Test Bank for Modern Advanced Accounting in Canada

Canadian 8th Edition Hilton Herauf 1259087557

9781259087554

Download full test bank at:

https://testbankpack.com/p/test-bank-for-modern-advanced-accounting-in-canada-canadian-
8th-edition-hilton-herauf-1259087557-9781259087554/

Download full solution manual at:

https://testbankpack.com/p/solution-manual-for-modern-advanced-accounting-in-canada-
canadian-8th-edition-hilton-herauf-1259087557-9781259087554/

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) Intercompany profits on sales of inventory are only realized:

A) once the inventory has been sold to outsiders.
B) when the inventory has been shipped to the purchaser.
C) once the seller receives payment for the sale.
D) when the inventory has been received by the purchaser.
Answer: A

2) If a parent company borrows money from its subsidiary, what effect (if any) will this have on the
non-controlling interest?
A) The non-controlling interest balance would be reduced by the amount of the loan.
B) The subsidiary would record any interest revenue as an extraordinary gain.
C) This would have no effect on the non-controlling interest.
D) The subsidiary would book its pro-rata share of any interest revenue.
Answer: C

3) How would any management fees charged by a Parent Company to its Subsidiary be accounted for
during the consolidation process?
A) Both the Parent's management fees and the subsidiary's related expense would be eliminated
when preparing Consolidated Financial Statements.
B) The Parent Company would only record its pro rata share of any management revenues.
C) No special accounting treatment is required, since this would have no effect on Consolidated
Net Income.
D) The Parent Company's profit on the rendering of management services would be charged to
retained earnings.
Answer: A

4) Which of the following statements best describes the required accounting treatment with respect to
income taxes on unrealized intercompany profits?

1
 A) These taxes can be ignored since an increase in income tax expense for one company is offset
by an equivalent reduction in Income Tax expense for the other.
B) They would be recognized as assets for the selling entity.
C) They would be charged to retained earnings during the preparation of Financial Statements.
D) They would be recognized as assets for the purchasing entity and liabilities for the selling
entity.
Answer: B

2
X Inc. owns 80% of Y Inc. During 2018, X Inc. sold inventory to Y for $10,000. Half of this inventory remained
in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's
warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is
20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its
Investment in Y Inc.

5) What is the after-tax dollar value of X's unrealized profits during the year on its sales to Y?
A) $2,000. B) $1,000. C) $400. D) $600.
Answer: D

6) What is the after-tax dollar value of X's realized profits during the year on its sales to Y?
A) $600. B) $2,000. C) $1,000. D) $400.
Answer: A

7) What is the after-tax dollar value of Y's unrealized profits during the year on its sales to X?
A) $400. B) $500. C) $240. D) $360.
Answer: C

8) What is the after-tax dollar value of Y's realized profits during the year on its sales to X?
A) $360. B) $240. C) $500. D) $400.
Answer: A

9) What effect (if any) would Y's unrealized profits on its sales to X have on the non-controlling
interest account on the consolidated balance sheet?
A) There would be an increase to the non-controlling interest account for the amount of $30.
B) There would be an increase to the non-controlling interest account for the amount of $48.
C) There would be a decrease to the non-controlling interest account for the amount of $48.
D) There would be no effect.
Answer: C

3
10) What would be the journal entry to eliminate any unrealized profits from the consolidated financial
statements during the year?
A) B)
Debit Credit Debit Credit
Cost of Goods Sold $400 Cost of Goods Sold $1,400
Inventory $400 Inventory $1,400

C) D)
Debit Credit Debit Credit
Sales $15,000 Sales $15,000
Cost of Goods Sold $15,000 Cost of Goods Sold $12,000
Inventory $3,000

Answer: B

11) Assuming that X Inc. used the equity method, what adjustment would have to be made to the
investment in Y account to adjust for any unrealized profits on Y's sales to X?
A) No adjustment would be required.
B) The account would have to be reduced by $48.
C) The account would have to be reduced by $192.
D) The account would have to be reduced by $240.
Answer: C

12) Assume that Y Inc. reported an after-tax net income of $20,000 in 2018, what would be Y's adjusted
net income for the year?
A) $19,840. B) $202,400. C) $19,760. D) $20,000.
Answer: C

13) When are profits from intercompany land sales realized?

