BACC497 – Advanced Accounting

Midterm Revision Sheet – Answer Key

Fall 2023-2024
Chapters: 1, 2 & 3

Problem One: (Goodwill Estimation)

1. Normal earnings for similar firms = ($10,000,000 - $6,000,000) x 16% = $640,000

Expected earnings of target:

Pretax income of Snack, Inc., 2021 $850,000
Add: Losses on discontinued operations 100,000
Subtract: Additional depreciation on building ($600,000 x 60%) (360,000)
Target’s adjusted earnings, 2021 $590,000

Pretax income of Snack, Inc., 2022 2,000,000

Subtract: Additional depreciation on building (360,000)
Extraordinary gain (200,000)
Target’s adjusted earnings, 2022 1,440,000
Target’s two years total adjusted earnings 2,030,000
Target’s two years average adjusted earnings ($2,030,000/2) $1,015,000

Excess earnings of target = $1,015,000 - $640,000 = $375,000 per year

Present value of excess earnings (Perpetuity) at 15%: $375,000 = $2,500,000

15% (Estimated Goodwill)

Implied offering price = $10,000,000 - $6,000,000 + $2,500,000 = $6,500,000.

2. Excess earnings of target (same as in Part 1) = $375,000

Present value of excess earnings (Ordinary Annuity) for five years at 13% (See Table A-4 Chap
1 PowerPoint, Slide 22):
Estimated Goodwill: $375,000 x 3.5172 = $1,318,950

Implied offering price = $10,000,000 - $6,000,000 + $1,318,950 = $5,318,950.

Note: The Sales commissions are expected to continue at the same rate, and thus do not
necessitate adjustments.

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Problem Two: (Goodwill Impairment Test, Chapter 2)
Year Present Value of Future Carrying Value of Fair Value of
Cash Flows Sandy’s Sandy’s Identifiable
Identifiable Net Net Assets
Assets*
2021 $300,000 $240,000 $270,000
2022 $300,000 $150,000 $280,000
2023 $250,000 $100,000 $230,000

January 1, 2020 (date of acquisition)

⮚ Price = $400,000
⮚ FVSandy Company’s Identifiable Net Assets= $310,000
Find goodwill at the acquisition date before starting with the impairment test:
Price (P) or Fair Value of Consideration Given = Fair Value of Identifiable Net Assets (NA)
+ Goodwill (GW)
GW = $400,000 – $310,000 = $90,000
BVGW = $90,000

a. Now, start the goodwill impairment test:

Year Present Value of Future Carrying Value of Fair Value of

Cash Flows Sandy’s Sandy’s Identifiable
Identifiable Net Net Assets
Assets*
2021 $300,000 $240,000 $270,000

Step One - 2021

FVS vs BVS (including GW)

$300,000 vs $330,000 ($240,000 + $90,000)

Since $300,000 < $330,000 => Step 2 is needed.

Step Two - 2021

BVGW vs IVGW (FVS – FV of identifiable net assets)
$90,000 vs $30,000 ($300,000 – $270,000)

Since $90,000 > $30,000 => Record goodwill impairment loss.

Amount of goodwill impairment loss = $90,000 – $30,000 = $60,000

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Year Present Value of Future Carrying Value of Fair Value of
Cash Flows Sandy’s Sandy’s Identifiable
Identifiable Net Net Assets
Assets*
2022 $300,000 $220,000 $280,000

Step One - 2022

FVS vs BVS (including GW)

$300,000 vs $250,000 ($220,000 + $30,000)

Since $300,000 > $250,000 => Step 2 is not needed.

=> No impairment of goodwill is recorded.

Year Present Value of Future Carrying Value of Fair Value of

Cash Flows Sandy’s Sandy’s Identifiable
Identifiable Net Net Assets
Assets*
2023 $230,000 $210,000 $213,000

Step One - 2023

FVS vs BVS (including GW)

$230,000 vs $240,000 ($210,000 + $30,000)

Since $230,000 < $240,000 => Step 2 is needed.

Step Two - 2023

BVGW vs IVGW (FVS – FV of identifiable net assets)
$30,000 vs $17,000 ($230,000 – $213,000)

Since $30,000 > $17,000 => Record goodwill impairment loss.

Amount of goodwill impairment loss = $30,000 – $17,000 = $13,000

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 b. Journal entries needed each year to record the goodwill impairment.

