Verez
Limited owns 90% of Consior Inc. During 2011, Verez acquired a machine from
Consior in exchange for its own used machine. Both companies are in the
consulting business. The agreed exchange amount is $1,000, although the
transaction is non-monetary. Consior Inc. carries its machine on its books at a
carrying amount of $700, whereas Verez carries its machine on its books at a
carrying amount of $900. Neither company has a balance in the contributed
surplus account relating to previous related-party transactions. Both Verez and
Consior follow ASPE.
Instructions
Using
the related-party decision tree in Illustration 23-5, prepare the journal
entries to record the exchange for both Verez and Consior under the following
assumptions.
(a)
The transaction is not in the normal course of operations for either company,
and the transaction has commercial substance.
(b)
The transaction is not in the normal course of operations for either company,
and the transaction does not have commercial substance.
(c)
The transaction is in the normal course of operations for each company, and the
transaction has commercial substance.
(d)
The transaction is in the normal course of operations for each company, and the
transaction does not have commercial substance.
(e)
Briefly explain how your answers to parts (a) through (d) would change if both
companies were to follow IFRS.
(a) The transaction is not in the
normal course of operations and the transaction has commercial substance:
Verez Limited:
|
Machinery
(new).........................
|
700
|
|
|
Retained
Earnings.......................
|
200
|
|
|
Machinery (old)....................
|
|
900
|
Consior Inc.:
|
Machinery
(new).........................
|
900
|
|
|
Contributed Surplus................
|
|
200
|
|
Machinery (old)....................
|
|
700
|
Since the transaction is not in the
normal course of operations for the two companies and there is no change in the
ownership interest in the machinery, the transaction is measured at its
carrying amount.
(b) The transaction is not in the
normal course of operations and the transaction does not have commercial
substance:
The entries are the same as for
part (a). Since the transaction is not in the normal course of operations for
the two companies and there is no change in the ownership interest in the
machinery, the transaction is measured at its carrying amount regardless of
whether the transaction has commercial substance or not.
A related party transaction that is
not in the normal course of operations requires additional support for the
substance of the transaction in order for the exchange amount to be used for
financial reporting purposes. This is considered to occur when a change in the
ownership interests in the item transferred is substantive and the exchange is
supported by independent evidence. In this case, the exchange amount is more
representative of the economic reality of the transaction than the carrying
amount and is sufficiently reliable to be used for financial reporting
purposes.
(c) The transaction is in the
normal course of operations and the transaction has commercial substance:
Verez Limited:
|
Machinery
(new).........................
|
1,000
|
|
|
Gain on sale of machine............
|
|
100
|
|
Machinery (old)....................
|
|
900
|
Consior Inc.:
|
Machinery
(new).........................
|
1,000
|
|
|
Gain on sale of machine............
|
|
300
|
|
Machinery (old)....................
|
|
700
|
As long as the amount of the
exchange is supported by independent evidence, the transaction is recorded at
the exchange amount and a gain or loss is recorded on each company’s income
statement.
(d) The transaction is in the
normal course of operations and the transaction does not have commercial
substance:
The entries are the same as for
part (a). A non-monetary transaction that does not have commercial substance
would be measured at the carrying amount. In such a case, the adjustment to
retained earnings is considered a capital payment by Verez and a capital
receipt by Consior.
(e) Under PE
GAAP/ASPE, certain related-party transactions must be remeasured to the
carrying amount of the underlying assets or services that were exchanged. This
is the case if the transaction is not in the normal course of business, there
is no substantive change in ownership, and/or the exchange amount is not
supported in independent evidence. Transactions that are in the normal course
of business that have no commercial substance must also be remeasured, and
where the transaction is also a non-monetary transaction, no gain or loss
should be recognized.
However, note that IFRS does not mandate
re-measurement of related-party transactions. Therefore, the transactions would
be recorded as in part (c) for all scenarios.
