Dr. M.

D Chase
Accounting 400
Examination 2K(b)
Instructions:

Name:

1. Place your name on each page of this examination.

2. Complete each of the following exercises. Show your work in the space provided.
3. If you have any questions about the examination or these instructions, ask the instructor. Failure to follow
these instructions may result in a failing grade.

Accounting 400

Examination 2K

Name:

Exercise A.
Leslie Inc. had the following balance sheet on December 31,

Assets
Current assets ..$ 50,000
Land............. 70,000
Buildings (net).. 230,000
Equipment (net).. 200,000
Goodwill......... 50,000
Total assets.....$600,000

Page 1 of 17

20x7:

Liabilities and Equity

Liabilities...................$150,000
Common stock ($10 par) ....... 50,000
Retained earnings............. 400,000
Total liabilities and equity..$600,000

Prior to a pooling of interests in which Rhett was the issuer, Rhett had the following stockholders' equity:
Common stock ($10 par)..................... $ 500,000
Retained earnings.......................... 2,000,000
$2,500,000
Less treasury stock, 5,000 shares at cost..
300,000
Total stockholders' equity................$2,200,000
Rhett exchanged the 5,000 shares of treasury stock plus 5,000 new shares of common stock for 90% of the
common stock of Leslie. $10,000 was paid in direct acquisition costs. At the date of the pooling, Rhett's stock
was selling at $50/share. If applicable, Rhett wants any excess of cost over bookvalue resulting from the pooling
to be credited to goodwill and amortized over 20 years.
In the space below:
a. Analyze the investment

b. Prepare the journal entries for Rhett Corporation to record the pooling of interests.

Accounting 400

Examination 2K

Name:

Page 2 of 17

The following Questions are related to Exercise A. Base your answers on your analysis from the prior
page. Be certain to show all computations or completely reference the source of your answer
1. What is the adjustment made to Rhett's PIC in excess of par as a result of the pooling?

2. What is the amount of Leslie's Retained Earnings that is consolidated as a result of the pooling?

3. What is the consolidated Goodwill after the pooling of interest?

4. What is the consolidated PIC after the pooling of interest?

5. What is the consolidated Retained earnings after the Pooling?

Accounting 400

Examination 2K

Name:

Page 3 of 17

Exercise B:
Pwoody, Inc. will purchase 90% of the outstanding stock of DartStart, Inc. The consolidation does not meet the
requirements of a pooling of interests. Significant facts are presented in the following schedules:
Name of Parent Firm:

Pwoody,
Inc.

Name of Purchased Firm:

DartStart

First year of consolidation?

(1=Yes,2=No):

Percentage of Sub to be acquired:

90.00%

Par Value of Stock to be acquired:

Number of Sub Shares to be acquired:

Cash Consideration given:

45,000
475,000

Schedule A
Book and Market Values

Pwoody,
Inc.
Book Values

DartStart
Book Values

Market Values

Difference

Cash

20,000

$95,000

$95,000

AR (net)

30,000

115,000

140,000

25,000

Inventory

120,000

Land

100,000

235,000

490,000

255,000

Building (net)

300,000

145,000

160,000

15,000

Equipment (net)

430,000

400,000

350,000

(50,000)

40,000

(40,000)

1,000,000

1,030,000

1,235,000

205,000

(180,000)

(180,000)

(180,000)

(400,000)

(410,000)

(10,000)

Goodwill (net)
Total

Accounts Payable
Bonds Payable
Common Stock

(400,000)

PIC in Excess of Par

Retained Earnings
Total Equities:

(100,000)
(50,000)

(420,000)

(300,000)

(1,000,000)

(1,030,000)

(10,000)

Accounting 400

Examination 2K

Name:

Page 4 of 17

Exercise B: Continued
a.. Complete the following Analysis of the investment (prepare a determination and distribution of excess
schedule) and utilize this information to answer the multiple choice questions that follow. Show computations
(in good form) to support your numbers.
Schedule b: Analysis of the Investment

