Management 124

Practice Final Exam Solution

A 6 pts)
Fair value or cost
Equity method
Consolidation

0-19.9%
20-49.9%
50-100%

B 5 pts) Transactions should affect the statements as they would if the firms were a
single company.
C 8 pts) Jones earnings for consolidation purposes is 80,000 30,000 = 50,000. The
minority interest is increased by 20% of Jones earnings and reduced by 20% of Jones
dividends. The ending minority interest is thus 100,000 + 20% x 50,000 20% x 15,000
= $107,000.
D 18 pts)
i) Goodwill = Purchase price FV of net identifiable assets = (12,000 x 4.50) (10,000 +
18,000 + 20,000 + 10,000 12,000 13,000) = 54,000 33,000 = $21,000.
ii)
Stockholders equity (Vicker)
Investment in Vicker

27,000
27,000

Inventory
5,000
Licenses
10,000
Goodwill
21,000
Receivables (or bad debt allowance)
2,000
Accrued expenses
4,000
Long-term debt (or bond premium)
3,000
Investment in Vicker
27,000

iii) All amortizations are for a full year. Debit FV adjustments amortize as higher
expenses and credit FV adjustments amortize as lower expenses. Licenses amortize
10,000 / 10 = 1,000 added expense. Long-term debt amortizes 3,000 / 6 = 500 less
expense. All the 5,000 inventory adjustment amortizes as added expense. Similarly the
2,000 receivables and 4,000 accrued expenses will amortize in full providing reduced
expenses.
Amortization expense
Licenses (or accum. amort.)

1,000

Long-term debt (or bond premium)

Interest expense

500

COGS

1,000
500
5,000

Inventory

5,000

Receivables (or bad debt allowance)

Bad debt expense

2,000

Accrued expenses
Expenses (of unknown type)

4,000

2,000
4,000

E 10 pts)
i) Warrens carrying value of the machine at time of sale was 50,000 x (1 6/10) =
20,000. The sale would have been recorded as a loss of 10,000 20,000 = (10,000). This
loss should not be counted for consolidation purpose.
Harding would have taken too little depreciation since the proper carrying value is 10,000
higher than on Hardings books at purchase date. year of depreciation for the extra
10,000 would be / 5 x 10,000 = 1,000.
Adding back the loss and increasing depreciation would increase consolidated income by
10,000 1,000 = +$9,000.
ii) Harding took too little depreciation again, this time a full years worth in 2015, or
1/5 x 10,000 = 2,000. Hardings carrying value for the machine at date of sale is
10,000 x (1 2.5/5) = 5,000. The proper carrying value for the consolidated enterprise is
20,000 x (1 2.5/5) = 10,000. Thus the loss needs to be increased by 5,000. The total
income adjustment is (2,000) + (5,000) = $7,000.
Note that the income adjustment in 2014 would have been -2,000, so the sum of income
adjustments in all years is 0.

F 8 pts) Remeasurement is required when assets or liabilities are valued in currencies

other than the functional currency. Remeasurement leads to gains or losses in the income
statement when exchange rates change. Translation is required when a subsidiary uses a
different functional currency from the parent. Translation leads to a gain or loss that is
included in other comprehensive income when exchange rates change.
G 5 pts) Under the fair value method, the receivables remeasurement and forward
contracts fair value adjustment are both treated as gain or loss in the income statement
and might not exactly offset.
H 40 pts) Astoria Partners is a business formed by Kelly, Louise, and Mark on 1/1/13
with the following agreed cash contributions and capital/profit shares.

Kelly
Louise
Mark

Contribution Capital %

Profit/loss %

50,000
70,000
80,000

50%
30%
20%

40%
30%
30%

i) Cash provided is 50,000 + 70,000 + 80,000 = 200,000. Under the bonus method, this is
the total capital, which is distributed to each partner in proportion to her/his capital %.
Kelly gets 40% x 200,000 = 80,000. The others get 30% x 200,000 = 60,000.
Cash

200,000
Capital Kelly
Capital Louise
Capital Mark

80,000
60,000
60,000

ii) Kelly gets her 60,000 salary and 10% x 80,000 = 8,000 in interest on her capital. The
other two get 40,000 in salary (Louise only) and 10% x 60,000 = 6,000 in interest (both).
Total income claims are 120,000. The remaining income (180,000 120,000 = 60,000) is
allocated in proportion to profit/loss %, so Kelly gets 50% x 60,000 = 30,000. In total,
Kelly is entitled to 60,000 + 8,000 + 30,000 = 98,000 which is added to her capital. Her
final capital balance is the initial balance of 80,000 + income (98,000) drawings
(80,000) = $98,000.
iii) Under the goodwill method, we increase the net assets of the partnership so that
Marks capital equals 120,000. Since Mark only gets 20% of income, only 20% of the
gain on adding goodwill (or other revaluations) will be allocated to him. Mark needs
30,000 in extra capital, so 150,000 in goodwill is needed. Louise is allocated 30% of this
or 45,000. This is added to her pre-dissolution capital, giving her a total of 60,000 +
45,000 = $105,000.

iv) First determine each partners ability to absorb losses before losing all capital. For
Kelly, it is 80,000 / 62.5% = 128,000. For Louise, it is 70,000 / 37.5% = 186,667. Thus,
Kelly is wiped out first, after which we pessimistically assume all losses are borne by
Louise until she is wiped out too. Once Kelly wipes out, Louises capital will be down to
70,000 37.5% x 128,000 = 22,000. After an addition 22,000 in losses, her capital will
be gone.
Before anything can be paid to the partners, all liabilities (including accrued liquidation
costs) must be paid off. Liabilities are 50,000 + 8,000 = 58,000.
Party or parties receiving payment

Amount of cash payable

Creditors

First

$58,000

Louise

Next

$22,000

Kelly (62.5%) and Louise (37.5%)

All remaining

v) Total losses and expenses due to liquidation are (100,000 + 80,000 45,000) + 5,000 =
140,000. This loss is allocated to both partners. Kelly is allocated 62.5% x 140,000 =
87,500. Since her capital account is just 80,000 before liquidation, she finishes with
(7,500) in the account, requiring her to pay $7,500 to settle her personal obligation to
cover the partnerships debts. Good luck to Louise in getting Kelly to actually pay it.