A) They are realized once legal ownership of the land has been transferred.
B) They are realized when consideration has been received for the land.
C) They are realized when an agreement is signed with respect to ownership of the land.
D) They are realized only when sold to outsiders.
Answer: D

14) Under which of the following Consolidation Theories would the elimination of only the Parent's
share of any intercompany profits be required for the preparation of consolidated financial
statements?
A) The Parent Company Theory. B) The Ownership Theory.
C) The Entity Theory. D) The Proprietary Theory.
Answer: D

4
 15) Which of the following theories does NOT acknowledge the existence of a non-controlling interest
in the consolidated financial statements?
A) The Proprietary Theory. B) The Parent Company Theory.
C) The Ownership Theory. D) The Entity Theory.
Answer: A

16) Under which of the following theories is the elimination of ALL intercompany profits called for?
A) The Entity Theory. B) The Proprietary Theory.
C) The Parent Company Theory. D) The Ownership Theory.
Answer: A

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2017. On that date, Lan's
commons shares and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise
stated, assume that Kho uses the cost method to account for its investment in Lan Inc.

Lan's fair values approximated its carrying values with the following exceptions:

Lan's trademark had a fair value which was $50,000 higher than its carrying value.

Lan's bonds payable had a fair value which was $20,000 higher than their carrying value.

The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable
mature on January 1, 2027. Both companies use straight line amortization exclusively.

The financial statements of both companies for the year ended December 31, 2018 are shown below:

Income Statements

KhoInc. Lan Inc.

Sales $700,000 $640,000

Other Revenues $300,000 $160,000

Less: Expenses:
Cost of Goods Sold $280,000 $256,000
Depreciation Expense $30,000 $14,000
Other Expenses $240,000 $155,000
Income Tax Expense $90,000 $75,000

Net Income $360,000 $300,000

Retained Earnings Statements

5
 KhoInc. Lan Inc.
Balance, January 1, 2018 $200,000 $100,000
Net Income $360,000 $300,000
Less: Dividends ($60,000) ($50,000)
Retained Earnings, Dec 31, 2018 $500,000 $350,000

Balance Sheets

KhoInc. Lan Inc.

Cash $200,000 $150,000
Accounts Receivable $50,000 $150,000
Inventory $50,000 $150,000
Investment in Lan Inc. $600,000
Equipment (net) $500,000 $150,000
Trademark --- $200,000
Total Assets $1,400,000 $800,000

Current Liabilities $280,000 $150,000

Bonds Payable $120,000 $100,000
Common Shares $500,000 $200,000
Retained Earnings $500,000 $350,000
Total Liabilities and Equity $1,400,000 $800,000

Other Information:

A goodwill impairment test conducted during August 2018 revealed that the Lan's Goodwill amount on the date
acquisition had been impaired by $10,000.

During 2017, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year.
During 2018, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside
parties.

During 2017, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year.
During 2018, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties

All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both
companies is 20%.

17) What is the amount of goodwill arising from this business combination?
A) $168,000. B) $(180,000). C) $186,667. D) $120,000.
Answer: C

6
18) What would be the journal entry to record the dividends received by Kho Inc. during the year?
A)
Debit Credit
Cash $50,000
Goodwill $50,000

B)
Debit Credit
Cash $45,000
Dividend Income $45,000

C)
Debit Credit
Cash $50,000
Investment in Lan $50,000

D)
Debit Credit
Cash $45,000
Acquisition Differential $45,000

Answer: B

19) What amount of sales revenue would appear on Kho Inc.'s consolidated income statement for the
year ended December 31, 2018?
A) $1,276,000. B) $1,210,000. C) $1,400,000. D) $1,340,000.
Answer: B

