Question 1: Choose the Best Answer. (16 Marks)

Islamic university – Gaza Final exam 2009/2010 advanced accounting College of commerce Tuesday 26/01/2010 Accounting department Two hours (60 marks)

Name: …………………………………………………… Id.:…………………………

Question 1: choose the best answer. (16 marks)

.1 The material sale of inventory items by a parent company to an affiliated company .a enters the consolidated revenue computation only if the transfer was the result of arm’s length .bargaining .b affects consolidated net income under a periodic inventory system but not under a perpetual .inventory system .c .does not result in consolidated income until the merchandise is sold to outside parties .d .does not require a working paper adjustment if the merchandise was transferred at cost

.2 PPP Corporation owns a 40% interest in SSS Company, acquired several years ago at a cost equal to book value and fair value. SSS sells merchandise to PPPr for the first time in 2005. In computing income from the investee for 2005 under the equity method, PPPr uses which ?equation .a .of SSS’s income less 100% of the unrealized profit in PPPr's ending inventory 40% .b .of SSS’s income plus 100% of the unrealized profit in PPPr's ending inventory 40% .c .of SSS’s income less 40% of the unrealized profit in PPPr’s ending inventory 40% .d .of SSS’s income plus 40% of the unrealized profit in PPPr’s ending inventory 40%

.3 In situations where there are routine inventory sales between parent companies and subsidiaries, when preparing the consolidation statements, which of the following line items is ?indifferent to the sales being either upstream or downstream .a .Consolidated retained earnings .b .Consolidated gross profit .c .Noncontrolling interest expense .d .Consolidated net income

.4 The consolidation procedures for intercompany sales are similar for upstream and downstream sales .a .if the merchandise is transferred at cost .b .under a periodic inventory system but not under a perpetual inventory system .c .if the merchandise is immediately sold to outside parties .d .when the subsidiary is 100% owned

.5 A parent company regularly sells merchandise to its 70%-owned subsidiary. Which of the ?following statements describes the computation of minority interest income .a .The subsidiary’s net income times 30% .b The subsidiary’s net income x 30%) + unrealized profits in the beginning inventory – ) .unrealized profits in the ending inventory .c The subsidiary’s net income + unrealized profits in the beginning inventory – unrealized ) .profits in the ending inventory) x 30% .d The subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits ) .in the beginning inventory) x 30%

1 .6 SSS Corporation, a 90%-owned subsidiary of PPP Corporation, sold inventory items to its parent at a $24,000 profit in 2005. PPP resold one-third of this inventory to outside entities. SSS reported net income of $100,000 for 2005. Minority interest income that will appear in the consolidated income statement for 2005 is .a .8,400 $ C .$10,000 .b .9,200 $ D .$10,800

.7 Which of the following will be debited to the Investment account when the equity method is ?used .a .Investee net losses .b .Investee net profits .c .Investee declaration of dividends .d .Depreciation of excess purchase cost attributable to investee equipment

.8 A parent company uses the equity method to account for its wholly-owned subsidiary. The company correctly uses this method and has fully reflected all items of subsidiary gain, loss, income, deductions, and dividends. If the parent company is preparing the consolidation working papers, which of the following will be a correct working paper procedure for the ?Investment account .a .A debit for a subsidiary loss and a credit for dividends received .b .A credit for subsidiary income and a debit for dividends received .c .A debit for subsidiary dividends received and a credit for a subsidiary loss .d .A credit for a subsidiary loss and a credit for dividends received

.9 A parent corporation owns 55% of the outstanding voting common stock of one domestic subsidiary, but does not control the subsidiary because it is in bankruptcy. Which of the ?following statements is correct .a The parent corporation must still prepare consolidated financial statements for the economic .entity .b The parent corporation must stop using the equity method of accounting for the subsidiary .and start using the cost method .c The parent company may continue to use the equity method but the subsidiary cannot be .consolidated .d The parent company would suspend the operation of the Investment account until notified by .the bankruptcy court that the subsidiary has emerged from bankruptcy

.10 The majority of errors in consolidated statements .a result because the Investment in Subsidiary account on the parent’s books and the subsidiary .equity accounts on the subsidiary’s books are reciprocal .b have conceptual problems from the minority interest representation of the equity investment .in consolidated net assets by stockholders outside the affiliation structure .c .involve the amortization of book/market differences .d .appear when the consolidated balance sheet does not balance

