Deck 6: Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Question 1

Warrenton, Inc., owns 80 percent of Aminable Corporation.On a consolidated income statement, the Noncontsrolling Interest in the Subsidiary's Income is reported as $37,000. Aminable paid a total cash dividend of $100,000 for the year. How does this impact the consolidated statement of cash flows
a.The dividends paid to the outside owners are reported as a financing activity, but the non-controlling interest figure is not viewed as a cash flow.
b.The noncontrolling interest figure is reported as an investing activity, but the dividends amount paid to the outside owners is omitted entirely.
c.Neither figure is reported on the statement of cash flows.
d. Both dividends paid and the noncontrolling interest are viewed as financing activities.

Answer 1

A.
The dividends paid to the outside owners are reported as a financing activity, but the non-controlling interest figure is not viewed as a cash flow

Question 2

Using the same information presented in problem (12), what is the noncontrolling interest's share of the subsidiary's net income

A) $27,000.
B) $28,290.
C) $28,620.
D) $30,000.

Answer 2

D
30% of Byrd's net income of $100,000; the intra-entity debt transaction is attributed solely to the parent company.

Question 3

On December 31, 2013, PanTech Company invests $20,000 in SoftPlus, a variable interest entity. In contractual agreements completed on that date, PanTech established itself as the primary beneficiary of SoftPlus. Previously, PanTech had no equity interest in SoftPlus. Immediately after PanTech's investment, SoftPlus presents the following balance sheet:

Each of the above amounts represents an assessed fair value at December 31, 2013, except for the marketing software.
a. If the marketing software was undervalued by $20,000, what amounts for SoftPlus would appear in PanTech's December 31, 2013, consolidated financial statements
b. If the marketing software was overvalued by $20,000, what amounts for SoftPlus would appear in PanTech's December 31, 2013, consolidated financial statements

Answer 3

"Consolidated Financial Statement:"
"The consolidated financial statements are those statements in which the financial statements of both the parent and all its subsidiaries into one single entity."
"Goodwill:"
" The goodwill is made within the books when the acquiring entity acquires another entity by far more than its value of its assets. Thus goodwill should be carried as an asset within the books and have to be checked for any kind of impairment charges.
If the goodwill has been identified as impaired the complete impairment balance must be immediately written off as a loss in the income statement by reduction of goodwill amount."
"Gain on Bargain Purchase:"
"A bargain purchase is recorded when the business is being acquired at a lower price than its fair value. So the transaction relating to bargain purchases usually occurs due to a crisis in the business or it may happen when there is a very rapid sale."
a.
i) Calculation of annual excess fair value allocated:
Deriving the excel cells are shown below:
Hence the annual excess net assets fair value is $20,000 when the marketing software is undervalued by $20,000.
ii) Calculation showing the excess of net assets fair value is being recognized as gain on purchases:
Deriving the excel cells are shown below:
Hence the excess fair value of $20,000 is considered as a gain on bargain purchase by P.Company. As a result this amount would be recorded as a gain on bargain purchases. Thus all the assets and liabilities of S.Company are recorded at their fair values individually.
b.
i) When the marketing software is being overvalued the calculation of goodwill is shown below:
Deriving the excel cells are shown below:
Hence the amount of goodwill which is to be recognized is $20,000.
ii) Calculation showing the excess of net assets fair value is being recognized as goodwill:
Deriving the excel cells are shown below:
When the estimated value of assets is less than the fair value of identifiable assets and liabilities of S.Company which are being recorded at fair values the difference is being reported as goodwill as because the entire business is being acquired at a purchase price which is being more than the fair value of its net tangible assets.

Question 4

Albuquerque, Inc., acquired 16,000 shares of Marmon Company several years ago for $600,000. At the acquisition date, Marmon reported a book value of $710,000, and Albuquerque assessed the fair value of the noncontrolling interest at $150,000. Any excess of acquisition-date fair value over book value was assigned to broadcast licenses with indefinite lives. Since the acquisition date and until this point, Marmon has issued no additional shares. No impairment has been recognized for the broadcast licenses.
At the present time, Marmon reports $800,000 as total stockholders' equity, which is broken down as follows:

View the following as independent situations:
a.Marmon sells 5,000 shares of previously unissued common stock to the public for $47 per share. Albuquerque purchased none of this stock. What journal entry should Albuquerque make to recognize the impact of this stock transaction
b.Marmon sells 4,000 shares of previously unissued common stock to the public for $33 per share. Albuquerque purchased none of this stock. What journal entry should Albuquerque make to recognize the impact of this stock transaction

Question 5

In question (4), why is the consolidation process simpler if the bonds had been acquired directly from the subsidiary than from a third party

Question 6

In many cases, EPS is computed based on the parent's portion of consolidated net income and parent company shares and convertibles. However, a different process must be used for some business combinations. When is this alternative approach required

