Question 1

REFERENCE: 06-02
Knight Co.owned 80% of the common stock of Stoop Co.Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding.Each preferred share received an annual per share dividend of $2 and is convertible into four shares of common stock.Knight did not own any of Stoop's preferred stock.Stoop also had 600 bonds outstanding,each of which is convertible into ten shares of common stock.Stoop's annual after-tax interest expense for the bonds was $2,000.Knight did not own any of Stoop's bonds.There are no excess amortizations or intra-entity transactions associated with this consolidation.Stoop reported net income of $300,000 for 2018.Knight has 100,000 shares of common stock outstanding and reported net income of $400,000 for 2018.
-What would Knight Co.report as consolidated diluted earnings per share (rounded)?
A)$4.00.
B)$)4.71
C)$8.71.
D)$5.89.
E)$6.37.

Accepted Answer

Sub Net income $300,000 + Interest saved $2,000 (no preferred divs)= $322,000.New ownership percentage = 40,000 / (50,000 + if-converted preferred shares 8,000 + if-converted bonds 6,000 shares)= 62.5%.Consolidated DEPS = 400,000 + (62.5% x 302,000)= 588,750/100,000 = $5.89 Knight Co.'s Consolidated Diluted Earnings per Share

Question 2

Parker owned all of Odom Inc.Although the Investment in Odom Inc.account had a balance of $834,000,the subsidiary's 12,000 shares had an underlying book value of only $56 per share.On January 1,2018,Odom issued 3,000 new shares to the public for $70 per share.How does this transaction affect the Investment in Odom Inc.account?
A)It should be decreased by $210,000.
B)It should be increased by $210,000.
C)It should be increased by $168,000.
D)It should be decreased by $1,200.
E)It is not affected since the shares were sold to outside parties.

Accepted Answer

Subsidiary's unamortized fair value of prior to new share issue
(12,000 × $56)$834,000
Parent's ownership 100%
Unamortized subsidiary fair value $834,000
Subsidiary unamortized fair value after issuing new
shares (above value plus 3,000 shares at $70 each)$1,044,000
Parent's ownership 12,000 ÷ 15,000 shares) 80%
Unamortized subsidiary fair value after stock issue $835,200
Investment in Odom increases by $1,200 ($835,200 less $834,000).

Question 3

REFERENCE: 06-02
Knight Co.owned 80% of the common stock of Stoop Co.Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding.Each preferred share received an annual per share dividend of $2 and is convertible into four shares of common stock.Knight did not own any of Stoop's preferred stock.Stoop also had 600 bonds outstanding,each of which is convertible into ten shares of common stock.Stoop's annual after-tax interest expense for the bonds was $2,000.Knight did not own any of Stoop's bonds.There are no excess amortizations or intra-entity transactions associated with this consolidation.Stoop reported net income of $300,000 for 2018.Knight has 100,000 shares of common stock outstanding and reported net income of $400,000 for 2018.
-What would Knight Co.report as consolidated basic earnings per share (rounded)?
A)$6.37
B)$6.40
C)$7.00
D)$5.68
E)$6.00

Accepted Answer

Sub net income (300,000)- preferred divs(4,000)= $296,000 x 80% = 236,800 included in consolidated EPS.Parent net income (400,000)+ portion of sub net income = (400,000 + 236,800)/ 100,000 shares = $6.37

Question 4

Campbell Inc.owned all of Gordon Corp.For 2018,Campbell reported net income (without consideration of its investment in Gordon)of $280,000 while the subsidiary reported $112,000.There are no excess amortizations associated with this consolidation.The subsidiary had bonds payable outstanding on January 1,2018,with a book value of $297,000.The parent acquired the bonds on that date for $281,000.During 2018,Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000.What is consolidated net income for 2018?
A)$406,000.
B)$374,000.
C)$378,000.
D)$410,000.
E)$394,000.

