Faculty of Business Studies

B326
Advanced Financial Accounting
MTA

Version Makeup- MGL

2017-2018 / First
December 2017

Number of Exam Pages: 7 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.

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Please solve all questions:

Question 1:

a- Define business combination? [Marks: 5]

A transaction or other event in which an acquirer obtains control of one or ,more businesses.
Transaction sometimes referred to as true mergers or mergers equals also are business
combination”
b- Briefly explain the legal forms of business combination [Marks: 15, each 5 marks ]
0. Acquisition
 When corporation acquires the productive asset of another business entity and
integrates those assets into its own operation.
 When one corporation obtains operating control over the productive facilities
of another entity by acquiring a majority of its outstanding voting stock.
 The acquired company may not be dissolve and does not have to go out of
existence.
1. Mergers
• Occurs when one corporation takes over all the operations of another
business entity and that entity is dissolved.
2. Consolidation
• Occurs when a new corporation is formed to take over the assets and
operation of two or more separate business entities and dissolve the
previously separated entity.

c- What are the reasons for business combination mention at least 4 with brief explanation of each?
[Marks: 10 ]

Reasons for business combination

 Cost advantage
i. Its less expensive to obtain the needed facility through business
combination rather than developing it.
 Lower risk
i. Less risky to by already developed product line than developing one
ii. Diversity is the only way to reduce the risk for single product company
and to expand.
 Fewer operating delays
i. Plant facilities acquired from business combination is ready to use and
meet the environmental and governmental regulation. Which will reduce
delays in construction and approvals.

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  Avoidance of takeovers
i. To avoid takeovers of small companies from large ones

Question 2:
Using the cost method solve the following:

1. In January 1, 2015 flower Company has acquired 60% of Dallas Company for
$1,020,000 on the date of the acquisition the subsidiary had retained earnings $150,000
and a capital of $1,450,000.

 Separate balance sheet as of 1 January 2015 for Parent and its Subsidiary.

Subsidiary
Description Parents at fair
at Book value
value
Cash 45,000 335,000 335,000
Receivable 60,000 240,000 240,000
Land 780,000 700,000 680,000
Property 1,405,000 400,000 430,000
Investment in Subsidiary 1,020,000 -
Total asset 3,310,000 1,675,000

Account payable 25,000 60,000 55,000

Other liabilities 205,000 15,000 16,000
Capital stock 2,400,000 1,450,000
Retained earnings 680,000 150,000
Total equity and
3,310,000 1,675,000
liabilities

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

Description Dr Cr
Investment in subsidiary 1,020,000
Cash 1,020,000

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 𝟏,𝟎𝟐𝟎,000
FV= % 𝒐𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑 = = 1,700,000
𝟔𝟎%

Unamortized excess = fair value – equity book value

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 1,700,000– (1,450,000+ 150,000) = 100,000
Subsidiary asset and
Description Parents liabilities
at Book value at fair value differential
Cash 45,000 335,000 335,000 0
Receivable 60,000 240,000 240,000 0
Land 780,000 700,000 680,000 -20,000
Property 1,405,000 400,000 430,000 30,000
Investment in Subsidiary 1,020,000 -
Total asset 3,310,000 1,675,000

Account payable 25,000 60,000 55,000 5,000

Other liabilities 205,000 15,000 16,000 -1,000
Capital stock 2,400,000 1,450,000
Retained earnings 680,000 150,000
Total equity and liabilities 3,310,000 1,675,000 14,000

Goodwill = unamortized excess – excess from asset and liabilities differential

= 100,000 – 14,000= 86,000

c. Record the elimination entries required for consolidation as of January 1, 2015

(using cost method) [Marks: 10, each entry 5 marks]

Description Dr Cr
Capital stock- subsidiary 1,450,000
RE – subsidiary 150,000
unamortized excess 100,000
Investment in subsidiary 1,020,000
Non Controlling Interest 680,000

Description Dr Cr
Account payable 5,000
Goodwill 86,000
property 30,000
unamortized excess 100,000
land 20,000
Other liabilities 1,000

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 d. Prepare the consolidated balance sheet as of January 1, 2015[Marks: 5]