.11 At the beginning of 2005, PPP Inc. acquired an 80% interest in SSS Corporation when the book values of identifiable net assets equaled their fair values. On December 26, 2005, SSS declared dividends of $50,000, and the dividends were unpaid at year-end. PPP had not recorded the dividend receivable at December 31. A consolidated working paper entry is necessary to .a .enter $50,000 dividends receivable in the consolidated balance sheet .b .enter $40,000 dividends receivable in the consolidated balance sheet .c .reduce the dividends payable account by $40,000 in the consolidated balance sheet .d .eliminate the dividend payable account from the consolidated balance sheet

2 .12 A parent company uses the equity method to account for its wholly-owned subsidiary, but has applied it incorrectly. In each of the past four full years, the company adjusted the Investment account when it received dividends from the subsidiary but did not adjust the account for any of the subsidiary’s profits. The subsidiary had four years of profits and paid yearly dividends in amounts that were less than reported net incomes. Which one of the following statements is correct if the parent company discovered its mistake at the end of the fourth year, and is now ?preparing consolidation working papers .a The parent company's Retained Earnings will be increased by the cumulative total of four .years of subsidiary profits .b The parent company's Retained Earnings will be increased by the cumulative total of the first three years of subsidiary profit, and the Subsidiary Income account will be increased by the .profit for the current year The parent company's Subsidiary Income account will be increased by the cumulative total of .c .four years of subsidiary profits A prior period adjustment must be recorded for the cumulative effect of four years of .accounting errors .d

.13 PPP Corporation acquired a 60% interest in SSS Company on January 1, 2005, for $70,000 cash when SSS had Capital Stock of $60,000 and Retained Earnings of $40,000. All excess purchase cost was attributable to equipment with a 10-year (straight-line) life. SSS suffered a $10,000 net loss in 2005 and paid no dividends. At year-end 2005, SSS owed PPP $12,000 on account. PPP’s separate income for 2005 was $150,000. Consolidated net income for 2005 was .a .$135,800 .b .$136,800 .c .$143,000 .d .$144,000

14. On consolidated working papers, a subsidiary’s income has .a .to be reduced from beginning retained earnings .b .to be completely eliminated .c to have an allocation between the noncontrolling interest share and the parent’s share (which .(is eliminated .d .only an entry in the parent company's general ledger

.15 ?Which one of the following will increase consolidated retained earnings .a .An increase in the value of goodwill subsequent to the parent's date of acquisition .b The amortization of a $10,000 excess in the fair value of a note payable over its recorded .book value .c The depreciation of a $10,000 excess in the fair value of equipment over its recorded book .value .d The sale of inventory by a subsidiary that had a $10,000 excess in fair value over recorded .book value on the parent's date of acquisition

.16 In contrast with single entity organizations, consolidated financial statements include which of the ?following in the calculation of cash flows from operating activities under the direct method .a .The change in the balance sheet of the investee account .b .Noncontrolling interest dividends .c .Noncontrolling interest income expense .d .Cash dividends from equity investees Please transfer your answer to the following table: Q. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 ANSWER C C B D A A B D C D C B C C B D

3 Decide whether each statement is true and false: (5 marks) 1. In the consolidated balance sheet, the assets and liabilities of the subsidiary are combined with those of the parent on an item by item basis. 2. Assets and liabilities are reflected at their market value at the date of acquisition and good will is amortized. 3. Under the partial equity method, the investor adjusts the investment account up ward for its share of the investee's earnings and dividends declared. 4. Assuming a FIFO cost flow ,(beginning retained earning –parent ) account should be debited for the inventory adjustment -assuming market value of subsidiary inventory to be higher than its book value- when allocating the difference between implied value and book value at the year of acquisition . 5. If the intercompany sales were not eliminated ,the consolidated gross profit would be correct .