Accepted Answer

Income of the Parent $280,000 + Income of the Sub $112,000 - Difference in Interest Income over Interest Expense on Intra-Entity Bonds ($31,000 - $29,000)$2,000 + Gain on Bonds Purchase ($297,000 - $281,000)$16,000 = $406,000 Consolidated Net Income

Question 5

Regency Corp.recently acquired $500,000 of the bonds of Safire Co. ,one of its subsidiaries,paying more than the carrying value of the bonds.According to the most practical view of this intra-entity transaction,to whom should the loss be attributed?
A)To Safire because the bonds were issued by Safire.
B)The loss should be allocated between Safire and Regency based on the purchase price and the original face value of the debt.
C)The loss should be amortized over the life of the bonds and need not be attributed to either party.
D)The loss should be deferred until it can be determined to whom the attribution can be made.
E)To Regency because Regency is the controlling party in the business combination.

Accepted Answer

The answer of Regency Corp.recently acquired $500,000 of the bonds...

Question 6

Where do dividends paid to the noncontrolling interest of a subsidiary appear on a consolidated statement of cash flows?
A)Cash flows from operating activities.
B)Cash flows from investing activities.
C)Cash flows from financing activities.
D)Supplemental schedule of noncash investing and financing activities.
E)They do not appear in the consolidated statement of cash flows.

Accepted Answer

Dividends paid to the noncontrolling interest of a subsidiary are considered equity transactions and would appear in the cash flows from financing activities section of the consolidated statement of cash flows.

Question 7

REFERENCE: 06-01
On January 1,2018,Riney Co.owned 80% of the common stock of Garvin Co.On that date,Garvin's stockholders' equity accounts had the following balances:
 $$\begin{array} { l r } 
\text { Common stock (\$5 par value) } & \$ 250,000 \
\text { Additional paid-in capital } & 110,000 \
\text { Retained earnings } & 330,000 \
\text { Total stockholders' equity } & \$ 690,000 \
\end{array}$$ The balance in Riney's Investment in Garvin Co.account was $552,000,and the noncontrolling interest was $138,000.On January 1,2018,Garvin Co.sold 10,000 shares of previously unissued common stock for $15 per share.Riney did not acquire any of these shares.
-What is the balance in Riney's "Investment in Garvin Co.Account" following the sale of the 10,000 shares of common stock?
A)$552,000.
B)$560,000.
C)$460,000.
D)$404,000.
E)$672,000.

Accepted Answer

The answer of REFERENCE: 06-01
On January 1,2018,Riney Co.owned 80% of...

Question 8

REFERENCE: 06-01
On January 1,2018,Riney Co.owned 80% of the common stock of Garvin Co.On that date,Garvin's stockholders' equity accounts had the following balances:
 $$\begin{array} { l r } 
\text { Common stock (\$5 par value) } & \$ 250,000 \
\text { Additional paid-in capital } & 110,000 \
\text { Retained earnings } & 330,000 \
\text { Total stockholders' equity } & \$ 690,000 \
\end{array}$$ The balance in Riney's Investment in Garvin Co.account was $552,000,and the noncontrolling interest was $138,000.On January 1,2018,Garvin Co.sold 10,000 shares of previously unissued common stock for $15 per share.Riney did not acquire any of these shares.
-What amount should be attributed to the Noncontrolling Interest in Garvin Co.following the sale of the 10,000 shares of common stock?
A)$288,000.
B)$101,000.
C)$280,000.
D)$230,000.
E)$168,000.

Accepted Answer

The answer of REFERENCE: 06-01
On January 1,2018,Riney Co.owned 80% of...

Question 9

Vontkins Inc.owned all of Quasimota Co.The subsidiary had bonds payable outstanding on January 1,2017,with a book value of $265,000.The parent acquired the bonds on that date for $288,000.Subsequently,Vontkins reported interest income of $25,000 in 2017 while Quasimota reported interest expense of $29,000.Consolidated financial statements were prepared for 2018.What adjustment would be required for the retained earnings balance as of January 1,2018?
A)Reduction of $27,000.
B)Reduction of $4,000.
C)Reduction of $19,000.
D)Reduction of $30,000.
E)Reduction of $20,000.

