Module2_PracticeProblems - To Submit For Grading
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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
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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
Problem 3 (recommended: Review slides 42-58)
Hoyle, Schaefer and Doupnik – Chapter 3 Problem 20
Chapman Company obtains 100% of Abernethy Company’s stock on January 1, 2023. As of that date, Abernethy has the following trial balance:
Accounts
Balances
Cash and short-term investment
60,000
Accounts Receivable
40,000
Inventory
90,000
Supplies
10,000
Buildings (net) 4-year life
120,000
Equipment (net) 5-year life
200,000
Land
80,000
Total Assets
600,000
Accounts Payable
50,000
Long-term liabilities (mature 12/31/26)
150,000
Common Stock
250,000
Additional Paid in Capital
50,000
R/E 1/1/23
100,000
Total Liabilities and Equity
600,000
During 2023, Abernethy reported net income of $80,000 while paying dividends of $10,000.
During 2024, Abernethy reported income of $110,000 while paying dividends of $30,000.
Requirement:
Assume that Chapman Company acquired Abernethy’s common stock for $500,000 in cash.
Assume that the equipment and long-term liabilities had fair values of $220,000 and $120,000,
respectively, on the acquisition date. Chapman uses the Initial Value method for this investment.
Prepare consolidation worksheet entries for December 31, 2023.
FMV of total consideration transferred: 500,000
BV of Subsidiary account: 400,000
ECOBV: 100,000
Equipment = 20,000/ 5 years = 4,000
LT Liabilities = 30,000/4 years = 7,500
Total ECOBV Amortization = 11,500
Goodwill = 50,000
Entry S
Common Stock
250,000
APIC
50,000
Retained Earnings
170,000
Investment in Abernethy
470,000
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Entry A
Equipment
20,000
LT Liabilities
30,000
Goodwill
50,000
Investment in Abernethy
100,000
Entry I
Dividend Income
10,000
Dividend Paid
10,000
Entry E
Depreciation expense
4,000
Interest expense
7,500
Equipment
4,000
LT Liabilities
7,500
Equity in Subsidiary earnings
74,000
Investment in Abernethy
74,000
Depreciation expense
6,000
Equipment
4,000
Buildings
10,000
Problem 4 (recommended: Review slides 59-72)
Hoyle, Schaefer and Doupnik – Chapter 3 Problem 21
Chapman Company obtains 100% of Abernethy Company’s stock on January 1, 2023. As of that date, Abernethy has the following trial balance:
Accounts Balances
Cash and short-term investment
60,000
Accounts Receivable
40,000
Inventory
90,000
Supplies
10,000
Buildings (net) 4-year life
120,000
Equipment (net) 5-year life
200,000
Land
80,000
Total Assets
600,000
Accounts Payable
50,000
Long-term liabilities (mature 12/31/26)
150,000
Common Stock
250,000
Additional Paid in Capital
50,000
R/E 1/1/23
100,000
Total Liabilities and Equity
600,000
During 2023, Abernethy reported net income of $80,000 while paying dividends of $10,000.
During 2024, Abernethy reported income of $110,000 while paying dividends of $30,000.
Requirement:
Assume that Chapman Company acquired Abernethy’s common stock for $520,000 in cash.
All of Abernethy’s accounts are estimated to have fair value approximately equal to present
book values. Chapman uses the partial equity method for this investment. Prepare
consolidation worksheet entries for December 31, 2023.
FMV of Total Consideration 520,000
BV of Subsidiary
400,000
ECOBV
120,000
Goodwill = 120,000
Equipment : 90,000 – 9,000 – 9,000 = 72,000
Entry S
Common Stock
250,000
APIC
50,000
RE 1/1/23 100,000
Investment in Abernethy
400,000
Entry A
Goodwill
120,000
Investment in Abernethy 120,000
Entry I
Investment in Income
80,000
Investment in Abernethy
80,000
Entry D
Investment in Abernethy
10,000
Dividend Paid
10,000
Depreciation expense
9,000
Equipment
9,000
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Problem 5 (recommended: Review slides 73-83)
Hoyle, Schaefer and Doupnik – Chapter 3 Problem 29
Following are separate financial statements of Michael Company and Aaron Company as of
December 31, 2024. Michael acquired all of Aaron’s outstanding voting stock on January 1, 2020,
by issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael
Company’s stock actively traded at $23.50 per share.
