Advanced Accounting BU 455A Professor K. S.

Motiska Test One, Due February 11, 2013 (at start of class) Submit All Calculation Worksheets On the worksheets, please reference your work to the problem. Print/Write Legibly Use of Software as MS Excel and MS Word is permitted. All students must work independently of others. Name ____Michael Moore Date ____________________

Multiple Choice: 1-1-10. On January 4, 2011, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2011, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2012, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold? A. $848,000. B. $742,000. C. $723,000. D. $761,000. E. $925,000.

(For questions 2-1-11 and 3-1-12) On January 3, 2011, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville's assets and liabilities:

For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired.

Name _______________________________
2-1-11. What is the amount of goodwill associated with the Austins 25% investment? A. $500,000. B. $200,000. C. $0. D. $300,000. E. $400,000.

3 -1-12. For 2011, what is the total amount of excess amortization for Austin's 25% investment in Gainsville? A. $27,500. B. $20,000. C. $30,000. D. $120,000. E. $70,000.

4-1-25. How should a permanent loss in value of an investment using the equity method be treated? A. The equity in investee income is reduced. B. A loss is reported the same as a loss in value of other long-term assets. C. The investor's stockholders' equity is reduced. D. No adjustment is necessary. E. An extraordinary loss would be reported.

5-1-26. Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true? A. The investor should change to the fair-value method to account for its investment. B. The investor should suspend applying the equity method until the investee reports income. C. The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded. D. The cumulative losses should be reported as a prior period adjustment. E. The investor should report these losses as extraordinary items.

Name _______________________________
6-2-9. An example of a difference in types of business combination is: A. A statutory merger can only be effected by an asset acquisition while a statutory consolidation can only be effected by a capital stock acquisition. B. A statutory merger can only be effected by a capital stock acquisition while a statutory consolidation can only be effected by an asset acquisition. C. Both a statutory merger and a statutory consolidation requires dissolution of at least one company. D. A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution. E. Both a statutory merger and a statutory consolidation can only be effected by an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.

7-3-6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2009. Tangiers maintained its incorporation. Which of Racer's account balances would vary between the equity method and the initial value method? A. Goodwill, Investment in Tangiers Co., and Retained Earnings. B. Expenses, Investment in Tangiers Co., and Equity in Subsidiary Earnings. C. Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings. D. Common Stock, Goodwill, and Investment in Tangiers Co. E. Expenses, Goodwill, and Investment in Tangiers Co.

8-3-70. Which of the following will result in the recognition of an impairment loss on goodwill? A. Goodwill amortization is to be recognized annually on a systematic and rational basis. B. Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. C. The fair value of the entity declines significantly. D. The fair value of a reporting unit falls below the original consideration transferred for the acquisition. E. The entity is investigated by the SEC and its reputation has been severely damaged.

Name _______________________________
Essay:

1-1-100. How would a change be made from the equity method to the fair value method of accounting for investments? There would have to be a sale of the investment that is held to a small enough quantity that the investor loses the ability to significantly influence the investee. As long as the investor has significant ownership interest they cannot report using the fair value method.

2-3-97. What advantages might push-d own accounting offer for internal reporting? The financial statements of the subsidiary report the cost incurred by the parent company in buying the subsidiary instead of the subsidiarys historical costs.

Problems: 1-1-43-48 On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2011 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2010, was $1,000,000. The book value of Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years.

Name _______________________________
Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2012, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.

1-43. What is the balance in the investment account at December 31, 2010? A. $150,000. B. $172,500. C. $180,000. D. $157,500. E. $170,000

1-44. How much income did Mehan report from Cook during 2010? A. $30,000. B. $22,500. C. $7,500. D. $0. E. $50,000.

1-45. How much income did Mehan report from Cook during 2011? A. $90,000. B. $110,000. C. $67,500. D. $87,500. E. $78,750.

Name _______________________________
1-46. What was the balance in the investment account at December 31, 2011? A. $517,500. B. $537,500. C. $520,000. D. $540,000. E. $211,250.

1-47. What was the balance in the investment account at April 1, 2012 just before the sale of shares? A. $468,281. B. $468,750. C. $558,375. D. $616,000. E. $624,375.

1-48. How much of Cook's net income did Mehan report for the year 2012? A. $61,750. B. $81,250. C. $72,500. D. $59,250. E. $75,000.

2-1-112. Wathan Inc. sold $180,000 in inventory to Miller Co. during 2010, for $270,000. Miller resold $108,000 of this merchandise in 2010 with the remainder to be disposed of during 2011. Required: Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Walthan should have recorded at the end of 2010 to defer the unrealized intra-entity inventory profit.

