ADMAS UNIVERSITY

FACULTY OF BUSINNES
Department Accounting and Finance
Degree In Accounting and Finance
Advanced Financial Accounting (AFA): AcFn - 3091
Worksheet and Assignment: From Chapter One to Chapter Five

InstructionS
In this assignment, you are going to prepare individual assignment on ACCOUNTING FOR JOINT
VENTURES, ACCOUNTING FOR PUBLIC ENTERPRISES IN ETHIOPIA, ACCOUNTING FOR
INSTALLMENT AND CONSIGNMENT SALES, AGENCY AND PRINCIPAL: HEAD OFFICE AND
BRANCH AND BUSINESS COMBINATIONS. This individual Assignment is meant to give you
exposure to basic concepts about the accounting and reporting issues of the above Five Items
and also to encourage you to "look around" for the type of work you may face in the future as
an Accounting and Finance professional.
BESIDES:
1 Your answers must be clear, specific and relevant
2 Workout the questions according to the directions beside the question. Neatness
and readability has value.
3 Copying each other will result in complete cancellation of your result and do
not be free rider person.
4 Submission date as of May 31, 2020.
5 Late submission shall result in a penalty of Two Marks for each day after the
submission date only for the Next Five days from the final submission date.

CHAPTER ONE
1 B and M agree to import Russian timber into Ethiopia. On 1st July, 18994 they
opened a joint bank account with $ 25,000 towards which B contributed $ 15,000
and M contributed $ 10,000. They agree to share profits and losses in proportion
to their cash contributions. They remitted to their agent in Russia $ 20,000 to pay
for timber purchased, and later $ 2,100 in settlement (commission) of his account.
Freight, insurance and postage charges amounted to $ 3,900. On Dec. 31, 1994
the sales amounted to $ 28,740 which enabled them to repay themselves with cost
originally advances, (no account to be taken of interest). They then decided to close
the venture and M agreed to take over the timber unsold for $ 1,260, which is to
be deducted from his share of profit.
Required: Prepare the necessary entries and accounts showing the amount of cash
available for division by way of profits and how the same is divisible between B and
M.

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 2 P and S doing business separately as building contractors, undertake jointly to
construct a building for newly started Joint Stock Company for a contract price of
$ 100,000 payable as to $ 80,000 by installment in cash and $ 20,000 in fully paid
stocks of the Company. A bank account is opened in their joint names, P paying
in $ 50,000 and S $ 25,000. They are share profit or loss in the proportion of 2/3
and 1/3 respectively. Their transactions were as follows:
Paid wages $ 30,000
Bought materials 40,000
Material supplied by P 5,000
Material supplied by S 4,000
Architect’s fees paid by P 2,000
The contract was completed and price duly received. The Joint Venture was closed
by P taking up all the stocks of the Company at an agreed valuation of $ 16,000.
Required: Prepare necessary entries in the books of Joint Venture and show the
final distribution.

3 R and S enter into a joint venture to import silk. On 1st January, 1988, they opened
a Joint Bank Account with the Commercial Bank of Ethiopia, R contributing $
20,000 and S $ 10,000. They agreed to share incomes in the ratio of the capitals
introduced by them. On 15th February, 1988, they remitted to a manufacturer in
Japan $ 25,000 for the goods received and incurred an expense of $ 800 for freight,
insurance, etc. The goods were sold for $ 33,000 for which the selling expenses
were as follows:
Warehouse rent $ 200, Commission payable to S on the gross amount of Sales 10%
and Miscellaneous expenses $ 300.
Required: Prepare journal entries and necessary ledger accounts showing the final
distribution of cash among the co-venturers.

4 Mr. S and Mr. R carrying on a business separately as contractors, jointly takes up

the work of constructing a building at an agreed price of $350,000 payable in cash
$ 240,000 and in fully paid stocks of a company for the balance of $110,000. A
bank account is opened in which Mr. s and Mr. R paid $75,000 and $50,000
respectively. The following costs were incurred in completing the construction and
the contract price was duly realized: Wages paid $90,000, Materials purchased for
Cash $ 210,000, Materials supplied by R from his stock $27,000, consulting
Engineer’s fees paid by Mr. S $ 6,000. The accounts were closed, Mr. S taking up
all the stocks of the company at an agreed valuation of $ 48,000, treating loss on
shares as Joint Venture Loss and Mr. R taking the remaining stock of material at
$ 9,000.
Required: Prepare and close the Joint Venture Account and the Personal Accounts
of Mr. S and Mr. R assuming that separate set of books are opened for this purpose
and that the net result of the venture is shared by Mr. S and Mr. R in the ratio of
2 : 1.