Accepted Answer

Bond Acquisition Price $288,000 - Bonds carrying amount $265,000 = $23,000 R/E Reduction.
Intra-Entity Interest $29,000 - $25,000 = $4,000 R/E Increase
$23,000 - $4,000 = $19,000 R/E Reduction

Question 10

A company had common stock with a total par value of $18,000,000 and fair value of $62,000,000;and 7% preferred stock with a total par value of $6,000,000 and a fair value of $8,000,000.The book value of the company was $85,000,000.Assuming ninety percent (90%)of the company's total equity is acquired,what amount must be attributed to the noncontrolling interest?
A)$8,500,000.
B)$7,000,000.
C)$6,200,000.
D)$2,400,000.
E)$6,929,400.

Accepted Answer

FV Common Stock $62,000,000 + FV Preferred Stock $8,000,000 = $70,000,000 × .10 = $7,000,000 Noncontrolling Interest

Question 11

REFERENCE: 06-03
These questions are based on the following information and should be viewed as independent situations.
Popper Co.acquired 80% of the common stock of Cocker Co.on January 1,2016,when Cocker had the following stockholders' equity accounts. $$\begin{array} { l r } 
\text { Common stock - 40,000 shares outstanding } & \$ 140,000 \
\text { Additional paid-in capital } & 105,000 \
\text { Retained eamings } & 476,000 \
\text { Total stockholders' equity } & \$ 721,000 \
\end{array}$$ To acquire this interest in Cocker,Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill,which has been measured for impairment annually and has not been determined to be impaired as of January 1,2019.
Popper did not pay any premium when it acquired its original interest in Cocker.On January 1,2019,Cocker reported a net book value of $1,113,000 before the following transactions were conducted.Popper uses the equity method to account for its investment in Cocker,thereby reflecting the change in book value of Cocker.
-On January 1,2019,Cocker issued 10,000 additional shares of common stock for $35 per share.Popper acquired 8,000 of these shares.How would this transaction affect the additional paid-in capital of the parent company?
A)Increase it by $28,700.
B)Increase it by $16,800.
C)$0.
D)Increase it by $280,000.
E)Increase it by $593,600.

Accepted Answer

The answer of REFERENCE: 06-03
These questions are based on the...

Question 12

On January 1,2018,Riley Corp.acquired some of the outstanding bonds of one of its subsidiaries.The bonds had a carrying value of $421,620,and Riley paid $401,937 for them.How should you account for the difference between the carrying value and the purchase price in the consolidated financial statements for 2018?
A)The difference is added to the carrying value of the debt.
B)The difference is deducted from the carrying value of the debt.
C)The difference is treated as a loss from the extinguishment of the debt.
D)The difference is treated as a gain from the extinguishment of the debt.
E)The difference does not influence the consolidated financial statements.

Accepted Answer

The answer of On January 1,2018,Riley Corp.acquired some of the...

Question 13

How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants?
A)Parent's earnings per share plus subsidiary's earnings per share.
B)Parent's net income divided by parent's number of shares outstanding.
C)Consolidated net income divided by parent's number of shares outstanding.
D)Average of parent's earnings per share and subsidiary's earnings per share.
E)Consolidated income divided by total number of shares outstanding for the parent and subsidiary.

Accepted Answer

Consolidated earnings per share is calculated as the consolidated net income divided by the parent's number of shares outstanding. Since the subsidiary has no convertible securities or warrants, there would be no dilution or complex calculations required.

Question 14

Where do intra-entity transfers of inventory appear in a consolidated statement of cash flows?
A)They do not appear in the consolidated statement of cash flows.
B)Supplemental schedule of noncash investing and financing activities.
C)Cash flows from operating activities.
D)Cash flows from investing activities.
E)Cash flows from financing activities.

Accepted Answer

Intra-entity transfers of inventory do not represent actual cash movements and therefore do not appear in the statement of cash flows.