Question 7

On January 1, 2013, Anywhere Tech Company exchanged $840,000 for 40 percent of the outstanding voting stock of Cloud Computing. Especially attractive to Anywhere Tech was a research project underway at Cloud Computing that would enhance both the speed and quantity of client accessible data. Although not recorded in Cloud Computing's financial records, the fair value of the research project was considered to be $1,800,000.
In contractual agreements with the sole owner of the remaining 60 percent of Cloud Computing, Anywhere Tech was granted (1) various decision-making rights over Cloud Computing's operating decisions and (2) special service purchase provisions at below market rates.
As a result of these contractual agreements, Anywhere Tech established itself as the primary beneficiary of Cloud Computing. Immediately after the purchase, Anywhere Tech and Cloud Computing presented the following balance sheets:

Each of the above amounts represents a fair value at January 1, 2013. The fair value of the 60 percent of Cloud Computing shares not owned by Anywhere Tech was $1,260,000.
Prepare an acquisition-date consolidated worksheet for Anywhere Tech and its variable interest entity.

Question 8

On January 1, 2011, Aronsen Company acquired 90 percent of Siedel Company's outstanding shares. Siedel had a net book value on that date of $480,000: common stock ($10 par value) of $200,000 and retained earnings of $280,000.
Aronsen paid $584,100 for this investment. The acquisition-date fair value of the 10 percent noncontrolling interest was $64,900. The excess fair value over book value associated with the acquisition was used to increase land by $89,000 and to recognize copyrights (16-year remaining life) at $80,000. Subsequent to the acquisition, Aronsen applied the initial value method to its investment account.
In the 2011-2012 period, the subsidiary's retained earnings increased by $100,000. During 2013, Siedel earned income of $80,000 while paying $20,000 in dividends. Also, at the beginning of 2013, Siedel issued 4,000 new shares of common stock for $38 per share to finance the expansion of its corporate facilities. Aronsen purchased none of these additional shares and therefore recorded no entry. Prepare the appropriate 2013 consolidation entries for these two companies.

Question 9

Net cash flows from operating activities were

A) $12,000.
B) $20,000.
C) $24,000.
D) $25,000.

Question 10

Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value method to account for this investment. On January 1, 2009, Pesto sold 9 percent bonds payable with a $10 million face value (maturing in 20 years) on the open market at a premium of $600,000. On January 1, 2012, Salerno acquired 40 percent of these same bonds from an outside party at 96.6 of face value. Both companies use the straight-line method of amortization. For a 2013 consolidation, what adjustment should be made to Pesto's beginning Retained Earnings as a result of this bond acquisition
a. $320,000 increase.
b. $326,000 increase.
c. $331,000 increase.
d. $340,000 increase.

Question 11

Darges owns 51 percent of the voting stock of Walrus, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition.
On January 1, 2008, Walrus sold $1,000,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 9 percent payable every December 31. Darges acquired 40 percent of these bonds on January 1, 2010. What consolidation entry would be recorded in connection with these intra-entity bonds for 96 percent of face value Both companies utilize the straight-line method of amortization.
a. December 31, 2010
b. December 31, 2011
c. December 31, 2012

Question 12

Pavin acquires all of Stabler's outstanding shares on January 1, 2011, for $460,000 in cash. Of this amount, $30,000 was attributed to equipment with a 10-year remaining life and $40,000 was assigned to trademarks expensed over a 20-year period. Pavin applies the partial equity method so that income is accrued each period based solely on the earnings reported by the subsidiary.
On January 1, 2014, Pavin reports $300,000 in bonds outstanding with a book value of $282,000. Stabler purchases half of these bonds on the open market for $145,500.
During 2014, Pavin begins to sell merchandise to Stabler. During that year, inventory costing $80,000 was transferred at a price of $100,000. All but $10,000 (at sales price) of these goods were resold to outside parties by year-end. Stabler still owes $33,000 for inventory shipped from Pavin during December.
The following financial figures are for the two companies for the year ending December 31, 2014. Prepare a worksheet to produce consolidated balances. (Credits are indicated by parentheses.)

Question 13

When a company acquires an affiliated company's debt instruments from a third party, how is the gain or loss on extinguishment of the debt calculated When should this balance be recognized

Question 14

A subsidiary has (1) a convertible preferred stock and (2) a convertible bond. How are these items factored into the computation of earnings per share for the parent company

Question 15

Highlight, Inc., owns all outstanding stock of Kiort Corporation. The two companies report the following balances for the year ending December 31, 2011:

On January 1, 2011, Highlight acquired on the open market bonds for $108,000 originally issued by Kiort. This investment had an effective rate of 8 percent. The bonds had a face value of $100,000 and a cash interest rate of 9 percent. At the date of acquisition, these bonds were shown as liabilities by Kiort with a book value of $84,000 (based on an effective rate of 11 percent). Determine the balances that should appear on a consolidated income statement for 2011.