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 5 A and B agree to enter into a joint venture to buy and sell second-hand ice-cream
vehicles and to share profits and losses in the ratio of 5:3 respectively. It was agreed
that/I would record all details of the venture in his books of account.
On 21st December, 2003, B purchased two vehicles and paid cash Br. 20,000 on
2nd January’, 2004. He spent sums of Br. 2,480 on repairs, Br. 240 on driver’s
wages and Br. 360 on temporary insurance cover. He sold the vehicles a week later
for Br. 28,000 subject to a 2% cash discount if paid within seven days. He paid the
proceeds of sale into his bank account on 10th January, 2004.

On 31st January, 2004, A purchased five vehicles for Br. 50,000 of which he
managed to sell three for Rs 36,000 for cash on the same day, without incurring
any expenses. The fourth vehicle was sold for Br. 13,500 and on 7th February,
2004, he received a Bill Receivable to be presented for payment in three months’
time.

On 31st March, 2004, the fifth vehicle was still unsold and it was agreed that B
should take over the vehicle at a valuation of Br. 7,500. On 31st March, 2004, the
parties made a settlement between each other, A agreeing to take the bill receivable
at a value of Br.13,180.
Required: prepare Joint Venture Account and B’s account as they would appear
in the books of A. (Assignment)

6 X and Y enter into a Joint Venture to build a multi-storeyed building. They agree
to share the profits and losses equally up to $ 50,000 from the venture. Thereafter
the profits and losses are to be share in the ratio of 3/5:2/5. X contributes plant
and machinery worth $ 40,000 and meets registration expenses worth $ 10,000.
Y contributes the plot on which the building is to be built, valued of $ 100,000.
Other expenses incurred are as follows:
Fuel and Electricity $ 40,000
Raw materials 160,000
Labor Charges 75,000
Advertisement Expenses 5,000
All the expenses were met from the Bank account opened for the Joint Venture. At
the end of the venture X agreed to take the Plant and Machinery valued at $ 10,000.
Y sold off the multi-storeyed building for a total of $ 720,000 and collected all dues
form the buyers except for one flat, valued at $ 180,000 which he kept for himself
in lieu of his expected share profits. The venturers who had agreed to maintain
Venture accounts in separate sets of books.
Required: prepare the Joint Venture Account, Joint Bank Account and Venturers’
investment Accounts.

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 7 TG Company and S company entered in to joint Venture on January 1, year 1.TG
Company invested $ 800, 000 and S company invested $ 400,000. They agreed to
share every affairs of the business in the ratio of 7:3. Trial balance of TGS Company
(Joint Venture) shows the following at the end of December 31, year 1.
Dr Cr
Investment by ventures $ 1,200,000
Gross Revenue 2,000,000
Costs and expenses $ 1,500,000
Current Liability 300,000
Long term liability 250,000
Current assets 1,350,000
Other assets 900,000 ------------
3,750,000 3,750, 000
Required: (Assignment)
A) Prepare an income statement for TGS Company
B) Prepare statement of Venturer’s Capital
C) Prepare Balance sheet
D) Prepaar3 journal entries under;
1) Equity methods
2) Proportionate share method

CHAPTER TWO
1. Assume the following information for ABC Enterprise:

ABC Enterprise
Trial Balance
Dec. 31, 2019 (Br ‘000)
Cash Br. 10,100
Accounts Receivable 5,600
Property, Plant and Equipment 2,200
Accumulated Depreciation Br. 100
Accounts Payable 150
Notes Payable 200
State Capital 18,700
Sales 5,000
Operating Expenses 2,950
Purchases 3,300 ____
24,150 24,150

In addition to the above trial balance assume that the ending inventory is Br
1,600,000; the board of directors decided to establish other reserves of Br 100,000
from the net income of the year and profit tax rate is 30%.
Required: Based on the aforementioned information: (Assignment)

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 1. prepare the income statement and balance sheet for ABC enterprise for the year
ended Dec. 31, 2019
2. Prepare the necessary closing entries?

