Final Exam
DATE: Wednesday, April 8, 2009 TIME: 6:00 pm to 9:00 pm
COURSE TITLE: Advanced Financial Accounting #: BUS-4002/3 SECTION: 050
INSTRUCTOR: Michael Weedon NUMBER OF PAGES: 9
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Problem 1
NOOK Inc purchased 70% of the outstanding voting shares of STAR Inc. for $300,000 on March
1, 2002. On that date, STAR Inc had Common Stock and Retained Earnings worth $80,000 and
$90,000, respectively. Goodwill is tested annually for impairment. The Balance Sheets of both
Companies, as well as STAR’s Fair Market Values on the date of acquisition are disclosed below:
NOOK Inc STAR Inc Fair Value
Cash $450,000
Accounts Receivable
Inventory
$ 50,000
$ 50,000
Investment in STAR Inc. $300,000
Equipment (net) $150,000
Patent
Total Assets $1,000,000
$30,000
$48,000
$67,000
$90,000
$75,000
$310,000
$30,000
$48,000
$77,000
$70,000
$90,000
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
Total Liabilities and Equity
$650,000
$200,000
$80,000
$70,000
$ 80,000
$ 60,000
$ 80,000
$ 90,000
$80,000
$70,000
$1,000,000 $310,000
The combined Statements of Income and Retained Earnings for the last fiscal year, which ended on February 28, 2003, are shown below: NOOK’s Dividend Income was received entirely from
STAR.
NOOK Inc. STAR Inc.
Sales
Dividend Income
$200,000
$ 42,000
$120,000
1

Less: Cost of Sales
Less: Other Expenses
Net Income:
Retained Earnings (Beginning)
Less: Dividends
$120,000
$ 30,000
$80,000
$20,000
$92,000
$70,000
($12,000)
$20,000
$90,000
($60,000)
Retained Earnings $150,000 $50,000
The Balance Sheets of both companies as at February 28, 2003 are shown below:
Cash $400,000
Accounts Receivable
Inventory
$ 50,000
$ 30,000
Investment in STAR Inc. $300,000
Equipment (net) $150,000
Patent
Total Assets
NOOK Inc
$930,000
STAR Inc
$20,000
$50,000
$60,000
$80,000
$67,500
$277,500
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
$500,000
$200,000
$ 80,000
$150,000
$ 87,500
$ 60,000
$ 80,000
$ 50,000
Total Liabilities and Equity $930,000 $277,500
Both companies use a FIFO system, and STAR’s inventory on the date of acquisition was sold during the year. STAR’s Equipment had a remaining useful life of 5 years from the date of acquisition. STAR’s Patent was estimated to have a remaining useful life of 10 years. STAR’s
Bonds mature exactly 10 years after the acquisition date. A Goodwill Impairment test conducted during January of 2003 revealed that NOOK’s Goodwill amount at acquisition was overestimated by $1,000.
NOOK Inc. uses the Cost Method to account for its Investment in STAR Inc.
Required: Prepare Nook’s Consolidated Balance Sheet as at February 28, 2003. (30 marks)
2

Problem 2
MAX Inc. purchased 80% of the voting shares of MIN Inc for $750,000 on January 1, 2000. On that date, MAX’s Common Stock 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 Payable mature on January 1, 2020. Both companies use straight line amortization exclusively.
The Financial Statements of both companies for the Year ended December 31, 2002 are shown below:
Income Statements
MAX Inc. MIN Inc.
Sales
Other Revenues
Less: Expenses:
Cost of Goods Sold:
Depreciation Expense
Other Expenses
Income Tax Expense
Net Income
Retained Earnings Statements
Balance, January 1, 2002
Net Income
Less: Dividends
Retained Earnings
$640,000
$360,000
$480,000
$ 40,000
$ 80,000
$250,000
$250,000
$ 200,000
$ 250,000
($ 50,000)
$400,000
$520,000
$160,000
$390,000
$ 20,000
$ 40,000
$115,000
$115,000
$350,000
$115,000
($65,000)
$400,000
3