Capitalized Cost of Investment:

LESS: Purchased BV:

90.00%

Unadjusted Purchase Differential:

ADD: Pre-Existing Goodwill

90.00%

Purchase Differential (Excess Avail to Identif Assets/Liab):

ATTRIBUTABLE TO:

Deferred

Fair Market Value Accounts:

Tax Liab

FMV-BV

Relative %

AR (net)

25,000

90.00%

Bonds Payable

(10,000)

90.00%

Totals:

Adjustment

Total allocated to FMV accts

Excess Available to NCA

Noncurrent Assets:

DTL NCA

Book
Value

Land

211,500

Building (net)

130,500

Equipment (net)

360,000

702,000

Total Value of NCA:

Total Allocation to NCA:

Purch Diff Accounted for:

+
Adjustment

= Adj.
Value

Accounting 400

Examination 2K

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Page 5 of 17

Exercise B: Continued
b. Complete the following schedules and utilize the information to answer the following multiple choice
questions.
Schedule C: Determination of
Bargain-Purchase/Nonbargain-Purchase

Excess Available to NCA:

Fair Market Value of
SNCA:
Book Value of SNCA:
Adj Req to Full FMV:
This is a bargain
purchase

Schedule E: Allocation of Excess to NCA in a Bargain-Purchase Analysis:

Step 1: Computation of Total Value to be allocated to Noncurrent Assets
COMPUTATION OF TOTAL VALUE TO BE ALLOCATED TO NONCURRENT ACCOUNTS
Total Value of NCA = Excess available to NCA + Percent purchased of BV of NCA
Total Value of NCA:

Excess Available to NCA

90.00%

Total Value of NCA

is:

Step 2: Computation of Excess to be Allocated to Noncurrent Assets

Non Current Asset:

FMV

Rel FMV

Land

490,000

49.00%

Building (net)

160,000

16.00%

Equipment (net)

350,000

35.00%

1,000,000

100.00%

Total

Total Value

Adj Value

NCA BV's

Adj. Req.

Accounting 400

Examination 2K

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Page 6 of 17

The following Questions are related to Exercise R. Base your answers on your analysis from the prior
page. Be certain to show all computations or completely reference the source of your answer
6. What is the Purchase Differential (excess of cost over book value) available to identifiable assets and
liabilities?

7. What is the Deferred tax liability associated with the Accounts Receivable?

8. What is the total excess allocated to the "Fair-Market Value Accounts"?

9. What is the adjustment required to bring the Non-current assets to full fair market value?

10. What is the "Total Value" that the non-current assets will be valued at after all allocations?

11. What is the adjusted value of Land (what value will land be carried at on the consolidated balance sheet)?

Accounting 400

Examination 2K

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Page 7 of 17

Exercise C:
DeeWee Company owns a 90% interest in the Moose Company. During 20x3, the following intercompany
transactions were recorded by the separate firms:
(a) Moose Company sold goods to DeeWee Company for $80,000 during 20x3, realizing the usual 30%
gross profit. DeeWee Company had $10,000 of the Moose Company goods in its beginning inventory and
$20,000 of such goods in its ending inventory. The ending inventory was written down to $16,000 at year
end. There is no outstanding trade debt. Prepare all the eliminations (with explanations and detailed
computations) that would be made for these intercompany transactions on the 20x3 consolidated worksheet.

(b) On January 1, 20x3, DeeWee Company gave a milling machine to Moose at no cost. The machine
originally cost $50,000, and had accumulated depreciation of $30,000 at the time of the gift. Also at the
time of the gift, the machine had a market value of $5,000 and a 5-year remaining life. Moose uses
straight-line depreciation for similar machines. Prepare all the eliminations (with explanations and detailed
computations) that would be made for these intercompany transactions on the 20x3 consolidated worksheet.

Accounting 400

Examination 2K

Name:

Page 8 of 17

The following Questions are related to Exercise C. Base your answers on your analysis from the prior
page. Be certain to show all computations or completely reference the source of your answer
12. What is the effect of the sale of inventory on the consolidated sales account?

