The Islamic University of Gaza Course: Advanced Accounting

Faculty of Commerce Instructor: Salah Shubair

Department of Accounting Time :Two hours

Final exam. 2018/2019

….…………… .Name:…………………………………………… Student No

Q.1 Multiple Choice (20 Points)

1 2 3 4 5 6 7 8 9 10

1) When the implied value exceeds the aggregate fair values of identifiable net assets,
the residual difference is accounted for as:

a) excess of implied over fair value.

b) a deferred credit.
c) difference between implied and fair value.
d) goodwill.

2) The excess of fair value over implied value must be allocated to reduce
proportionally the fair values initially assigned to:

a) current assets.
b) noncurrent assets.
c) both current and noncurrent assets.
d) none of these

3) On January 1, 2016, Lester Company purchased 70% of Stork Corporation's $5 par

common stock for $600,000. The book value of Stork net assets was $640,000 at that
time. The fair value of Stork's identifiable net assets were the same as their book
value except for equipment that was $40,000 in excess of the book value. In the
January 1, 2016, consolidated balance sheet, goodwill would be reported at:

a) $152,000.
b) $177,143.
c) $80,000.
d) $0.

4) Pinta Company acquired an 80% interest in Strummer Company on January 1,

2016, for $270,000 cash when Strummer Company had common stock of $150,000
and retained earnings of $150,000. All excess was attributable to plant assets with a
10-year life. Strummer Company made $30,000 in 2016 and paid no dividends. Pinta
Company’s separate income in 2016 was $375,000. Controlling interest in
consolidated net income for 2016 is:

a) $405,000.
b) $399,000.
c) $396,000.
d) $375,000.

5) The SEC requires the use of push down accounting when the ownership change is
greater than:

a) 50%
b) 80%
c) 90%
d) 95%

6) A parent company regularly sells merchandise to its 80%-owned subsidiary.

Which of the following statements describes the computation of noncontrolling
interest income?

a) the subsidiary’s net income times 20%.

b) (the subsidiary’s net income x 20%) + unrealized profits in the beginning
inventory – unrealized profits in the ending inventory.
c) (the subsidiary’s net income + unrealized profits in the beginning inventory –
unrealized profits in the ending inventory) × 20%.
d) (the subsidiary’s net income + unrealized profits in the ending inventory –
unrealized profits in the beginning inventory) × 20%.
7) P Corporation acquired a 60% interest in S Corporation on January 1, 2017, at
book value equal to fair value. During 2017, P sold merchandise that cost $135,000
to S for $189,000. One-third of this merchandise remained in S’s inventory at
December 31, 2017. S reported net income of $120,000 for 2017. P’s income from S
for 2017 is:

a) $36,000.
b) $50,400.
c) $54,000.
d) $61,200.

8) Petunia Company acquired an 80% interest in Shaman Company in 2016. In 2017

and 2018, Shaman reported net income of $400,000 and $480,000, respectively.
During 2017, Shaman sold $80,000 of merchandise to Petunia for a $20,000 profit.
Petunia sold the merchandise to outsiders during 2018 for $140,000. For
consolidation purposes, what is the noncontrolling interest’s share of Shaman's 2017
and 2018 net income?

a) $90,000 and $96,000.

b) $100,000 and $76,000.
c) $84,000 and $92,000.
d) $76,000 and $100,000.

9) In January 2013, S Company, an 80% owned subsidiary of P Company, sold

equipment to P Company for $1,980,000. S Company’s original cost for this
equipment was $2,000,000 and had accumulated depreciation of $200,000. P
Company continued to depreciate the equipment over its 9 year remaining life using
the straight-line method. This equipment was sold to a third party on January 1, 2017
for $1,440,000. What amount of gain should P Company record on its books in 2017?

a) $60,000.
b) $120,000.
c) $240,000.
d) $360,000.

10) Search Company is a 90% owned subsidiary of Passage Company. On January 1,

2016, Search Company purchased for $680,000 bonds of Passage Company that had a
carrying value of $725,000 (par value $700,000). The bonds mature on December 31,
2017. Both companies use the straight-line method of amortization and have a
December 31 year-end. The increase in 2016 consolidated income (i.e., income before
subtracting noncontrolling interest) is:

a) $45,000.
b) $44,000.
c) $54,000.
d) $36,000.

Q. 2 MATCHING (12 points )

Match the terms in the list to the definitions below. Each term may be used only once.

A. Downstream sale G. Noncontrolling interest in consolidated

income
B. Upstream sale H. Controlling interest in consolidated net
income
C. Horizontal sale I. Intercompany profit prior to affiliation
D. Unrealized intercompany profit in ending J. Consolidated sales
inventory K. Consolidated cost of sales
E. Unrealized profit in beginning inventory L. Markup
F. 100 percent rule

_____ 1. The amount of P’s and S’s income that is attributable to other stockholders of S,
as adjusted for unrealized profit on upstream sales

_____ 2. The difference between what P bought merchandise for and what it sold that
merchandise to S for, when S still has the merchandise at year end

_____ 3. A sale of merchandise from S to another subsidiary, R

_____ 4. The amount of intercompany sales that must be eliminated, according to GAAP

_____ 5. The profit on sales made by S to P before P bought a controlling interest in S

_____ 6. The difference between what P buys merchandise for and what it sells it for

_____ 7. A sale of merchandise from S to P

_____ 8. P’s and S’s income combined and adjusted for unrealized profit on intercompany
sales

_____ 9. The difference between what S bought merchandise for and what it sold to P for
last year, when P didn’t sell that merchandise to outsiders until this year

_____10. The total of sales made by all the affiliates, less those sales made to each other

_____11. A sale of merchandise from P to S

_____12. The original cost of merchandise sold to outsiders.

Q.3 ( 12 points )

P Corporation paid $420,000 for 70% of S Corporation’s $10 par common stock on
December 31, 2016, when S Corporation’s stockholders’ equity was made up of
$300,000 of Common Stock, $90,000 of Other Contributed Capital and $60,000 of
Retained Earnings. S’s identifiable assets and liabilities reflected their fair values on
December 31, 2016, except for S’s inventory which was undervalued by $60,000 and
their land which was undervalued by $25,000. Balance sheets for P and S
immediately after the business combination are presented in the partially completed
work-paper below.