Balance Sheets
MAX Inc MIN Inc
Cash
Accounts Receivable
Inventory
Investment in MIN Inc.
Equipment (net)
Trademark
Total Assets
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
$100,000
$150,000
$200,000
$750,000
$300,000
$1,500,000
$300,000
$300,000
$500,000
$400,000
$150,000
$150,000
$150,000
$250,000
$300,000
$1,000,000
$150,000
$150,000
$300,000
$400,000
Total Liabilities and Equity $1,500,000 $1,000,000
Other Information :
A Goodwill Impairment test conducted during August of 2002 revealed that the Min’s Goodwill amount on the date of acquisition was overstated by $5,000.
During 2001, Max sold $60,000 worth of Inventory to Min, 80% of which was sold to outsiders during the year. During 2002, Max sold inventory to Min for $80,000. 75% of this inventory was resold by Min to outside parties.
During 2001, Min sold $40,000 worth of Inventory to Max, 80% of which was sold to outsiders during the year. During 2002, Min sold inventory to Max for $50,000. 80% of this inventory was resold by Max 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 50%.
Required:
1.
Compute MAX’s Consolidated Net Income for 2002. (15 marks)
2.
Calculate the Non-Controlling Interest (Balance Sheet) as at December 31, 2002. (15 marks)
4

Problem 3
Hot Inc. owns 60% of Cold Inc, which it purchased on January 1, 2009 for $540,000. On that date, Cold’s Retained Earnings and Common Stock were valued at $100,000 and $250,000 respectively. Cold’s book values approximated its fair market values on that date, with the exception of the company’s Inventory and a Patent identified on acquisition. The patent had an estimated useful life of 10 years from the date of acquisition. The Inventory had a book value that was $10,000 in excess of its fair value, while the Patent had a Fair market value of $50,000. Hot uses the Equity method to account for its Investment in Cold Inc. The inventory on hand on the acquisition date was sold to outside parties during the year.
Hot Inc. sold depreciable assets to Cold on January 1, 2009, at a loss of $15,000.
On January 1, 2010, Cold sold depreciable assets to Hot at a gain of $10,000.
Both assets are being depreciated straight line over 5 years. During 2009, Cold sold inventory to
Hot in the amount of $18,000. This inventory was sold to outside parties during 2010. During
2010, Hot sold inventory to Cold for $45,000. One third of this inventory was still in Cold’s warehouse on December 31, 2010. All sales (both internal and external) are priced to provide the seller with a mark-up of 50% above cost.
Cold’s Net Income and Dividends for 2009 and 2010 are shown below.
Net Income
2009
$180,000
2010
$200,000
Dividends $ 20,000 $ 60,000
Both companies are subject to a tax rate of 20%.
Required:
1.
Prepare a schedule of Realized and Unrealized profits for 2009 and 2010 for both companies. Show your figures before and after tax. (15 marks)
2.
Compute the amount of Income Tax that would be deferred as at December 31, 2010. (15 marks)
5

Problem 4
Beta Corp owns 80% of Gamma Corp. The Consolidated Financial Statements of Beta Corp for
2009 and 2010 are shown below:
Beta Corp.
Consolidated Balance Sheet,
December 31, 2002
Cash
Accounts Receivable
Inventory
Land
Plant and Equipment
Accumulated Depreciation
Goodwill
Total Assets
Accounts Payable
Accrued Liabilities
Bonds Payable
Less Bond Discount
Non-Controlling Interest
Common Shares
Retained Earnings
2009
Total Liabilities and Equity $1,950,000 $ 900,000
Beta Corp.
Consolidated Income Statement,
For the year ended December 31, 2002
Sales $500,000
Cost of Sales
Depreciation
Interest Expense
Gain on Land
$115,000
$ 30,000
$ 50,000
2010
$ 180,000
$ 300,000
$ 400,000
$ 160,000
$1,650,000
($800,000)
$ 60,000
$1,950,000
$ 326,000
$ 350,000
$ 400,000
($ 40,000)
$ 214,000
$ 350,000
$ 350,000
$ 40,000
$ 100,000
$ 100,000
$ 200,000
$1,170,000
($770,000)
$ 60,000
$ 900,000
$ 40,000
$ 140,000
$ 100,000
($ 50,000)
$ 200,000
$ 350,000
$ 120,000
6

