For Question 1: Part "b" explain the reason pertaining the solution. For Question 2: Explain the eliminations and adjustments part of the questions.

_____Key___________________ Name AC425 Advanced Accounting Mid Term Exam Chapters 1 - 5 200 Points Total 1. (100 points) The Paris Company purchased an 80% interest in Seine, Inc. for $600,000 on July 1, 20X5, when Seine had the following balance sheet: Assets Accounts receivable Inventory Land Building Equipment Total $ 50,000 120,000 80,000 270,000 80,000 $600,000 Liabilities and Equity Current liabilities Common stock, $5 par Paid-in capital in excess of par Retained earnings (July 1) Total $100,000 50,000 150,000 300,000 $600,000 The inventory is understated by $20,000 and is sold in the third quarter of 20X1. The building has a fair value of $320,000 and a 10-year remaining life. The equipment has a fair value of $120,000 and a remaining life of 5 years. Any remaining excess is attributed to goodwill. From July 1 through December 31, 20X5, Seine had net income of $100,000 and paid $10,000 in dividends. Assume that Paris uses the cost method to record its investment in Seine. Required: a. Prepare a determination and distribution of excess schedule as of July 1, 20X5 at acquisition based on all information presented in this problem. b. Prepare the eliminations and adjustments that would be made on the June 30, 2016, consolidated worksheet to eliminate the investment in Seine. Distribute and amortize any excess. ANS: a. Determination and distribution of excess schedule as of July 1, 20X5 at acquisition: Fair value of subsidiary Less book value: C Stk APIC R/E Total S/E Interest Acquired Book value Excess of fair over book Adjust identifiable accounts: Inven Building Equipment Goodwill Total Company Implied Fair Value 750,000 50,000 150,000 300,000 500,000 250,000 20,000 50,000 40,000 140,000 250,000 Parent Price 600,000 NCI Value 150,000 500,000 80% 400,000 200,000 500,000 20% 100,000 50,000 Life Amort/Year [sold in third quarter] 10 5,000 5 8,000 b. Eliminations and adjustments for the June 30, 2016 consolidating worksheet CV CY2 EL D A Investment in Subsidiary* R/E-Par Investment in Subsidiary Dividends Declared-Sub Debit n/a n/a 8,000 8,000 C Stk-Sub APIC-Sub R/E-Sub Investment in Sub 40,000 120,000 240,000 Cost of Goods Sold Building Equipment Goodwill Investment in Sub R/E-Sub (NCI) 20,000 50,000 40,000 140,000 Dep Exp A/D-Building Dep Exp A/D-Equipment Credit 400,000 200,000 50,000 5,000 5,000 8,000 8,000 *conversion from cost to simple equity not required at end of first year DIF: M 2. OBJ: 3-3 | 3-5 (100 points) On January 1, 20X1, Prange Company acquired 100% of the common stock of Seaman Company for $600,000. On this date Seaman had total owners' equity of $400,000. Any excess of cost over book value is attributable to a patent, which is to be amortized over 10 years. During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple equity method. On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold merchandise to Prange for $100,000, of which $20,000 is held by Prange on December 31, 20X2. Seaman's gross profit on all sales is 40%. On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December. Required: Complete the Figure 4-1 worksheet for consolidated financial statements for the year ended December 31, 20X2. Account Titles Inventory, December 31 Other Current Assets Investment in Sub. Company Figure 4-1 Trial Balance Prange Seaman Company Company 100,000 105,000 207,000 325,000 710,000 Land Buildings and Equipment Accumulated Depreciation Patent 140,000 315,000 (220,000) 20,000 80,000 340,000 (130,000) Current Liabilities Bonds Payable Other Long-Term Liabilities (150,000) (70,000) (100,000) (40,000) Common StockP Co. Other Paid in CapitalP Co. Retained