Advanced Financial Accounting

ACCT 302
Assignment 2
Instructions for the students:
The due date for this assignment is 12th 2015 March.
Assignments submitted after due date will not be marked.
Students are required to submit the assignment on
the black board and not on instructors E-mail address.
Students who cheat or copy from other students will
receive a grade of zero.

Q1.Consolidated financial statements are required by GAAP in certain

circumstances. This information can be very useful to stockholders and
creditors. Yet, there are limitations to these financial statements for which the
users must be aware. What are at least three (3) limitations of consolidated
financial statements?
Results of individual companies included in the consolidation are not
disclosed, thereby hiding poor performance.
Not all the consolidated retained earnings balance is necessarily available for
dividends of the parent.
Financial ratios are not necessarily representative of any single company in
the consolidation.
Similar accounts of different companies that are combined in the
consolidation may not be entirely comparable.
Additional information about companies may be needed for a fair
presentation, thus requiring voluminous footnotes.
Information is lost any time data sets are aggregated.

Q2. Describe the difference between Acquisition Price and Underlying Book
Value.
When an investor purchases the common stock of another company, the purchase price normally
is based on the market value of the shares acquired rather than the book value of the investees
assets and liabilities.
the acquisition price is usually different from the book value of the investors proportionate share
of the investees net assets. This difference is referred to as a differential.
The differential is frequently positive, meaning the acquiring company pays more than their
share of the book value of the subsidiarys net assets.
When the parent company uses the equity-method that portion of the differential pertaining to
limited-life assets of the investee, including identifiable intangibles, must be amortized over the
remaining economic lives of those assets.
Any portion of the differential that represents goodwill (referred to as equity-method goodwill )
is not amortized or written off because of impairment.
an impairment loss on the investment itself should be recognized if it suffers a material decline in
value that is other than temporary.

Q.3
Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000
cash. On December 31, 20X7, the balance sheets of the two companies showed the following
amounts:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. Income of
Tenzing Corp for 20X7= $30,000, Dividends paid by Tenzing corporation for20X7= $15,000.
The difference between the acquisition price and underlying book value is assigned to buildings
and equipment with a remaining economic life of five years from the date of acquisition.
Required:
1) Give the appropriate eliminating entry or entries needed to prepare a consolidated balance
sheet as of December 31, 20X7.
2) Prepare a consolidated balance sheet worksheet as of December 31, 20X7.

Solution
1- Book Value Calculation

2- Work Sheet