2. Assume the following information that is obtained from the accounting records of
XYZ Company, a public enterprise, which is privatized on Dec. 31, 2019.

XYZ Enterprise
Balance Sheet
Dec. 31, 2019 (Br ‘000)
Assets Cost Market value
Cash 10,050
Accounts Receivable 2,600 2000
Inventory 1,600 2000
Property, Plant and Equipment (net) 2150 3000
Total assets 16,400

Liabilities and Capital

Accounts Payable 150
Income Tax Payable 105
Notes Payable 200
State Dividend Payable 132.75
State Capital 15,700
Legal Reserve 12.25
Other Reserves 100
Total Liabilities and Capital 16,400

If an individual investor has paid Br 20,000,000 to acquire the XYZ Company.

Required: Prepare the journal entries for privatization of the public enterprise under
the following two alternatives.
Assumption 1: Continuing with the XYZ Books
Assumption 2: Establishing New Books

CHAPTER THREE
1. At the beginning of Year 1, SANCHO Company sold merchandise on installment
basis for Br 250,000 that have cost of Br 150,000. The first payment is to be
collected at the end of Year 1. The cash collection performances are as follows:
Year 1.......................................................................................... Br.100,000
Year 2.......................................................................................... Br.70,000
Year 3.......................................................................................... Br.80,000
Required: Determine the realized gross profit to be reported each year under
Accrual Method, Cost Recovery Method, and Installment Method.

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 (Assignment)
2. Riaz Sugar Factory of Multan, consigned to Mr. Shahid of Lahore 400 bags of sugar
at $25 per bag. They also paid cartage, freight, etc. $250. The consignor drew on
consignee as an advance against the consignment at 3 months for $6,000 which
they discounted at their bank at 5 percent. The consignee sold off the goods and
rendered an account sales showing that the goods realized $12,000, out of which
he deducted his charges amounting to $80 and his commission at 5 percent.
Required: Make journal entries in respect of the above transactions in the books of
consignor as well as the consignee

3. Newton Co. had installment sales of $1,000,000 and cost of installment sales of
$700,000 in 2010. A 2010 sale resulted in a default in 2012, at which time the
balance of the installment receivable was $30,000. The repossessed merchandise
had a fair value of $15,000.
Required:
(a) Calculate the rate of gross profit on 2010 installment sales.
(b) Make the entry to record the repossession.

4. Sawyer Furniture Company concluded its first year of operations in which it made
sales of $800,000, all on installment. Collections during the year from down
payments and installments totaled $300,000. Purchases for the year totaled
$400,000; the cost of merchandise on hand at the end of the year was $80,000.
Required: Using the installment-sales method, make summary entries to record:
(a) the installment sales and cash collections;
(b) the cost of installment sales;
(c) the unrealized gross profit;
(d) the realized gross profit.

5. ABC Manufacturing Company ships merchandise costing Br 40,000 on

consignment to XYZ Stores. XYZ pays Br 3,000 of freight costs to a transport
company, and pays Br 2,000 for local advertising costs that are reimbursable from
ABC. By the end of the period, three fourths of the consigned merchandise has
been sold for Br 50,000 cash. XYZ notifies ABC of the sales, retains a 10%
commission and the paid advertising costs, and remits the cash due to ABC.
Required: prepare journal entry that appropriately records the notification of sale
and the receipt of cash by XYZ. (Assignment)
6. Kamus Medical Center uses the cost recovery method in accounting for recognizing
revenue. The following information is available:
2005 2006 2007
Sales ................... $45,000 $60,000 $85,000
Cost of Sale 28,350 35,400 51,000
Gross profit percentage . 37% 41% 40%
Cash collections:
2005 ................. $24,000 $19,000 $ 2,000

