Kingdom of Saudi Arabia ‫اﻟﻤﻤﻠﻜﺔ اﻟﻌﺮﺑﯿﺔ‬

Ministry of Education ‫اﻟﺴﻌﻮدﯾﺔ‬

Imam Abdulrahman Bin Faisal University ‫وزارة اﻟﺘﻌﻠﯿﻢ‬
College of Business Administration
‫ﺟﺎﻣﻌﺔ اﻹﻣﺎم‬
Department of Accounting
‫ﻋﺒﺪاﻟﺮﺣﻤﻦ ﺑﻦ ﻓﯿﺼﻞ‬

Midterm Examination
‫ﻛﻠﯿﺔ إدارة اﻷﻋﻤﺎل‬

Version 01
Semester I
‫ﻗﺴﻢ اﻹدارة‬

Course Name: Advance Accounting Academic Year: 2020-21

Date: 19-10-2020
Course Code: ACCT501
Time: 75 Minutes
Section# _____________
Marks: 25

University ID# __________________________ Total No. of Pages:

Name: _____________________________________________Signature:

________________

Marks Details
SECTION MARKS ASSIGNED MARKS OBTAINED

I 10
II 15
Total 25

Exam Instructions

1. Cutting and overwriting will not be accepted on the question paper. The use of lead
pencils is strictly prohibited unless specifically mentioned by the instructor. Use a blue
or black color ballpoint pen instead.

2. Any attempt to use unfair means will disqualify you from the examination. Possession
and use of mobile phones and other electronic gadgets are strictly prohibited for any
purpose.

3. The examination authority will not return the script to the examinee once submitted.

4. All students must bring their own stationery. Borrowing of calculators/stationary in the
examination hall is strictly prohibited.

5. Follow any other instructions provided by the examiner during the exam.
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Section I: Multiple Choice Questions(Marks for each MCQ are given with the
question Marks 10

1. Which of the following statement(s) is / are correct with regard to preparation of

consolidated financial Statement? (1
mark)

a) To be a subsidiary a parent should not necessarily hold 100% of its equity shares

b) Consolidation merely addition together of two Statements of financial position

c) In consolidation a subsidiary and an associate are treated identically

d) Consolidated balance sheet excludes assets not owned by the group

2. If the capital and reserves, including fair valuation gain of a subsidiary is £5,400 and the
parent acquires the whole of it for £4,000, the difference of £1,400 would be known as; (1
mark)

a) Bargain purchase

b) Gain on acquisition

c) Goodwill

d) Stock split

3. When preparing a Consolidated Income Statement, inter-company transactions are

cancelled. Which one or more of the following would you say is the reason for this step?
Choose more than one answer.
(1 mark)

a) That is how it is expected to be done.

b) Otherwise group earnings can be inflated by one within the group earning from another.

c) Otherwise the same amount is double counted both as an income and expense

d) Failure to do so would be bad for the group image

4. The method adopted in combining the separate sets of financial statements of entities in a
group to form a set of consolidated financial statements is:
(0.5 marks)

a) set-off all assets and liabilities and recognise a single net investment

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b) line-by-line recognition of the elements of financial statements

c) combine the cash balances of the separate entities into one-line and aggregate the remaining
net assets into one item

d) combine all assets and liabilities into one net assets item and combine all profits and losses
into one profit or loss item.

5. Costs incurred in completing a business combination are listed below.

General administrative costs .................... $240,000

Consulting fees ....................................... 120,000

Direct cost to register and issue equity securities..................................... 80,000

The amount charged to the expenses of the business combination is: (0.5 marks)

a) $80,000

b) $120,000

c) $240,000

d) $360,000

6. In order to reduce the risk associated with a new line of business, Conservative
Corporation established Spin Company as a wholly owned subsidiary. It transferred assets
and accounts payable to Spin in exchange for its common stock. Spin recorded the following
entry when the transaction occurred:

Cash and receivables 23,000

Inventory 15,000
Land 30,000
Buildings 100,000
Equipment 95,000
Accounts Payable 20,000
Accumulated Depreciation—Buildings 32,000
Accumulated Depreciation—Equipment 30,000
Common Stock 56,000
Additional Paid-In Capital 125,000

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Student Name: ______________________________________________ University ID#_________________

A) Based on the preceding information, what number of shares of $7 par value stock did Spin
issue to Conservative? (1 mark)
a) 10,000
b) 7,000
c) 8,000
d) 25,000

B) Based on the preceding information, what was the book value of Conservative's assets
transferred to Spin Company? (1
mark)

a) $243,000

b) $263,000

c) $221,000

d) $201,000

7. Burrough Corporation paid $80,000 to acquire all of Helyar Company's net assets. Helyar
reported assets with a book value of $60,000 and fair value of $98,000 and liabilities with a book
value and fair value of $23,000 on the date of combination. Burrough also paid $3,000 to a
search firm for finder's fees related to the acquisition. What amount will be recorded as
goodwill by Burrough Corporation while recording its investment in Helyar?
(1 mark)

