3 after the acquisition of peaceful by erl sufficient

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3. After the acquisition of Peaceful by ERL, sufficient business was directed to Peaceful to commence the process of utilizing the tax loss carry-forwards. During fiscal Year 5, the benefit realized from the utilization of the loss carry- forwards amounted to $2.36 million and was credited to extraordinary gain on the income statement. 4. Excess cemetery land (acquired in the purchase of Tranquil) was sold in December Year 4 at a gain of $1.2 million. The proceeds were reported as “other revenue.” 5. One working paper entitled “Land” contains the following note: “Land record- ed on the books at $2,305,600 and called ‘Sunset Hill’ is undeveloped and is not scheduled for use until Year 8 or Year 9. It is subject to a Year 5 government order requiring that ERL clear up environmental concerns on the site. I asked one employee what the cost would be and was told ‘half a million dollars.’ No amount was accrued, because of uncertainty.”
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CHAPTER 4 CONSOLIDATED STATEMENTS ON DATE OF ACQUISITION 155 6. A working paper entitled “Management Compensation” shows that senior management shares in what is called a “Bonus Pool.” The bonus is 15 percent of income before income taxes. Required: Prepare the memo. ( CICA adapted ) Case 3 Factory Optical Distributors (FOD) is a publicly held manufacturer and distributor of high-quality eyeglass lenses located in Burnaby, British Columbia. For the past 10 years, the company has sold its lenses on a wholesale basis to optical shops across Canada. Beginning in Year 3, the company began to offer franchise opportu- nities to opticians wanting to sell only FOD lenses. The franchise agreements contain the following stipulations: Each franchise must be a corporation. FOD (Burnaby) will purchase 35 per- cent of the corporation’s outstanding common shares and the franchisee will hold the remaining 65 percent. No other equity instruments can be issued. Franchises can be established in new locations or in existing locations under the name Factory Optical Distributors. If a new building is required, FOD (Burnaby) will guarantee the mortgage to ensure that the best interest rates can be obtained. If an existing location is used, it must be renovated to meet company specifica- tions, and again FOD (Burnaby) will guarantee any required financing. To qualify as a franchisee, an individual must be a licensed optician and must commit to 40 hours a week in the franchise location, managing the day-to-day activities. Franchisees are to be paid a salary that does not exceed 1.5 times the industry average for opticians with equivalent experience. The franchise agreement specifies that only FOD lenses can be sold in fran- chise locations. FOD lenses can be purchased by franchisees at 20 percent below normal selling price for the first $500,000 of purchases, and at 25 per- cent below normal selling price if purchases exceed $500,000.
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  • Fall '12
  • Smith
  • Balance Sheet, consolidated balance sheet, S Ltd, acquisition differential, hiL01537_ch04_120-169.indd Page

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