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Rawhide Brewery (Rawhide), a small Canadian brewery, is considering an opportunity to share its excess production capacity with another brewery, Tabby Cat Beer (Tabby). Three proposals are under consideration, each requiring a different accounting treatment by Rawhide. The first option is an arrangement under which Tabby would outsource its production to Rawhide. The second is a more complex arrangement under which both parties would invest in the common shares of a newly formed entity into which Rawhide would transfer its existing brewery operations and related debt. Because Rawhide would guarantee the debt of the new entity, it would make all key decisions. Under the third alternative, Rawhide would own 60 per cent of the common shares and Tabby would own the remaining 40 per cent, and all key decisions would be made jointly by both parties. The CFO of Rawhide has been asked to assess the accounting implications, advantages and disadvantages of the various options, taking into account the impact on Rawhide’s debt-to-equity ratio.

A heavy equipment manufacturing firm is considering three different levels of investment in a professional services firm that performs consulting engineering work for industrial firms. To assess the impact of the different levels of investment, financial statements need to be prepared using generally accepted accounting principles (GAAP), for one year after the planned investment.