ACC 401 Exam 2 Fall 2022 Solution

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University of Southern Mississippi *

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401CA

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Accounting

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Jun 8, 2024

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docx

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Uploaded by LieutenantFish881

1 Name_________________ Section________________ ACC 401 Exam 2 Solution Fall 2022 The exam includes four sections. You must show your work to obtain credit. Point allocations are presented below: Maximum Points Points Earned Part 1 39 Part 2 8 Part 3 46 Part 4 16 Total Points 111 The exam time limit is 80 minutes. Exam scores will be scaled to count 100 points.

1 Part I. Basic Consolidation Problem 1 (39 points) On 1/1/X1, Big's book equity included $1,000,000 of capital stock and $800,000 retained earnings. On 1/1/X1, Big purchased 80% of Small for $1,200,000 when Small's book equity was $1,300,000 consisting of $700,000 capital stock and $600,000 retained earnings. An appraisal of Small's assets revealed that buildings and land were under-valued by $100,000 and $40, 000, respectively. Small's building has a 10- year life and is being depreciated using the S-L method. During year X1, Small reported a $200,000 net income and paid $50,000 of dividends. Big reported a $200,000 income from its own operations and paid $60,000 of dividends. 1. Calculate and allocate the differential. What is goodwill? (8) Show calculations. Small Stock (book value) 1,300,000 Allocation to Building (10 years) 100,000 P's 80% share 1,040,000 Allocation to Land 40,000 Small Stock Mkt Value 1,200,000 total Allocations 140,000 P's Differential 160,000 Total Differential 200,000 NCI's Differential 40,000 Unallocable Differential 60,000 Total Diff 200,000 Allocation to Building (10 years) 100,000 2. How much investment income should Big recognize in Year X1? Show calculations. (5) Depreciation =$100,000/10 =$10,000 per year Small’s reported Income $200,000 Less: Diff Amortization -10,000 S’s Adjusted income $190,000 Big’s 80% Share $152,000 (Investment Income) NCI’s 20% share $38,000 3. Calculate Consolidated Income and Consolidated Retained Earnings on 12/31/X1. (10) Consolidated NI = Big’s own NI +S’s Adjusted NI= $200,000 + $190,000 =$390,000 Consolidated Beg RE (=P’s RE) $800,000 Add P’S Share of Consol NI ($200,000+ $152,000) $352,000 Deduct P’s own Dividends -$60,000 Consolidated RE (12/31/X1) $1,092,000

2 4. Assume that pre-closing trial balances will be consolidated on 12/31/X1. Prepare the consolidation worksheet entries. Show supporting calculations. (16) Investment Income $152,000 Investment $112,000 Dividends $40,000 Retained Earnings: Small $600,000 Capital Stock: Small $700,000 Differential $200,000 Investment in Small $1,200,000 NCI $300,000 Building $90,000 Depreciation Expense $10,000 Land $40,000 Goodwill $60,000 Differential $200,000 Investment Income $152,000 Less: Dividends (.8*$50,000) $40,000 Net Investment Increase= $152,000-$40,000 =$112,000

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