20) What would be the amount of other revenue appearing on Kho Inc.'s consolidated income statement
for the year ended December 31, 2018?
A) $444,000. B) $415,000. C) $460,000. D) $410,000.
Answer: B

21) Ignoring taxes, what is the total amount of pre-tax profit from 2017 sales that was realized during
2017?
A) Nil. B) $5,000. C) $6,200. D) $9,800.
Answer: D

22) Ignoring taxes, what is the total amount of unrealized profits in inventory at the start of 2018?
A) Nil. B) $5,000. C) $6,000. D) $6,200.
Answer: D

7
23) Ignoring taxes, what is the total amount of unrealized profits in inventory at the end of 2018?
A) Nil. B) $6,000. C) $7,800. D) $8,000.
Answer: D

24) Where would be the amortization of the acquisition differential reflected on Kho's consolidated
income statement?
A) It would be reflected as a reduction of sales.
B) It would be reflected through other expenses.
C) It would be reflected through non-controlling interest in earnings.
D) It would be reflected through cost of sales.
Answer: B

25) Excluding any goodwill impairment losses, what would be the amount of the acquisition differential
amortization for 2018?
A) $4,000. B) $2,700. C) $3,000. D) $2,000.
Answer: C

26) What effect (if any) would the unrealized profits in beginning inventory have on income tax expense
for 2018?
A) They would cause a $1,240 reduction in income tax expense.
B) They would cause a $1,200 increase in income tax expense.
C) They would cause a $1,240 increase in income tax expense.
D) They would cause a $1,200 reduction in income tax expense.
Answer: C

27) What effect (if any) would the unrealized profits in ending inventory have on income tax expense
for 2018?
A) They would cause a $1,600 reduction in income tax expense.
B) They would cause a $1,600 increase in income tax expense.
C) They would cause a $1,200 reduction in income tax expense.
D) They would cause a $1,200 increase in income tax expense.
Answer: A

28) What would be the non-controlling interest amount appearing on Kho's consolidated statement of
financial position on the date of acquisition?
A) $66,667. B) $30,000. C) $120,000. D) $29,936.
Answer: A

29) What would be the non-controlling interest amount appearing on Kho's consolidated statement of
financial position at the end of 2018?
A) $57,400. B) $55,840. C) $29,936. D) $74,907.
Answer: D

8
 30) What would be the amount appearing on the December 31, 2018 consolidated statement of financial
position for trademarks?
A) $245,000. B) $236,000. C) $240,000. D) $200,000.
Answer: C

31) What would be the amount appearing on the December 31, 2018 consolidated statement of financial
position for bonds payable?
A) $234,400. B) $236,000. C) $216,000. D) $240,000.
Answer: B

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2018 for $400,000. Unless otherwise stated, LEO
uses the cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stoc
and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated a
follows:

$80,000 to undervalued inventory.

$40,000 to undervalued equipment. (to be amortized over 20 years)

The following took place during 2018:

▪ MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.

▪ LEO's December 31, 2018 inventory contained an intercompany profit of $10,000.

▪ LEO's net income was $75,000.

The following took place during 2019:

▪ MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.

▪ MARS' December 31, 2019 inventory contained an intercompany profit of $5,000.

▪ LEO's net income was $48,000.

Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to
provide the selling company with gross margin of 20%.