Subsidiary Adjustment
Consolidatio
Description Parents at Book
dr cr n
value
Cash 45,000 335,000 380,000
Receivable 60,000 240,000 300,000
Land 780,000 700,000 20,000 1,460,000
1,405,00
Property 400,000 30,000 1,835,000
0
1,020,00 1,020,00
Investment in Subsidiary 0 0
0 0
unamortized excess 100,000 100,000 0
Goodwill 86,000 86,000
3,310,00
Total asset 1,675,000 4,061,000
0

Account payable 25,000 60,000 5,000 80,000

Other liabilities 205,000 15,000 1,000 221,000
2,400,00 1,450,00
Capital stock 1,450,000 2,400,000
0 0
Retained earnings 680,000 150,000 150,000 680,000
NCI 680,000 680,000
Total equity and 3,310,00
1,675,000 4,061,000
liabilities 0

[Marks:5+10+10+5= 30]
Question 3:
Using the equity method sole the following:
1. Delaware Corporation has acquired 80% of Phil Company stock for $560,000 on
January1, 2015, when Phil Equity consist of $450,000 capital stock and $200,000
retained earnings.

 Subsidiary had net income of 170,000 and had distributed cash dividends of $50,000
which was recorded as payable by the subsidiary.
 Subsidiary equipment was undervalued by $16,000 in time acquisition.

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  Any excess differential above the $16,000 which was mentioned above should be
allocated to Goodwill.

 The equipment has useful life of 5 years

 Separate Company financial statements for the year ended December 31, 2015 for parent
and its Subsidiary provided below

Parent Subsidiary

Incomes statement and retained

earnings 31, Dec 2015
Sales $500,000 $250,000
Income from Subsidiary $133,440 -
Cost of goods sold ($290,000) ($50,000)
Operating expenses ($100,600) ($30,000)
Net income $242,840 $170,000
Add: retained earnings, 1 Jan 2015 $61,000 $200,000
Less: dividends ($50,000) ($50,000)
Retained earnings 31 Dec. 2015 $253,840 $320,000
Balance sheet 31, Dec 2015
Cash $17, 200 $435,000
Receivable – net $60,000 $240,000
Dividends receivable form Subsidiary $40,000 -
Inventories $80,940 $155,000
Investment in Subsidiary $652,000 -
Total asset $832,940
830,000
Account payable $116,200 $10,000
Dividends Payable - $50,000
Capital stock $462,900 $450,000
Retained earnings $253,840 $320,000
Total equity and liabilities $832,940 $830,000
Use Equity method to calculate the following
o Calculate the following:[Marks: 5]
o unamortized excess amount and
o the amount to be allocated to the goodwill

Fair value = 560,000 / 80% = 700,000

Excess in asset = 700,000– 650,000 = 50,000
Amount assigned to equipment 16,000
Goodwill = 50,000 – 16,000 = 34,000

o Calculate the adjusted income from subsidiary for [Marks: 8]

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 o the parent and
o the NCI
Parent adjusted income
Add: Subsidiary net income (170,000 * 80%) 136,000
Less: Amortize of excess amount – equipment (16,000 / 5 * 80%) 2,560
=Adjusted income 133,440

NCI adjusted income

Add: Subsidiary net income (170,000 * 20%) 34,000
Less: Amortize of excess amount – equipment (16,000 / 5 * 20%) 640
=Adjusted income 33,360

o Record the elimination entries required (27 marks, each entry 4.5 marks)
Elimination of subsidiary income - Parent
Dr. Income from subsidiary 133,440
Cr. Dividends 40,000
Cr. Investment in subsidiary 93,440
Elimination of subsidiary income - NCI
Dr. NCI-income 33,360
Cr. Dividends 10,000
Cr. NCI-equity 23,360

Elimination on Investment and Equity

Dr. Retained earnings 200,000
Dr. Capital stock 450,000
Dr. Unamortized excess in asset 50,000
Cr. Investment in subsidiary 184,000
Cr. NCI 46,000

Allocation of unamotize excess

Dr. equipment 16,000
Dr. Goodwill 34,000
Cr. Unamortized excess in asset 50,000

Dividends
Dr. Dividends payable 40,000
Cr. Dividends receivable 40,000
Amortization entry
Dr. Expense 3,200
Cr. equipment- net 3,200
16,000/5 = 3,200

[Marks: 5+8+27=40]

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