13.

What adjustment is necessary to adjust the cost of goods sold for profit in ending inventory?

14.

What is the adjustment is necessary to adjust the cost of goods sold for profit in beginning inventory?

15. What is the amount of the gain or loss that is recognized on the consolidated books as a result of the sale of
the milling machine at the date of the sale?

16. What is the amount of the gain or loss that is recognized on the consolidated books as a result of the sale of
the milling machine during the entire year (all of 20x3)

17. What is the adjustment to the depreciation expense account for 20x3 as a result of the sale of the milling
machine?

Accounting 400

Examination 2K

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Page 9 of 17

Exercise D.
DMC Company is a wholly-owned subsidiary of Shane. On April 1, 20x1, Shane loaned DMC $30,000 in
exchange for a six month, 8% note payable. Interest will be paid at maturity.
(a) Prepare the entries (including adjusting entries) that Shane and DMC Companies would make (on
their own respective books) concerning the note during the fiscal year ending June 30, 20x1.
Shane Co

DMC Co

(b) Prepare the eliminations that would be made on the June 30, 20x1 consolidated worksheet as a result
of the note.

Accounting 400

Examination 2K

Name:

Page 10 of 17

The following Questions are related to Exercise D. Base your answers on your analysis from the prior
page. Be certain to show all computations or completely reference the source of your answer
18.

What is the valuation of the intercompany note on the books of DMC?

19.

What is the valuation of the intercompany note on the consolidated books?

20.

What is the interest revenue recognized on the books of DMC?

21.

What is the interest revenue recognized on the consolidated books?

22.

What is the amount of interest receivable recognized on the books of Shane?

Accounting 400

Examination 2K

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Page 11 of 17

Exercise E:
On January 1, 20x2, Topgun Company sold a machine to Subway Company for $20,000. The machine had an
original cost of $24,000, and depreciation on the asset had accumulated to $9,000 at the time of sale. The
machine has a 5-year remaining life and will be depreciated on a straightline basis with no salvage value. Subway
Company is an 80%-owned subsidiary of Topgun Company.
(1) Prepare the elimination that would be required on the December 31, 20x3 consolidated worksheet as a
result of this sale.

(2) Assuming that Subway Company was the seller of the machine and that all the other facts remained
constant, prepare the elimination that would be required on the December 31,20x3 consolidated
worksheet as a result of this sale.

Accounting 400

Examination 2K

Name:

Page 12 of 17

The following Questions are related to Exercise E. Base your answers on your analysis from the prior
page. Be certain to show all computations or completely reference the source of your answer
23.

What is the consolidated gain or loss recognized on the sale of the machine at the time of the sale?

24.

What is the total gain recognized at 12/31/x3 if the sale is downstream?

25.

What is the total gain recognized at 12/31/x3 if the sale is upstream?

26.

What is the gain recognized by Topgun at 12/31/x3 if the sale is downstream?

27.

What is the gain recognized by Topgun at 12/31/x3 if the sale is upstream?

28. What is the consolidated adjustment (net) to controlling interest retained earnings at 12/31/x3 if the sale
is upstream?

Accounting 400

Examination 2K

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Page 13 of 17

Exercise F:
Bondo Products is an 80%-owned subsidiary of Parenti Inc. On January 1, 20x8, Bondo sold $100,000 of
10-year, 9% bonds for $95,000. Interest is paid annually on January 1. The market rate for this type of bond was
12% on January 1, 19Y0, when Parenti purchased 40% of the Bondo bonds for $34,000. Discounts may be
amortized on a straight-line basis.
(a) Compute the gain or loss on the intercompany bond purchase.

