THE UNIVERSITY OF THE WEST INDIES EXAMINATIONS OF December 2017. CODE AND NAME OF COURSE: ACCT3041 Advanced Financial Accounting DATE AND TIME: DURATION: 2 Hours INSTRUCTIONS TO CANDIDATES: This paper has 7 pages and 5 questions. ANSWER ANY THREE (3) QUESTIONS Question 1 [25 marks] PartA Greenidge and Devonish have been partners in the medical supply business since January 1, 2013. Since the formation of the partnership, profits and losses have been shared in the ratio of 55:45, respectively. Capital balances on November 30, 2017, were $159,000 for Greenidge and $106,000 for Devonish. They have agreed to admit Alleyne as a partner on December 1, 2017. Alleyne will receive a 30% interest in partnership capital, and future profits and losses will be allocated equally among the partners. Required: Prepare journal entries in the partnership books to record Alleyne's admission in each of the following situations: i, Alleyne deals directly with Greenidge and agrees to exchange land with a book value of $60,000 and a fair market value of $87,000 for 50% of Greenidge's interest in capital. [2 marks] ii, Alleyne contributes $130,000 cash and a 1-year note with a value of $20,000 to the partnership entity. Record journal entries under the bonus and goodwill methods. [5 marks] ii, Alleyne invests $84,000 in the partnership entity. Use the goodwill method and assume that net assets should not be written down, [3 marks] TURN OVER ‘The University of the West Indies Course Code ACCT3041 201:PartB Roberts, Smith and Hinkson are partners who share profits 4:3:3, respectively. Smith decides that it would be more profitable for her to operate as a sole proprietor. Roberts and Hinkson make repeated attempts to acquire Smith’s interest in the partnership. Unable to reach an agreement, the partners mutually agree that their association should be dissolved. A condensed balance sheet before realization of assets shows the following balances: Assets Liabilities and Capital Cash $ 10,000 Liabilities $40,000 Other Assets 120,000 Roberts, Capital 40,000 Smith, Capital 24,000 Hinkson, Capital 26,000 Total $130,000 Total $130,000 ‘Asset realization is accomplished in three stages as follows: Stage Sales Price Book Value 1 $32,000 $24,000 2 24,000 20,000 3 12,000 76,000 Required: Prepare liquidation schedule and determine how the available assets will be distributed using a schedule of safe payments, [15 marks] Question 2 [25 marks] Castle Frank Corporation has been experiencing financial difficulties for some time and is proceeded to liquidate the company in accordance with the Bankruptcy Act. The accounts of Castle Frank at the time of filing are summarized as follows: Estimated Realizable Book Value Value Cash $ 80,000 — $ 80,000 Accounts receivable-net 50,000 40,000 Inventory 80,000 60,000 Land 10,000 20,000 Building-net 150,000 110,000 Equipment-net 60,000 40,000 Goodwill 0 10,000 $440,000 TURN OVER ‘The University of the West In Course Code ACCT3041. 2017-12.Question 2 continued Accounts payable $120,000 ‘Wages and salaries 20,000 Contributions due to pension pian 10,000 Taxes payable 60,000 Accrued interest payable (includes 10,000 $8,000 from the mortgage payable and $2,000 from the note payable) Note payable 120,000 Mortgage payable 90,000 Capital stock 80,000 Deficit (70,000) $440,000 The land and building are pledged as security for the mortgage payable as well as any accrued interest on the mortgage. The note payable is secured with the equipment, but the interest on the note is unsecured. Wages and salaries were earned within 90 days of filing the petition for bankruptcy and pension plan contributions relate to services rendered within 6 months of filing the petition for bankruptcy; neither exceeds $4,000 per employee. Liquidation expenses are expected to be $40,000. Required: Prepare a statement of affairs for Castle Frank Corporation showing the priority rankings of the creditors and the expected payouts. [18 marks] Part B On January 1, 2017, Deal Mart owed Money Bank $1,600,000, under an 8% note with three years remaining to maturity, Due to financial difficulties, Deal Mart wes unable to pay the previous year's interest. Money Bank agreed to settle Deal Mart’s debt in exchange for land having a fair market value of $1,310,000. Deal Mart purchased the land in 2003 for $1,000,000. Required: Prepare the journal entries to record the restructuring of the debt by Deal Mart. [7 marks] TURN OVER ‘The University of the West Indies _Course Code ACCT3041 2017-12-Question 3 [25 marks] PartA Merida Inc. purchases 2 90% interest in the common stock of Cosumel Corporation on January 1, 2016, for an agreed priced of $495,000. Merida Inc. issues $400,000 of bonds to Cosumel shareholders plus $95,000 cash as a payment. Cosumel's balance sheet on the acquisition date is as follows: ‘Assets Liabilities and Eauity Cash $60,000 | Accounts payable $45,000 ‘Accounts receivable 95,000 | Long-term liabilities 120,000 Property, plant, and equipment | 460,000 | Common stock ($10 par) 150,000 Retained earnings 300,000 Total $615,000 | Total $615,000 + Cosumel's equipment is understated by $20,000 and has a remaining depreciable life of five years, Any remaining excess is attributable to goodwill, ‘+ _ In addition to the bonds issued as part of the purchase, Merida Inc sold additional bonds in the amount of $100,000. * Consolidated net income for 2016 is $92,300 of which the non-controlling interest share is $4,600. Cosumel pays $10,000 in dividends to all shareholders. No plant assets are purchased or sold during 2016. Comparative balance sheet data are as follows: December 31, December 31, 2015 2016 Parent only | Consolidated Cash $82,000 $_ 187,700 ‘Accounts receivable 120,000 161,000 Property, plant, and equipment (net) 870,000 127,600 Goodwill 80,000 ‘Accounts payable (62,000) (80,000) Bonds payable (600,000) Long-term liabilities (80,000) (40,000) [ner (58,600) | Controlling interest: Common stock ($10 par) (200,000) (200,000) {Additional paid-in capital (300,000) (300,000) [_ Retained earnings (440,000) (527,700) [Total 0 0 Required: Prepare a consolidated statement of cash flows for the year ended December 31, 2016, for Merida Inc, and its subsidiary, Supporting schedules should be in good form. [18 marks] TURN OVER ‘The University of the West Indies _Course Code ACCT3041. 