General Journal
Date Account Title and Explanation Ref. Debit Credit
2021 Impairment Loss – Goodwill 60,000
Goodwill 60,000

2022 No Entry
(No Goodwill Impairment is recorded)

2023 Impairment Loss – Goodwill 13,000

Goodwill 13,000

Problem Three: (Acquisition, Chapter 2)

Before proceeding in the solution, let us find the fair value of identifiable assets acquired
(except for cash). It is simply the sum of the fair values of all identifiable assets (without cash).
→ Fair value of identifiable assets acquired = $30,000+$200,000+$20,000+$35,000 =
$285,000

A. Fair value of identifiable assets acquired $285,000

(All assets are acquired except for cash)
Fair value of liabilities assumed (35,000+80,000) 115,000
Fair value of identifiable net assets 170,000
Price paid 300,000
Goodwill $130,000
Goodwill with contingent consideration (130,000+200,000) $330,000

General Journal
Date Account Title and Explanation Ref. Debit Credit
Receivables (net) 30,000
January 2,
Inventory 200,000
2023
Land 20,000
35,000
Plant and equipment (net)
330,000
Goodwill
Current Liabilities 35,000
Long-term debt 80,000
Liability for Contingent Consideration 200,000
Cash 300,000

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B. 1- Target is met.
General Journal
Date Account Title and Explanation Ref. Debit Credit
Liability for Contingent Consideration 200,000
January 2,
Cash 200,000
2023

B. 2- Target is NOT met.

General Journal
Date Account Title and Explanation Ref. Debit Credit
Liability for Contingent Consideration 200,000
January 2,
Income from Change in Estimate 200,000
2023

C. 1- Target is expected to be met.

General Journal
Date Account Title and Explanation Ref. Debit Credit
Receivables (net) 30,000
January
Inventory 200,000
2, 2023
Land 20,000
35,000
Plant and equipment (net)
180,000
Goodwill (130,000+50,000)
Current Liabilities 35,000
Long-term debt 80,000
Paid-in Capital for Contingent Consideration 50,000
Cash 300,000

C. 2- Target is met.
General Journal
Date Account Title and Explanation Ref. Debit Credit
Paid-in Capital for Contingent Consideration 50,000
January
Common stock (2,000 shares x $15 par) 30,000
2, 2023
Paid-in Capital in Excess of Par – CS 20,000
(50,000-30,000)

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Problem Four: (Elimination Entries and CAD Schedule, Chapter 3)

A. Journal entry on the books of Prince Company to record the purchase of the common stock of
Salinas Company.

General Journal
Date Account Title and Explanation Ref. Debit Credit
Investment in Salinas Company 550,000
January 3,
Cash 550,000
2022

B. The Balance sheet for Prince Company after acquisition.

Before Acquisition After Acquisition
Cash $615,000 $65,000
Accounts receivable (net) 157,000 157,000
Inventory 68,000 68,000
Land 50,000 50,000
Investment in S Company 550,000
Total assets $890,000 $890,000
Accounts payable $160,000 $160,000
Mortgage payable 120,000 120,000
Common stock, $3 par value 250,000 250,000
Other contributed capital 90,000 90,000
Retained earnings 270,000 270,000
Total equities $890,000 $890,000
C.
CAD Schedule 100% 0% 100%
P Company NCI Total
Value
Purchase Price & Implied $550,000 - $550,000
Value
Less: BV of S equity
Common Stock 300,000 - 300,000
Other Contributed Capital 100,000 - 100,000
Retained Earnings 150,000 - 150,000
Total 550,000 - 550,000
Difference between IV and BV 0 0 0

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D. Elimination entry

Common Stock 300,000

Other Contributed Capital 100,000
Retained Earnings 150,000

Investment in Salinas Company 550,000

Problem Five: (Elimination Entries and CAD Schedule, Chapter 3)

A.
General Journal
Date Account Title and Explanation Ref. Debit Credit
Investment in Salinas Company 440,000
January
Cash 440,000
3, 2022

B.
CAD Schedule 80% 20% 100%
P NCI Total
Company Value
Purchase Price & Implied $440,000 $110,000 $550,000
(440,000/0.8)
Value (550,000*0.2)

Less: BV of S equity
Common Stock 240,000 60,000 300,000
Other Contributed Capital 80,000 20,000 100,000
Retained Earnings 120,000 30,000 150,000
Total 440,000 110,000 550,000
Difference between IV and 0 0 0
BV
C. Elimination entry

Common Stock 300,000

Other Contributed Capital 100,000
Retained Earnings 150,000

Investment in Salinas Company 440,000

Noncontrolling Interest in Equity 110,000

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 Problem Six: (Elimination Entries and CAD Schedule, Chapter 3)
A.
General Journal
Date Account Title and Explanation Ref. Debit Credit
Investment in S Company(20,000 x $40) 800,000
December
Common Stock(20,000 x $10) 200,000
31, 2022
Other contributed capital 590,000
(800,000-200,000-10,000) 10,000
Cash

B.

CAD Schedule 60% 40% 100%

P NCI Total
Company Value
Purchase Price & Implied $800,000 $533,333 $1,333,333
(800,000/0.6)
Value
Less: BV of S equity
Common Stock 135,000 90,000 225,000
Other Contributed Capital 90,000 60,000 150,000
Retained Earnings 108,000 72,000 180,000
Total 333,000 222,000 555,000
Difference between IV and 467,000 311,333 778,333
BV
Goodwill (467,000) (311,333) (778,333)
Balance 0 0 0

C. Elimination entry
Common Stock 225,000
Other Contributed Capital 150,000
Retained Earnings 180,000
Difference between IV & BV 778,333

Investment in S Company 800,000

Noncontrolling Interest in Equity 533,333
Goodwill 778,333
Difference between IV&BV 778,333