13500

Name _______________________________
3-1-114. On January 2, 2010, Hull Corp. paid $516,000 for 24% (48,000 shares) of the outstanding common stock of Oliver Co. Hull used the equity method to account for the investment. At the end of 2010, the balance in the investment account was $620,000. On January 2, 2011, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2011, Oliver reported income of $118,000 and paid dividends of $30,000. Required (on a separate sheet): (A.) Prepare the journal entry to record the sale of the 12,000 shares. Cash 144000 Loss 11000 Investment in Oliver

155000

(B.) After the sale has been recorded, what is the balance in the investment account? 476000

(C.) What percentage of Oliver Co. stock does Hull own after selling the 12,000 shares? 18%

(D.) Because of the sale of stock, Hull can no longer exercise significant influence over the operations of Oliver. What effect will this have on Hull's accounting for the investment?

The company has to switch fair value method for future records because of the loss of influence. (E.) Prepare Hull's journal entries related to the investment for the rest of 2011.

Investment in Oliver equity Cash

21240 21240 5400 7

Investment in Oliver Cash Loss Investment in Oliver

5400 144000 15840 159840

Name _______________________________
4-1-116. On January 1, 2010, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis. Ramp generated net income of $300,000 in 2010 and a loss of $120,000 in 2011. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders. During 2010, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2010 and the remainder was sold during 2011. In 2011, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2011 and the rest during 2012. Required: For 2010 and then for 2011, calculate the equity income to be reported by Pond for external reporting purposes. 91400 -2010 -79000 2011

5-2-8192 Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 20X1. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the 8

acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs.

Name _______________________________
The book values for both Flynn and Macek as of January 1, 20X1 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

5-81. By how much will Flynn's additional paid-in capital increase as a result of this acquisition? A. $150. B. $160. C. $230.

D. $350. E. $360.

5-82. What amount will be reported for goodwill as a result of this acquisition? A. $30. B. $55. C. $65. D. $175. E. $200.

Name _______________________________
5-83. What amount will be reported for consolidated receivables? A. $660. B. $640. C. $500. D. $460. E. $480.

5-84. What amount will be reported for consolidated inventory? A. $1,000. B. $960. C. $920. D. $660. E. $620.

5-85. What amount will be reported for consolidated buildings (net)? A. $1,420. B. $1,260. C. $1,140. D. $1,480. E. $1,200.

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5-86. What amount will be reported for consolidated equipment (net)? A. $385. B. $335. C. $435. D. $460. E. $360.

5-87. What amount will be reported for consolidated long-term liabilities? A. $1,520. B. $1,480. C. $1,440. D. $1,180. E. $1,100.

Name _______________________________
5-88. What amount will be reported for consolidated common stock? A. $1,000. B. $1,080. C. $1,200. D. $1,280. E. $1,360.

5-89. Assuming the combination is accounted for as a purchase, what amount will be reported for consolidated retained earnings? A. $1,830. B. $1,350. C. $1,080. D. $1,560. E. $1,535.

5-90. What amount will be reported for consolidated retained earnings? A. $1,065. B. $1,080. C. $1,525. D. $1,535. E. $1,560.

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5-91. What amount will be reported for consolidated additional paid-in capital? A. $365. B. $350. C. $360. D. $375. E. $345.

Name _______________________________
5-92. What amount will be reported for consolidated cash after the acquisition is completed? A. $475. B. $500. C. $555. D. $580. E. $875.

6-3-21-22 Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2009, for $372,000. Equipment with a ten-year life was undervalued on Tysk's financial records by $46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years. Tysk earned reported net income of $180,000 in 2009 and $216,000 in 2010. Dividends of $70,000 were paid in each of these two years. Selected account balances as of December 31, 2011, for the two companies follow.

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6-21. If the partial equity method had been applied, what was 2011 consolidated net income? A. $840,000. B. $768,400. C. $822,000. D. $240,000. E. $600,000. 6-22. If the equity method had been applied, what would be the Investment in Tysk Corp. account balance within the records of Jans at the end of 2011? A. $612,100. B. $744,000. C. $774,150. D. $372,000. E. $844,150.

Name _______________________________
7-3-116. Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2010. As of that date, Jackson had the following trial balance:

During 2010, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2011, Jackson reported net income of $132,000 while paying dividends of $36,000. Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As of January 1, 2010, Jackson's land had a fair value of $102,000, its buildings were valued at $188,000, and its equipment was appraised at $216,000. Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized

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over 10 years. Matthews decided to use the equity method for this investment.

Required (on a separate sheet): (A.) Prepare consolidation worksheet entries for December 31, 2010. (B.) Prepare consolidation worksheet entries for December 31, 2011.

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