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 2006 ................. 40,000 17,000
2007 ................. 53,000
Required: Compute the realized gross profit for each of the years 2005, 2006, and
2007 And Prepare in journal entry for 2007, under installment-sales method of
accounting. (Assignment)

7. Finley Company sells office equipment. On January 1, 2011, Finley entered into
an installment sale contract with Miller Company for a six-year period expiring
January 1, 2017. Equal annual payments under the installment sale are $936,000
and are due on January 1. The first payment was made on January 1, 2011.
Additional information is as follows:
The cash selling price of the equipment, i.e., the amount that would be realized on
an outright sale, is $4,584,000.
The cost of sales relating to the equipment is $3,825,000.
The finance charges relating to the installment period are $1,032,000 based on a
stated interest rate of 9% which is appropriate. For tax purposes, Finley
appropriately uses the accrual basis for recording finance charges.
Circumstances are such that the collection of the installment sale is reasonably
assured.
The installment sale qualified for the installment method of reporting for tax
purposes.
Assume that the income tax rate is 30%.
Required: What income (loss) before income taxes should Finley appropriately
record as a result of this transaction for the year ended December 31, 2011? Show
supporting computations in good form.

8. Pasta Inn charges an initial fee of $800,000 for a franchise, with $160,000 paid
when the agreement is signed and the balance in four annual payments. The
present value of the annual payments, discounted at 10%, is $507,200. The
franchisee has the right to purchase $60,000 of kitchen equipment and supplies
for $50,000. An additional part of the initial fee is for advertising to be provided by
Pasta Inn during the next five years. The value of the advertising is $1,000 a month.
Collectibility of the payments is reasonably assured and Pasta Inn has performed
all the initial services required by the contract.
Required: Prepare the entry to record the initial franchise fee. Show supporting
computations in good form.

9. Houser Appliances accounts for all sales of its merchandise on the installment
basis. Following is the unadjusted trial balance at 12/31/12.
Cash $45,000
Installment accounts receivable—2010 20,000
Installment accounts receivable—2011 50,000
Installment accounts receivable—2012 90,000

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 Inventory 27,400
Repossessed merchandise 4,600
Accounts payable $ 37,600
Deferred gross profit—2010 12,000
Deferred gross profit—2011 26,400
Common stock 125,000
Retained earnings 10,000
Installment sales 120,000
Cost of installment sales 78,000
Loss on repossessions 3,000
Operating expenses 13,000
$331,000 $331,000
Additional information:
2010 gross profit rate: 25%
Total cash receipts during 2012: $118,000
Merchandise sold in 2011 was repossessed in 2012 and the following entry was
prepared:
Deferred Gross Profit—2011 .................................... 2,400
Repossessed Merchandise ....................................... 4,600
Loss on Repossessions ............................................ 3,000
Installment Accounts Receivable—2011 ......... 10,000
Required:
(a) What is the gross profit rate for 2011? Show supporting computations.
(b) What is the gross profit rate for 2012? Show supporting computations.
(c) Of the total cash receipts in 2012, how much represents collections from
installment sales of: (Show supporting computations.)
(1) 2010?
(2) 2011?
(3) 2012?
(d) What is the total realized gross profit in 2012? Show supporting computations.

CHAPTER FOUR
1. Prepare the entries that are required on the books of the Shebele Company and the
separate books of its branch to record: (Assignment)
(a) Transfer of Cash Br. 1,500 and merchandise Br. 6,000 by home office to the
branch.
(b) Branch purchases of merchandise on account Br. 1,500.
(c) Branch payments on account Br. 750.
(d) Branch sales for cash Br. 6,500
(e) Branch payment of expenses Br. 2,200
(f) Home office disbursements representing branch expenses Br. 350.
(g) At the beginning of 1991 the home office acquires branch furniture on account
Br. 2,500 terms 2/10, n/30.

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 (h) The home office makes payment on the invoice within the discount period.
(i) Depreciation on the equipment on the invoice with in the discount period.
(j) At the beginning of 1992 the branch furniture is trades in for new branch
furniture costing Br. 4,000 an allowance of Br. 1,500 is received on the old
furniture an the home office pays the balance.