32) What would be the amount of the acquisition differential amortized during 2018?
A) $78,000. B) $82,000. C) $80,000. D) $120,000.
Answer: B

33) What would be the amount of the acquisition differential amortized during 2019?
A) $2,000. B) $82,000. C) $40,000. D) $78,000.
Answer: A

9
34) Assuming thatLEO uses the equity method to account for its investment in MARS, what would be
the NET increase/decrease to the investment in MARS account during 2018?
A) $43,200. B) $(49,200). C) $12,000. D) $(41,700).
Answer: D

35) Assuming once again that

LEO uses the equity method to account for its investment in MARS, what
would be the NET increase to the investment in MARS account during 2019?
A) $17,550. B) $16,000. C) $16,800. D) $20,000.
Answer: A

36) Consolidated net income attributable to the shareholders of the parent for 2018 would be:
A) $33,300. B) $12,500. C) $36,300. D) $53,200.
Answer: A

37) Consolidated net income attributable to the shareholders of the parent for 2019 would be:
A) $65,550. B) $69,150. C) $58,000. D) $56,000.
Answer: A

38) What would be the change in the non-controlling interest account for 2018?
A) Non-controlling interest would decrease by $18,000.
B) Non-controlling interest would increase by $18,000.
C) Non-controlling interest would decrease by $27,800.
D) Non-controlling interest would increase by $27,800.
Answer: C

39) What would be the change in the non-controlling interest account for 2019?
A) Non-controlling interest would decrease by $45,000.
B) Non-controlling interest would increase by $48,000.
C) Non-controlling interest would increase by $14,200.
D) Non-controlling interest would increase by $16,800.
Answer: C

40) What would be the balance in the investment in MARS account at December 31, 2018?
A) $358,300. B) $400,000. C) $318,000. D) $330,000.
Answer: A

41) What would be the balance in the investment in MARS account at December 31, 2019?
A) $400,000. B) $348,000. C) $330,000. D) $375,850.
Answer: D

42) The amount of goodwill arising from this combination would be:
A) $200,000. B) $296,667. C) $130,000. D) $120,000.
Answer: B

10
 43) What would be the balance in the non-controlling interest account on the date of acquisition?
A) $403,000. B) $400,000. C) $397,000. D) $266,667.
Answer: D

On June 30, 2015, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent
Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a
rate of 20%. On June 30, 2017, the subsidiary sold the land to an outside party for $275,000. This transaction
was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its
subsidiary and accounts for its investment using the cost method.

44) What amount will appear on the "Gain on sale of land" line in Parent Company's consolidated
income statement for the year ended December 31, 2015?
A) $0. B) $96,000. C) $120,000. D) $240,000.
Answer: A

45) What amount will appear on the "Gain on sale of land" line in Parent Company's consolidated
income statement for the year ended December 31, 2017?
A) $0. B) $93,000. C) $124,000. D) $155,000.
Answer: D

46) What effect will the elimination of the unrealized intercompany gain (in the preparation of the
consolidated income statement) have on consolidated income tax expense for 2015?
A) It will have no effect.
B) It will increase income tax expense by $24,000.
C) It will reduce income tax expense by $18,000.
D) It will reduce income tax expense by $24,000.
Answer: D

47) What effect will the adjustment for the realization of the intercompany gain (in the preparation of
the consolidated income statement) have on consolidated income tax expense for 2017?
A) It will have no effect.
B) It will reduce income tax expense by $18,000.
C) It will increase income tax expense by $24,000.
D) It will reduce income tax expense by $24,000.
Answer: C

48) What effect will the adjustment for the realization of the intercompany gain (in the preparation of
the consolidated income statement) have on the non-controlling interest in income for 2017?
A) It will have no effect on the non-controlling interest in income.
B) It will increase the non-controlling interest in income by $24,000.
C) It will decrease the non-controlling interest in income by $24,000.
D) It will increase the non-controlling interest in income by $30,000.
Answer: A

11
 49) On December 31, 2015, the land account balance in the books of Parent Company is $300,000 and
in the books of the subsidiary is $300,000. No acquisition differential was allocated to land. What
will be the amount of land in the consolidated balance sheet at December 31, 2015?
A) $600,000. B) $510,000. C) $480,000. D) $504,000.
Answer: C