Question 16

Fred, Inc., and Herman Corporation formed a business combination on January 1, 2011, when Fred acquired a 60 percent interest in Herman's common stock for $312,000 in cash. The book value of Herman's assets and liabilities on that day totaled $300,000 and the fair value of the noncontrolling interest was $208,000. Patents being held by Herman (with a 12-year remaining life) were undervalued by $90,000 within the company's financial records and a customer list (10-year life) worth $130,000 was also recognized as part of the acquisition-date fair value.
Intra-entity inventory transfers occur regularly between the two companies. Merchandise carried over from one year to the next is always sold in the subsequent period.

Fred had not paid for half of the 2013 inventory transfers by year-end.
On January 1, 2012, Fred sold $15,000 in land to Herman for $22,000. Herman is still holding this land.
On January 1, 2013, Herman acquired $20,000 (face value) of Fred's bonds on the open market. These bonds had an 8 percent cash interest rate. On the date of repurchase, the liability was shown within Fred's records at $21,386, indicating an effective yield of 6 percent. Herman's acquisition price was $18,732 based on an effective interest rate of 10 percent.
Herman indicated earning a net income of $25,000 within its 2013 financial statements.
The subsidiary also reported a beginning Retained Earnings balance of $300,000, dividends paid of $4,000, and common stock of $100,000. Herman has not issued any additional common stock since its takeover. The parent company has applied the equity method to record its investment in Herman.
a. Prepare consolidation worksheet adjustments for 2013.
b. Calculate the 2013 balance for the noncontrolling interest's share of consolidated net income. In addition, determine the ending 2013 balance for noncontrolling interest in the consolidated balance sheet.
c. Determine the consolidation worksheet adjustments needed in 2014 in connection with the intra-entity bonds.

Question 17

Net cash flows from financing activities were
a. $(25,000).
b. $(37,000).
c. $(38,000).
d. $(42,000).

Question 18

On January 1, Tesco Company spent a total of $4,384,000 to acquire control over Blondel Company. This price was based on paying $424,000 for 20 percent of Blondel's preferred stock and $3,960,000 for 90 percent of its outstanding common stock. At the acquisition date, the fair value of the 10 percent noncontrolling interest in Blondel's common stock was $440,000. The fair value of the 80 percent of Blondel's preferred shares not owned by Tesco was $1,696,000. Blondel's stockholders' equity accounts at January 1 were as follows:

Tesco believes that all of Blondel's accounts approximate their fair values within the company's financial statements. What amount of consolidated goodwill should be recognized
a.$300,000.
b.$316,000.
c.$364,000.
d.$520,000.

Question 19

Several years ago Abrams, Inc., sold $800,000 in bonds to the public. Annual cash interest of 8 percent ($64,000) was to be paid on this debt. The bonds were issued at a discount to yield 10 percent. At the beginning of 2012, Bierman Corporation (a wholly owned subsidiary of Abrams) purchased $100,000 of these bonds on the open market for $12 on an effective interest rate of 6 percent. The bond liability had a book value on that date of $668,778. Assume Abrams uses the equity method to account internally for its investment in Bierman. What consolidation entry would be required for these bonds on
a. December 31, 2012
b. December 31, 2014 1,655, a price based

Question 20

On January 1, 2012, Mona, Inc., acquired 80 percent of Lisa Company's common stock as well as 60 percent of its preferred shares. Mona paid $65,000 in cash for the preferred stock, with a call value of 110 percent of the $50 per share par value. The remaining 40 percent of the preferred shares traded at a $34,000 fair value. Mona paid $552,800 for the common stock. At the acquisition date, the noncontrolling interest in the common stock had a fair value of $138,200. The excess fair value over Lisa's book value was attributed to franchise contracts of $40,000. This intangible asset is being amortized over a 40-year period. Lisa pays all preferred stock dividends (a total of $8,000 per year) on an annual basis. During 2012, Lisa's book value increased by $50,000.
On January 2, 2012, Mona acquired one-half of Lisa's outstanding bonds payable to reduce the business combination's debt position. Lisa's bonds had a face value of $100,000 and paid cash interest of 10 percent per year. These bonds had been issued to the public to yield 14 percent. Interest is paid each December 31. On January 2, 2012, these bonds had a total $88,350 book value. Mona paid $53,310, indicating an effective interest rate of 8 percent.
On January 3, 2012, Mona sold Lisa fixed assets that had originally cost $100,000 but had accumulated depreciation of $60,000 when transferred. The transfer was made at a price of $120,000. These assets were estimated to have a remaining useful life of 10 years.
The individual financial statements for these two companies for the year ending December 31, 2013, are as follows:

a. What consolidation worksheet adjustments would have been required as of January 1, 2012, to eliminate the subsidiary's common and preferred stocks
b. What consolidation worksheet adjustments would have been required as of December 31, 2012, to account for Mona's purchase of Lisa's bonds
c. What consolidation worksheet adjustments would have been required as of December 31, 2012, to account for the intra-entity sale of fixed assets
d. Assume that consolidated financial statements are being prepared for the year ending
December 31, 2013. Calculate the consolidated balance for each of the following accounts:
Franchises
Fixed Assets
Accumulated Depreciation
Expenses