2. prepare journal entries in the accounting records of the home office and in the
accounting records of Branch P for each of the following transactions (omit
explanations):
(a) Home office transferred cash of Br. 5,000 and merchandise (at cost) of Br.
10,000 to Branch P. Both the home office and the branch use a perpetual
inventory system.
(b) Home office allocated operating expenses of Br. 1,500 to Branch P.
(c) Branch P informed the home office that it had collected Br. 416 on a note
payable to the home office. Principle amount of the note was Br. 400.
(d) Branch P made sales of Br. 12,500 terms 2/10, n/30, and incurred operating
expenses of Br. 2,500. The cost of goods sold was Br. 8,000 and the operating
expenses were paid in cash.
(e) Branch P reported a net income of Br. 500.

3. Brockwell Company is located in Addis Ababa and operated a branch in North

Ethiopia. Transactions related to the branch operations are as follows:
(a) The home office transferred Br. 1,000 to the branch.
(b) The merchandise costing the home office Br. 2,000 was transferred to the
branch; the merchandise is billed at cost.
(c)The sales on account totaling Br. 1,000 were made by the branch; merchandise
cost the branch Br. 500.
(d) The branch collected accounts receivable Br. 300.
(e)The home office paid and notified the branch that it had incurred Br. 500 of
general and administrative expenses to benefit the branch.
(f) The branch remitted Br. 100 cash to home office.
(g) Returned to the home office Br. 300 of the merchandise received in transaction
(b) above.
(h) The branch paid operating expenses of Br. 400
(i) The branch purchased equipment for Br. 700 cash and notified the home office
of the purchase the branch does not maintain fixed asset accounts.
Required: Prepare journal entries to record the preceding transaction for the home
office and branch office.

4. KPMG Design recently established a branch in a very popular shopping center

in the Bole Road, Addis Ababa. Following are selected transactions of the home
and branch during the first year of operations.
(a) The home office transferred Br. 20,000 cash to the branch.

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 (b) The branch purchased Br. 8,000 of merchandise on accounting from outside
suppliers.
(c) Machinery costing the home office Br. 30,000 with accumulated depreciation
of Br. 13,000 is transferred by the home office to the branch. Assets used by
the branch are carried on the books of the home office.
(d) The home office shipped merchandise costing the home office Br. 18,000 to
the branch at a billed price of cost.
(e) The branch sold merchandise on account for Br. 19,600 the merchandise cost
the branch Br. 14,000
(f) The branch paid operating expenses of Br. 3,500.
(g) Accountings receivable of Br. 6,000 were collected by the branch.
(h) The home office paid and notified the branch of operating expenses of Br.
1,800 that had been incurred on behalf of the branch.
(i) The branch transferred Br. 1,200 cash to the Home office.
(j) The branch purchased Br. 3,200 of equipment on account to be used in its
operations. Assets used by the branch are carried on the books of the head
office.
Required: Prepare the journal entries in the books of home office and branch office.

5. On January 1 year 5, Nishiyama Camera Company opened its first branch with
instructions to Wilson Gates, the branch manager to perform the functions of
granting credit, billing customers, accounting or receivables, and making
collections. The branch paid its operating expenses by checks drawn on its
bank account. The branch obtained merchandise solely from the home office;
billings from these shipments were on the basis of the cost to the home office.
The trial balance for the home office and for the branch on December 31, Year
5, were as follows:
Nishiyama Camera Company
Trial Balance
December 31, Year 5
Home Office Branch Office
Balances Debit Credit Debit Credit
Cash 42,000 14,600
Notes Receivables 7,000
Accounts Receivables 120,460 37,300
Inventories, December 31, Year 5 95,800 24,200
Furniture and Equipment (net) 48,100
Investment in Branch 82,700
Accounts Payable 41,000
Capital Stock Br. 2 par 200,000
Home Office 82,700
Retained Earnings Jan. 1, Year 5 25,000

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 Sales 400,000 101,100
Cost of Goods Sold 200,500 85,800
Operating Expenses 69,500 21,900
Totals : 666,000 666,000 183,800 183,800

The physical inventories taken on December 31, Year 5, were in agreement with the
perpetual records in the accounts of the home office and the branch.
Required: (Assignment)
A. Prepare the closing entries needed at December 31, Year 5, in the accounting
records of the branch.
B. In the home office accounting records prepare the adjusting entries pertaining
to the branch and also all closing entries for the home office.
C. Prepare a working paper for the combined financial statement of the home office
and branch.
D. Prepare Combined Income Statement, Statement of Retained Earnings and a
Combined Balance Sheet of Home Office and Branch Office.