2017-12-PartB Pratt Company purchased 40,000 shares of Silas Company's common stock for $860,000 on January 1, 2016. At that time Silas Company had $500,000 of $10 par value common stock and $300,000 of retained earnings. Silas Company's income earned and increase in retained earnings during 2016 and 2017 were: 2016 2017 Income earned $260,000 $360,000 Increase in Retained Earnings 200,000 300,000 Silas Company income is earned evenly throughout the year. On September 1, 2017, Pratt Company sold on the open market, 12,000 shares of its Silas Company stock for $460,000. Any difference between cost and book value relates to Silas Company land. Pratt Company uses the cost method to account for its investment in Silas Company. Required: i. Compute Pratt Company's reported gain (loss) on the sale. [2 marks] il, Prepare the journal entries that would appear on the consolidated statements workpaper as eliminating entries at December 31, 2017. [ 5 marks] Question 4 [25 marks] ‘The Imgram & Wilson Inc; a Turks & Caicos based company, acquired an 80% equity interest in a Jamaican Company Negrill Inc on January 1, 2010. The cost of the investment was equal to the book value of the interest acquired. Imgram & Wilson Inc. accounted for the transaction as a purchase. The following set of financial statements was provided by the Jamaican subsidiary. Negril Inc Condensed Income Staternent For the year ended December 31, 2016 Sales $12,000,000 Cost of sales (2,000,000) Gross profit 10,000,000 Depreciation (800,000) Other expenses (expense depreciation) (9,000,000) Net operating income 200,000 Gain on the sale of investments 600,000 Income taxes (220,000) Net income TURN OVER ‘The University of the West Indies __ Course Code ACCT3041. 201;6 Negrill Inc Condensed Balance Sheets December 31, 2015 and 2016 2015 2016 Assets Current Assets Cash $60,000 $80,000 Marketable Securities 100,000 100,000 Accounts Receivable 200,000 190,000 Inventory 40,000 50,000 Total current assets 400,000 420,000 Investments 200,000 120,000 Fixed Assets Land 1,000,000 1,000,000 Building 10,000,000 11,800,000 Equipment 2,000,000 2,200,000 Accumulated depreciation (3,200,000) __ (4,000,000) Total Assets $10,400,000 $11,540,000 Liabilities and Owners’ Equity Current liabilities ‘Accounts Payable $120,000 $140,000 Dividends Payable 60,000 100,000 Current portion of Long term debt 200,000 260,000 Total 380,000 500,000 Long term debt 8,400,000 8,740,000 Capital stock 1,000,000 1,200,000 Retained earnings 620,000 1,100,000 Total $10,400,000 $11,540,000 Negril Inc was incorporated on January 1, 1999 when all the plant and equipment were acquired, The long-term notes were issued to partly finance the purchase of the fixed assets. Direct exchange rates for J$1 January 1,199 E,C.$0.50 Average for 2016 EC. $0.44 January 1,2010 E.C. $0.53 Average for October ~ December 2015 _E.C. $0.46 December 31, 2015 E.C, $0.48 Average for November - December 2016 _E.C, $0.52 December 31, 2016 E.C. $0.40 The beginning inventory was acquired during the period October — December 2015 and the ending inventory was acquired during the period November ~ December 2016. Revenues and expenses were evenly incurred during the year. TURN OVER The University of the West Indies _ Course Code ACCT3041 201)Required: a) Translate the December 31, 2016 account balances of Negrill Inc in EC dollars using the ‘temporal method, [20 marks] b) The transiation process can be done using either the current rate method or the temporal method. Explain under what circumstances each of the methods is appropriate, [5 matks] Question 5 [25 marks] PartA On January 1, 2005 Trini acquired an 80% interest in Lucian for $560,000 when Lucian’s equity consisted of $530,000 paid-in capital and $100,000 Retained Earnings. Any excess of purchase price over was attributed to goodwill. (On January 1, 2017, Lucian had the following stockholders’ equity: Common stock ($20 par) $180,000 Paid-in capital in excess of par 350,000 Retained earnings 220,000 Total stockholders! equity +$750,000 On January 2, 2017, Lucian sold 1,000 additional shares to non-controlling shareholders in a public offering for $50 per share. Lucian’s net income for 2017 was 80,000. Lucian paid dividends of $15,000. Trini uses the simple equity method to record its investment in Lucian, Requit i, Prepare Trini’s journal entry to adjust its Investment in Lucian account on January 2, 2017. Assume that Trini has $500,000 additional paid-in capital. [10 marks] li, Calculate the balance in Trini's Investment in Lucian account on December 31, 2017. [5marks] Part B A private, not-for-profit university received donations of $1,000,000 cash in 2017 that were restricted to certain research projects on sustainability, with an emphasis on reducing the campus waste. The university incurred and paid $450,000 of expenses on this research in 2017. In 2017, an alumnus contributed a $700,000 endowment for energy research with all ‘endowment income restricted for that purpose. Income totaled $35,000 for the year, Energy research expenses incurred and paid were $22,000, Required: Prepare the appropriate journal entries for the University for these Transactions. [10 marks] END OF EXAM The University of the West Indies _ Course Code ACCT3041.