Question 21

Several years ago, Bennett, Inc., bought a portion of the outstanding bonds of Smith Corporation, a subsidiary organization. The acquisition was made from an outside party. In the current year, how should these intra-entity bonds be accounted for within the consolidation process

Question 22

Why might a subsidiary decide to issue new shares of common stock to parties outside the business combination

Question 23

Opus, Incorporated, owns 90 percent of Bloom Company. On December 31, 2012, Opus acquires half of Bloom's $500,000 outstanding bonds. These bonds had been sold on the open market on January 1, 2010, at a 12 percent effective rate. The bonds pay a cash interest rate of 10 percent every December 31 and are scheduled to come due on December 31, 2020. Bloom issued this debt originally for $435,763. Opus paid $283,550 for this investment, indicating an 8 percent effective yield.
a. Assuming that both parties use the effective rate method, what gain or loss from the retirement of this debt should be reported on the consolidated income statement for 2012
b. Assuming that both parties use the effective rate method, what balances should appear in the Investment in Bloom Bonds account on Opus's records and the Bonds Payable account of Bloom as of December 31, 2013
c. Assuming that both parties use the straight-line method, what consolidation entry would be required on December 31, 2013, because of these bonds Assume that the parent is not applying the equity method.

Question 24

Rodriguez Company holds 80 percent of the common stock of Molina, Inc., and 30 percent of this subsidiary's convertible bonds. The following consolidated financial statements are for 2012 and 2013:

Additional Information for 2013
• The parent issued bonds during the year for cash.
• Amortization of databases amounts to $5,000 per year.
• The parent sold a building with a cost of $60,000 but a $30,000 book value for cash on May 11.
• The subsidiary purchased equipment on July 23 using cash.
• Late in November, the parent issued stock for cash.
• During the year, the subsidiary paid dividends of $10,000.
Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2013. Either the direct or the indirect method may be used.

Question 25

Place Company owns a majority voting interest in Sassano, Inc. On January 1, 2011, Place issued $1,000,000 of 11 percent 10-year bonds at $943,497.77 to yield 12 percent. On January 1, 2013, Sassano purchased all of these bonds in the open market at a price of $904,024.59 with an effective yield of 13 percent.
Required
Using an Excel spreadsheet, do the following:
1. Prepare amortization schedules for the Place Company bonds payable and the Investment in Place Bonds for Sassano, Inc.
2. Using the values from the amortization schedules, compute the worksheet adjustment for a December 31, 2013, consolidation of Place and Sassano to reflect the effective retirement of the Place bonds. Formulate your solution to be able to accommodate various yield rates (and therefore prices) on the repurchase of the bonds.
Hints

Question 26

Bensman Corporation is computing EPS. One of its subsidiaries has stock warrants outstanding.
How do these convertible items affect Bensman's EPS computation

A) No effect is created because the stock warrants were for the subsidiary company's shares.
B) The stock warrants are not included in the computation unless they are antidilutive.
C) The effect of the stock warrants must be computed in deriving the amount of subsidiary income to be included in making the diluted EPS calculation.
D) The stock warrants are included only in basic EPS but never in diluted EPS.

Question 27

On January 1, Morgan Company has a net book value of $1,460,000 as follows:

Leinen Company acquires all outstanding preferred shares for $106,000 and 60 percent pf the common stock for $870,000. The acquisition-date fair value of the noncontrolling interest in Morgan's common stock was $580,000. Leinen believed that one of Morgan's buildings, with a 12-year life, was undervalued by $50,000 on the company's financial records.
What amount of consolidated goodwill would be recognized from this acquisition

A)$40,000.
B)$41,200
C)$42,400.
D)$46,000.

Question 28

Hepner Corporation has the following stockholders' equity accounts:

The preferred stock is participating. Wasatch Corporation buys 80 percent of this common stock for $1,600,000 and 70 percent of the preferred stock for $630,000. The acquisition-date fair value of the noncontrolling interest in the common shares was $400,000 and was $270,000 for the preferred shares. All of the subsidiary's assets and liabilities are viewed as having fair values equal to their book values. What amount is attributed to goodwill on the date of acquisition

Question 29

Following are separate income statements for Austin, Inc., and its 80 percent owned subsidiary, Rio Grande Corporation as well as a consolidated statement for the business combination as a whole.

Additional Information
•Annual excess fair over book value amortization of $25,000 resulted from the acquisition.
•The parent applies the equity method to this investment.
•Austin has 50,000 shares of common stock and 10,000 shares of preferred stock outstanding. Owners of the preferred stock are paid an annual dividend of $40,000, and each share can be exchanged for two shares of common stock.
•Rio Grande has 30,000 shares of common stock outstanding. The company also has 5,000 stock warrants outstanding. For $10, each warrant can be converted into a share of Rio Grande's common stock. Austin holds half of these warrants. The price of Rio Grande's common stock was $20 per share throughout the year.
•Rio Grande also has convertible bonds, none of which Austin owned. During the current year, total interest expense (net of taxes) was $22,000. These bonds can be exchanged for 10,000 shares of the subsidiary's common stock.
Determine Austin's basic and diluted EPS.