50) On December 31, 2016, the land account balance in the books of Parent Company is $300,000 and
in the books of the subsidiary is $340,000. No acquisition differential was allocated to land. What
will be the amount of land in the consolidated balance sheet at December 31, 2016?
A) $550,000. B) $544,000. C) $640,000. D) $520,000.
Answer: D

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

P Inc. owns 70% of Q Inc. During 2017, P Inc sold inventory to Q for $20,000. Half of this inventory remained
in Q's warehouse at December 31, 2017 year end. On January 1, 2017, Q Inc had inventory in its warehouse
which was purchased from P for $5,000. This inventory was sold to an outside party during 2017. Also during
2017, Q Inc sold inventory to P Inc. for $10,000. 50% of this inventory remained in P's warehouse at year end.
Both companies are subject to a tax rate of 25%. The gross profit percentage on sales is 30% for both
companies. P Inc. uses the cost method to account for its Investment in Q Inc. The inventories of both
companies as at December 31, 2017 was all sold to outsiders during 2018. There were no intercompany
transactions during 2018.

51) Prepare a schedule showing the realizedand unrealized profits for P Inc. for 2017 and 2018. Your
schedule should include both pre-tax and after-tax amounts.
Answer:
2017
Profits realized during 2017 Before Tax After Tax
Inventory Sales $3,000 $2,250
Profits Realized from Opening Inventory $1,500 $1,125

Unrealized Profits at Year-end (2017)

Inventory Sales $3,000 $2,250

2018
Profits realized during 2018
Inventory Sales $3,000 $2,250

12
 52) Prepare a schedule showing the realizedand unrealized profits for Q Inc. for 2017 and 2018. Your
schedule should include both pre-tax and after-tax amounts.
Answer:
2017
Profits realized during 2017 Before Tax After Tax
Inventory Sales $1,500 $1,125

Unrealized Profits at Year-end (2017)

Inventory Sales $1,500 $1,125

2018
Profits realized during 2018
Inventory Sales $1,500 $1,125

53) In
your own words, explain what effect (if any) these intercompany transactions would have on
non-controlling interest.
Answer: Non-controlling interest is only affected by upstream transactions - that is, sales from a
subsidiary to the parent. Unrealized profits serve to decrease the non-controlling interest by
the non-controlling interest's pro rata share of the after-tax upstream profits. Conversely,
profits realized in a given year serve to increase the non-controlling interest by the
non-controlling interest's pro rata share of the after-tax upstream profits.
In 2017, there will be an unrealized profit in ending inventory from the upstream transactions;
this will decrease the non-controlling interest in income (and the non-controlling interest accou
on the consolidated balance sheet) by 30% of the after-tax unrealized profit, i.e., 30% of $1,12
or $338.
However, the unrealized upstream profits in inventory at the end of 2018 will have been
realized during 2018, thus increasing the non-controlling interest in income and the
non-controlling interest account by $338 (i.e. $1,125 × 30%).

MAX Inc. purchased 80% of the voting shares of MIN Inc for $750,000 on January 1, 2015. On that date,
MAX's common shares and retained earnings were valued at $300,000 and $150,000 respectively. Unless
otherwise stated, assume that MAX uses the cost method to account for its investment in MIN Inc.

MIN's fair values approximated its carrying values with the following exceptions:

MIN's trademark had a fair value which was $80,000 higher than its carrying value.

MIN's bonds payable had a fair value which was $30,000 higher than their carrying value.

The trademark had a useful life of exactly twenty years remaining from the date of acquisition. The bonds payabl
mature on January 1, 2035. Both companies use straight line amortization exclusively.

