Effective Strategies for Mastering Financial Accounting Exam
20. The balance sheets of Percy Corp. and Saltz Ltd. on December 31, Year 10, are shown below: Percy
The balance sheets of Percy Corp. and Saltz Ltd. on December 31, Year 10, are shown below:
The fair values of the identifiable net assets of Saltz Ltd. on December 31, Year 10, were as follows:
In addition to the assets identified above, Saltz owned a taxi license in the City of Moose Jaw. This license expires in 9 years. These licenses are selling in the open market at approximately $40,000.
On January 1, Year 11, Percy Corp paid $175,000 in cash to acquire 7,000 (70%) of the common shares of Saltz Ltd. Saltz’s shares were trading for $20 per share just after the acquisition by Percy.
Required:
Prepare the consolidated balance sheet on January 1, Year 11.
Q20
The balance sheets of Prima Ltd. and Donna Corp. on December 31, Year 5, are shown below:
The fair values of the identifiable net assets of Donna Corp. on this date are as follows:
In addition to the assets identified above, Donna owned a significant number of Internet domain names, which are unique alphanumeric names that are used to identify a particular numeric Internet address. These domain names can be sold separately and are estimated to be worth $50,000. On January 1, Year 6, Prima Ltd. paid $351,000 in cash to acquire 90% of the common shares of Donna Corp.
Required:
(a) Prepare the consolidated balance sheet on January 1, Year 6, under entity theory.
(b) Now assume that an independent business valuator valued the NCI at $35,000 at the date of acquisition. What accounts on the consolidated balance would change, and at what amount would they be reported?
(c) Assume that Prima is a private entity, uses ASPE, and chooses to use the cost method to account for its investment in Donna. Prepare Prima’s January 1, Year 6, separate-entity balance sheet after the business combination.
Q21
On January 1, Year 5, FLA Company issued 6,300 ordinary shares to purchase 9,000 ordinary shares of MES Company. Prior to the acquisition, FLA had 180,000 and MES had 10,000 ordinary shares outstanding, which were trading at $5 and $3 per share, respectively. The following information has been assembled for these two companies just prior to the acquisition:
Required:
(a) Prepare a consolidated statement of financial position for FLA Company and its non–wholly owned subsidiary at January 1, Year 5, under each of the following:
(i) Proprietary theory
(ii) Parent company theory
(iii) Parent company extension theory
(iv) Entity theory
(b) Which of the above theories is required under IFRS 3?
Q22
The condensed financial statements for OIL Inc. and ERS Company for the year ended December 31, Year 5, follow:
On December 31, Year 5, after the above figures were prepared, OIL issued $240,000 in debt and 12,000 new shares to the owners of ERS for 80% of the outstanding shares of that company. OIL shares had a fair value of $40 per share. OIL also paid $30,000 to a broker for arranging the transaction. In addition, OIL paid $32,000 in stock issuance costs. ERS’s equipment was actually worth $690,000, but its patented technology was appraised at only $280,000.
Required:
What are the consolidated balances for the year ended/at December 31, Year 5, for
the following accounts?
(a) Net income
(b) Retained earnings, 1/1/Year 5
(c) Equipment
(d) Patented technology
(e) Goodwill
(f) Liabilities
(g) Common shares
(h) Non-controlling interests
Q23
The July 31, Year 3, balance sheets of two companies that are parties to a business combination are as follows:
In addition to the assets identified above, Ravinder Corp. attributed a value of $100,000 to a major research project that Robin Inc. was working on. Robin Inc. feels that it is within a year of developing a prototype for a state-of-the-art biomedical device. If this device can ever be patented, it could be worth hundreds of thousands of dollars.
Effective on August 1, Year 3, the shareholders of Robin Inc. accepted an offer from Ravinder Corp. to purchase 80% of their common shares for $1,040,000 in cash. Ravinder Corp.’s legal fees for investigating and drawing up the share purchase agreement amounted to $25,000.
Required:
(a) Prepare the journal entries in the records of Ravinder Corp. to record the share acquisition and cost of legal fees.
(b) Prepare a schedule to calculate and allocate the acquisition differential. Explain the rationale for the accounting treatment of the $100,000 attributed to the research project.
(c) Prepare Ravinder Corp.’s consolidated balance sheet as at August 1, Year 3. Assume there were no transactions on this date other than the transactions described above.