Please transfer your answer to the following table: Q. NO. 1 2 3 4 5 ANSWER

Question 3: (23 marks) PPP Corporation paid $24,800 for an 80% interest in SSS Corporation on January 1, 2004, at which time SSS’s stockholders’ equity consisted of $15,000 of Common Stock and $6,000 of Retained Earnings. The fair values of SSS Corporation’s assets and liabilities were identical to recorded book values when PPP .acquired its 80% interest .SSS Corporation reported net income of $4,000 and paid dividends of $2,000 during 2004 :PPP Corporation sold inventory items to SSS during 2004 and 2005 as follows

2004 2005 PPP’s sales to SSS 5,000 $ 6,000 $ PPP’s cost of sales to SSS 3,000 3,500 Unrealized profit at year-end 1,000 1,500 .The accounts payable of SSS include $1,500 owed to PPP for inventory purchases The following conversion to equity schedule provides information that may be helpful in completing the .consolidation working papers for the year ended December 31, 2005

Retained Investment Income Earnings In SSS from SSS :Prior years

Inventory profit $ ( 1,000 ) ( 1,000 )$

:Current year

Inventory profit-2004 $ 1,000 $ 1,000 $ Inventory profit-2005 $ ( 1,500 )$ ( 1,500)$ Totals $ ( 1,000 ) ( 1,500 )$ ( 500 )$

:Required

Financial statements of PPP and SSS appear in the first two columns of the partially completed working papers. Complete the consolidation working papers for PPP Corporation and Subsidiary .for the year ended December 31, 2005

4 PPP Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2005 Eliminations -Non Balance PPP SSS Debit Credit .Cntrl Sheet INCOME $ $6,000 $57,000 STATEMENT 43,000 $20,000 Sales Income from 500 SSS 7,200 6,700 1,500 6,000 Cost of Sales (22,000 ) (8,000 ) 1,000 (24,500 ) Other expenses (12,200 ) (3,000 ) (15,200 ) Minority income 1,800 (1,800 ) Net income 16,000 9,000 15,500 Retained 1,000 Earnings 10,000 8,000 8,000 9,000 Retained Earnings 1/1 Add: Net income 16,000 9,000 15,500 Less: Dividends (10,000 ) (5,000 ) 4,000 (1,000) (10,000 ) Retained Earnings 12/31 $ 16,000 $12,000 $14,500 BALANCE SHEET 5,400 3,000 8,400 Cash Net Receivables 14,000 10,000 1,500 22,500 Dividend Receivable 2,000 2,000 Inventories 18,000 8,000 1,500 24,500 Goodwill 8,000 8,000 Plant assets-net 24,000 31,000 55,000 Investment in 1,000 1,500 SSS 29,600 2,700 26,400 TOTAL ASSETS $ 93,000 $52,000 $118,400 LIAB. & EQUITY Accounts payable 17,500 12,500 1,500 28,500 Dividend payable 7,000 2,500 2,000 7,500 Other debt 12,500 10,000 22,500 Capital stock 40,000 15,000 15,000 40,000 Retained Earnings 16,000 12,000 14,500 Noncntrl. Interest 1/1 4,600 4,600 Noncntrl. 12/31 Interest 5,400 5,400 TOTAL LIAB. & $93,000 $52,000 $118,400 EQUITY

5 Question 4: answer the following (21 marks)

: Give the reason for preparing the following elimination enteritis .1 a. Sales 200000 Purchases (COGS) 20000 …………………………………………………………………………………………… …………………………………………………………………………………………… …………………………………………………………………………………………… b. Investment in subsidiary 20000 Dividends declared 20000 …………………………………………………………………………………………… …………………………………………………………………………………………… …………………………………………………………………………………………… c. Investment in subsidiary 60000 Beginning retained earning –parent 60000 …………………………………………………………………………………………… ...…………… …………………………………………………………………………………………… ……………………………………………………………………………

2. Give two differences between using the cost method and partial equity method in the elimination procedures ? ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… …………………………………………………………………………………………......

? What is the difference between the parent concept and the economic entity concept .3 ……………………………………………………………………………………………… ……………………………………………………………………………………………… …………………………………………………………………………………………… ……………………………………………………………………………………………

What are the purposes of the elimination entries related to the sale of inventory .4 ? between parent and subsidiary companies ……………………………………………………………………………………………… ……………………………………………………………………………………………… ……………………………………………………………………………………………… ………………………………………………………………………………………………

With best wishes Mohammad Marwan Al Ashi & Ghadeer Mohtadi