Question 1

_____ The amount to be reported for the NCI in the net assets of a created subsidiary would be the lowest amount under which of the following methods?
A) The parent company concept.
B) The economic unit concept.
C) Proportional consolidation.
D) None of the above.

Accepted Answer

The amount reported for the Non-Controlling Interest (NCI) in the net assets of a created subsidiary does not depend on the method (parent company concept, economic unit concept, or proportional consolidation) because these methods primarily affect the consolidation process and presentation in the financial statements rather than the valuation of NCI itself.

Question 2

_____ Which of the following methods reports the NCI in the subsidiary's net income as a deduction in arriving at consolidated net income in the consolidated income statement?
A) The parent company concept.
B) The economic unit concept.
C) Proportional consolidation.
D) None of the above.

Accepted Answer

When preparing consolidated financial statements, the parent company concept focuses on the interests of the parent company's shareholders. Under this concept, non-controlling interest (NCI), also known as minority interest, is reported in the subsidiary's net income as a deduction in arriving at consolidated net income. This means that the net income attributable to the non-controlling shareholders of the subsidiary is subtracted from the total consolidated net income to determine the net income attributable to the parent company's shareholders.
The economic unit concept (b) treats the consolidated entity as a single economic entity, regardless of the legal ownership structure. Under this concept, all of the subsidiary's income, expenses, assets, and liabilities are included in the consolidated financial statements in full, with a separate line item showing the non-controlling interest's share of equity and net income.
Proportional consolidation (c) is a method used for joint ventures where the parent company includes its proportionate share of the joint venture's assets, liabilities, income, and expenses in its consolidated financial statements. This method is not typically used for subsidiaries where the parent has control.
Therefore, the parent company concept is the method that reports the NCI in the subsidiary's net income as a deduction in arriving at consolidated net income in the consolidated income statement.

Question 3

_____ The NCI in a created subsidiary's net assets is based on the subsidiary's book values under which of the following concepts?

Accepted Answer

The answer of _____ The NCI in a created subsidiary's...

Question 4

_____ Which of the following methods reports the noncontrolling interest as a division or sharing of the consolidated net income?
A) The parent company concept.
B) The economic unit concept.
C) Proportional consolidation.
D) None of the above.

Accepted Answer

The answer of _____ Which of the following methods reports...

Question 5

_____ Paxel owns 80% of Saxel's outstanding common stock. For 2006, Saxel reported $60,000 of net income and declared dividends of $10,000. What is the carrying value of Paxel's investment using the equity method at 12/31/06 if the investment's carrying value on 1/1/06 was $200,000?
A) $200,000
B) $208,000
C) $240,000
D) $248,000
E) $256,000

Accepted Answer

The carrying value of Paxel's investment in Saxel using the equity method at the end of 2006 is calculated by starting with the initial carrying value at the beginning of the year, adding Paxel's share of Saxel's net income, and subtracting dividends received by Paxel. Paxel owns 80% of Saxel, so Paxel's share of Saxel's net income is 80% of $60,000, which is $48,000. Paxel's share of the dividends is 80% of $10,000, which is $8,000. Therefore, the carrying value at the end of 2006 is $200,000 + $48,000 - $8,000 = $240,000. However, the correct calculation should include the initial investment value plus the proportionate share of net income, without subtracting the dividends received, because the equity method adjusts the investment account for the investor's share of the investee's earnings and dividends are considered a distribution of those earnings. Thus, the correct calculation is $200,000 + $48,000 = $248,000.

Question 6

_____ Paxel owns 80% of Saxel's outstanding common stock. For 2006, Saxel reported $60,000 of net income and declared dividends of $10,000. What amount appears in Paxel's 2006 income statement if Paxel accounts for its investment using the equity method?
A) $ -0-
B) $8,000
C) $40,000
D) $48,000
E) $56,000

Accepted Answer

Paxel's share of Saxel's net income is 80% x $60,000 = $48,000. Paxel's share of Saxel's dividends is 80% x $10,000 = $8,000. Paxel's net income from its investment in Saxel is $48,000 - $8,000 = $40,000.

Question 7

_____ For 2006, Pyna reported $500,000 of net income from its own separate operations. This amount excludes income relating to Syna, its 80%-owned created subsidiary, which reported $100,000 of net income and declared $55,000 of dividends in 2006. What is the consolidated net income under the economic unit concept?
A) $536,000
B) $544,000
C) $580,000
D) $600,000
E) $644,000

Accepted Answer

The answer of _____ For 2006, Pyna reported $500,000 of...

Question 8

_____ For 2006, Pyna reported $500,000 of net income from its own separate operations. This amount excludes income relating to Syna, its 80%-owned created subsidiary, which reported $100,000 of net income and declared $55,000 of dividends in 2006. What is the consolidated net income under the parent company concept?
A) $536,000
B) $544,000
C) $580,000
D) $600,000
E) $644,000

Accepted Answer

Under the parent company concept, the consolidated net income includes the parent's net income and the parent's share of the subsidiary's net income. Pyna's net income is $500,000, and it owns 80% of Syna, so it includes 80% of Syna's $100,000 net income, which is $80,000. Therefore, the consolidated net income is $500,000 + $80,000 = $580,000.

