Faculty of Business Studies

B326
Advanced Financial Accounting
MTA

Version A- MGL

2017-2018 /Second
17 April 2018

Number of Exam Pages: 8 Time Allowed:2

(including this cover sheet( hours

Instructions:

1-Read each question carefully and make sure you understand it before you begin to answer it

2-This exam consists of three compulsory questions.

3-The use of non-programmable calculators is permitted in the examination.

4-In questions that require calculations, credit will be given for showing your workings.
 B326 MTA second 2017-2018

Question 1:

a- Goodwill is tested for impairment once a year, or if certain events occur, discuss the main five
reasons upon which goodwill undergoes a test for its impairment. [Marks: 10 , each point 2
marks]
Test for impairment of goodwill should be done at least once a year. If any of the below
events occur a test is required:
1. A significant adverse change in legal factors or in the business climate
2. An adverse action or assessment by a regular
3. Unanticipated competition
4. Loss of key personnel
5. A more likely than not expectation that a reporting unit or a significant portion
of the unit will be sold
6. Recognition of a goodwill impairment loss in the financial of a subsidiary.

b- Under the reporting entity, who does benefits from the consolidation financial statements?
Explain why companies maintain a separate legal entity. [Marks: 10]

• Consolidated financial statements are : ( 4 marks)

 Primarily benefit the owners and creditors of the parent
 Not primarily intended for the non-controlling owners nor the subsidiary’s
creditors
 Subsidiaries issue separate statements for the benefit of their owners and
creditors
• why maintain separate legal entity ( 6 marks)
 To maintain customer loyalties
 Legal reason, major lawsuit against a subsidiary results in a significant
loss the parent cannot held accountable for more than the loss of the
investment.

c- Consolidation policy requires companies that owns 50% and more to consolidate their financial.
GAAP have mentioned cases where companies own more than 50% but they are excluded from
consolidation. Discuss any four cases where a subsidiary may be excluded from the
consolidation.[Marks: 10, 2.5 marks per argument]
1. Control doesn’t rest with majority owner
2. Joint ventures
3. Acquisitions of groups of assets that do not constitute a business
4. Combination between entities under common control
5. Combination of not-for-profit entities or acquisition of a for-profit company by
a not-for-profit entity

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 B326 MTA second 2017-2018

Question 2:
Using the chapter 3 solve the following:

• In January 1, 2017 Jassim Company has acquired 75% of Majed Company for
$487,500 on the date of the acquisition the subsidiary had retained earnings $145,500
and a capital of $413,500.

 Separate balance sheet as of 1 January 2017 for Parent and its Subsidiary.

Subsidiary
Description Parents
at Book value at fair value
Cash 11,250 67,750 67,750
Receivable 15,000 35,000 35,000
Land 195,000 100,000 125,000
Property 375,000 375,000 400,500
Investment in Subsidiary 487,500 -
Total asset 1,083,750 577,750

Account payable 6,250 15,000 13,750

Other liabilities 31,250 3,750 4,000
Capital stock 950,000 413,500
Retained earnings 96,250 145,500
Total equity and
1,083,750 577,750
liabilities

a. Record the parent entry in time of acquisition of assets. [Marks: 5]

Description Dr Cr
Investment in subsidiary 487,500
Cash 487,500

b. Is there any Goodwill raised from the business combination? If yes what is the
amount of Goodwill. [Marks: 10 , each step 2.5 marks]
𝒂𝒎𝒐𝒖𝒏𝒕 𝒑𝒂𝒊𝒅 487,500
FV= % 𝒐𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑 = = 650,000
𝟕𝟓%

Unamortized excess = fair value – equity book value

650,000– (413,500+ 145,500) = 91,000

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B326 MTA second 2017-2018

Subsidiary
Description Parents at fair
at Book value
value
Cash 11,250 67,750 67,750 0
Receivable 15,000 35,000 35,000 0
Land 195,000 100,000 125,000 25,000
Property 375,000 375,000 400,500 25,500
Investment in Subsidiary 487,500 -
Total asset 1,083,750 577,750
0
Account payable 6,250 15,000 13,750 1,250
Other liabilities 31,250 3,750 4,000 -250
Capital stock 950,000 413,500
Retained earnings 96,250 145,500
Total equity and
1,083,750 577,750 51,500
liabilities

Goodwill = unamortized excess – excess from asset and liabilities differential

= 91,000– 51,500= 39,500

c. Record the elimination entries required for consolidation as of January 1,

2017. [Marks: 10, each entry 5 marks]

Description Dr Cr
Capital stock- subsidiary 413,500
RE – subsidiary 145,500
unamortized excess 91,000
Investment in subsidiary 487,500
Non-Controlling Interest 162,500

Description Dr Cr
Account payable 1,250
Goodwill 39,500
property 25,500
Land 25,000
unamortized excess 91,000
Other liabilities 250

d. Prepare the consolidated balance sheet as of January 1, 2017. [Marks: 5]