(b) Prepare a straight-line amortization table for years 1/1/x8 through 1/1/y1 for Bondo and Parenti
Date

PMT
9%

Int
12%

Amort

Disc

CV

Date

Pmt
9%

Int
12%

Amort

Disc

1/1/X8
1/1/X9
1/1/Y0
1/1/Y1
1/1/Y2

c) Prepare the eliminations and adjustments required for this bond purchase on the December 31, 19Y0
and December 31, 19Y1 consolidated worksheets.
12/31/Y0

12/31/Y1

CV

Accounting 400

Examination 2K

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Page 14 of 17

The following Questions are related to Exercise F. Base your answers on your analysis from the prior page.
Be certain to show all computations or completely reference the source of your answer
29.

What is the amount of gain or loss that would be recognized on 1/1/Y0?

30.

What is the amount of gain or loss that would be recognized on 12/31/Y0?

31.

What is the interest revenue recognized on the books of Bondo at 12/31/Y0?

32.

What is the interest revenue recognized on the books of Parenti at 12/31/Y0?

33.

What is the unamortized discount on the books of Bondo at 12/31/Y1?

34.

What is the adjustment to Parenti retained earnings on 12/31/Y1?

Accounting 400

Examination 2K

Name:

Page 15 of 17

Exercise G:
DD Department Stores Inc. is leasing specialized display fixtures from its 80%-owned subsidiary, Sandor
Promotion. Assume that Sandor is not a dealer of these specialized display fixtures and the lease was signed on
Jan. 1, 20x5. Lease payments are $20,000 per year, payable at the beginning of each year. The lessor paid
$52,000 for the asset, which had a market value of $57,717 at the start of the lease term. The lessor estimates
that the fixtures will have a residual value (unguaranteed) of $5,500 at the end of the 3-year lease. The lessor's
implicit interest rate is 12%. The 12% rate also is used by the lessee to record the lease. Lease amortization
schedules are as follows:
Pv of a sum of $1 n=4,i=12 is .6355
n=3,i=12 is .7118
n=2,i=12 is .7972

PV of an ordinary annuity of $1 n=4, i=12 is 3.0373

n=3, i=12 is 2.4018
n=2, i=12 is 1.6901

Sandor (12%)
Date
Jan. 1,20x5
Jan. 1,20X6
Jan. 1,20x7
Jan. 1,20x8
Total

Payment
$20,000
20,000
20,000
5,500
$65 500

Interest at 12%
on Previous Balance
-$4,526
2,669
588
$7,783

Reduction
of Principal
$20,000
15,474
17,331
4,912
$57,717

Principal
Balance
$37,717
22,243
4,912

DD (12%)
Date
Jan. 1, 20x5
Jan. 1, 20x6
Jan. 1, 20x7
Total

Payment
$20,000
20,000
20,000
$60,000

Interest at 12%
on Previous Balance
-$4,056
2,142
$6,198

Reduction
of Principal
$20,000
15,944
17,858
$53,802

Principal
Balance
$33,802
17,858

a. Classify this lease for the lessee and the lessor:

Lessee:
Lessor:

b. Classify the lease for the lessor if the lessor is a dealer specialized display fixtures:

c.
Prepare the eliminations and adjustments required for this lease on the December 31. 20x5 consolidated
worksheet (show computations or where numbers come from).
Eliminate Current Year Interest Revenue/Expense booked by parties to lease

Accounting 400

Examination 2K

Exercise G: continued:Eliminate interest on unguaranteed Residual booked in prior years

Eliminate the Lease accounts on the books and reclassify the leased asset

Reclassify the Accumulated depreciation

Recognize any gain or loss allowable to date (if applicable)

Name:

Page 16 of 17

Accounting 400

Examination 2K

Name:

Page 17 of 17

The following Questions are related to Exercise G. Base your answers on your analysis from the prior
page. Be certain to show all computations or completely reference the source of your answer
35.

Assuming Sandor is not a dealer, how does Sandor classify this lease?

36.

Assuming Sandor is a dealer, how does Sandor classify this lease?

37.

How does DD classify this lease?

38.

Assuming Sandor is not a dealer, what is the profit or loss on this lease at its inception?

39.

At what value will the leased asset appear on the consolidated balance sheet?

40.

What is the gain or loss recognized on this lease on 12/31/x5?