6. KPMG Design recently established a branch in a very popular shopping center

in the Bole Road, Addis Ababa. Following are selected transactions of the home
and branch during the first year of operations.
(a) The home office transferred Br. 20,000 cash to the branch.
(b) The branch purchased Br. 8,000 of merchandise on accounting from outside
suppliers.
(c) Machinery costing the home office Br. 30,000 with accumulated depreciation
of Br. 13,000 is transferred by the home office to the branch. Assets used by
the branch are carried on the books of the home office.
(d) The home office shipped merchandise costing the home office Br. 18,000 to
the branch at a billed price of cost plus 30%.
(e) The branch sold merchandise on account for Br. 19,600; the merchandise
cost the branch Br. 14,000.
(f) The branch paid operating expenses of Br. 3,500.
(g) Accounts receivables of Br. 6,000 were collected by the branch.
(h) The home office paid and notified the branch of operating expenses of Br.
1,800 that had been incurred on behalf of the branch.
(i) The branch transferred Br. 1,200 cash to the Home office.
(j) The branch purchased Br. 3,200 of equipment on account to be used in its
operations. Assets used by the branch are carried on the books of the head
office.
Required: Prepare the journal entries in the books of home office and branch office.

7. Montex Hy-Power Pen Company bills merchandise to Branch x at Cost plus 50%
mark up and the branch maintains complete accounting records and prepares
monthly financial statements. Both the home office and branch use the

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 perpetual inventory system. Equipment used at the branch is carried in the
home office accounting records. Following are selected transactions of the home
and branch during the Year 1 of operations.
(a) Cash of Br. 1,000 was sent to the branch.
(b) Merchandise with a cost of Br. 60,000 was shipped to the branch at Cost plus
50% mark up.
(c) Equipment was purchased by the branch for Br. 500, to be carried in home
office accounting records.
(d) Sales by the branch on credit amounted to Br. 80,000 the cost of the
merchandise sold was Br. 45,000 (billed price is Br. 67,500).
(e) Collections of accounts receivable by the branch amounted to Br. 62,000.
(f) Payments for operating expenses by the branch totaled Br. 20,000.
(g) Cash of Br. 37,500 was remitted by the branch to the home office
(h) Operating expenses incurred by the home office and charged to the branch
totaled Br. 3,000.
The balances of ledgers accounts of both home office and branch office are as follows:
Home Office Branch Office
Balances Debit Credit Debit Credit
Cash 24,000 5,000
Accounts Receivables 40,000 18,000
Inventories 45,000 22,500
Equipment 150,000
Accumulated 10,000
Depreciation
Accounts Payables 20,000
Capital Stock Br. 10 150,000
Retained Earnings at 70,000
beginning
Dividends paid 40,000
Sales 400,000
Cost of Goods Sold 235,000
Operating Expenses 90,000
You are required to:
a. Prepare journal entries in the books of head office and branch office.
b. Prepare Working Paper for combined financial statements.
c. Prepare Combined Income Statement, Combined Retained Earnings
Statement and a Combined Balance Sheet.

8. The Knicks Sporting Goods, Inc., located in New York, established a branch in
in Alabama on January 1, 1997. The home office transferred Br. 3,000 of cash
and Br. 10,000 of merchandise (cost) to the branch. During the year, the branch
sold 51% of the merchandise transferred from the home office on account for

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 Br. 7,800. The branch collected cash of Br. 4,500 from accounts receivable
during the year and allowed Br. 325 in sales discounts. The branch paid Br.
1,200 of operating expense incurred for the year and remitted cash of Br. 1,000
to the home office. Ending inventory of the branch as of December 31, 1997
was Br. 4.900.
Required:
a. Prepare journal entries for the preceding 1997 transactions on the home
office and branch office.
b. Prepare a 1997 income statement for the branch.

