QUESTION 3 (9 marks)

Your firm has recently been chosen as the auditor of Maple Products Unlimited, a company which was formed on October 15, 2020. Mr. Sweet owns 70% of the voting shares of Maple Products Unlimited and his wife owns the remaining 30%. On October 31, 2020, Maple Products Unlimited acquired all of the voting shares of Buckets, a company which was founded by Mr. Sweets wife four years ago. Buckets will sell maple sap collecting supplies to Maple Products Unlimited at a gross profit of 25%. In a meeting with Mr. Sweet, he asks your audit partner the following questions.

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 Buckets is a profitable company and it seems unfair that the profits of this company will not be reflected in Maple Products financial statements. (3 marks)

Buckets owns some metal shaping equipment with a net book value of $45,000. At the time that Maple Products Unlimited bought Buckets was estimated to be worth $45,000. However, our tax advisor has suggested that Buckets should sell the equipment to Maple Products Unlimited for $40,000. The equipment is really only currently worth $40,000 because it is becoming obsolete due to the recent introduction of superior technology. Buckets 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)

c) 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. Sweets questions, for use by your audit partner in a follow-up meeting with Mr. Sweet to discuss his concerns. (3 marks per item; 9 marks total).