EarningsP Co. (200,000) (100,000) (492,000) (200,000) Common StockS Co. Other Paid in CapitalS Co. Retained EarningsS Co. Net Sales (150,000) (100,000) (200,000) (600,000) (380,000) Eliminations and Adjustments Debit Credit Cost of Goods Sold 360,000 228,000 Operating Expenses 140,000 62,000 Subsidiary Income Dividends DeclaredP Co. Dividends DeclaredS Co. (90,000) 60,000 30,000 Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31 0 0 (continued) Account Titles Inventory, December 31 Other Current Assets Investment in Sub. Company Land Buildings and Equipment Accumulated Depreciation Patent Current Liabilities Bonds Payable Other Long-Term Liabilities Common StockP Co. Other Paid in CapitalP Co. Retained EarningsP Co. Common StockS Co. Other Paid in CapitalS Co. Retained EarningsS Co. Net Sales Cost of Goods Sold Operating Expenses Subsidiary Income Dividends DeclaredP Co. Dividends DeclaredS Co. Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31 Consol. Income Statement NCI Control. Retained Earnings Consol. Balance Sheet ANS: For the worksheet solution, please refer to Answer 4-1. Account Titles Inventory, December 31 Other Current Assets Investment in Sub. Company Answer 4-1 Trial Balance Prange Seaman Company Company 100,000 105,000 207,000 325,000 710,000 Land Buildings and Equipment Accumulated Depreciation Patent 140,000 315,000 (220,000) 20,000 80,000 340,000 (130,000) Current Liabilities Bonds Payable Other Long-Term Liabilities (150,000) (70,000) (100,000) (40,000) Common StockP Co. Other Paid in CapitalP Co. Retained EarningsP Co. (200,000) (100,000) (492,000) (200,000) Common StockS Co. Other Paid in CapitalS Co. Retained EarningsS Co. Eliminations and Adjustments Debit Credit (D) 200,000 (IA) 20,000 (A) (BI) 20,000 12,000 (150,000) (100,000) (200,000) (EL) (EL) (EL) 150,000 100,000 200,000 Net Sales Cost of Goods Sold (600,000) 360,000 (380,000) 228,000 (IS) (EI) 100,000 8,000 Operating Expenses 140,000 62,000 (A) 20,000 Subsidiary Income Dividends DeclaredP Co. Dividends DeclaredS Co. (90,000) 60,000 (CY) 90,000 30,000 (EI) (IA) (CY) (EL) (D) 8,000 20,000 60,000 450,000 200,000 (A) 40,000 (BI) (IS) 12,000 100,000 (CY) 30,000 Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31 0 0 920,000 920,000 (continued) Account Titles Inventory, December 31 Other Current Assets Investment in Sub. Company Consol. Income Statement NCI Control. Retained Earnings Consol. Balance Sheet 197,000 512,000 0 Land Buildings and Equipment Accumulated Depreciation Patent 220,000 655,000 (350,000) 180,000 Current Liabilities Bonds Payable Other Long-Term Liabilities (200,000) (100,000) (240,000) Common StockP Co. Other Paid in CapitalP Co. Retained EarningsP Co. (200,000) (100,000) (460,000) Common StockS Co. Other Paid in CapitalS Co. Retained EarningsS Co. Net Sales Cost of Goods Sold (880,000) 484,000 Operating Expenses 222,000 Subsidiary Income Dividends DeclaredP Co. Dividends DeclaredS Co. Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31 0 60,000 (174,000) 0 174,000 (174,000) 574,000 0 (574,000) 0 Eliminations and Adjustments: (CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account. (EL) Eliminate the Seaman Company equity balances at the beginning of the year against the investment account. (D) Distribute the $200,000 excess of cost over book value to patent. (A) Amortize the patent over 10 years, with $20,000 for 20X1 charged to retained earnings, and $20,000 for 20X2 to operating expenses. (BI) Eliminate the $12,000 of gross profit in the beginning inventory. (IS) Eliminate the entire intercompany sales of $100,000. (EI) Eliminate the $8,000 of gross profit in the ending inventory. (IA) Eliminate the $20,000 intercompany accounts receivable and payable. DIF: M OBJ: 4-2 MSC: 100%; simple equity