9. Majestic Textile Company has a single branch in Toledo. On March 1, Year 1,

the accounting records of the company contains an account entitled Allowance
for Overvaluation of Branch inventories with a balance of Br. 32,000. During
March, merchandise costing Br. 36,000 was shipped to the Toledo branch and
billed at a price representing a 40% mark up on the billed price. At March 31,
the branch prepared an income statement indicating a loss of Br. 11,500 for
March, with ending inventories at billed price of Br. 25,000.
a. What was the cost of branch inventories on March 1, assuming a uniform
mark up on all shipments to the branch?
b. Prepare the journal entry to adjust the Allowance for Overvaluation of Branch
Inventories account at March 31 in the accounting records of the home office.
c. What was the correct net income or net loss for the Toledo Branch for the
month of March as reflected by the above information?

CHAPTER FIVE
1. James, Inc. acquires all of the assets and liabilities of Kenny Company on
December 31, 2008. The consideration for the deal is 50,000 shares of common
stock with a par value of $10 per share and fair market value of $50 per share
and $1,500,000 in cash. The fair value of Kenny’s net identifiable assets is
$3,650,000. Book and fair values of Kenny Company net identifiable assets
follow:
Book Values Fair Values
Current assets $500,000 $500,000
Office equipment (net) 1,700,000 2,500,000
Capitalized software (net) 200,000 600,000
Customer contracts -0- 400,000
Notes payable (300,000) (350,000)
Net assets $2,100,000 3,650,000
Required: Prepare the journal entry on James’ books to record the acquisition of
Kenny Company? (Assignment)

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 2. We continue with the illustration above. Suppose that James acquires all of
Kenny’s assets and liabilities for consideration having a fair value of $3,800,000.
This includes 50,000 shares of common stock, $20 par value, and $76 per share
fair market value.
In addition, let’s add the following out-of-pocket expenses to the acquisition
transaction:
James pays $75,000 in accounting and legal fees directly for the acquisition.
Administrative expenses of $30,000 are attributable to the acquisition.
SEC registration costs of the securities issued for the combination amounted to
$25,000.
Required: Prepare the journal entries on James’ books to reflect the acquisition?

3. Echo Corporation and Fit Company entered into a purchase statutory merger on
September 30, 2001. Under the agreement, Echo would issue 60,000 shares of
its $5 par value common stock, fair market value of $25 per share, for all 30,000
shares of Fit’s common stock. A special copyright was not previously recorded on
Fit’s records. The copyright has a current fair market value of $20,000.
Additional costs of the merger were:
SEC registration costs $40,000
Attorney and finder’s fees 30,000
At the date of the merger, Fit’s accounts appeared as follows:
Book Value Fair Market Value
Accounts receivable $400,000 $400,000
Inventories 800,000 900,000
Equipment (net) 1,000,000 1,200,000
Goodwill from previous
business combinations 50,000 -
Current liabilities 200,000 200,000
Bonds payable, 8% 900,000 850,000
Common stock, $10 par 300,000
Additional paid-in capital 50,000
Retained earnings 750,000
Required: Prepare the entries on the books of Echo Corporation to record the
business combination.

4. Poster Company acquired 100% of the outstanding voting stock of Sauce Company
on December 31, 2006. Sauce will continue as a separate legal entity following the
business combination. Consideration for the Sauce stock was 64,000 shares of
Poster Company’s $2 par value, $15 fair market value, common stock. Out-of-
pocket costs included $10,000 for SEC registration fees and $40,000 for attorney
and accountants’ fees.

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 Requirement 1: Record the business combination on Poster’s books under the
Purchase Method. (Assignment)
Requirement 2: Suppose the above business combination was accounted for as a
pooling of interests rather than a purchase, and the date of the combination was
December 31, 1999. Also, assume that Sauce’s stockholders’ equity included the
following on December 31, 1999:
Common stock, $5 par $120,000
Additional paid-in capital 20,000
Retained earnings 60,000
How was the original business combination recorded on Poster’s books the Pooling
of Interests Method? (Assignment)

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