Michael
Aaron
Income Statement
Revenues
($610,000)
($370,000)
Cost of Goods sold
$270,000 $140,000 Amortization Expense
$115,000 $80,000 Dividend Income
($5,000)
Net Income
($230,000)
($150,000)
Statement of Retained Earnings
Retained Earnings 1/1/24
($880,000)
($490,000)
Net Income (above)
($230,000)
($150,000)
Dividend Paid
$90,000 $5,000 Retained Earnings 12/31/24
($1,020,000)
($635,000)
Balance Sheet
Cash
$110,000 $15,000 Receivables
$380,000 $220,000 Inventory
$560,000 $280,000 Investment in Subsidiary
$470,000 $0 Copyrights
$460,000 $340,000 Royalty Agreements
$920,000 $380,000 Total Assets $2,900,000 $1,235,000 Liabilities
($780,000)
($470,000)
Preferred Stock
($300,000)
$0 Common Stock
($500,000)
($100,000)
Additional Paid-in Capital
($300,000)
($30,000)
Retained Earnings 12/31/24
($1,020,000)
($635,000)
Total Liabilities and Equity
($2,900,000)
($1,235,000)
On the date of acquisition, Aaron reported Retained Earnings of $230,000 and a total book value
of $360,000. At that time, its royalty agreements were undervalued by $60,000. This intangible
was assumed to have a six-year life with no residual value. Additionally, Aaron owned a
trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its
books.
Requirement:
Using the preceding information, prepare consolidation worksheet for these two companies as of December 31, 2024.
Purchase price: 20,000 shares @ $23.50 = $470,000
BV: 360,000
ECOBV: 110,000
Amortizations
Royalty agreements 60,000/6 years = 10,000
Trademark: 50,000/10 years = 5,000
Total ECOBV Amortization: 15,000
Aaron RE 1/1/24 490,000
RE at purchase date
(230,000)
Increase since purchase date
260,000
Excess Amortization expense
(60,000)
(15,000 x 4 years)
Conversion to equity method 200,000
Account
Parent
Subsidiary
Consolidation Entries
Consolid.
Totals
Debits
Credit
s
Income Statement
($980,000)
Revenues
($610,000)
($370,000)
Cost of Goods Sold $270,000 $140,000
410,000
Amortization Expenses $115,000 $80,000 15,000
210,000
Dividend Income
($5,000)
5,000
0
Net Income
($230,000)
($150,000)
490,000
200,000
($360,000)
(1,080,000)
Statement of Retained Earnings
Retained Earnings 1/1/24 ($880,000)
($490,000)
Net Income (above) ($230,000)
($150,000)
(360,000)
Dividend Paid
$90,000 $5,000
5,000
90,000
Retained Earnings 12/31/24
($1,020,000)
($635,000)
(1,350,000)
Balance Sheet
125,000
Cash $110,000 $15,000 Receivables $380,000 $220,000
600,000
Inventory
$560,000 $280,000
840,000
Investment in Subsidiary
$470,000 $0 200,000
620,000
0
50,000
Copyrights
$460,000 $340,000
800,000
Royalty Agreements
$920,000 $380,000 20,000
10,000
1,310,000
Trademark
30,000
5,000
25,000
Total Assets
$2,900,000 $1,235,000
3,700,000
Liabilities
($780,000)
($470,000)
(1,250,000)
Preferred Stocks
($300,000)
$0
100,000
(300,000)
Common Stock
($500,000)
($100,000)
(500,000)
Additional Paid-in Capital
($300,000)
($30,000)
30,000
(300,000)
Retained Earnings 12/31/24
($1,020,000)
($635,000)
(1,350,000)
Total Liabilities and Equity
($2,900,000)
($1,235,000)
890,000
890,000
(3,695,000)
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Gold Ltd purchased Silver on 1 June 2023, acquiring all of the assets and liabilities.
The price agreed on was $60, 000, payable $20, 000 in cash and the balance by the issue to Silver Ltd of 16, 000 fully paid shares in Gold Ltd, these shares having a fair value of $2.50 per share.
The balances of the two companies accounts as at 1 June 2023 were as follows:
Gold Ltd Silver LtdCash 30,000 -Accounts receivable 8,000 20,000Inventory 14,000 26,000Plant (net) 50,000 30,000Government bonds 12,000 -Goodwill - 10,000Total assets 114,000 86,000Accounts payable 2,000 20,000Retained earnings 12,000 (24,000)Share capital 100,000 90,000Total liabilities and equity 114,000 86,000
All the identifiable net assets of Silver Ltd were recorded by Silver Ltd at fair value except for the inventories, which were considered to be worth $28,000. The plant had an expected remaining life of 5 years. Gold Ltd incurred incidental costs of $500 in relation to the acquisition. Costs of issuing shares in Gold Ltd…
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