ATI707 Mid Term Exam with Solutions (Graded A)

INSTRUCTIONS Answer the multiple choice and problems (narrative questions, etc.) in you examination booklet using the instructions for each question. Address all the issues required in each of the following questions. Each question is worth the stated value. Be sure that all the key points are covered. Be brief and concise. PART 1 - MULTIPLE CHOICE 10 MARKS Select the best answer for each of the following unrelated items. Answer each of these questions by giving the letter of your choice. For example, if (A) is the best answer for question 1, write “1 (A)”. If more than one answer is given for an item then that item will not be marked. Incorrect answers will be marked as zero. No account will be taken for any explanations you offer. Each question is worth one mark. 1. Which of the following would not be a reason to obtain a greater understanding of accounting practices in other nations? a. Financial Results are disclosed in different currencies. b. One needs to be aware of differing disclosure requirements from nation to nation, as this impacts the preparation of Financial Statements. c. Income-smoothing may have affected a Foreign Subsidiary’s results; such smoothing practices are not permitted in North America. d. Departures from the Historical Cost Principle may be possible in other nations. Ans: A 2. Which of the following is/are LEAST likely to influence a country’s accounting standards? a. Taxation Policies. b. Differing Legal Systems. c. The currency used. d. Ties between countries. Ans: C 3. Which of the following bodies is responsible for the harmonization of international accounting standards? a. The European Union. (EU) b. The Federal Accounting Standards Board (FASB) c. The International Accounting Standards Board (IASB) d. The Canadian Institute of Chartered Accountants (CICA). Ans: C 4. Which of the following does NOT constitute a Business Combination? a. A Corp purchases the net assets of B Corp. b. A Corp enters into a Joint Venture with B Corp. c. A Corp acquires 51% of B Corp’s voting shares for $1,000,000 in Cash. d. A Corp acquires 51% of B Corp’s voting shares for future considerations. Ans: B 5. Which of the following statements is TRUE? a. All unrealized gains and losses on equity investments are flow through Other Comprehensive Income. b. Unrealized gains and losses on held-for-trading securities are included in Other Comprehensive Income. c. Unrealized gains and losses on available-for-sale investments are included in Other Comprehensive Income. d.Other Comprehensive Income is included in Retained Earnings. Ans: C 6. Differential reporting is permitted in certain instances for a. all privately held companies. b. all publicly held companies. c. all Canadian companies. d. Canadian companies consolidating its foreign subsidiaries. Ans: A 7. Parent Company acquires Sub Company’s common shares for cash. On the date of acquisition, Sub had Goodwill of $100,000 on its books. Which of the following statements regarding Sub’s Goodwill on the date of acquisition is correct? a. Sub’s goodwill is considered an identifiable asset and should therefore be included in Parent Company’s Purchase Price Discrepancy calculation. b. Sub’s goodwill is considered an identifiable asset and should therefore be excluded from Parent Company’s Purchase Price Discrepancy calculation. c. Sub’s goodwill is not considered an identifiable asset and should therefore be excluded from Parent Company’s Purchase Price Discrepancy calculation. d. Sub’s goodwill is not considered an identifiable asset and should therefore be included in Parent Company’s Purchase Price Discrepancy calculation. Ans: C 8. Which of the following pertaining to Consolidated Financial Statements is correct? a. The preparation of consolidated Financial Statements means that the companies involved cease to operate as separate legal entities. b. The preparation of Consolidated Financial Statements is at the Parent Company’s discretion. c. When one company has control over another, Consolidated Financial Statements must be prepared for the combined entity. d. Before preparing Consolidated Financial Statements, a subsidiary’s Financial Statements prior to the date of acquisition must be restated. Ans: C 9. One weakness associated with the Entity Theory is that a. it is inconsistent with the Historical Cost Principle. b. Non-Controlling Interest is computed using the Fair Market Values of the subsidiary’s net assets. c. Non-Controlling interest is computed using the Book Values of the subsidiary’s net assets. d. the presumed acquisition cost may be unrealistic when the Parent purchases significantly less than 100% of the subsidiary’s voting shares, or voting control is achieved incrementally. Ans: D QUESTION 19 20 MARKS NNR Inc purchased 80% of the outstanding voting shares STP Inc. for $250,000 on April 1, 2002. On that date, STP Inc had Common Stock and Retained Earnings worth $60,000 and $80,000, respectively. Goodwill is tested annually for impairment. The Balance Sheets of both Companies, as well as STP’s Fair Market Values on the date of acquisition are disclosed below: NNR Inc STP Inc Fair Value Cash $120,000 $10,000 $10,000 Accounts Receivable $ 30,000 $24,000 $24,000 Inventory $150,000 $36,000 $32,000 Investment in STP Inc. $250,000 Equipment (net) $300,000 $ 80,000 $70,000 Trademark $75,000 $100,000 $120,000 Total Assets $925,000 $250,000 Current Liabilities $600,000 $ 70,000 $70,000 Bonds Payable $200,000 $ 40,000 $60,000 Common Shares $ 50,000 $ 60,000 Retained Earnings $ 75,000 $ 80,000 Total Liabilities & Equity $925,000 $250,000 The net incomes for NNR and STP for the year ended March 31, 2003 were $80,000 and $90,000 respectively. STP paid $24,000 in Dividends to NNR during the year, which NNR recorded as revenue on its own books. There were no other inter-company transactions during the year. Both companies use a FIFO system, and STP’s inventory on the date of acquisition was sold during the year. NNR declared $10,000 in dividends during the year. STP’s Equipment had a remaining useful life of 5 years from the date of acquisition. STP’s Trademark was also estimated to have a remaining useful life of 5 years. STP’s Bonds mature exactly 20 years after the acquisition date. A Goodwill Impairment test conducted during August of 2003 revealed that NNR’s Goodwill amount at acquisition was overestimated by $2,500. NNR uses the Cost Method to account for its investment in STP. Required: a. Calculate the Goodwill on the date of acquisition. (4 Marks) b. Calculate NNR’s Consolidated Net Income for the Year. (8 Marks) c. Calculate the amount of Non-Controlling Interest appearing on the Consolidated Balance Sheet on the date of acquisition. (4 Marks) d. Calculate NNR’s Consolidated Retained Earnings for the Year. (4 Marks) a. Solution Purchase Price of 100% of net assets (250/0.8) $300,000 Less: Fair Value of Net Assets Acquired: (100%*126,000) ($126,000) Goodwill $174,000 b. Solution: NNR’s Net Income $80,000 STP’s Net Income (80%) $72,000 Add (Deduct): Dividends paid to NNR ($24,000) Goodwill Impairment Loss ($2,500) Inventory Fair Value amortization $3,200 Equipment Fair Value Amortization $1,600 Trademark Fair Value Amortization ($3,200) Bonds Payable Fair Value Amortization $800 Consolidated Net Income $127,900 c. Solution: Imputed Purchase price of 100% of FV of Assets ($250,000/0.80) = $300,000 Non-Controlling Interest (20%) $60,000 d. Solution: Beginning Retained Earnings $ 75,000 Consolidated Net Income $127,900 Less: NNR’s Dividends ($10,000) Consolidated Retained Earnings $192,900