The financial statements of both companies for the year ended December 31, 2017 are shown below:
13
Income Statements

MAXInc. MINInc.
Sales $640,000 $520,000
Other Revenues $360,000 $160,000

Less: Expenses
Cost of Goods Sold $480,000 $390,000
Depreciation Expense $40,000 $20,000
Other Expenses $80,000 $40,000
Income Tax Expense $250,000 $115,000

Net Income $250,000 $115,000

Retained Earnings Statements

MAXInc. MINInc.
Balance, January 1, 2017 $200,000 $350,000
Net Income $250,000 $115,000
Less: Dividends ($50,000) ($65,000)
Retained Earnings, Dec 31, 2017 $400,000 $400,000

Balance Sheets

MAXInc. MINInc.
Cash $100,000 $150,000
Accounts Receivable $150,000 $150,000
Inventory $200,000 $150,000
Investment in MIN Inc. $750,000 ---
Equipment (net) $300,000 $250,000
Trademark - $300,000
Total Assets $1,500,000 $1,000,000

Current Liabilities $300,000 $150,000

Bonds Payable $300,000 $150,000
Common Shares $500,000 $300,000
Retained Earnings $400,000 $400,000
Total Liabilities and Equity $1,500,000 $1,000,000

14
OtherInformation:

A goodwill impairment test conducted during August 2017 revealed that the Min's goodwill amount on the date
acquisition had been impaired by $5,000.

During 2016, Max sold $60,000 worth of Inventory to Min, 80% of which was sold to outsiders during the year.
During 2017, Max sold inventory to Min for $80,000. 75% of this inventory was resold by Min to outside parties
during that year.

During 2016, Min sold $40,000 worth of Inventory to Max, 80% of which was sold to outsiders during the year.
During 2017, Min sold inventory to Max for $50,000. 80% of this inventory was resold by Max to outside partie
during that year.

All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both
companies is 50%.

54) Compute MAX's Goodwill at the date of acquisition.

Answer:
Purchase Price for 80% ownership interest $750,000

Imputed price of 100% of fair value of net identifiable $937,500

assets ($750,000 / 0.80)

Less: carrying value of MIN: $450,000

Add/Deduct: fair value increments:
Trademark $ 80,000
Bonds Payable ($30,000) $500,000

Goodwill $437,500

15
55) Prepare a schedule of Realized and Unrealized Profits for 2017 for both companies. Show your
figures before and after tax.
Answer: Schedule ofRealized and Unrealized Profits,2017

Unrealized Profits Realized During 2017:

MAX Inc: Before Tax After Tax
Profits in Beginning Inventory $2,400 $1,200
($12,000 - $12,000/1.25)

MIN Inc:
Profits in Beginning Inventory $1,600 $800
($8,000 - $8,000/1.25)

Unrealized Profits at December 31, 2014:

MAX Inc: Before Tax After Tax
Inventory Sales $4,000 $2,000
($20,000 - $20,000/1.25)

MIN Inc:
Inventory Sales $2,000 $1,000
($10,000 - $10,000/1.25)

16
56) Compute MAX's Consolidated Net Income for 2017.
Answer:
MAX's Income $250,000
Less: Dividends from MIN ($ 52,000)

Less:
Goodwill Impairment Loss ($1,000 to NCI) ($5,000)
Ending Inventory Profit ($2,000)

Add: Opening Inventory Profit: $1,200

MAX's Net Income - Adjusted $192,200

MIN's Net Income $115,000

Less: Ending Inventory Profit ($1,000)
Add: Opening Inventory Profit $800
Amortization of acquisition differential ($2,500)
MIN's Net Income $112,300

Consolidated Net Income $304,500

57) Calculate the non-controlling interest (Balance Sheet) as at December 31, 2017.
Answer:
Non-Controlling Interest at Acquisition: ($937,500 × $187,500
20%)

Add (Deduct):
Increase in MIN's Retained Earnings $250,000
Add/Deduct: Acquisition differential amortizations:
Trademark ($ 12,000)
Bonds Payable $4,500
Goodwill Impairment ($5,000)
Less: Unrealized Inventory Profit at year end: ($1,000)
Subtotal ($236,500)
×20% $47,300