Sale ($10,000)
($185,000)
Net Income
- Entity
Non-Controlling
Interest
Net Income
Other Information :
$315,000
(15,000)
$300,000
Beta purchased its interest in Gamma on January 1, 1998 for $360,000 when the company’s net assets were valued at $300,000. The Purchase Price Discrepancy was allocated equally between
Goodwill and Equipment, which was estimated to have a remaining useful life of ten years from the acquisition date.
Gamma reported a net income of $75,000 and paid dividends of $5,000 during 2002.
Beta issued $300,000 in Bonds during the year. Beta reported an equity method net income of
$300,000 and paid $70,000 in dividends to its shareholders.
Required:
Prepare a Consolidated Statement of Cash Flows for Beta Corp. for 2002. (30 marks)
Problem 5
ABC Inc. has acquired all of the voting shares of DEF Inc and is gathering the necessary data to prepare consolidated Financial Statements. ABC paid $1,200,000 for its Investment. Details of the companies’ assets and liabilities on the acquisition date are shown below:
Inventory
Fair Market Value
$ 80,000
Tax Basis
$ 80,000
Accounts Receivable
Land
Buildings
Equipment
$100,000
$200,000
$300,000
$250,000
$ -
$200,000
$200,000
$200,000
Accounts Payable $ 70,000 $ 70,000
Required:
Assuming that DEF hasn’t set up Future Income Tax Asset or Liability accounts, determine the amounts that would be used to prepare the Consolidated Balance Sheet on the acquisition date.
Assume a tax rate of 50%. (30 marks)
7

Problem 6
On December 31, 2013, Hilman Enterprises of Montreal paid $12,000,000 for 100% of the outstanding shares of Wilsen Corp of the United States. Wilsen’s Fair values approximated its book values on that date.
Wilsen’s comparative balance sheets for 2013 and 2014 are shown below:
Balance Sheet as at
December 31 (in U.S. Dollars),
Current Monetary Assets
Inventory
Plant and Equipment (Net)
2014
$8,000,000
$2,000,000
$1,500,000
2013
$7,500,000
$3,000,000
$1,800,000
Total Assets
Current Liabilities
Total Liabilities and Equity
Bonds Payable (due Dec 31, 2019)
Common Stock
Retained Earnings
$11,500,000
$1,100,000
$5,000,000
$4,000,000
$1,400,000
$11,500,000
Income Statement for
The Year ended
December 31, 2014
Sales
Inventory, January 1, 2014
Purchases
$5,200,000
$3,000,000
$3,000,000
Inventory, December 31, 2014
Depreciation Expense
Other Expenses
($2,000,000)
$ 300,000
$ 400,000
$4,700,000
$12,300,000
$2,300,000
$5,000,000
$4,000,000
$1,000,000
$12,300,000
8

Net Income
Other Information :
Exchange Rates:
$ 500,000
December 31, 2013: $1U.S.=$1.1850 CDN
September 30, 2014: $1U.S.=$1.1975 CDN
December 31, 2014: $1U.S.=$1.20 CDN
Average for 2014: $1U.S.=$1.19 CDN
Wilsen paid U.S. $100,000 in dividends on September 30, 2014.
The inventories on hand at the end of 2014 were purchased when the exchange rate was
$1U.S.=$1.195 CDN.
Assume that Wilsen is considered to be an integrated subsidiary.
Required:
1.
Compute Wilsen’s exchange gain or loss for 2014. (5 marks)
2.
Translate Wilsen’s 2014 Income Statement. (10 marks)
3.
Translate Wilsen’s December 31, 2014 Statement of Retained Earnings. (5 marks)
4.
Translate Wilsen’s December 31, 2014 Balance Sheet. (10 marks)
9