Question 30

The FASB ASC Subtopic Variable Interest Entities affects thousands of business enterprises that now, as primary beneficiaries, consolidate entities that qualify as controlled VIEs. Retrieve the annual reports of one or more of the following companies (or any others you may find) that consolidate
VIEs:
• The Walt Disney Company.
• General Electric.
• ConAgra Foods.
• Time Warner.
• Allegheny Energy.
Required
Write a brief report that describes
1. The reasons for consolidation of the company's VIE(s).
2. The effect of the consolidation of the VIE(s) on the company's financial statements.

Question 31

One company purchases the outstanding debt instruments of an affiliated company on the open market. This transaction creates a gain that is appropriately recognized in the consolidated financial statements of that year. Thereafter, a worksheet adjustment is required to correct the beginning balance of the consolidated Retained Earnings. Why is the amount of this adjustment reduced from year to year

Question 32

Washburn Company owns 75 percent of Metcalf Company's outstanding common stock. During the current year, Metcalf issues additional-shares to outside parties at a price more than its per share consolidated value. How does this transaction affect the business combination How is this impact recorded within the consolidated statements

Question 33

Smith, Inc., has the following stockholders' equity accounts as of January 1, 2013:

Haried Company purchases all of Smith's common stock on January 1, 2013, for $14,040,000.
The preferred stock remains in the hands of outside parties. Any excess acquisition-date fair value will be assigned to franchise contracts with a 40-year life.
During 2013, Smith reports earning $450,000 in net income and pays $360,000 in cash dividends. Haried applies the equity method to this investment.
a. What is the noncontrolling interest's share of consolidated net income for this period
b. What is the balance in the Investment in Smith account as of December 31, 2013
c. What consolidation entries are needed for 2013

Question 34

On January 1, Paisley, Inc., paid $560,000 for all of Skyler Corporation's outstanding stock. This cash payment was based on a price of $180 per share for Skyler's $100 par value preferred stock and $38 per share for its $20 par value common stock. The preferred shares are voting, cumulative, and fully participating. At the acquisition date, the book values of Skyler's accounts equaled their fair values. Any excess fair value is assigned to an intangible asset and will be amortized over a 10-year period.
During the year, Skyler sold inventory costing $60,000 to Paisley for $90,000. All but $18,000 (measured at transfer price) of this merchandise has been resold to outsiders by the end of the year. At the end of the year, Paisley continues to owe Skyler for the last shipment of inventory priced at $28,000.
Also, on January 2, Paisley sold Skyler equipment for S20.000 although it had a book value of only $12,000 (original cost of $30,000). Both companies depreciate such property according to the straight-line method with no salvage value. The remaining life at this date was four years.
The following financial statements are for each company for the year ending December 31. Determine consolidated financial totals for this business combination.

Note: parentheses indicate a credit balance

Question 35

An enterprise that holds a variable interest in a variable interest entity (VIE) is required to consolidate the assets, liabilities, revenues, expenses, and noncontrolling interest of that entity if:

A)The VIE has issued no voting stock.
B)The variable interest held by the enterprise involves a lease.
C)The enterprise has a controlling financial interest in the VIE.
D)Other equity interests in the VIE have the obligation to absorb the expected losses of the VIE.

Question 36

Arcola, Inc., acquires all 40,000 shares of Tuscola Company for $725,000. A year later, when Arcola's equity adjusted balance in its investment in Tuscola equals $800,000, Tuscola issues an additional 10,000 shares to outside investors for $25 per share. Which of the following best describes the effect of Tuscola's stock issue on Arcola's investment account

A) No effect because the shares were all sold to outside parties.
B) The investment account is reduced because Arcola now owns a smaller percentage of Tuscola.
C) The investment account is increased because Arcola's share of Tuscola's value has increased.
D) No effect because Arcola maintains control over Tuscola despite the new stock issue

Question 37

Aedion Company owns control over Breedlove, Inc. Aedion reports sales of $300,000 during 2011 and Breedlove reports $200,000. Inventory costing $20,000 was transferred from Breedlove to Aedion (upstream) during the year for $40,000. Of this amount, 25 percent is still in ending inventory at year-end. Total receivables on the consolidated balance sheet were $80,000 at the first of the year and $110,000 at year-end. No intra-entity debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business combination from its customers

A) $430,000.
B) $460,000.
C) $490,000.
D) $510,000.