Question 15

Tray Co.reported current earnings of $560,000 while paying $56,000 in cash dividends.Sparrish Co.earned $140,000 in net income and distributed $14,000 in dividends.Tray held a 70% interest in Sparrish for several years,an investment that it originally acquired by transferring consideration equal to the book value of the underlying net assets.Tray used the initial value method to account for these shares.
On January 1,2018,Sparrish acquired in the open market $70,000 of Tray's 8% bonds.The bonds had originally been issued several years ago at a price that would yield a 10% effective interest rate.On the date of the bond purchase,the book value of the bonds payable was $67,600.Sparrish paid $65,200 based on a 12% effective interest rate over the remaining life of the bonds.
What is the noncontrolling interest's share of the subsidiary's net income?
A)$42,000.
B)$37,800.
C)$39,600.
D)$40,070.
E)$44,080.

Accepted Answer

Sub's income $140,000 × .30 = $42,000 NCI's Portion of Income (gain or loss is assigned to the parent only)

Question 16

Which one of the following characteristics of preferred stock would make the stock a dilutive security for purposes of calculating earnings per share?
A)The preferred stock is callable.
B)The preferred stock is convertible.
C)The preferred stock is cumulative.
D)The preferred stock is noncumulative.
E)The preferred stock is participating.

Accepted Answer

Convertible preferred stock can be converted into common shares, which would increase the number of outstanding shares and potentially dilute the earnings per share. Callable, cumulative, noncumulative, and participating preferred stock do not have a direct impact on the calculation of earnings per share.

Question 17

Cadion Co.owned a controlling interest in Knieval Inc.Cadion reported sales of $420,000 during 2018 while Knieval reported $280,000.Inventory costing $28,000 was transferred from Knieval to Cadion (upstream)during the year for $56,000.Of this amount,twenty-five percent was still in ending inventory at year's end.Total receivables on the consolidated balance sheet were $112,000 at the first of the year and $154,000 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 from its customers?
A)$602,000.
B)$644,000.
C)$686,000.
D)$714,000.
E)$592,000.

Accepted Answer

Parent's Sales $420,000 + Sub's Sales $280,000 - Intra-Entity Sales $56,000 - increase in A/R $42,000 ($154,000 - $112,000)= $602,000 Consolidated Cash Collected

Question 18

How do intra-entity transfers of inventory affect the preparation of a consolidated statement of cash flows?
A)They must be added in calculating cash flows from investing activities.
B)They must be deducted in calculating cash flows from investing activities.
C)They must be added in calculating cash flows from operating activities.
D)Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows,no special elimination is required.
E)They must be deducted in calculating cash flows from operating activities.

Accepted Answer

The answer of How do intra-entity transfers of inventory affect...

Question 19

Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of cash flows?
A)Cash flows from operating activities.
B)Cash flows from investing activities.
C)Cash flows from financing activities.
D)Supplemental schedule of noncash investing and financing activities.
E)They do not appear in the consolidated statement of cash flows.

Accepted Answer

The answer of Where do dividends paid by a subsidiary...

Question 20

Rojas Co.owned 7,000 shares (70%)of the outstanding 10%,$100 par,preferred stock and 60% of the outstanding common stock of Brett Co.Assuming there are no excess amortizations or intra-entity transactions,and Brett reports net income of $780,000,what is the noncontrolling interest in the subsidiary's income?
A)$234,000.
B)$273,000.
C)$302,000.
D)$312,000.
E)$284,000.

Accepted Answer

$780,000 Net Income - Preferred Dividends (10,000 × $10)= $680,000 × .40 = $272,000 Noncontrolling Interest
$100,000 Preferred Dividends × .30 = $30,000 Noncontrolling Interest
$272,000 from Income + $30,000 Preferred Dividends = $302,000 Noncontrolling Interest in Income

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

Regency Corp.recently acquired $500,000 of the bonds of Safire Co. ,one of its subsidiaries,paying more than the carrying value of the bonds.According to the most practical view of this intra-entity transaction,to whom should the loss be attributed?

Where do dividends paid to the noncontrolling interest of a subsidiary appear on a consolidated statement of cash flows?

How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants?

Where do intra-entity transfers of inventory appear in a consolidated statement of cash flows?

Which one of the following characteristics of preferred stock would make the stock a dilutive security for purposes of calculating earnings per share?

How do intra-entity transfers of inventory affect the preparation of a consolidated statement of cash flows?

Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of cash flows?