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1.Haynes, Inc., obtained 100 percent of Turner Company’s common stock on January 1, 2014, by issuing 9,000 shares of $10 par value common stock. Haynes’s shares had a $20 per share fair value. On that date, Turner reported a net book value of $100,000. However, its equipment (with a five-year remaining life) was overvalued by $5,000 in the company’s accounting records. Also, Turner had developed a customer list with an assessed value of $30,000, although no value had been recorded on Turner’s books. The customer list had an estimated remaining useful life of 10 years. Turner’s land was undervalued by 10,000. Turner’s patent, which has 10 years of useful life remaining, was undervalued by 15,000. The following figures come from theindividualaccounting records of these two companies as of December 31, 2014 Haynes Revenues$(700,000) Expenses460,000 Investment incomeNot given Dividends declared90,000 The pre-acquisition balance sheets of the two companies are presented below: HaynesTurner Current Assets$100,000$50,000 Land$200,000$50,000 Equipment$300,000$30,000 Patent$150,000$20,000 Total Assets$750,000$150,000 Liabilities$350,000$50,000
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Common Stock$50,000$50,000 Additional Paind-in Capital$150,000 Retained Earnings$200,000$50,000 a.What is balance of the investment account of Haynes right after this acquisition? Write down the relevant journal entries and the affected accounts (5 points). Ans:The balance of the investment account of Haynes right after the acquisition is $180,000 (90,000 shares @ $20 each) Investment in Turner Ltd.Dr.180,000 To Common StockCr.90,000 To Retained Earnings (1/1/14)Cr.90,000 (To record investment in Turner) b.What is the consolidated balance sheet numbers for Haynes and Turner onJanuary 1, 2014? Please fill out the table below and write down the according journal entries (10 points) HaynesTurnerConsolidated Balance Current Assets$100,00 0$50,000 Land$200,00 0$50,000 Equipment$300,00 0$30,000 Patent$150,00 0$20,000
Total Assets$750,00 0$150,000 Liabilities$350,00 0$50,000 Common Stock$50,000$50,000 Additional Paind-in Capital150,000 Retained Earnings$200,00 0$50,000 Ans:Consolidated Balance sheet Numbers as on January 1, 2014 ParticularsHaynesTurner Consolidated Balance Current Assets100,00050,000180,000 Land200,00050,000260,000 Equipment300,00030,000325,000 Patent150,00020,000185,000 Goodwill30,000 Total Assets750,000150,000980,000 Liabilities350,00050,000400,000 Common Stock50,00050,000140,000 Additional Paid-in Capital150,000150,000 Retained Earnings200,00050,000290,000 Total Liabilities and equity750,000150,000980,000
Journal Entries Goodwill (refer WN-1)Dr.30,000 Common StockDr.50,000 Retained EarningsDr.50,000 Business Combination Valuation ReserveDr.50,000 To Common stockCr.90,000 To Retained EarningsCr.90,000 (To record consolidation entry) WN-1Acquisition Analysis as on 1/1/14 Consideration Paid by Haynes180,000 Book value of Turner's assets Recorded Book value100,000 Less: Equipment Overvalued(5,000) Add: Customer List not recorded30,000 Add: Land undervalued10,000 Add: Patent undervalued15,000150,000 Goodwill on Acquisition30,000 c.What should be the investment income of Haynes 2014? (5 points) Ans:The investment income of Haynes 2014 is as below: Net income of Turner13,000 Less: Dividend declared(4,000) Less: Excess Amortisation (refer WN- 2)(3,500) Net investment income - 20145,500 WN-2Amortisation Value Undervalued / (overvalued)Life (years)Yearly amortisation Equipment(5,000)5(1,000) Customer List30,000103,000 Patent15,000101,500 Net excess amortisation3,500
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d.What should be the balance of investment account of Haynes for 2014? (5 points) Ans: Balance of investment account of Haynes for 2014 Fair value of consideration Paid by Haynes180,000 Net investment income - 20145,500 185,500
e.Had Haynes acquired 80% instead of 100% of Turner’s shares (Haynes issued 8,000 shares instead of 9,000 shares other conditions remain the same), what is the journal entry to document the transaction? (2 points) Ans: Investment in Turner Ltd. (80%) Dr .160,000 To Common StockCr.80,000 To Retained Earnings (1/1/14)Cr.80,000 (To record investment in Turner) f.What should be the investment income of Haynes for 2014? (2 points) Ans: The investment income of Haynes 2014 is as below: Net income of Turner13,000 Less: Dividend declared(4,000) Less: Excess Amortisation (refer WN- 2)(3,500) Net investment income - 20145,500
g.What should be the balance of non-controlling interests on December 31, 2014? (2 point) Ans: Share in Fair value of assets36,000 Share in income - 20141,100 Balance of NCI as on 31/12/201437,100 2.At the beginning of January 1st2007, the financial position of company Z and B are as follows: 1/1/2007 Company ZCompany b AssetL&EAssetL&E Cash3,000,0001,500,000Cash5,000,0002,500,000 1,500,000300,000 5,000,000Loan5,000,000 5,000,000Inventory700,000Total L.7,500,000 Loan5,000,000PPE1,000,000 Inventory4,000,000Total L.11,500,000Land1,500,000 PPE10,000,000EquityPatent3,000,000Equity Land8,000,000C/S10,000,000C/S2,000,000 Patent5,000,000R/E15,000,000R/E2,000,000 Total E.25,000,000Total E.4,000,000 Total Assets36,500,000Total E & L36,500,000Total Assets11,500,000Total E & L11,500,000 Accounts PaylableAccounts Paylable Marketable SecuritiesAccounts Receiveable Notes Payable Accounts Receiveable
