Module2_PracticeProblems - To Submit For Grading

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Accounting

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Feb 20, 2024

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Problem 1 (Recommended: review slides 2-32) Epsilon acquired 100% of Zeta on January 1, 2025, by issuing 15,000 shares of its $10 par value common stock with a fair value of $45 per share, issuing $200,000 in debt and paying $200,000 in cash. On January 1, 2025, the book value of Zeta’s Accounts Receivable differs from the fair value by $5,000 (undervalued). Also, Zeta's land was undervalued by $140,000, its buildings were overvalued by $15,000, and equipment was undervalued by $125,000. The useful life of the land is indefinite. The turnover of short-term assets and liabilities is less than one year. The buildings have a 15-year life, and the equipment has a 10-year life. $50,000 of the ECOBV was attributed to an unrecorded trademark with a 16-year remaining life. Additionally, during the due- diligence process, Epsilon found out that Zeta has unrecorded liabilities for product warranties for $10,000 that will be likely exercised over 4 years starting January 1, 2025. Epsilon uses the equity method to account for the investment account. Following are selected accounts for Epsilon and Zeta Company as of December 31, 2025. Several accounts have been omitted. FV of CT Common Stock - $675,000 (15,000 shares @ $45 par value) Debt - $200,000 Cash - $200,000 $1,075,000 1/1/2025 - Epsilon records acquisition. Investment in Zeta $1,075,000 Cash $200,000 Debt $200,000 Common Stock $675,000 Book Value of Zeta Equity = $45,000+$165,000+$320,000 = $530,000 ECOBV = FV of CT – BV of Sub = $545,000 Identifiable ECOBV Life Amortization Account Receivable $5,000 1 $5,000 Land 140,000 Indefinite 0 Buildings (15,000) 15 (1,000) Equipment 125,000 10 12,500 Trademark 50,000 16 3,125 Warranty Liability (10,000) 4 2,500 Total identified. $295,000 $17,125 Goodwill (545,000 – 295,000) $250,000

Account Epsilon Zeta Income Statement Revenues Cost of Goods sold Depreciation Amortization Other Expenses Equity in Zeta's income Net Income Statement of Retained Earnings Retained earnings 1/1/25 Net Income (above) Dividend paid Retained earnings 12/31/25 Balance Sheet Cash Accounts Receivable Land Buildings (net) Equipment (net) Investment in Zeta Total Assets Current Liabilities LT Liabilities Common Stock Additional paid in capital Retained earnings 12/31/25 Total liabilities and equity ($350,000) $160,000 $40,000 $20,000 $10,000 ($200,000) $100,000 $15,000 $5,000 $2,500 $0 ? ? ($77,500) ($1,350,000) ($320,000) ($77,500) $42,500 ? $195,000 ? ($355,000) $235,000 $50,000 $150,000 $325,000 $245,000 $720,000 $45,000 $90,000 $145,000 $320,000 $0 ? ($400,000) ($350,000) ($355,000) ($587,000) ? ($620,000) $0 ($45,000) ($165,000) ($355,000) Requirement: Prepare the consolidation worksheet at December 31, 2025. Investment in Zeta Equity in Zeta Original cost $1,075,000 Income earned $77,500 Income earned + 77,500 - 17,125 Amortization - 42,500 Dividend - 17,125 Amortization = $1,092,875 Investment Balance = $60,375 Equity in Zeta’s income