Solutions
Problem 1
Solution:
Nook Inc.
Consolidated Balance Sheet as at
February 28, 2003
Cash
Accounts Receivable
Inventory
Equipment (net)
Patent
Goodwill
Total Assets
Current Liabilities
Bonds Payable
Non-Controlling Interest
Common Shares
Retained Earnings
$420,000
$100,000
$ 90,000
$214,000
$ 81,000
$262,571
$1,167,571
$587,500
$269,000
$114,621
$ 80,000
$116,450
Total Liabilities and Equity
Problem 2
1. Solution:
Max’s Income
Less: Dividends from Min
Less:
$1,167,571
$250,000
($ 52,000)
10

Goodwill Impairment Loss
Ending Inventory Profit
Add: Opening Inventory Profit:
Max’s Net Income – Adjusted
Min’s Net Income
Less: Ending Inventory Profit
Add: Opening Inventory Profit
Amortization of
Purchase Price Discrepancy
Min’s Net Income
* 80%
($5,000)
($2,000)
$1,200
$192,200
$115,000
($ 1,000)
$800
($ 2,500)
$112,300
$ 89,840
Consolidated Net Income
2. Solution:
Non-Controlling Interest at Acquisition: (937,500*20%)
Add (Deduct):
Increase in Min’s Retained Earnings
Add/Deduct: Purchase Price Discrepancy Amortizations:
Trademark
Bonds Payable
Less: Unrealized Inventory Profit at Year End:
$282,040
$250,000
($ 12,000)
$ 4,500
($ 1,000)
$187,500
Subtotal
Non-Controlling Interest
($241,500)
* 20% $ 48,300
$235,800
Problem 3
1. Solution:
Schedule of Realized and Unrealized Profits, 2009, 2010
Profits Realized During 2009:
HOT Inc: Before Tax After Tax
11

Loss on Intercompany Sale of Equipment
Realized through depreciation
($15,000/5)
COLD Inc:
Unrealized Profits at December 31, 2009:
HOT Inc:
Unrealized Loss on Equipment Sale
COLD Inc:
Inventory Sales
($18,000-$18,000/1.5)
Profits Realized During 2010:
HOT Inc:
Loss on Intercompany Sale of Equipment
Realized through depreciation
($15,000/5)
Inventory Sales
($45,000-$45,000/1.5)*2/3
COLD Inc:
Gain on Intercompany Sale of Equipment
Realized through depreciation
($10,000/5)
Unrealized Profits at December 31, 2010:
HOT Inc:
Unrealized Loss on Equipment Sale
($15,000-2*$3,000)
Inventory Sales
($45,000-$45,000/1.5)*1/3
COLD Inc:
($3,000)
Before Tax
Before Tax
$12,000
$6,000
Before Tax
($3,000)
$10,000
Before Tax
$2,000
Before Tax
($9,000)
$5,000
($2,400)
After Tax
After Tax
$9,600
$4,800
After Tax
($2,400)
$8,000
After Tax
$1,600
After Tax
($7,200)
$4,000
12

Unrealized Gain on
Intercompany Sale of Equipment
2. Solution:
Unrealized Gain on Intercompany Equipment Sale
Unrealized Loss on Intercompany Equipment Sale
$8,000
Unrealized Profit in Ending Inventory
Total Unrealized Profit
$8,000
($9,000)
$5,000
$4,000
$800 Income Tax deferred (20%)
Problem 4
Solution:
Net Income $300,000
Add (Deduct)
Non-Controlling Interest in Income
Depreciation
Gain on Land Sale
Add: Bond Discount Amortization
Increase in Inventory
Increase in Accounts Payable
Increase in Accounts Receivable
Increase in Accrued Liabilities
Cash from Operations:
Investing
Purchase of Plant/Equipment
Sale of Land
Total Cash from Investing
$ 15,000
$ 30,000
($ 10,000)
$ 10,000
($300,000)
$ 286,000
($200,000)
$ 210,000
$ 341,000
($ 480,000)
$ 50,000
($430,000)
Financing
Bond Issue
Dividends – to Beta’s shareholders
$ 300,000
($ 70,000)
Dividends – Non-Controlling shareholders ($ 1,000)
Cash from Financing $229,000
13
$6,400