Q24
When accounting for the acquisition of a non–wholly owned subsidiary, the parent can use entity theory or parent company extension theory to account for the business combination. Access the 2011 consolidated financial statements for BCE Inc. by going to investor’s relations section of the company’s website. Answer the questions below for 2011. Round percentages to one decimal point and other ratios to two decimal points. For each question, indicate where in the financial statements you found the answer, and/or provide a brief explanation.
(a) Which theory of consolidation is used to value non-controlling interest at the date of acquisition?
(b) What portion of the additions to property, plant, and equipment during the year came from business combinations, and what portion came from direct purchases?
(c) What percentage of shareholders’ equity at the end of the year pertains to non-controlling interests?
(d) How were costs directly attributable to the business combination accounted for?
(e) Were any of the subsidiaries controlled, even though the percentage ownership was equal to or less than 50%? If so, what explanation was provided to explain how control was achieved with ownership of 50% or less?
(f) Assume that the company used the other acceptable theory of consolidation for valuing non-controlling interest and that the fair value of the subsidiary as a whole was greater than the fair value of the identifiable net assets at the date of acquisition. How would this change in theory affect the debt-to-equity ratio at the date of acquisition?
Q25
Access the 2011 consolidated financial statements for Barrick Gold Corporation by going to investor’s relations section of the company’s website. For each question, indicate where in the financial statements you found the answer, and/or provide a brief explanation. (Some questions may not be applicable.)
(a) Which theory of consolidation is used to value non-controlling interest at the date of acquisition?
(b) What portion of the additions to property, plant, and equipment during the year came from business combinations, and what portion came from direct purchases?
(c) What percentage of shareholders’ equity at the end of the year pertains to non-controlling interests?
(d) How were costs directly attributable to the business combination accounted for?
(e) Were any of the subsidiaries controlled, even though the percentage ownership was equal to or less than 50%? If so, what explanation was provided to explain how control was achieved with ownership of 50% or less?
(f) Assume that the company used the other acceptable theory of consolidation for valuing non-controlling interest and that the fair value of the subsidiary as a whole was greater than the fair value of the identifiable net assets at the date of acquisition. How would this change in theory affect the debt-to-equity ratio at the date of acquisition?
21. Ms. Tejal Gandhi has decided that the stock of SmallCap
Ms. Tejal Gandhi has decided that the stock of SmallCap Inc is overvalued at $4 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin, so Ms. Gandhi must put up the entire value of the stock when it is sold short.
a) What is the percentage loss if the price of the stock rises to $8?
b) What is the percentage loss if the price of the stock rises to $10?
c) What is the percentage gain if the company goes bankrupt and is dissolved?
d) What are the maximum percentage gain the short seller can earn and the largest percentage loss the short seller can sustain?
e) From the short seller’s perspective, what are the best and worst case scenarios?
22. Deacon Company is a merchandising company that is preparing a budget for the three-month period e...
Deacon Company is a merchandising company that is preparing a budget for the three-month period ended June 30th. The following information is available
Budgeting Assumptions:
60% of sales are cash sales and 40% of sales are credit sales. Twenty percent of all credit sales are collected in the month of sale and the remaining 80% are collected in the month subsequent to the sale.
Budgeted sales for July are $160,000.
10% of merchandise inventory purchases are paid in cash at the time of the purchase. The remaining 90% of purchases are credit purchases. All purchases on credit are paid in the month subsequent to the purchase.
Each month’s ending merchandise inventory should equal $10,000 plus 50% of the next month’s cost of goods sold.
Depreciation expense is $1,900 per month. All other selling and administrative expenses are paid in full in the month the expense is incurred.
Required:
1. Calculate the expected cash collections for April, May, and June.
2. Calculate the budgeted merchandise purchases for April, May, and June.
3. Calculate the expected cash disbursements for merchandise purchases for April, May, and June.
4. Prepare a budgeted balance sheet at June 30th. (Hint: You need to calculate the cash paid for selling and administrative expenses during April, May, and June to determine the cash balance in your June 30th balance sheet.)
23. Review case 3.3 The Anonymous Caller , p. 63-65. Compose brief answers, approximately 45 to 90...
Review case 3.3 The Anonymous Caller, p. 63-65.