Non-Controlling Interest $234,800

17
58) Calculate Consolidated Retained Earnings as at December 31, 2017.
Answer:
MAX's Retained Earnings $400,000

Less:
Ending Inventory Profit ($2,000)
MAX's Adjusted Retained Earnings $398,000

Increase in MIN's Retained Earnings since acquisition: $250,000

Acquisition differential amortization (2015 - 2017) ($7,500)
Less: Unrealized Profit in Ending Inventory ($1,000)
Less: Goodwill Impairment ($5,000)
MIN's Adjusted Retained Earnings Increase $236,500
×80% $189,200

Consolidated Retained Earnings $587,200

59) Prepare MAX's Consolidated Statement of Financial Position as at December 31, 2017.
Answer: MAX Inc
Consolidated Statement of Financial Position
as at December 31, 2017

Cash $250,000
Accounts Receivable $300,000
Inventory $344,000
Goodwill $432,500
Equipment (net) $550,000
Trademark $368,000
Future Income Taxes $3,000
Total Assets $2,247,500

Current Liabilities $450,000

Bonds Payable $475,500
Non-Controlling Interest $234,800
Common Shares $500,000
Retained Earnings $587,200
Total Liabilities and Equity $2,247,500

18
YIN Inc. purchased 75% of the voting shares of YANG Inc for $500,000 on July 1, 2015. On that date, YANG
Inc.'s Common Shares and Retained Earnings were valued at $200,000 and $100,000 respectively. Unless
otherwise stated, assume that YIN uses the cost method to account for its investment in YANG Inc.

YANG's fair values approximated its carrying values with the following exception:

YANG's bonds payable had a fair value which was $50,000 higher than their carrying value.

The bonds payable mature on July 1, 2025. Both companies use straight line amortization exclusively.

The Financial Statements of both companies for the Year ended June 30, 2018 are shown below:

Income Statements

YINInc. YANGInc.

Sales $500,000 $400,000

Other Revenues $100,000 $60,000

Less: Expenses
Cost of Goods Sold $400,000 $320,000
Depreciation Expense $20,000 $10,000
Other Expenses $60,000 $30,000
Income Tax Expense $48,000 $40,000

Net Income $72,000 $60,000

Retained Earnings Statements

YINInc. YANGInc.
Balance, July 1, 2017 $200,000 $240,000
Net Income $72,000 $60,000
Less: Dividends ($22,000) ($30,000)
Retained Earnings, June 30, 2018 $250,000 $270,000

Balance Sheets

YINInc. YANGInc.

Cash $150,000 $120,000

Accounts Receivable $350,000 $160,000
Inventory $200,000 $180,000
19
Investment in YANG Inc. $500,000 -
Land $40,000 -
Equipment (net) $360,000 $240,000
Total Assets $1,600,000 $700,000

Current Liabilities $600,000 $130,000

Bonds Payable $250,000 $100,000
Common Shares $500,000 $200,000
Retained Earnings $250,000 $270,000
Total Liabilities and Equity $1,600,000 $700,000

OtherInformation:

During August of 2016, YIN sold $60,000 worth of Inventory to YANG, 80% of which was sold to outsiders
during the year. During October of 2017, YIN sold inventory to YANG for $90,000. two-thirds of this inventory
was resold by YANG to outside parties later that year.

During September of 2016, YANG sold $90,000 worth of inventory to YIN, 50% of which was sold to outsiders
during the year. During April of 2018, Yang sold inventory to YIN for $120,000. 80% of this inventory was
resold by YANG to outside parties in May.

During May of 2018, YANG sold a plot of Land to YIN for $40,000. The land was recorded at cost of $24,000
on YANG's book prior to the sale. YIN has not yet sold the land.

All intercompany sales as well as sales to outsiders are priced 50% above cost. The effective tax rate for both
companies is 40%.

60) Compute YIN's Goodwill at the date of acquisition.