Question 38

Through the payment of $10,468,000 in cash, Drexel Company acquires voting control over Young Company. This price is paid for 60 percent of the subsidiary's 100,000 outstanding common shares ($40 par value) as well as all 10,000 shares of 8 percent, cumulative, $100 par value preferred stock. Of the total payment, $3.1 million is attributed to the fully participating preferred stock with the remainder paid for the common. This acquisition is carried out on January 1, 2013, when Young reports retained earnings of $10 million and a total book value of $15 million. The acquisition-date fair value of the noncontrolling interest in Young's common stock was $4,912,000. On this same date, a building owned by Young (with a 5-year remaining life) is undervalued in the financial records by $200,000, while equipment with a 10-year life is overvalued by $100,000. Any further excess acquisition-date fair value is assigned to a brand name with a 20-year life.
During 2013, Young reports net income of $900,000 while paying $400,000 in cash dividends. Drexel uses the initial value method to account for both of these investments.
Prepare appropriate consolidation entries for 2013.

Question 39

On June 30, 2013, Plaster, Inc., paid $916,000 for 80 percent of Stucco Company's outstanding stock. Plaster assessed the acquisition-date fair value of the 20 percent noncontrolling interest at $229,000. At acquisition date, Stucco reported the following book values for its assets and liabilities:

On June 30, Plaster allocated the excess acquisition-date fair value over book value to Stucco's assets as follows:

At the end of 2013, the following comparative (2012 and 2013) balance sheets and consolidated income statement were available:

Additional Information for 2013
• On December 1, Stucco paid a $40,000 dividend. During the year, Plaster paid $100,000 in dividends.
• During the year, Plaster issued $800,000 in long-term debt at par.
• Plaster reported no asset purchases or dispositions other than the acquisition of Stucco.
Prepare a 2013 consolidated statement of cash flows for Plaster and Stucco. Use the indirect method of reporting cash flows from operating activities.

Question 40

What is a variable interest entity (VIE)

Question 41

A parent acquires the outstanding bonds of a subsidiary company directly from an outside third party. For consolidation purposes, this transaction creates a gain of $45,000. Should this gain be allocated to the parent or the subsidiary Why

Question 42

Assume the same information as in question (16) except that Metcalf issues a 10 percent stock dividend instead of selling new shares of stock. How does this transaction affect the business combination

Question 43

The following information has been taken from the consolidation worksheet of Peak and its 90 percent-owned subsidiary, Valley:
• Peak reports a $12,000 gain on the sale of a building. The building had a book value of $32,000 but was sold for $44,000 cash.
• Intra-entity inventory transfers of $129,000 occurred during the current period.
• Valley paid a $30,000 dividend during the year with $27,000 of this amount going to Peak.
• Amortization of an intangible asset recognized by Peak's worksheet was $16,000 for the current period.
• Consolidated accounts payable decreased by $11,000 during the year.
Indicate how to reflect each of these events on a consolidated statement of cash flows

Question 44

A subsidiary has a debt outstanding that was originally issued at a discount. At the beginning of the current year, the parent company acquired the debt at a slight premium from outside parties. Which of the following statements is true
a.Whether the balances agree or not, both the subsequent interest income and interest expense should be reported in a consolidated income statement.
b The interest income and interest expense will agree in amount and should be offset for consolidation purposes.
c.In computing any noncontrolling interest allocation, the interest income should be included but not the interest expense.
d.Although subsequent interest income and interest expense will not agree in amount, both balances should be eliminated for consolidation purposes.

Question 45

Jordan, Inc., owns Fey Corporation. For the current year, Jordan reports net income (without consideration of its investment in Fey) of $200,000 and the subsidiary reports $80,000.
The parent had a bond payable outstanding on January 1, with a book value of $212,000.
The subsidiary acquired the bond on that date for $199,000. During the current year, Jordan reported interest expense of $22,000 while Fey reported interest income of $21,000. What is consolidated net income
a. $266,000.
b. $268,000.
c. $292,000.
d. $294,000.

Question 46

Aaron owns 100 percent of the 12,000 shares of Veritable, Inc. The Investment in Veritable account has a balance of $588,000, corresponding to the subsidiary's unamortized acquisition-date fair value of $49 per share. Veritable issues 3,000 new shares to the public for $50 per share. How does this transaction affect the Investment in Veritable account

A)It is not affected because the shares were sold to outside parties.
B)It should be increased by $2,400.
C)It should be increased by $3,000.
D)It should be decreased by $117,600.

Question 47

Alford Company and its 80 percent-owned subsidiary, Knight, have the following income statements for 2013:

Additional Information for 2013
• Intra-entity inventory transfers during the year amounted to $90,000. All intra-entity transfers were downstream from Alford to Knight.
• Unrealized inventory profits at January 1 were $6,000, but at December 31, they are $9,000.
• Annual excess amortization expense resulting from the acquisition is $11,000.
• Knight paid dividends totaling $20,000.
• The noncontrolling interest's share of the subsidiary's income is $9,800.
• During the year, consolidated inventory rose by $11,000 while accounts receivable and accounts payable declined by $8,000 and $6,000, respectively.
Using either the direct or indirect method, compute net cash flows from operating activities during the period for the business combination.

