Unity University- College of Distance Education – Advanced Accounting I-36

UNITY UNIVERSITY
COLLEGE OF DISTANC EDUCATION
DEPARTMENT OF Accounting and Finance
Advanced Accounting I

36
WORKSHEET
Name: _________________________________________________

ID No._________________

Centre: ___________________ Semester ___________ Academic Year ____________

This is a worksheet paper you are expected to do on your own. It carries 25 points. The
paper should be completed and mailed to the College of Distance Education. Do not try to
complete the worksheet until you have covered all the lessons and exercises in the course
material.
Any questions in the course that you have not been able to understand should be stated on
a separate sheet of paper and attached to this worksheet then your tutor will clarify them
for you.
After completing this paper, be certain to write your Name, Id No and Address on the first
page and the answer sheet.

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Unity University- College of Distance Education – Advanced Accounting I-36

Part I. Write "true” if the statement is correct and "False " the statement is
incorrect.
1. Adjustments for depreciation and amortization of differences between current fair
values and carrying amounts of a subsidiary's identifiable net assets on the date of
business combination are recorded on the subsidiary's books.
2. Equity method for the operating results of the subsidiary stresses the legal substance of
the parent-subsidiary relationship.
3. Under the cost method the parent company accounts for the operations of a subsidiary
only to the extent that dividends are declared by the subsidiary.
4. In the equity method of accounting for an investment in a subsidiary, dividends from the
subsidiary are accounted for by the parent company as reduction in the carrying amount
of the Investment in Subsidiary Common Stock ledger account.
5. An event or transaction in which two businesses are brought under the same ownership,
economic entity, or reporting and reporting entity is known as an internal expansion of a
firm.

Part II. For each of the following question select a letter corresponding with the
best answer |(10 points)
1. In a foreign currency transaction, if the foreign currency is strengthening in value against
the local currency, then which of the following is necessarily true?
A. The direct exchange rate is decreasing
B. The indirect exchange rate is increasing
C. Import decreases in volume
D. Export increases in volume
E. All of the above
2. Which of the following journal entry formats is appropriate under the equity method of
accounting to record the parent company's share of a subsidiary's dividend declaration?

A. Intercompany Dividends Receivable XXX  

       Investment in Subsidiary Common Stock   XXX
B. Cash XXX  
       Intercompany Dividend Revenue   XXX
C. Intercompany Dividends Receivable XXX  
       Intercompany Dividend Revenue   XXX
D. Investment in Subsidiary Common Stock XXX  
       Intercompany Dividend Revenue   XXX
E. None of the above

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Unity University- College of Distance Education – Advanced Accounting I-36

3. In the equity method of accounting for a subsidiary's operations, the parent company's
share of the subsidiary's adjusted net income not distributed as dividends is credited in a
closing entry to the following ledger account:
A. Intercompany Investment Income
B. Retained Earnings of Subsidiary
C. Retained Earnings
D. Investment in Subsidiary Common Stock
E. None of the above
4. A business combination between companies in the same industry and producing similar
products is known as:
A. conglomerate
B. Vertical
C. Horizontal
D. A combination is not possible between them
E. None of the forgoing
5. which one of the following is a purpose business combination:
A. economies of scale allowing greater efficiency and negotiating power
B. diversification of business risk
C. quick entry for a new and existing products into domestic and foreign market
D. a and b
E. all of the above
6. If a home office bills merchandises shipments to the branch at a mark of 25% on cost,
the mark on billed price would be:
A. 16.67%
B. 20%
C. 25%
D. 30%
E. None of the above
7. The reorganization of bankruptcy may involve all of the following except:
A. Lengthening the term to maturity of liabilities
B. Exchanging some debts with equity
C. Revising the interest rates on debt securities
D. Distribution of cash to partnership according to their capital balances
E. None of the above
8. Assume an Ethiopian exporter wants to sell goods for importer in Britain. If Br.14.85 is
required to acquire one units of British pound, the amount of pound(s) required to
acquire Br.500,000 is:
A. ₤7,425,000
B. ₤33,670
C. ₤500,000
D. ₤0.0.0000297
E. None of the above

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Unity University- College of Distance Education – Advanced Accounting I-36

9. In a purchase -type business combination resulting in a parent company-wholly owned

subsidiary relationship, goodwill developed in the working paper is attributed to:
A. In its entirety to the subsidiary
B. In its entirety to the parent company
C. To both the parent company and the subsidiary, in the ratio of current fair values
of identifiable net assets.
D. In its entirety to the consolidated company
E. None of the above
10. Foreign currency translation adjustments arising from translation of the financial
statements of a foreign subsidiary are currently reported in:
A. Stockholders’ equity section of the balance sheet
B. Revenue or expenses of the foreign entity
C. Consolidated net income of the parent company and the foreign subsidiary
D. Paid-in capital of the parent company
E. None of the above
Part III. Workout questions: show your computation clearly
On January 1/2011(date of business combination), ABC Company issued 10,000 shares of its
$20 par ($45 current fair value) common stock to purchase 90% of the outstanding common
stocks of M Company. In addition the following out of pocket costs were incurred in relation to
the business combination:
 Finders’ fees and other direct business combination costs------------------$50,000
 Costs related to SEC registration statement------------------------------------120,000

Additional information
 On the date of business combination M company had the following stock holder's equity
accounts:

Common stocks $200,000

Additional paid in capital 50,000
Retained earnings 150,000
 On the date of business combination, all of M company’s assets and liabilities had current
fair values equal to book values except for the following assets having excess of current fair
values over book values of:
 Inventory (FIFO method)------------------------------6,000
 Land ----------------------------------------------------$12,000
 Machinery (5 years economic life)-------------------10,000
 Building (4 years of remaining life)--------------------8,000
 Patent (amortizable over 10 years) -------------------4,000
 Any good will from this combination is to be amortized over 10 years.

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Unity University- College of Distance Education – Advanced Accounting I-36

 As per the parent company’s policy, all of the machinery and inventory amortization is
allocated entirely to cost of goods sold and that of Building is allocated 50% each to CGS and
operating expenses but that of patent amortizations is allocated entirely to operating
expenses.
 M Company had reported the following regarding its periodic Net income and dividends
declared for the years ended December 31:

Net income reported Dividend declared

December 31/2011 $100,000 $40,000
The parent company uses an equity method to account for subsidiary's operating results.
Required:
1. On the date of business combination (on January 1/2011),
i) Record the necessary journal entry on the date of business combination for the
issuance of common stock and payment of out of pocket costs.
ii) Calculate the total cost of combinee on the date of business combination.
iii) Calculate the current fair values of Net assets acquired.
iv) Calculate the Minority interest in Net assets of the subsidiary.
v) Calculate the resulted Goodwill/BPE.
vi) Record the working paper elimination entry.

Answer Sheet
Part I: True or False
1. _________
2. _________
3. _________
4. _________
5. _________

Part II: Multiple Choices

1. _______ 6. ______
2. _______ 7. ______
3. _______ 8. ______
4. _______ 9. ______
5. _______ 10. ______