Answer:
Purchase Price $500,000
Imputed Purchase Price for 100%
Of Fair Value of Net Assets: $666,667

Fair Value of Net Assets: $250,000

Goodwill $416,667

20
61) Prepare a schedule of
realized and unrealized profits for the fiscal year ended June 30, 2018 for both
companies. Show your figures before and after tax.
Answer: Schedule of Realized and Unrealized Profits
For the year ended June 30, 2018

YIN Inc: Before Tax After Tax

Profits in Beginning Inventory $4,000 $2,400
($12,000 - $12,000/1.5)

YANG Inc:
Profits in Beginning Inventory $15,000 $9,000
($45,000 - $45,000/1.5)

Unrealized Profits as at June 30, 2015:

YIN Inc: Before Tax After Tax
Inventory Sales $10,000 $6,000
($30,000 - $30,000/1.5)

YANG Inc:
Inventory Sales $8,000 $4,800
($24,000 - $24,000/1.5)

Unrealized Gain on Land Sale to YIN $16,000 $9,600

21
62) Prepare YIN's Consolidated Income Statement for the Year ended June 30, 2018. Show the
allocation of the income between the controlling and non-controlling interests.
Answer: YIN Inc.
Consolidated Income Statement for the Year Ended
June 30, 2018.

Sales ($500,000 + $400,000 - $90,000 - $120,000) $690,000

Other Revenues ($100,000 + $60,000 - $16,000 - $22,500) $121,500

Cost
Less:of Goods
Expenses: ($400,000 + $320,000 - $90,000 - $120,000 - $509,000
Sold $15,000 - $4,000 + $10,000 + $8,000)
Depreciation ($20,000 + $10,000) $30,000
Expense
Other Expenses ($60,000 + $30,000) - $5,000 $85,000
Income Tax ($48,000 + $40,000 - $6,400 + $6,000 + $1,600 - $82,000
Expense $4,000 - $3,200)

Net Income $105,500

Shareholders of
Attributable to: $90,600
Parent
Non-Controlling [($60,000 + $9,000 - $4,800 - $9,600 + $5,000) × $14,900
Interest 25%]

22
63) Calculate the non-controlling interest (Balance Sheet) as at June 30, 2018.
Answer:
Non-Controlling Interest at Acquisition: $166,667
($666,667 × 25%)

Add (Deduct):
Increase in Min's Retained Earnings $170,000
Add/Deduct: Acquisition differential amortizations:
Bonds Payable $15,000
Less: Unrealized Inventory Profit at year end: ($ 4,800)
Less: Unrealized Land Gain: ($9,600)
Subtotal ($170,600)
×25% $42,650

Non-Controlling Interest $209,317

64) Calculate Consolidated Retained Earnings as at June 30, 2018.

Answer:
YIN's Retained Earnings $250,000
Less: Ending Inventory Profit ($6,000)
YIN's Adjusted Retained Earnings $244,000

Increase in YANG's Retained Earnings since acquisition: $170,000

Acquisition differential amortization to date (Bonds) $15,000
Less: Unrealized Inventory Profit at year end: ($ 4,800)
Less: Unrealized Land Gain: ($9,600)
YANG's Adjusted Retained Earnings Increase $170,600
×75% $127,950

Consolidated Retained Earnings $371,950

23
65) Assuming that YIN Inc uses the equity method to account for its investment in YANG, compute the
balance in its investment in YANG account at June 30, 2018.
Answer: YIN Inc
Investment in YANG Account
as at June 30, 2018

Investment at Cost $500,000

Increase in Retained Earnings since acquisition: $170,000

×75% $127,500

Ending Inventory ($6,000)

Acquisition differential amortization:

Bonds: ($50,000 × 75%) / 10 × 3 $11,250 $11,250

Less: Unrealized Profits at year end (Upstream)

Land $9,600
Inventory $4,800
$14,400
×75% ($10,800)

Investment in YANG as at June 30, 2018 $621,950

24