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On January 1st2007, Z purchased 70% of B by issuing 700,000 shares of common stock (1 dollars face value and 8 dollars market price). Note that B’s PPE has a remaining life of 5 years at the purchase date, and it was overvalued by $500,000, Land was undervalued by 800,000, and patent has a remaining life of 10 years and undervalued by $1,000,000. Z also determines that B’s brand name has market value of $1,000,000. Company Z records the investment in Company B using equity method. a.What are the journal entries of Z and B to book the transactions? (4 points) Ans: Acquisition Analysis as on 1/1/2007 Net fair value of B's assets4,000,000 Less: PPE overvalued(500,000) Add: Land undervalued800,000 Add: Patent undervalued1,000,000 Add: Brand name valuation1,000,000 Total fair value of assets6,300,000 Z's share of fair value @ 70%4,410,000 Less: Consideration Paid5,600,000 Goodwill1,190,000 Journal Entries Investment in B Ltd. Dr .5,600,000 To Common StockCr.700,000 To Retained EarningsCr.4,900,000 (To record investment in B)
b.What does the balance sheet of Company Z, and the consolidated balance sheet look like right afterthe purchase?Fill out the table below (note that new accounts may be created due to the consolidation) and write down the consolidation journal entries(10 points) Ans: 01/01/2007Mechanical TotalConsolidated Total Company Z Company b AssetAsset Cash3,000,000Cash5,000,0008,000,0008,000,000 Marketable Securities 1,500, 0001,500,0001,500,000 Accounts Receiveable 5,000, 000 Accounts Receiveabl e300,0005,300,0005,300,000 Inventory4,000,000Inventory700,0004,700,0004,700,000 PPE10,000,000PPE1,000,00011,000,00010,500,000 Land8,000,000Land1,500,0009,500,00010,300,000 Patent5,000,000Patent3,000,0008,000,0009,000,000 Brand Name1,000,000 Goodwill1,190,000 Total Assets36,500,000 Total Assets11,500,00048,000,00051,490,000 L&EL&E Accounts Paylable 1,500, 000 Accounts Paylable 2, 500,0004,000,0004,000,000 Notes Payable 5,000, 0005,000,0005,000,000 Loan5,000,000Loan5,000,00010,000,00010,000,000 Non-controlling interest1,890,000
Total L.11,500,000Total L.7,500,00019,000,00020,890,000 EquityEquity C/S10,000,000C/S2,000,00012,000,00010,700,000 R/E15,000,000R/E2,000,00017,000,00019,900,000 Total E.25,000,000Total E.4,000,00029,000,00030,600,000 Total E & L36,500,000 Total E & L11,500,00048,000,00051,490,000
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Journal Entry Common StockDr.2,000,000 Retained EarningsDr.2,000,000 Business Combination Valuation ReserveDr.2,300,000 GoodwillDr.1,190,000 To Investment in B Ltd.Cr.5,600,000 To NCICr.1,890,000 (To record acquisition of B) During 2007, the following transactions took place 1.Z sold a piece of land with cost of $1,500,000 to B for 2,000,000. 2.In 2006, Z sold inventory to B for $4,500,000, which cost Z 3,600,000, by the end of 2006, 20% of the inventory was not sold to outsiders and remained in B’s warehouse. 3.Z sold products to B for $5,000,000, which cost Z $4,000,000. By the end of 2007, 70 percent of the products were sold for $4,900,000. 4.Z reported income (not taking investment income from B into consideration) of $10,000,000 and announced and paid dividend in the amount of $2,000,000. 5.B reported net income of $3,000,000 and announced and paid dividend in the amount of 1,000,000. c.Please write down the adjusting journal entries for the internal transactions for 2007 (22 points) Ans: 1Gain on sale of Land Dr .500,000 LandCr.500,000 (To record elimination of profit on sale of land) 2Sales Dr .900,000 To Cost of SalesCr.720,000 To InventoryCr.180,000 (To eliminated profit in closing inventory) 3SalesDr1,500,000
. To Cost of SalesCr.1,200,000 To InventoryCr.300,000 (To eliminated profit in closing products) d.What is the investment income of Z for 2007? What is the balance of investment account by the end of 2007 for Z? (4 points) Ans: Investment income of Z for 2007 Share in income of B2,100,000 Less: Gain on sale of Land(350,000) Less: Dividend declared(700,000) Less: Excess amortisation (Refer WN-2)- Net investment income of Z1,050,000
WN- 2Amortisation Value Undervalued / (overvalued)Life (years)Yearly amortisation PPE(500,000)5(100,000) Patent1,000,00010100,000 Net excess amortisation- Balance of Investment account of Z in 2007 Net investment5,600,000 Add: Investment income of 20071,050,000 Balance of Investment account of Z in 20076,650,000 e.What is the amount of income that goes to non-controlling interests? What is the amount of consolidated net income? What is the balance of non-controlling interests by the end of 2008? (4 points) Ans: 30% of the amount goes to NCI
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Amount of income of 2007 belonging to NCI is $600,000 Share in income of B900,000 Less: Gain on sale of Land(150,000) Less: Dividend declared(300,000) Net investment income of Z450,000 Balance of NCI at the end of 2007 Net investment1,890,000 Add: Investment income of 2007450,000 Balance of NCI in 20072,340,000 f.For year 2008, 2009, 2010, 2011, 2012 and 2013, B reported net income of $2,500,000, $2,500,000, $3,500,000, $3,000,000, $4,000,000. 3,500,000, assuming no upstream sales, what should the non-controlling interests’ income be for the 6 years respectively? (4 points) Ans: YearNet income of BNCI income @ 30% 20082,500,000750,000 20092,500,000750,000 20103,500,0001,050,000 20113,000,000900,000 20124,000,0001,200,000