Account Epsilon Zeta Consolidation Entries Consolidated Totals Debits Credits Income Statement Revenues ($350,000) ($200,000) ($550,000) Cost of Goods sold $160,000 $100,000 $260,000 Depreciation $40,000 $15,000 $11,500 (E) $66,500 Amortization $20,000 $5,000 $5,625 (E) $30,625 Other Expenses $10,000 $2,500 $12,500 Equity in Zeta's income ($60,375) $0 (I) $60,375 $0 Net Income ($180,375) ($77,500) ($180,375) Statement of Retained Earnings Retained earnings 1/1/25 ($1,350,000) ($320,000) (S) $320,000 ($1,350,000) Net Income (above) ($180,375) ($77,500) Dividend paid $195,000 $42,500 (D) $42,500 $195,000 Retained earnings 12/31/25 ($1,335,375) ($355,000) ($1,335,375) Balance Sheet Cash $235,000 $720,000 Accounts Receivable $50,000 $45,000 (A) $5,000 $5,000 (E) $95,000 Land $150,000 $90,000 (A) $140,000 $380,000 Buildings (net) $325,000 $145,000 $1,000 (E) (A) $15,000 $456,000 Equipment (net) $245,000 $320,000 (A) $125,000 $12,500 (E) $677,500 Investment in Zeta $1,092,875 $0 (D) $42,500 (S) $530,000 $0 (A) $545,000 (I) $60,375 Trademark (A) $50,000 $3,125 (E) $46,875 Goodwill (A) $250,000 $250,000 Total Assets Current Liabilities ($400,000) ($620,000) ($1,020,000) LT Liabilities ($350,000) $0 ($350,000) Warranty Liability $2,500 (E) (A) $10,000 ($7,500) Common Stock ($355,000) ($45,000) (S) $45,000 ($355,000) APIC ($587,000) ($165,000) (S) $165,000 ($587,000) Retained earnings 12/31/25 ($1,335,375) ($355,000) ($1,335,375) Total Liabilities and Equity $1,223,500 $1,223,500

Problem 2 (recommended: Review slides 33-41) Hoyle, Schaefer and Doupnik – Chapter 3 (Modified version of Problem 24) Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2022, for $600,000 cash. Greenburg’s accounting records showed net assets on that date of $470,000 although equipment with a 10-year life was undervalued on the records by $90,000. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2022 of $90,000 and $100,000 in 2023. The subsidiary paid dividends of $20,000 in each of these two years. Foxx Greenburg Revenues ($800,000) ($600,000) Cost of Goods sold $100,000 $150,000 Depreciation Expenses $300,000 $350,000 Investment Income ($91,000) Net Income ($491,000) ($100,000) Retained earnings 1/1/24 ($1,232,000) ($320,000) Net Income (above) ($491,000) ($100,000) Dividend paid $120,000 $20,000 Retained earnings 12/31/24 ($1,603,000) ($400,000) Current assets $300,000 $100,000 Investment in Subsidiary $803,000 $0 Equipment (net) $900,000 $600,000 Buildings (net) $800,000 $400,000 Land $600,000 $100,000 Total Assets $3,403,000 $1,200,000 Liabilities ($900,000) ($500,000) Common Stock ($900,000) ($300,000) Retained earnings 12/31/24 ($1,603,000) ($400,000) Total Liabilities and Equity ($3,403,000) ($1,200,000) Requirement: Prepare the consolidation worksheet at December 31, 2024.

Account Parent Subsidiary Consolidation Entries Consolid. Totals Debits Credits Income Statement (1,400,000) Revenues ($800,000) ($600,000) Cost of Goods Sold $100,000 $150,000 $250,000 Depreciation Expense $300,000 $350,000 9,000 $659,000 Investment Income ($91,000) 91,000 $0 Net Income ($491,000) ($100,000) 320,000 ($591,000) (1,232,000) Statement of Retained Earnings Retained earnings 1/1/24 ($1,232,000) ($320,000) Net Income (above) ($491,000) ($100,000) (591,000) Dividend paid $120,000 $20,000 20,000 $120,000 Retained earnings 12/31/24 ($1,603,000) ($400,000) (1,703,000) Balance Sheet $400,000 Current Assets $300,000 $100,000 Investment in Sub. $803,000 $0 20,000 $112,000 $0 $620,000 91,000 Goodwill $40,000 $40,000 Equipment, net $900,000 $600,000 $72,000 9,000 $1,563,000 Buildings, net $800,000 $400,000 $1,200,000 Land $600,000 $100,000 $700,000 Total Assets $3,403,000 $1,200,000 Liabilities ($900,000) ($500,000) (1,400,000) Common Stock ($900,000) ($300,000) $300,000 ($900,000) Retained earnings 12/31/24 ($1,603,000) ($400,000) (1,603,000) Total Liabilities and Equity ($3,403,000) ($1,200,000) 852,000 852,000

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