Question 9

_____ Parco, a publicly owned company, could properly not consolidate Sarco, which is
A) Controlled only by having a majority voting interest and unable to distribute dividends because of long-term currency transfer restrictions imposed by a foreign government.
B) Controlled only by having a majority voting interest and has recently emerged from bankruptcy proceedings.
C) Controlled by means other than by having a majority voting interest.
D) Controlled only by having a majority voting interest and has total assets that are less than 10% of the parent's total assets and earnings, respectively.
E) None of the above.

Accepted Answer

The answer of _____ Parco, a publicly owned company, could...

Question 10

_____ Prell's 100%-owned domestic subsidiary has filed for bankruptcy protection. How should Prell value its investment in its unconsolidated statements if Prell can exercise significant influence?
A) The cost method.
B) The equity method.
C) The cost method or the equity method, as most appropriate.
D) The equity method or the fair market value.
E) The cost method or the fair market value.

Accepted Answer

When a parent company can exercise significant influence over its subsidiary, the equity method is the appropriate accounting method for valuing its investment in its unconsolidated financial statements.

Question 11

_____ Prell's 100%-owned domestic subsidiary has filed for bankruptcy protection. How should Prell value its investment in its unconsolidated statements if Prell cannot exercise significant influence?
A) The cost method.
B) The equity method.
C) The cost method or the equity method, as most appropriate.
D) The equity method or the fair market value.
E) The cost method or the fair market value.

Accepted Answer

The answer of _____ Prell's 100%-owned domestic subsidiary has filed...

Question 12

_____ Which of the following valuation techniques could not be used to value an investment in an unconsolidated 100%-owned subsidiary?
A) The cost method.
B) The equity method.
C) The fair market value.
D) The cost method and the fair market value.
E) The equity method and the fair market value.

Accepted Answer

The cost method is typically not used to value a 100%-owned subsidiary because it does not reflect the subsidiary's current value or performance. Instead, consolidation or the equity method is more appropriate for reflecting the financial position and results of a wholly-owned subsidiary in the parent company's financial statements.

Question 13

_____ Which of the following valuation techniques could not be used to value an investment in an unconsolidated 90%-owned subsidiary that has its unowned shares publicly traded?
A) The cost method.
B) The equity method.
C) The fair market value.
D) The cost method and the fair market value.
E) The equity method and the fair market value.

Accepted Answer

The answer of _____ Which of the following valuation techniques...

Question 14

_____ What would be the effect on parent-company-only financial statements-not the consolidated statements-if an unconsolidated subsidiary is accounted for under the cost method?
A) All of the unconsolidated subsidiary's accounts will be included individually in the parent company's statements.
B) The retained earnings in the parent company's statements will reflect the earnings of the unconsolidated subsidiary.
C) Dividend income from the unconsolidated subsidiary will be reported in the parent company's income statement.
D) The parent company's retained earnings will be the same as if the subsidiary had been consolidated.
E) None of the above.

Accepted Answer

The answer of _____ What would be the effect on...

Question 15

_____ Pallco justifiably does not consolidate two of its 100%-owned subsidiaries (Sallco and Sellco). Sallco is (a) a foreign subsidiary and (b) prohibited by the foreign government from paying dividends. Sellco is (a) a domestic subsidiary acquired two months ago in the purchase of a conglomerate and (b) in process of being sold. What would be the most likely method of accounting for each of these unconsolidated subsidiaries?

Accepted Answer

The answer of _____ Pallco justifiably does not consolidate two...

Question 16

_____Under the FASB's consolidation rules, an entity that is controlled by financial arrangements (rather than by a majority voting interest)
A) Must be consolidated.
B) Must be consolidated if the parent is publicly owned.
C) Must be consolidated if the parent has significant influence.
D) Must be consolidated only if the subsidiary is partially owned.

Accepted Answer

Under the FASB's consolidation rules, an entity that is controlled through financial arrangements, rather than by a majority voting interest, must be consolidated. This is based on the principle that control, rather than the form of ownership, dictates the need for consolidation.

Question 17

_____Entity A will absorb a majority of a VIE's expected losses and Entity B will receive a majority of that VIE's expected residual returns.
A) Entity A must consolidate the VIE.
B) Entity B must consolidate the VIE.
C) Neither entity must consolidate the VIE.
D) Both entities must consolidate the VIE.

Accepted Answer

In the context of Variable Interest Entities (VIEs), consolidation is required for the entity that has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. This is often referred to as the primary beneficiary.
In the scenario provided, Entity A is expected to absorb a majority of the VIE's expected losses, which indicates that Entity A likely has the obligation to absorb losses that could potentially be significant to the VIE. This would typically lead to the conclusion that Entity A is the primary beneficiary and, therefore, must consolidate the VIE.
Entity B, while receiving a majority of the VIE's expected residual returns, does not necessarily have the obligation to absorb significant losses or the power to direct the activities of the VIE. Therefore, Entity B would not be required to consolidate the VIE based solely on receiving residual returns.
The consolidation decision is based on a comprehensive analysis of the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits, not just on the financial interest such as residual returns. Therefore, the correct answer is that Entity A must consolidate the VIE.