A) $0

B) $5,000

C) $8,000

D) $13,000

8. The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On X
Company's books, the carrying value of this reporting unit's net assets is $350,000, which
includes $60,000 of goodwill. If the fair value of the reporting unit as a whole is $335,000, what
amount of goodwill impairment will be recognized for this unit?
(1 mark)

A) $0

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Student Name: ______________________________________________ University ID#_________________

B) $15,000

C) $25,000

D) $35,000

9. Public Equity Corporation acquired Lenore Company through an exchange of common

shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity.
Public's common stock was trading at $20 per share at the time of exchange. Following selected
information is also available.
(1 mark)

Public Equity

Before acquisition After acquisition

Par value of shares outstanding $ 200,000 $ 250,000

Additional paid-in capital $ 350,000 $ 550,000

Based on the preceding information, what number of shares was issued at the time of the
exchange?

a) 5,000

b) 17,500

c) 12,500

d) 10,000

10. In which of the following situations do accounting standards not require that the financial
statements of the parent and subsidiary be consolidated? (1 mark)

A) A corporation creates a new 100 percent owned subsidiary

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Student Name: ______________________________________________ University ID#_________________

B) A corporation purchases 90 percent of the voting stock of another company

C) A corporation has both control and majority ownership of an unincorporated company

D) A corporation owns less-than a controlling interest in an unincorporated company

Section II: Numerical Questions 15 Marks

Question 1: Marlow Company acquired 40 percent of voting shares of Brown Company on

January 1, 2018, for $85,000. The following results are reported for Brown Company.

2008 2009

Net Income $20,000 $30,000

Dividends Paid $10,000 $15,000

Fair values of shares held by

Marlow

January 1 $85,000 $97,000

December 31 $97,000 $92,000

Required:

Give journal entries recorded by Marlow for 2008 and 2009 assuming it carries its investment
in Brown at fair values. (7 marks)

Solution:
Journal entries investment carried at fair value for 20X8:

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Student Name: ______________________________________________ University ID#_________________

(1) Investment in Brown Company Stock 85,000

Cash 85,000
Record purchase of Brown Company stock.

(2) Cash 4,000

Dividend Income 4,000
Record dividends from Brown Company: $10,000 x .40

(3) Investment in Brown Company Stock 12,000

Unrealized Gain on Increase in Value of Brown
Company Stock 12,000
Record increase in value of Brown stock: $97,000 - $85,000

Journal entries investment carried at fair value for 20X9:

(1) Cash 6,000

Dividend Income 6,000
Record dividends from Brown Company: $15,000 x .40

(2) Unrealized Loss on Decrease in Value of Brown

Company Stock 5,000
Investment in Brown Company Stock 5,000
Record decrease in value of Brown stock: $97,000 - $92,000

Question 2: Amber Corporation reported the following summarized balance sheet data on
December 31, 2016.

Assets $600,000 Liabilities $100,000

Common Stock $300,000

Retained Earnings $200,000

Total 600,000 $600,000

On January 1, 2017, Purple Corporation acquired 100% of Amber’s stock for $500,000. At the
acquisition date, the book values and fair values of Amber’s assets and liabilities were equal.
Amber reported net income of $50,000 for 2017 and paid dividends of $20,000.

Required:

a. Give the journal entries recorded by Purple in its books during 2017 if it accounts for its
investment in Amber using the equity method. (4 marks)

b. Give the consolidation entries needed on December 31, 2017 to prepare consolidated
financial statements. Show book value calculations. (4
marks)

a.
Equity Method Entries on Purple Co.'s Books:

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Student Name: ______________________________________________ University ID#_________________

Basic Consolidation Entry

Common stock 300,000
Retained earnings 200,000
Income from Amber Corp. 50,000
Dividends declared 20,000
Investment in Amber Corp. 530,000

Investment in Amber Corp. 500,000

Cash 500,000
Record the initial investment in Amber Corp.

Investment in Amber Corp. 50,000

Income from Amber Corp. 50,000
Record Purple Co.'s 100% share of Amber Corp.'s 20X7 income

Cash 20,000
Investment in Amber Corp. 20,000
Record Purple Co.'s 100% share of Amber Corp.'s 20X7 dividend

b.
Book Value Calculations:
Total = Common + Retained
Book Value Stock Earnings
Original book
value 500,000 300,000 200,000
+ Net Income 50,000 50,000
- Dividends (20,000) (20,000)
Ending book value 530,000 300,000 230,000

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