Midas Company is interested in gold mining in northern Ontario. On January 1, 2019, Midas entered into a 10-year joint venture arrangement with Big Gold Mining Ltd. to develop the mine. Under the arrangement, Midas contributed equipment with a net book value of $5 million, fair value of $20 million, and a remaining useful life of 10 years in exchange for $5 million cash from the joint venture and a 60% interest in the joint venture. Big Gold contributed $2 million in cash to the joint venture and equipment very similar to that contributed by Midas valued at $8 million, in return for a 40% interest in the joint venture. The joint venture borrowed $5 million on January 1, 2019 from a local bank. What is the gain on formation that Midas can recognize at commencement of the joint venture.
Midas Company is interested in gold mining in northern Ontario. On January 1, 2019, Midas entered into a 10-year joint venture arrangement with Big Gold Mining Ltd. to develop the mine. Under the arrangement, Midas contributed equipment with a net book value of $5 million, fair value of $20 million, and a remaining useful life of 10 years in exchange for $5 million cash from the joint venture and a 60% interest in the joint venture. Big Gold contributed $2 million in cash to the joint venture and equipment very similar to that contributed by Midas valued at $8 million, in return for a 40% interest in the joint venture. The joint venture borrowed $5 million on January 1, 2019 from a local bank.
What is the gain on formation that Midas can recognize at commencement of the joint venture.
At the end of 2019, the net income reported by the joint venture was $5 million. Also, as at the end of 2019, the inventory of the joint venture contained refined gold purchased from Midas for $500,000. Midas recorded a gross profit of 30 percent on these sales. What
Step by step
Solved in 3 steps