Question 48

What are variable interests in an entity and how might they provide financial control over an entity

Question 49

Perkins Company acquires 90 percent of the outstanding common stock of the Butterfly Corporation as well as 55 percent of its preferred stock. How should these preferred shares be accounted for within the consolidation process

Question 50

On January 1, 2013, Stamford issues 10,000 additional shares of common stock for $25 per share. Neill acquires 8,000 of these shares. How will this transaction affect the parent company's Additional Paid-In Capital account
a. Has no effect on it.
b. Increases it by $20,500.
c. Increases it by $36,400.
d. Increases it by $82,300.

Question 51

Porter Corporation owns all 30.000 shares of the common stock of Street, Inc. Porter has 60,000 shares of its own common stock outstanding. During the current year, Porter earns income (without any consideration of its investment in Street) of $150,000 while Street reports $130,000. Annual amortization of $10,000 is recognized each year on the consolidation worksheet based on acquisition-date fair-value allocations. Both companies have convertible bonds outstanding. During the current ye.ir, bond-related interest expense (net of taxes) is $32,000 for Porter and $24,000 for Street. Porter's bonds can be converted into 8,000 shares of common stock; Street's bonds can be converted into 10,000 shares. Porter owns none of these bonds. What are the earnings per share amounts that Porter should report in its current year consolidated income statement

Question 52

The parent company acquires all of a subsidiary's common stock but only 70 percent of its preferred shares. This preferred stock pays a 7 percent annual cumulative dividend. No dividends are in arrears at the current time. How is the noncontrolling interest's share of the subsidiary's income computed
a.As 30 percent of the subsidiary's preferred dividend.
b.No allocation is made because the dividends have been paid.
c.As 30 percent of the subsidiary's income after all dividends have been subtracted.
d.Income is assigned to the preferred stock based on total par value and 30 percent of.that amount is allocated to the noncontrolling interest.

Question 53

Mattoon, Inc., owns 80 percent of Effingham Company. For the current year, this combined entity reported consolidated net income of $500,000. Of this amount $465,000 was attributable to Mattoon's controlling interest while the remaining $35,000 was attributable to the noncontrolling interest. Mattoon has 100,000 shares of common stock outstanding and Effingham has 25,000 shares outstanding. Neither company has issued preferred shares or has any convertible securities outstanding. On the face of the consolidated income statement, how much should be reported as Mattoon's earnings per share

A) $5.00
B) $4.65
C) $4.00
D) $3.88

Question 54

On January 1, 2013, Stamford issues 10,000 additional shares of common stock for $15 per share. Neill does not acquire any of this newly issued stock. How does this transaction affect the parent company's Additional Paid-In Capital account
a. Has no effect on it.
b. Increases it by $44,000.
c. Decreases it by $35,200.
d. Decreases it by $55,000.

Question 55

Primus, Inc., owns all outstanding stock of Sonston, Inc. For the current year, Primus reports income (exclusive of any investment income) of $600,000. Primus has 100,000 shares of common stock outstanding. Sonston reports net income of $200,000 for the period with 40,000 shares of common stock outstanding. Sonston also has 10,000 stock warrants outstanding that allow the holder to acquire shares at $10 per share. The value of this stock was $20 per share throughout the year. Primus owns 2,000 of these warrants. What amount should Primus report for diluted earnings per share

Question 56

When is a sponsoring firm required to consolidate the financial statements of a VIE with its own financial statements

Question 57

The income statement and the balance sheet are produced using a worksheet, but a consolidated statement of cash flows is not. What process is followed in preparing a consolidated statement of cash flows

Question 58

On January 1, 2013, Stamford reacquires 8,000 of the outstanding shares of its own common stock for $24 per share. None of these shares belonged to Neill. How does this transaction affect the parent company's Additional Paid-In Capital account

A) Has no effect on it.
B) Decreases it by $55,000.
C) Decreases it by $35,000.
D) Decreases it by $28,000.

Question 59

Garfun, Inc., owns all of the stock of Simon, Inc. For 2013, Garfun reports income (exclusive of any investment income) of $480,000. Garfun has 80,000 shares of common stock outstanding. It also has 5,000 shares of preferred stock outsta per year. Simon reports net income of $290,000 for the period with 80,000 shares of common stock outstanding. Simon also has a liability for 10,000 of $100 bonds that pay annual interest of $8 per bond. Each of these bonds can be converted into three shares of common stock. Garfun owns none of these bonds. Assume a tax rate of 30 percent. What amount should Garfun report as diluted earnings per share nding that pay a dividend of $15,000 per year. Simon reports net income of $290,000 for the period with 80,000 shares of common stock outstanding. Simon also has a liability for 10,000 of $100 bonds that pay annual interest of $8 per bond. Each of these bonds can be converted into three shares of common stock. Garfun owns none of these bonds. Assume a tax rate of 30 percent. What amount should Garfun report as diluted earnings per share

Question 60

Aceton Corporation owns 80 percent of the outstanding stock of Voctax, Inc. During the current year. Voctax made $140,000 in sales to Aceton. How does this transfer affect the consolidated statement of cash flows

A)The transaction should be included if payment has been made.
B)Only 80 percent of the transfers should be included because the subsidiary made the sales.
C)Because the transfers were from a subsidiary organization, the cash flows are reported as investing activities.
D)Because of the, intra-entity nature of the transfers, the amount is not reported in the consolidated cash flow statement.

