Last Name: __________________

First Name: ___________________

Student Number: ________________

SOLUTION

MID TERM EXAMINATION

Fall 2013
ADVANCED FINANCIAL ACCOUNTING
ACCT 453
DATE: Friday, November 1, 2013
TIME: 6:00 8:00 p.m.
Instructor: Julia Scott
INSTRUCTIONS:
This is a CLOSED BOOK examination.
Answer PROBLEMS on the Examination Paper. Return all materials.
Answer the CASE in the Examination Booklet. If you answer them in the wrong spots there
is a chance they will not be graded. Make sure you put your NAME on both things.
ONLY TRANSLATION dictionaries ARE PERMITTED.
Noiseless non-programmable calculators are PERMITTED.
The time allocations per questions are just guidelines and do not correspond exactly to the
marks on each question.
This examination consists of 3 questions on a total of 9 pages including this cover page.
Please ensure that you have a complete examination paper before starting

Problem
1

Marks
Available
20

12

Mark

Subtotal Problems /32

Case

TOTAL:

Grade on 100%

18

50

___________

___________

GOOD LUCK

Acct 453 Midterm Fall 2013, Copyright McGill University, 2013

Question 1 (20 marks, recommended time 45 minutes)

(Note all figures are in 000s)
On January 2, 2012, Pad Company purchased 70% of the outstanding common shares of Sad
Company for $1,120.
On that date Sad had common shares of $750 and retained earnings of $250. In negotiating the
purchase price, it was agreed that assets and liabilities were fairly valued except as follows:
-

Equipment had a fair value $100 more than the carrying value. The equipment had a
remaining useful life of 5 years at the date of acquisition and no salvage value.

Land had a $200 excess of fair value over carrying value.

The financial statements for the two companies for the year ended December 31, 2014 were as
follows:
Single Entity Financial Statements
Balance Sheet as at Dec 31 2014
Pad Company
Sad Company
Cash & Accts Receivable
$ 600
$ 450
Inventories
850
400
Land
900
250
Plant and Equipment (Net)
2,100
1,400
Investment in Sad
1,120
Total Assets
$5,570
$2,500
Current Liabilities
Long-Term Liabilities
Common Stock
Retained Earnings
Total Equities

$ 700
1,350
1,800
1,720
$5,570

$ 445
800
750
505
$2,500

Income Statements for 2014

Pad Company
$ 6,300
150

Sad Company
$ 4,500

3,600
360
1,440

3,150
180
650

175
$1,225

$520

$800

$250

Sales
Other revenue
Expenses:
Cost of goods sold
Depreciation
Income taxes & other expenses
Investment Income
Net Income
Dividends paid
Other Information:

1. Each year, goodwill is evaluated to determine if there has been a permanent impairment.
Sads goodwill was determined to be impaired in the amount of $75 at the end of 2014.
2. Pads inventories contained $500 of merchandise purchased from Sad at December 31, 2014
and $300 at December 31, 2013. During 2014 sales from Sad to Pad were $800. Sads gross
profit margin is 30%. Pad owed $50 to Sad at December 31, 2014 related to these purchases.
3. Sad rented a building throughout the year from Pad for $10 per month.
4. Pad uses the cost method to account for its long-term investments. Pad uses IFRS entity
method and is a public company.
5. Both companies pay tax at the rate of 40%.

Acct 453 Midterm Fall 2013, Copyright McGill University, 2013

Question 1 continued:
Required:
A. Prepare the consolidated Income Statement for the year ending December 31, 2014 for Pad
Company including the calculation of NCIs share of consolidated net income. (10 marks)
B. For the consolidated Balance Sheet as at December 31, 2014:
i.
prepare the asset and liability portions of the balance sheet.
ii.
determine NCI.
(10 marks)

NOTE: The required are repeated on the answer pages.

SPACE for ROUGH WORK
70%
Initial Investment 70%
100%
Common shares
RE at acquisition
Acq Differential
PPE
Land
GW
Amortization Schedule
PPE
Land
GW
Total
Pads 70%
NCIs 30%
Unrealized profit ending
inv
Sad to Pad
Realized profit beg inv
Sad to Pad
net adjust to CGS & tax

1,120
1,600
750
250
600
( 100)
( 200)
300

NCI
480

At
Acquisition
100
200
300
600
420
180

2012-2013

2014

( 40)

( 20)

( 40)
( 28)
( 12)

( 75)
( 95)
( 67)
( 29)

In
Inventory
500

Gross
Profit
150

tax

after tax

( 60)

90

decrease NI

54

increase NI

Adjustment to inventory

90
( 36)
60
( 24)
increase
Decrease
CGS
tax exp
( 150)

eliminate 100% of Sads sales to Pad

eliminate 100% of interco rent

sales & CGS

other rev/exp

Intercompany A/R A/P

Deferred tax asset

300
800

End of
2014
40
200
225
465
326
140

800
120

50
60

Acct 453 Midterm Fall 2013, Copyright McGill University, 2013

Answer Space Question 1

Answer Space A
A. Prepare the consolidated Income Statement for the year ending December 31, 2014 for Pad
Company including the calculation of NCIs share of consolidated net income. Clearly
indicate or label all adjustments you make. (10 marks)
You dont have to use the table but can if it helps you.
Income Statements 2014
Pad
6 ,300
150
3,600
60