Question 18

_____ In general, an entity's equity at risk is deemed sufficient to permit the entity to finance its activities without additional subordinated financial support if the equity at risk is
A) At least 10% of the entity's total liabilities.
B) At least 10% of the entity's total long-term debt.
C) At least 10% of the entity's total assets.
D) More than $1,000,000.
E) More than $5,000,000.

Accepted Answer

Equity at risk is considered sufficient if it is at least 10% of the entity's total assets. This ratio indicates a healthy level of equity to support the entity's operations and investments, reducing reliance on debt.

Question 19

matching
based on the information given.
The following (a) seven account balances and (b) statements of retained earnings were obtained from the separate company statements of Parr Inc. and its 80%-owned created sub-sidiary, Subb Inc. (Parr's only subsidiary), at the end of 2006:
  When Subb was created (in 2004, 20% of the common shares it issued were sold to private investors.
Requirement 1:
How is each of the first 11 preceding items reported in Parr's 2006 consolidated statements? Use the following list of possible answer codes in the answer columns:
-_____(item 1)
A) Report at the amount shown in Subb's separate statements.
B) Report at the amount shown in Parr's separate statements.
C) Report at less than the sum of the amounts shown in Parr's and Subb's separate statements.
D) Report at the sum of the amounts shown in Parr's and Subb's separate statements.
E) Do not report this item in the consolidated statements or in the separate statements of either Parr or Subb.
F) Do not report this item in the consolidated statements.
G) Create this item in the consolidation process.

Accepted Answer

The answer of matching
based on the information given.
The following (a)...

Question 20

matching
based on the information given.
The following (a) seven account balances and (b) statements of retained earnings were obtained from the separate company statements of Parr Inc. and its 80%-owned created sub-sidiary, Subb Inc. (Parr's only subsidiary), at the end of 2006:
  When Subb was created (in 2004, 20% of the common shares it issued were sold to private investors.
Requirement 1:
How is each of the first 11 preceding items reported in Parr's 2006 consolidated statements? Use the following list of possible answer codes in the answer columns:
-_____(item 2)
A) Report at the amount shown in Subb's separate statements.
B) Report at the amount shown in Parr's separate statements.
C) Report at less than the sum of the amounts shown in Parr's and Subb's separate statements.
D) Report at the sum of the amounts shown in Parr's and Subb's separate statements.
E) Do not report this item in the consolidated statements or in the separate statements of either Parr or Subb.
F) Do not report this item in the consolidated statements.
G) Create this item in the consolidation process.

Accepted Answer

The answer of matching
based on the information given.
The following (a)...

Quiz 3: Partially Owned Created Subsidiaries & Variable Interest Entities

_____ The amount to be reported for the NCI in the net assets of a created subsidiary would be the lowest amount under which of the following methods?

_____ Which of the following methods reports the NCI in the subsidiary's net income as a deduction in arriving at consolidated net income in the consolidated income statement?

_____ The NCI in a created subsidiary's net assets is based on the subsidiary's book values under which of the following concepts?

_____ Which of the following methods reports the noncontrolling interest as a division or sharing of the consolidated net income?

_____ Paxel owns 80% of Saxel's outstanding common stock. For 2006, Saxel reported $60,000 of net income and declared dividends of $10,000. What is the carrying value of Paxel's investment using the equity method at 12/31/06 if the investment's carrying value on 1/1/06 was $200,000?

_____ Paxel owns 80% of Saxel's outstanding common stock. For 2006, Saxel reported $60,000 of net income and declared dividends of $10,000. What amount appears in Paxel's 2006 income statement if Paxel accounts for its investment using the equity method?

_____ Parco, a publicly owned company, could properly not consolidate Sarco, which is

_____ Prell's 100%-owned domestic subsidiary has filed for bankruptcy protection. How should Prell value its investment in its unconsolidated statements if Prell can exercise significant influence?

_____ Prell's 100%-owned domestic subsidiary has filed for bankruptcy protection. How should Prell value its investment in its unconsolidated statements if Prell cannot exercise significant influence?

_____ Which of the following valuation techniques could not be used to value an investment in an unconsolidated 100%-owned subsidiary?

_____ Which of the following valuation techniques could not be used to value an investment in an unconsolidated 90%-owned subsidiary that has its unowned shares publicly traded?

_____ What would be the effect on parent-company-only financial statements-not the consolidated statements-if an unconsolidated subsidiary is accounted for under the cost method?

_____Under the FASB's consolidation rules, an entity that is controlled by financial arrangements (rather than by a majority voting interest)

_____Entity A will absorb a majority of a VIE's expected losses and Entity B will receive a majority of that VIE's expected residual returns.

_____ In general, an entity's equity at risk is deemed sufficient to permit the entity to finance its activities without additional subordinated financial support if the equity at risk is