Question 61

Ace Company reports current earnings of $400,000 while paying $40,000 in cash dividends. Byrd Company earns $100,000 in net income and distributes $10,000 in dividends. Ace has held a 70 percent interest in Byrd for several years, an investment with an acquisition-date fair value equal to the book value of its underlying net assets. Ace uses the initial value method to account for these shares.
On January 1 of the current year, Byrd acquired in the open market $50,000 of Ace's 8 percent bonds. The bonds had originally been issued several years ago for 92, reflecting a 10 percent effective interest rate. On the date of purchase, the book value of the bonds payable was $48,300. Byrd paid $46,600 based on a 12 percent effective interest rate over the remaining life of the bonds.
What is consolidated net income for this year
a. $492,160.
b. $493,938.
c. $499,160.
d. $500,258.

Question 62

Hillsborough Country Outfitters, Inc., entered into an agreement for HCO Media LLC to exclusively conduct Hillsborough's e-commerce initiatives through a jointly owned (50 percent each) Internet site known as HCO.com. HCO Media receives 2 percent of all sales revenue generated through the site up to a maximum of $500,000 per year. Both Hillsborough and HCO Media pay 50 percent of the costs to maintain the Internet site. However, if HCO Media's fees are insufficient to cover its 50 percent share of the costs, Hillsborough absorbs the loss.
Assuming that HCO Media qualifies as a VIE, should Hillsborough consolidate HCO Media LLC

Question 63

The following separate income statements are for Mason and its 80 percent-owned subsidiary, Dixon:

Additional Information
•Amortization expense resulting from Dixon's excess acquisition-date fair value is $25,000 per year.
•Mason has convertible preferred stock outstanding. Each of these 5,000 shares is paid a dividend of $4 per year. Each share can be converted into four shares of common stock.
•Stock warrants to buy 10,000 shares of Dixon are also outstanding. For $20, each warrant can be converted into a share of Dixon's common stock. The fair value of this stock is $25 throughout the year. Mason owns none of these warrants.
•Dixon has convertible bonds payable that paid interest of $30,000 (after taxes) during the year. These bonds can be exchanged for 20,000 shares of common stock. Mason holds 15 percent of these bonds, which it bought at book value directly from Dixon.
Compute Mason's basic and diluted EPS.

Question 64

A parent company acquires from a third party bonds that had been issued originally by one of its subsidiaries. What accounting problems are created by this purchase

Question 65

How do noncontrolling interest balances affect the consolidated statement of cash flows

Question 66

The following describes a set of arrangements between TecPC Company and a variable interest entity (VIE) as of December 31, 2013. TecPC agrees to design and construct a new research and development (R D) facility. The VIE's sole purpose is to finance and own the R D facility and lease it to TecPC Company after construction is completed. Payments under the operating lease are expected to begin in the first quarter of 2015.
The VIE has financing commitments sufficient for the construction project from equity and debt participants (investors) of $4 million and $42 million, respectively. TecPC, in its role as the VIE's construction agent, is responsible for completing construction by December 31, 2014. TecPC has guaranteed a portion of the VIE's obligations during the construction and postconstruction periods.
TecPC agrees to lease the R D facility for five years with multiple extension options.
The lease is a variable rate obligation indexed to a three-month market rate. As market interest rates increase or decrease, the payments under this operating lease also increase or decrease, sufficient to provide a return to the investors. If all extension options are exercised, the total lease term is 35 years.
At the end of the first five-year lease term or any extension, TecPC may choose one of the following:
• Renew the lease at fair value subject to investor approval.
• Purchase the facility at its original construction cost.
• Sell the facility on the VIE's behalf, to an independent third party. If TecPC sells the project and the proceeds from the sale are insufficient to repay the investors their original cost, TecPC may be required to pay the VIE up to 85 percent of the project's cost.
a. What is the purpose of reporting consolidated statements for a company and the entities that it controls
b. When should a VIE's financial statements be consolidated with those of another company
c. Identify the risks of ownership of the R D facility that (1) TecPC has effectively shifted to the VIE's owners and (2) remain with TecPC.
d. What characteristics of a primary beneficiary does TecPC possess

Question 67

DeMilo, Inc., owns 100 percent of the 40,000 outstanding shares of Ricardo, Inc. DeMilo currently carries the Investment in Ricardo account at $490,000 using the equity method.
Ricardo issues 10,000 new shares to the public for $15.75 per share. How does this transaction affect the Investment in Ricardo account that appears on DeMilo's financial records