Sales
Other revenue
Cost of goods sold
Depreciation
Impairment loss
Investment Income
Income taxes and other
expenses

1, 440

Net Income

, 1,225

Sad
4,500
3,150
180

175
650

Adjustments
( 800)
( 120)
( 800) 150
20
75
( 175)
( 120)

( 24)

520

Check

Calculation NCI on I/S &

Invstmt income for P (equity)
S's NI
less unrealized profit
plus realized profit
less FV
amortizations
S' s adjusted NI
NCI's 30%
30%
P's share
70%

( 90)

NCI
P's cons NI
P - div + invst inc

Consolidated
10,000
30
6,010
560
75
1,946

1,439
( 116.7)
1,322.3
1,322.3

520
( 90)
54
( 95)
389.0
116.7
272.3

Acct 453 Midterm Fall 2013, Copyright McGill University, 2013

Answer Space Question 1 continued

B. For the consolidated Balance Sheet as at December 31, 2014:
i.
prepare the asset and liability portions of the balance sheet.
ii.
determine NCI.
Clearly indicate or label all adjustments you make. (10 marks)

You dont have to use the table but can if it helps you.
Balance Sheets Dec 31,
2014
Cash & Accts Receivable
Inventories
Land
Plant and Equipment (Net)
Goodwill
Deferred Tax asset
Investment in Sad
Total Assets
Current Liabilities
Long-Term Liabilities
NCI
Common Stock
Retained Earnings
Total Equities

Calculation NCI B/S

S's Common share
S's RE
less unrealized profit inv

Pad

Sad

Adjustments

Cons

600
850
900
2,100

450
400
250
1,400

1,120
5,570

2,500

( 50)
( 150)
200
40
225
60
( 1,120)

1,000
1,100
1,350
3,540
225
60
7,275

700
1,350

445
800

( 50)

1,095
2,150
489.0
1,800
1,741
7,275

489.0
1,800
1,720
5,570

750
505
2,500

21

750
505
( 90)
OR

Adjusted BV
30% S's BV
30% unamort FVI
NCI
OR
NCI at Acquisition
plus 30% change in RE

1,165.0
349.5
139.5
489

100%
100% FVI
100% Adj BV
30% of Adj BV

1,165
465
1,630
489

480
9
489

Acct 453 Midterm Fall 2013, Copyright McGill University, 2013

Question 2 (12 marks, recommended time 25 minutes)

Part A (8 marks)
Paper owns 80% of Scrap. Details from the date of acquisition on January 1, 2012 are as follows:
Price paid
$1,200
Scraps Common shares
$500
Scraps Retained earnings
$800
Acquisition differential
$200
FVI Patent
$50 remaining useful life at that time of 5 years
Goodwill
$150
On January 1, 2013 Paper sold to Scrap equipment as follows:
Original cost to Paper
$200
Accumulated depreciation
80
Useful life remaining
5 years
Selling price
$220
Other relevant information about the companies is as follows:
2013
Net income before investment income
Dividends

Paper
$250
$40

Scrap
$120
$20

2014
Net Income before investment income
Dividends
Retained earnings (end of year)

Paper
$250
$40
2,525

Scrap
$120
$20
$1,100

You may ignore taxes in all calculations.

Required:
a. Assume Paper uses the uses the equity method to account for its investment in Scrap,
what is the Investment income from Scrap on Papers unconsolidated income statement
for the year ended December 31, 2013? (4 marks)
NBV equipment sold in 2013:
Sold for
Gain

200 80 = 120
220
100

To be realized every year 100 5 = 20

2013
Scrap's net income
less FV Amort Patent
Adjusted NI
Paper's 80%
less gain on equip unrealized
plus realized portion
Investment income

120
(10)
50 5 yrs
110
88
(100) downstream 100%
20
100 5 yrs
8

b. Assume Paper uses the cost method, what is the closing balance in the Retained
earnings account on the consolidated balance sheet on December 31, 2014? (4 marks)
2014

P
2,525

RE
increase in RE
less patent amort
adjusted RE
P's 80%
less Unrealized Equip
to P's RE
156
Total RE
2,681

S
1100
300
( 30)
270
216
( 60)
156

3 yrs (12/13/14)

100 2 yrs of 20

Acct 453 Midterm Fall 2013, Copyright McGill University, 2013

Part B (4 marks)
P bought 100% of S on January 1, 2013 for $1,000,000. The FV of all of Ss assets & liabilities
equaled their BV except for the following bond:
S Book value bond January 1, 2013:
Bond discount or premium
Coupon rate (paid annually December 31)
Bond matures December 31, 2014

