlled but did not consolidate, did Ronen overstate its earnings? 


Required 

Determine how this transaction should have been accounted for assuming that.

(a) Ronen controlled MIL and used consolidated financial statements to report its investment in MIL; 

(b) Ronen had significant influence over MIL and used the equity method to report its investment;

(c) Ronen did not have control or significant influence over MIL, but MIL was considered a related party and Ronen had to apply IAS 24 Related Party Disclosures.

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Modern Advanced Accounting In Canada

ISBN: 9781260881295

10th Edition

Authors: Hilton Murray, Herauf Darrell

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