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 B326 MTA second 2017-2018

Subsidiary adjustment
Description Parents at Book consolidation
dr
value cr
Cash 11,250 67,750 79,000
Receivable 15,000 35,000 50,000
Land 195,000 100,000 25,000 320,000
Property 375,000 375,000 25,500 775,500
excess amortized 91,000 91,000 0
goodwill 39,500 39,500
Investment in Subsidiary 487,500 0 487,500 0
Total asset 1,083,750 577,750 181,000 578,500 1,264,000

Account payable 6,250 15,000 1,250 20,000

Other liabilities 31,250 3,750 250 35,250
Capital stock 950,000 413,500 413,500 950,000
Retained earnings 96,250 145,500 145,500 96,250
Non-controlling interest 162,500 162,500
Total equity and
1,083,750 577,750 560,250 162,750 1,264,000
liabilities

[Marks: 5+10+10+5= 30]

Question 3:
Using chapter 4 solve the following:
 Mark Corporation has acquired 88% of John Company stock for $616,000 on January
1, 2017, when John Equity consist of $450,000 capital stock and $200,000 retained
earnings.

 The subsidiary had a net income of $200,000 and had distributed cash dividends of
$30,000 which was recorded as payable.
 Any difference between book and fair value will be assigned to patent with a useful life
of 10 years.

 Separate Company financial statements for the year ended December 31, 2017 for parent
and its Subsidiary are provided below:

Parent Subsidiary
Incomes statement
and retained
earnings 31, Dec
2017
Sales $500,000 $450,000

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B326 MTA second 2017-2018

Income from
$132,000 -
Subsidiary
Cost of goods sold ($250,000) ($240,000)
Operating expenses ($100,600) ($10,000)
Net income $281,400 $200,000
Add: retained
$61,000 $200,000
earnings, 1 Jan 2017
Less: dividends ($50,000) ($30,000)
Retained earnings
$292,400 $370,000
31 Dec. 2017
Balance sheet 31, Dec
2017
Cash $38, 560 $435,000
Receivable – net $60,000 $240,000
Dividends receivable
$26,400 -
form Subsidiary
Inventories $80,940 $185,000
Investment in
$765,600 -
Subsidiary
Total asset 932,940 860,000
Account payable $177,640 $10,000
Dividends Payable - $30,000
Capital stock $462,900 $450,000
Retained earnings $292,400 $370,000
Total equity and
$932,940 $860,000
liabilities

Required:
a. Is there any patent raised from the business combination? If yes compute the
amount of patent. [Marks: 3]

𝒂𝒎𝒐𝒖𝒏𝒕 𝒑𝒂𝒊𝒅 𝟔𝟏𝟔,𝟎𝟎𝟎

FV= % 𝒐𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑 = = 700,000 (1.5 marks)
𝟖𝟖%
Patent = fair value – book value = 700,000 – (200,000+ 450,000) = 50,000 (1.5 marks)
𝟓𝟎,𝟎𝟎𝟎
Amortization = = 5,000
𝟏𝟎

b. Record the parent entries for the following:[Marks: 12, each entry 4 marks]
 The entry for acquisition of the subsidiary on January 1, 2015
Description Dr Cr
Investment in subsidiary 616,000
Cash 616,000

 The entry for recording the income from subsidiary

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B326 MTA second 2017-2018

Description Dr Cr
Investment in subsidiary ( 200,000- 5,000) *88% 171,600
Income from subsidiary 171,600
Income from subsidiary should be calculated = (net income –amortization)* %

 The entry for recording the dividends of the subsidiary

Description Dr Cr
Dividends receivable (30,000*88%) 26,400
Investment in subsidiary 26,400
Dividends of the subsidiary * % ownership

c. Record the elimination entries required for consolidation (no consolidation

required) [Marks: 20, each entry 4 marks]

1.Eliminating income – parent

Description Dr Cr
income from subsidiary ( 200,000- 5,000) *88% 171,600
Dividends (30,000*88%)) 26,400
Investment from subsidiary (remaining) 145,200

2.Eliminating income – non controlling

Description Dr Cr
NCI- income ( 200,000- 5,000) *12% 23,400
Dividends (30,000*12%) 3,600
NCI – equity (remaining) 19,800
*NCI income should be calculated = (net income –amortization)* %

3.Eliminating investment and equity balance

s
Description Dr Cr
retained earnings (beginning ) 200,000
capital stock- subsidiary 450,000
Patent 50,000
Investment in subsidiary (700,000*88%) 616,000
Non-controlling interest (700,000*12%) 84,000

4.Amortization entry
Description Dr Cr
Amortization expense (50,000/10) 5,000
patent 5,000

5.Dividends payable / receivable

Description Dr Cr
Dividends payable 26,400
Dividends receivable 26,400

d. Calculate the investment amount for the parent and the NCI as of 1 January
2018. [Marks: 5, each 2.5 marks]
Parent
Original investment 616,000
Add: net income 176,000
Less : Dividends 26,400

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B326 MTA second 2017-2018

= new investment amount 765,600

NCI
Original investment 84,000
Add: net income 24,000
Less : Dividends 3,600
= new investment amount 104,400

[Marks: 3 + 12 + 20 + 5= 40]

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