$100,000
0 (was issued at par)
5%
2 yrs

Market interest rate at date of acquisition

Market value of the bond at date of acquisition

4%
$101,886

a. Under IFRS, what is the 2013 interest expense reported by S related to this bond? (2
marks)
0,05 x 100,000 = 5,000.00

b. Under IFRS, what is the 2013 interest expense reported on the Consolidated income
statement related to this bond? (2 marks)

0.04 x 101,886 = 4,075.44

c. BONUS MARKS: What is the value of the bond on the consolidated balance sheet on
December 31, 2013? (2 marks)
Bond premium amortization in 2013 5,000 4,075.44 = 924.66
Carrying value at the beginning of the year
Less premium amortization
Carrying value at the end of the year

101,886.00
(924.66)
100,962.00

Acct 453 Midterm Fall 2013, Copyright McGill University, 2013

Question 3 (18 marks, recommended time 50 minutes)

ANSWER THE CASE IN THE EXAMINATION BOOKLETS PROVIDED. Only answers & notes in
there will be graded. Remember to put your NAME on the booklets.
Chocolate Ltd. is a private Ontario corporation controlled by Ted Crumble. The company owns a
series of chocolate chip cookie stores throughout Ontario, and also has a wholly owned Quebec
subsidiary that operates stores in Montral and Quebec City. Because of its lack of stores in
Western Canada and its managers lack of knowledge about that part of the country, Chocolate
Ltd. has just acquired 75% of the outstanding class A voting shares of Chip Inc. for $6,000,000
cash. Chip Inc. is another cookie store chain that is headquartered in Vancouver and has stores
throughout Vancouver and Victoria, as well as in Edmonton, Saskatoon and Winnipeg. Chip is
well known for its Chocolate Delight cookie and Ted hopes to be able to use the recipe to
introduce the cookie in his existing stores.
Ted expects that the acquisition will greatly help Chocolate Ltd.s bottom line, which in turn
will help Chocolate Ltd to obtain expanded debt financing because of the greater net income
and cash flow. The management of Chip Inc. will not change as a result of the purchase; the
former sole owner, John Chip, retains the remaining 25% of the Chip Inc. shares and has agreed
to continue as CEO of Chip Inc. for at least five years after the change in control. The president
and chief operating officer, Travis Hubert, will also stay on, so there is no reason that the
acquired company should not continue to be highly profitable. The condensed balance sheet of
Chip Inc., at the date of acquisition, is shown in Exhibit A on the next page.
The acquisition was financed mainly by debt; $4,500,000 was borrowed by Chocolate Ltd. from
the Western Bank of British Columbia, secured by the assets of both Chocolate Ltd. and Chip Inc.
The bank has requested audited financial statements of both companies on an annual basis,
supplemented by unaudited quarterly statements.
Chip Inc. owns the buildings in which some of its stores are located, but most are leased. None
of the land is owned. The buildings are being depreciated over 30 years. John has obtained two
separate appraisals of the owned buildings:
- one appraisal firm placed the aggregate current value at $9,000,000,
- the second firm arrived at a value of $8,400,000.
Chip Inc. owns all of the equipment in its stores:
- The equipment that originally cost $3,000,000 new (4 years ago) could be bought new
now for $3,300,000 with similar capacity.
- The original equipment is 40% depreciated (NBV 1,800,000) and is being depreciated
over 10 years.
Inventories are generally worth their book values, except that the replacement cost of the stock
of imported Belgian chocolate in the Vancouver warehouse is $20,000 less than book value
because of the strengthening Canadian dollar.
On the other hand, the accounts payable shown in Exhibit A includes an unrealized gain of
$10,000 because much of the liability is denominated in Belgian francs.
Required:
Ted Crumble has asked you to explain the options available to him for accounting for this
acquisition and to make a recommendation. Where alternative values or methods could be
used, explain the reasons for your selection. Your recommendation should include the effect of
your decision on Chocolates financial statements (year-end November 30). It is not necessary to
restate Chips financial statements.

Acct 453 Midterm Fall 2013, Copyright McGill University, 2013

Exhibit A
Chip Inc.
Condensed Balance Sheet
May 8, 2013
Assets
Cash
Accounts receivable
Inventories raw materials and supplies
Buildings
Accm depreciation
Equipment
Accm depreciation
Total Assets
Liabilities and Shareholders Equity
Liabilities
Accounts payable
Accrued expenses
Total current liabilities
Bank loan payable, due May 3, 2016
Total liabilities

$200,000
100,000
1,200,000
$7,000,000
(1,400,000)
3,000,000
1,200,000

5,600,000
1,800,000
$8,900,000

$550,000
150,000
$700,000
3,500,000
4,200,000

Shareholders Equity
Common Shares Class A, voting
Retained earnings
Total Shareholders equity
Total Liabilities and Shareholders equity

1,000,000
3,700,000
4,700,000
$8,900,000

END OF EXAMINATION

Acct 453 Midterm Fall 2013, Copyright McGill University, 2013