- Masson is selling the distribution center for $200 million. The net book value of the center would have been $170 million at year-end therefore the company will record a $30 million gain. I reflected the gain in my projections as an increase in net income in 2014. There will be no taxes on this gain due to the availability of loss carry forwards.
- Sequoia will finance the purchase of the center through borrowing arrangements totaling $192 million with a group of financial institutions. The land and building will be pledged as collateral against these loans and Masson will provide unconditional guarantees as well.
Q. If Langer is correct in his belief about Masson’s required accounting treatment of Sequoia, the revised projected ROE for Masson in 2014 would be closest to:
- 10.9%.
- 8.9%.
- 9.1%
C is correct. If Langer is correct and Sequoia is a VIE, then on consolidation net income would be reduced by the $30 million gain, and retained earnings (and total equity) would also decrease by the same amount.
Are not we going to deduct the interest paid for the loan from the I/S??