ACC 401 Exam 2 Fall 2023 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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1 Professor Beck Name______________ Fall 2023 ACC 401 Exam 2 Solution Point allocations are as follows: Maximum Points Points Earned Part 1 45 Part 2 48 Part 3 12 Total Points 105 You will have 90 minutes to complete the exam. You must show your supporting calculations to receive credit.
1 Part 1 (45 pts) On 1/1/X1, P Company had a market value of $1,200,000 acquired 80% of Slim Company for $960,000. On the date of acquisition, S reported the following equity balances: Capital Stock: $1 Par 100,000 Additional Paid in Capital 400,000 Retained Earnings 500,000 An appraisal of Slim’s assets on 1/2/X1 provided the following information: Asset Fair value Book Value Inventory $100,000 $90,000 Building (10-yr life) $150,000 $130,000 Land $100,000 $80,000 Additional Information: During year X1, Slim reported a $120,000 income and paid $20,000 of dividends. Required : 1. Calculate and Allocate the total Differential on the date of acquisition. (8) Capital Stock: $1 Par 100,000 Asset Fair value Book Value Differenc e P's 80% Share Additional Paid in Capital 400,000 Inventor y $100,000 $90,000 $10,000 $16,000. 0 Retained Earnings 500,000 Building (10-yr life) $150,000 $130,00 0 $20,000 $16,000. 0 total Book Equity 1,000,000 Land $100,000 $80,000 $20,000 $16,000. 0 Market Value 1,200,000 Total Allocatio n $50,000 $48,000 Total Differential 200,000 Goodwill 150,000 P's 80% share 160,000
2 2. Prepare P’s investment entries for year X1 under the assumption that the equity method is used and calculate the value of the Slim investment on 12/31/X1. Show supporting calculations. (12) Investment Entries: Calculations: Investment in Slim 960,000 Investment (1/1) 960,000 Cash 960,000 96,000 (9,600) Investment 96,000 (16,000) Investment income 96,000 Investment (12/31) 1,030,400 Investment income 9,600 Investment 9,600 (.8*[$10,000 +$2,000]) Cash 16,000 Investment in Slim 16,000 (Dividends) Amortization : COGS $8,000 (.8*10,000) Depreciation $1,600 (.8*20,000/10) Amortization $9,600 Investment Entries: Investment in Slim 960,000 Cash 960,000 Investment 96,000 Investment income 96,000 Investment income 9,600 Investment 9,600 Cash 16,000 Investment in Slim 16,000
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3 3. Assume that trial balances will be consolidated on 12/31/X1. Prepare the consolidation worksheet entries. (20 pts) Consolidation Entries: Investment Income 86,400 Investment in Slim 70,400 Dividends Paid 16,000 COGS 20,000 Goodwill 140,000 Building 20,000 Land 20,000 Retained Earnings 500,000 Capital Stock 100,000 Additional PIC 400,000 Investment 960,000 NCI 240,000 Depreciation 2,000 Building 2,000 (I recorded COGS directly. However, students could allocate $10,000 to inventory and then expense the inventory in using separate entries.) 4. Calculate NCI on 12/31/X1. (5) NCI (1/1/X1) 240,000 +NCI’s 20% share of Income 21,600 -NCI’s 20% share of dividends -4,000 NCI (12/31/X1) 257,600 (You can multiply is by 4 and get P’s investment value of 1,030,400)
4 Part 2: Internal Sales (48 pts) Big Company acquired 70% of Small Company for $700,000 when Small Company reported the following equity: Capital Stock: $1 par 100,000 Additional PIC 400,000 Retained Earnings 500,000 Total Book Equity 1,000,000 Additional information : During year X1, Small reported a $150,000 income. Small sold 1,000 units of Inventory to Big for $35 each which had a $10 cost per unit. A on 12/31/X1, a count revealed that 300 of the units purchased from Small remained in Big’s inventory. Required : 1. Calculate Big’s investment income for year X1 and prepare Big’s investment entries. Show calculations. (15) Investment in Small 700,000 Cash 700,000 Small's Internal Sales Profit: Sales Revenue 35,000 COGS 10,000 Gross Profit 25,000 Unrealized (30%) 7,500 Small's Reported Income 150,000 Deduct: Unrealized Profit (7,500) Small's Realized Profit 142,500 Big's 70% Share 99,750 Investment in Small 99,750 Investment Income 99,750
5 2. Assume that the trial balances of Big and Small will be consolidated on 12/31/X1. Prepare the consolidation worksheet entries. (15) Investment Income 99,750 Investment 99,750 Capital Stock: $1 par 100,000 Additional PIC 400,000 Retained Earnings 500,000 Investment in S 700,000 NCI (30%) 300,000 Sales Revenue 10,500.0 COGS 3,000.0 Inventory 7,500.0 3. Calculate NCI on 12/31/X1. (6 pts) NCI Calculation : NCI on 1/1/X1 300,00 0 (.3*$1,000,000) Add : 30% of Small's Realized Income 42,750 (.3*$142,500) NCI on 12/31/X1 342,75 0
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6 4. Assume that Small reported $160,000 of income in year X2 and that Small sold 500 units of inventory to P for $40 each that had a unit cost of $15. On 12/31/X2, a count revealed that 200 of the units purchased from Small in year X2 remained in Big’s inventory. (12 pts) How much investment income should Big recognize in year X2? Show calculations. Small's Internal Sales Profit in X2: Sales Revenue 20,000 COGS 7,500 Gross Profit 12,500 Unrealized X2 Profit (40%) 3,750 Small's Reported Income 150,000 Deduct: Unrealized X2 Profit (3,750) Add: Unrealized X1 Profit 7,500 Small's Realized Profit 153,750 Big's 70% Share 107,625 Investment in Small 107,625 Investment Income 107,625 Part III. Short Answer questions (12 pts) 1. When affiliated companies make internal sales to each other, why is unrealized profit eliminated? (6) Internal sales merely shift assets from one affiliate to another, but do not actually increase consolidated assets. To create income for the consolidated entity, consolidated assets must increase. Consolidated assets will increase only when assets are sold to outsiders for more than their internal cost. 2. GAAP requires investors to allocate the differential to mis-valued assets and record amortization on some of the asset allocations. Explain why the allocation and amortization are required. (6) The differential allocation is made so that assets are recorded at fair value, thus reflecting the purchase price. If the investee had re-valued depreciable/amortizable assets, the cost basis of inventory and or the amortization/depreciation base of assets would be increased. Thus, the amortization represents an adjustment to the COGS and/or depreciation (amortization) expense recorded by the investee.