Increase (decrease) in Cash
Add: Opening Cash Balance
Cash Balance – December 31, 2002
$140,000
$ 40,000
$180,000
Problem 5
Solution:
Inventory
Accounts Receivable
Land
Fair Market Value Tax Basis
$80,000 $80,000
$100,000
$200,000
$ -
$200,000
Buildings
Equipment
Accounts Payable
$300,000
$250,000
$70,000
$200,000
$200,000
$70,000
$750,000 Total Difference
Deferred Tax Liability (50%)
$1,000,000
Calculation of Goodwill:
Purchase Price
Less:
Fair Value of Assets Acquired:
Allocation to Deferred Tax Liability
Goodwill
Difference
$ -
$100,000
$ -
$100,000
$50,000
$ -
$250,000
$125,000
$1,200,000
($1,000,000)
($125,000)
$75,000
The following amounts would be used to prepare the Consolidated Balance Sheet:
Inventory $80,000
Accounts Receivable
Land
Buildings
Equipment
$100,000
$200,000
$300,000
$250,000
$70,000
$75,000
$125,000
$810,000
Accounts Payable
Goodwill
Deferred Liability
Investment Account
Problem 6
1. Solution:
Balance, Jan 1, 2013
(7,500-2,300-5,000)
Changes – 2014
U.S. Dollars
$200,000 *1.185
CDN Dollars
$237,000
14

Sales
Purchases
Other Expenses
Dividends
Calculated Monetary Position:
Actual Position, Dec 31, 2014
(8,000-1,100-5,000)
$5,200,000
($3,000,000)
($400,000)
($100,000)
$1,900,000
*1.19
*1.19
*1.19
*1.1975
*1.20
2. Solution:
Sales
Inventory, January 1, 2014
Purchases
Exchange Gain – 2014
U.S. Dollars
$5,200,000 *1.19
$3,000,000 *1.185
$3,000,000 *1.19
Inventory, December 31, 2014 ($2,000,000) *1.195
Depreciation Expense $300,000 *1.185
Exchange Gain
Other Expenses $400,000 *1.19
Net Income
$4,700,000
$500,000
$6,188,000
($3,570,000)
($476,000)
($119,750)
$2,259,250
$2,280,000
$20,750
CDN Dollars
6,188,000
3,555,000
3,570,000
(2,390,000)
355,500
(20,750)
476,000
$5,545,750
$642,250
3. Solution:
Balance, January 1, 2014
Add: Net Income
4. Solution:
U.S. Dollars
1,000,000
500,000
Balance Sheet as at
December 31, 2014
*1.185
CDN Dollars
1,185,000
642,250
Less: Dividends (100,000) *1.1975
Retained Earnings 1,400,000
($119,750)
1,707,500
Current Monetary Assets
Inventory
Plant and Equipment (Net)
U.S Dollars
$8,000,000 *1.20
$2,000,000 *1.195
$1,500,000 *1.1850
Total Assets
Current Liabilities
Bonds Payable (due Dec 31, 2019) $5,000,000
Common Stock
Retained Earnings
$11,500,000
$1,100,000 *1.20
*1.20
$4,000,000 *1.185
$1,400,000
Total Liabilities and Equity $11,500,000
CDN Dollars
$9,600,000
$2,390,000
$1,777,500
$13,767,500
$1,320,000
$6,000,000
$4,740,000
$1,707,500
$13,767,500
15