Question 1 (31.4 Marks)
A- Pickles Corporation purchased 70% of Salad Industries' common stock on January 2, 2019. On January 1, 2020, Salad sold equipment to Pickles that had a net book value of $80,000 and an original cost of $120,000 for $100,000. On January 1, 2020, Pickles sold a building to Salad that had a net book value of $1,000,000 and an original cost of $1,250,000 for $1,500,000. The equipment had a remaining useful life of 8 years, and the building had a remaining useful life of 20 years. Neither asset had salvage value. Both companies use straight-line depreciation.Selected account balances are shown below for Pickles and Salad for the year ended December 31, 2020:
Pickles Salad
Sales $1,400,000 $1,380,000
Cost of Goods Sold 900,000 500,000
Other Expenses 300,000 150,000
Building - net 2,800,000 1,425,000
Equipment - net 1,580,000 935,000
Required:
1. Calculate the following balances for the year ended December 31, 2020:
a. Consolidated "Other Expenses"
b. Consolidated Buildings
c. Consolidated Equipment
2. Calculate consolidated net income and controlling share of consolidated net income for 2020.
3. Prepare consolidation working paper entry to eliminate Income from subsidiary-parent share. No dividends were declared or paid. (15.4 Marks)
B- Habiba Company has a single branch in Southwest. On March 1, 2020, the home office accounting records included an Allowance for Overvaluation of Inventories: Southwest Branch ledger account with a credit balance of $32,000. During March, the following transactions occurred:
4- On March 22, the home office informed the branch that it had collected 50% of the amount owed by Hope company.
5- On March 28, the branch paid operating expenses of $10,000 cash.
6- On March 29, Hope company paid the remaining amount due to Southwest branch,
7- On March 30, the home office allocated operating expenses of $4,000 to the branch.
Required:
1) Prepare a working paper for the home office to analyze the flow of merchandise to Southwest branch during March 2020.
2) Prepare all required entries, including closing and adjusting entries, for the foregoing intracompany transactions in the accounting records of (a) the home office and (b) the Branch.
3) Reconstruct a three-column ledger account Allowance for overvaluation of inventories: Southwest branch for the home office of Habiba Company.
Question 2 (34.6 Marks)
A- Nour company (a U.S. company) began operations on December 1, 2020, when Nour Invested $150,000 of her cash savings in the business. In the first month of operations, Nour had the following transactions:
3, 2020 Bought inventory for 100,000 foreign currency units (FCU) on account. Must be paid with foreign currency units.
December 8, 2020 Sold 60% of inventory acquired on 1/12/20 for 32,000 British pounds on account. Invoice denominated in British pounds
December 10, 2020 Paid $3,000 in other operating expenses
December 23, 2020 Acquired and paid half of the foreign currency units. owed to the foreign supplier
December 28, 2020 Collected half of the 32,000 pounds from and immediately converted them into U.S. dollars
The following exchange rates apply:
Date Rate Rate
December 3 $.6260 = 1 FCU $1.5950 = 1 pound
December 8 $.6230 = 1 FCU $1.5760 = 1 pound
December 10 $.6210 = 1 FCU $1.5880 = 1 pound
December 23 $.6250 = 1 FCU $1.5610 = 1 pound
December 28 $.6330 = 1 FCU $1.5570 = 1 pound
December 31 $.6180 = 1 FCU $1.5720 = 1 pound
Required:
(Including the adjusting entries) at Nour company to record the previous transactions.
2) Assuming there were no other transactions, Calculate the net income for the month ended December 31, 2020 and Calculate the amounts that should appear in the balance sheet of Nour company on December 31, 2020, for the following items:
a) Cash
b) Accounts Receivable
c) Inventory
d) Accounts Payable. (18 Marks)
B- Phantom Corporation acquired an 80% interest in Speed Corporation at a cost equal to 80% of the book value of Speed's net assets several years ago. At the time of purchase, the fair value and book value of Speed's assets and liabilities were equal. Phantom purchases its entire inventory from Speed at 150% of Speed's cost. During 2020, Speed sold $1,470,000 of merchandise to Phantom. Phantom's beginning and ending inventories for 2020 were $216,000 and $198,000, respectively. Income statement information for both companies for 2020 is as follows:
Phantom Speed
Sales Revenue $ 2,460,000 $1,320,000
Income from Speed 436,800
Cost of Goods Sold (1,380,000) (495,000)
Expenses (360,000) (285,000)
Net Income $ 1,156,800 $ 540,000
Required:
1- Prepare a consolidated income statement for Phantom Corporation and Subsidiary for 2020.
2- Determine which consolidated income statement items would (or would not) change if Phantom were the seller and Speed, was the buyer. Explain why. (16.6 Marks)
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