On January 1, Year 1, BAT Company acquired 60 percent of the common shares of STIC Company and obtained control over STIC. Of the $300,000 acquisition differential, $200,000 was allocated to land and $100,000 was allocated to goodwill. Deferred income tax implications related to the acquisition differential were not recognized. During Year 2, BAT sold inventory to STIC for $100,000 and earned a gross margin of 30 percent. At the end of Year 2, STIC still had the goods purchased from BAT in its inventory.

1. What would be the impact on the debt-to-equity ratio if deferred income taxes related to the acquisition differential were recognized on the consolidated balance sheet at the date of acquisition?

2. What would be the impact on the return on shareholders equity attributable to BATs shareholders for the Year 2 consolidated financial statements if BAT had joint control rather than control over STIC?

(same choices for both questions)

Multiple Choice

A. It would increase.

B. It would decrease.

C. It would not be affected.

D. The impact cannot be determined based on the information provided.