FINANCIAL ACCOUNTING 4 EXAMINATION
Time: 4 Hours
All calculations must be shown in an orderly manner to obtain part marks. Round all calculations to the nearest dollar.
Narratives for journal entries are not required unless specifically requested. Assume a December 31 fiscal year-end unless specifically stated otherwise. Assume all amounts are material unless directed otherwise.
Assume all companies are public companies unless otherwise noted. Assume no companies use differential reporting unless otherwise noted.
Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note:
2 marks each
Use the following information to answer parts (a) and (b).
On December 31, 2004, CHL Inc. purchased 70% of the common shares of WAC for $700,000. On the date of acquisition, WAC’s shareholders’ equity was as follows: Preferred shares, 6%, cumulative with 3 years in arrears, callable at 102 Common shares, no par value, 20,000 shares outstanding
Any purchase price discrepancy is allocated to land. During 2005, WAC reported net income of $150,000 and paid dividends of $100,000 in total to common and preferred shareholders. a.
What will CHL report as investment income for 2005 on its nonconsolidated financial statements, assuming that it accounts for its investment in WAC under the cost method? 1)
b. What will CHL report as investment income for 2005 on its nonconsolidated financial statements, assuming that it accounts for its investment in WAC under the equity method? 1)
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RUP Co. has a 30% ownership interest in ERT Co., a joint venture. During 2005, ERT reported net income of $200,000 and paid a dividend of $150,000. RUP’s inventory includes goods purchased from ERT on which ERT had made a profit of $20,000. What is the amount of income RUP should report on its investment in ERT for 2005 under the equity method? 1)
d. CD Ltd. owns 800 shares (80%) of LS Inc. The fair value of LS’s identifiable net assets is greater than their carrying value today and when CD purchased its 80% interest. Which of the following would result in a decrease in the purchase price discrepancy assigned to identifiable net assets? 1)
LS issues 100 new shares and CD purchases 60 of these new shares. LS issues 100 new shares and CD purchases 90 of these new shares. LS retires 100 of its shares, 70 of which were purchased from CD. LS retires 100 of its shares, 80 of which were purchased from CD.
Use the following information to answer parts (e) and (f).
On January 1, 2005, REV Company purchased 100% of the voting shares of STO Company for $500,000. On the date of acquisition, data related to equipment was as follows: Equipment
Net book value for accounting purposes
Undepreciated capital cost (UCC) for tax purposes
The equipment is being amortized for accounting purposes on a straight-line basis. At the date of acquisition, the equipment for both companies had a remaining useful life of 5 years and no residual value. For tax purposes, CCA is calculated using a rate of 20%. Both companies pay income tax at the rate of 40%.
Assume that this business combination is to be...
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