Composebrief answers, approximately 45 to 90 words to the following Required questions related to this case:
- 1
- 2
- 4
- 5
- 7
- 8
- Professional Judgment Question: 11
Document Preview:
The Anonymous Caller CASE 3.3 The Anonymous Caller Recognizing It’s a Fraud and Evaluating What to Do MARK S. BEASLEY • FRANK A. BUCKLESS • STEVEN M. GLOVER • DOUGLAS F. PRAWITT LEARNING OBJECTIVES After completing and discussing this case you should be able to [1] Appreciate real-world pressures for meeting financial expectations [2] Distinguish financial statement fraud from aggressive accounting [3] Identify alternative actions when confronted with suspected financial statement fraud [4] Develop arguments to resist or prevent inappropriate accounting techniques BACKGROUND It was 9:30 A.M. on a Monday morning when the call came through. “Hi Dr. Mitchell, do you have a minute?” “Sure,” the professor replied. “I am one of your former students, but if you don’t mind, I would prefer to remain anonymous. I think it is best for both of us if I not reveal my name or company to you. I am concerned that the senior executives of the company where I serve as controller just provided our local bank fraudulently misstated financial statements. I need some fast advice about what to do. Currently, I am on my cell phone and need help evaluating my next step before I head to my office this morning. May I briefly describe what’s going on and get some input from you?” she asked. “Go ahead, let me see if there is some way I can help,” responded Dr. Mitchell. “I am the controller of a privately-held, small, start-up company that I joined three and onehalf months ago. On Friday of last week, the company’s chief executive officer (CEO), the vice president of operations, and the chief financial officer (CFO) met with representatives of the bank that funds the company’s line of credit. One of the purposes of the meeting was to provide our most recent quarterly financial statements. The company is experiencing a severe cash shortage, and the bank recently halted funding the line of credit until we could present our most recent operating results. It was at that meeting, just three days...
24. Compute the total cost IAP will incur to (a) purchase the needed materials and then (b) assemble and...
Indianapolis Auto Parts (IAP) has a Seat Manufacturing Department that uses activity-based costing. IAP’s system has the following activities:
Each auto seat has 20 parts. Direct materials cost per seat is $1. Direct labor cost per seat is $10. Suppose Ford has asked IAP for a bid on 50,000 built-in baby seats that would be installed as an option on some Ford SUVs. IAP will use a total of 200 purchase orders if Ford accepts IAP’s bid.
Requirements
1. Compute the total cost IAP will incur to (a) purchase the needed materials and then (b) assemble and (c) package 50,000 baby seats. Also, compute the average cost per seat.
2. For bidding, IAP adds a 30% markup to total cost. What total price will IAP bid for the entire Ford order?
3. Suppose that instead of an ABC system, IAP has a traditional product costing system that allocates indirect costs other than direct materials and direct labor at the rate of $65 per direct labor hour. The baby-seat order will require 10,000 direct labor hours. What price will IAP bid using this system’s total cost?
4. Use your answers to Requirements 2 and 3 to explain how ABC can help IAP make a better decision about the bid price to offer Ford.
25. He following data for two products of Gitano Manufacturing Overhead Cost Product A Number of unit...
1-4 he following data for two products of Gitano Manufacturing Overhead Cost Product A Number of units produced Product B labor cost (@$24 per DLH) 10.000 units 2.000 units Direct cost Direct materials 020 DUH per unit 025 DLH per unit $2 per unit $3 per unit. Activity Machine setup $121,000 handling 48,000 Materials Quality control inspections 80,000 $249,000 S3488 per un prot t Exercise 17-10 Using ABC for str decisions
26. 36. Gunnar Company gathered the following reconciling information in preparing its September bank...
36. Gunnar Company gathered the following reconciling information in preparing its September bank reconciliation. Calculate the adjusted cash balance per books on September 30.
a.$3,040.
b.$5,130.
c.$3,690.
d.$1,590.
37. Which of the following would be deducted from the balance per books on a bank reconciliation?
A. outstanding checks
B. deposits in transit
C. notes collected by the bank
D. service charges
38. The following data were gathered to use in reconciling the bank account of Savannah Company:
What is the adjusted balance on the bank reconciliation?
a.$15,095
b.$15,720
c.$14,470
d.$10,705
39. An intangible asset is one that has a physical existence.
True or False
41. The double-declining-balance method is an accelerated depreciation method.
True or False
42. Patents are exclusive rights to produce and sell goods with one or more unique features.
True or False
43. The difference between the balance in a fixed asset account and its related accumulated depreciation account is the asset's book value.
True or False
44. Though a piece of equipment is still being used, the equipment should be removed from the accounts if it has been fully depreciated.
True or False
45. When a property, plant, and equipment asset is sold for cash, any gain or loss on the asset sold should be recorded.
True or False
46. The entry to record the disposal of fixed assets will include a credit to accumulated depreciation.
True or False