- Eliminations
P S Debit Credit Noncontrolling Consolidated
Interest Balances
ASSETS
Cash $40,000 $30,000
Accounts
receivable-net 30,000 45,000
Inventories 185,000 165,000
Land 45,000 120,000
Plant assets-
net 480,000 240,000
Investment in
S Corp. 420,000
Difference
between implied
and book value
Goodwill
Total Assets $1,200,000 $600,000
EQUITIES
Current
liabilities $170,000 $150,000
Capital stock 600,000 300,000
Additional paid-
in capital 150,000 90,000
Retained
earnings 280,000 60,000
Noncontrolling
interest
Total Equities $1,200,000 $600,000

Required:
Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary.
Q.4 (16 points )

On January 1, 2017, Pruit Company purchased 85% of the outstanding common stock
of Salty Company for $525,000. On that date, Salty Company’s stockholders’ equity
consisted of common stock, $150,000; other contributed capital, $60,000; and
retained earnings, $210,000. Pruit Company paid more than the book value of net
assets acquired because the recorded cost of Salty Company’s equipment ( had an
estimated useful life of 10 more years) was significantly less than its fair value .

During 2017 Salty Company earned $222,000 and declared and paid a $75,000
dividend. Pruit Company used the equity method to record its investment in Salty
Company.

Required:

A.
Prepare a Computation and Allocation Schedule for the Difference between Implied
and Book Value

B. Prepare the investment related entries on Pruit Company’s books for 2017.

C. Prepare the workpaper eliminating entries for a workpaper on December 31,

2017.
Q.1 Multiple Choice (20 Points)

1 2 3 4 5 6 7 8 9 10
D D B C D A C D B A

Q. 2 MATCHING (12 points )

1. G 4. F 7. B 10.
J
2. D. 5. I 8. H 11.
A
3. C 6. L 9. E 12.
K

Q. 2 MATCHING (12 points )

__G___ 1. The amount of P’s and S’s income that is attributable to other stockholders of S,
as adjusted for unrealized profit on upstream sales

__D___ 2. The difference between what P bought merchandise for and what it sold that
merchandise to S for, when S still has the merchandise at year end

___C__ 3. A sale of merchandise from S to another subsidiary, R

___F__ 4. The amount of intercompany sales that must be eliminated, according to GAAP

___I__ 5. The profit on sales made by S to P before P bought a controlling interest in S

___L__ 6. The difference between what P buys merchandise for and what it sells it for

___B__ 7. A sale of merchandise from S to P

__H___ 8. P’s and S’s income combined and adjusted for unrealized profit on intercompany
sales

___E__ 9. The difference between what S bought merchandise for and what it sold to P for
last year, when P didn’t sell that merchandise to outsiders until this year

__J___10. The total of sales made by all the affiliates, less those sales made to each other

__A___11. A sale of merchandise from P to S

___K__12. The original cost of merchandise sold to outsiders.

 Q.3 ( 12 points )
Answer:
Eliminations
P S Debit Credit Noncontrolling Consolidated
Interest Balances
ASSETS
Cash $40,000 $30,000 $70,000
Accounts
receivable-net 30,000 45,000 75,000
Inventories 185,000 165,000 (b) 60,000 410,000
Land 45,000 120,000 (b) 25,000 190,000
Plant assets-
net 480,000 240,000 720,000
Investment in
S Corp. 420,000 (a) 420,000
Difference
between
implied and
book value (a) 150,000 (b) 150,000
Goodwill (b) 65,000 65,000
Total Assets $1,200,000 $600,000 $1,530,000
EQUITIES
Current
liabilities $170,000 $150,000 $320,000
Capital stock 600,000 300,000 (a) 300,000 600,000
Additional
paid-in capital 150,000 90,000 (a) 90,000 150,000
Retained
earnings 280,000 60,000 (a) 60,000 280,000
Noncontrolling
interest (a) 180,000 180,000 180,000
Total Equities $1,200,000 $600,000 $750,000 $750,000 $1,530,000
Q.4 (16 points )

A. Computation and Allocation of Difference between Implied and Book Value

Parent Non-
share controlling
share

Purchase price and implied value $ 525,000 92,647

617,647
Book Value of Equity Acquired 357,000 63,000
420,000
Difference between Implied and Book Value 168,000 29,647
197,647
Adjust Equipment Upward (168,000) (29,647)
(197,647)
Balance -0- -0-
-0-

B. Investment in Salty 525,000

Cash 525,000

Investment in Salty ($222,000)(.85) 188,700

Equity in Subsidiary Income 188,700

Cash ($75,000)(.85) 63,750

Investment in Salty 63,750

Equity in Subsidiary Income 16,800

Investment in Salty 16,800

C. Equity in Subsidiary Income 171,9 00

Dividends Declared - Salty 63,750
Investment in Salty 108,1 50

Common Stock - Salty 150,000

Other Contributed Capital - Salty 60,000
Retained Earnings 1/1 - Salty 210,000
Difference between Implied and Book Value 197,647
Investment in Salty 525,000
Noncontrolling Interest in Equity 92,647

Depreciation Expense 19,765

Equipment 177,882
Difference between Implied and Book Value 197,647