QUESTION 1 (9 marks) Your firm has recently been chosen as the auditor of Rocky Mountain Unlimited, a company which was formed on October 15, 2014. Mr. Summit owns 70% of the voting shares of Rocky Mountain Unlimited and his wife owns the remaining 30%. On October 31, 2014, Rocky Mountain Unlimited acquired all of the voting shares of Foothills, a company which was founded by Mr. Summit's wife four years ago. Foothills will sell Rocky Mountain chocolate making supplies to Rocky Mountain Unlimited at a gross profit of 25%. In a meeting with Mr. Summit, he asks your audit partner the following questions. a) Why do accounting standards require that profits on sales of inventory between a subsidiary and its parent must be eliminated? My wife is working hard to ensure that Foothills is a profitable company and it seems unfair that the profits of this company will not be reflected in Rocky Mountain' financial statements. (3 marks) b) Foothills owns some packaging equipment with a net book value of $45,000. At the time that Rocky Mountain Unlimited bought Foothills was estimated to be worth $45,000. However, our tax advisor has suggested that Foothills should sell the equipment to Rocky Mountain Unlimited for S40,000. The equipment is really only currently worth $40,000 because it is becoming obsolete due to the recent introduction of superior technology. Foothills can use the tax loss that the sale will generate because the company has been paying a lot of income taxes since it was formed. Assuming the sale takes place, how should we account for this equipment? (3 marks) An intercompany gain on the sale of land is eliminated in the preparation of the consolidated statements in the year that the gain was recorded. Will the gain be eliminated in the preparation of subsequent consolidated statements? Explain (3 marks) REQUIRED Draft responses to each of Mr. Summit's questions, for use by your audit partner in a follow-up meeting with Mr. Summit to discuss his concerns. (3 marks per item; 9 marks total)