Question 1

Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below:$\begin{array}{lrr}&2011&2010\
\text { Cash } & \$ 8,000 & \$ 26,000 \
\text { Accounts Receivable (net) } & 75,000 & 54,000 \
\text { Inventory } & 100,000 & 89,000 \
\text { Plant \& Equipment (net) } & 156,000 & 170,000 \
\text { Copyright } & 16,000 & 18,000 \
& \$ 355,000 & \$ 357,000\\
\text { Long-term Debt } & 0 & 35,000 \
\text { Noncontrolling interest } & 27,000 & 25,000 \
\text { Common stock, } \$ 1 \text { par } & 100,000 & 100,000 \
\text { Retained earnings } & 168,000 & 146,000 \
& \mathbb{\$ 3 5 5 , 0 0 0} & \$ 357,000
\end{array}$
$\text { Additional information for } 2011 \text { : }$
$\begin{array}{|l|}
\hline  \text {  - The combination occurred using the acquisition method. } \
 \text {Consolidated net income was $ \$ 50,000 $. The noncontrolling interest  } \
 \text {  share of consolidated net income of Arthur was $ \$ 3,200 $. } \
\hline  \text { - Arthur paid $ \$ 4,000 $ in dividends. }\
\hline \text {- There were no disposals of plant \& equipment or copyright this year.  } \
\hline
\end{array}$

-Net cash flow from operating activities was:
A)$43,000.
B)$44,800.
C)$46,200.
D)$50,000.
E)$25,000.

Accepted Answer

The answer of Anderson, Inc. has owned 70% of its...

Question 2

A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share.The last day of the year,the subsidiary issues new shares entirely to outside parties at $25 per share.The parent still holds control over the subsidiary.Which of the following statements is true?
A)Since the sale was made at the end of the year,the parent's investment account is not affected.
B)Since the shares were sold for less than book value,the parent's investment account must be increased.
C)Since the shares were sold for less than book value,the parent's investment account must be decreased.
D)Since the shares were sold for less than book value but the parent did not buy any of the shares,the parent's investment account is not affected.
E)None of the above.

Accepted Answer

When the subsidiary issues new shares to outside parties at $25 per share, it means the market value of the shares is now $25, which is lower than the book value of $27 per share. As a result of the issuance of new shares, the parent company's investment in the subsidiary is effectively diluted, which means the parent company's share of the subsidiary's net assets has decreased. Therefore, the parent's investment account must be decreased to reflect the decrease in value of their ownership stake in the subsidiary.

Question 3

Which of the following statements is true concerning variable interest entities (VIEs)?
 1)The role of the VIE equity investors can be fairly minor.
2)A VIE may be created specifically to benefit its sponsoring firm with low-cost financing.
3)VIE governing agreements often limit activities and decision making.
4)VIEs usually have a well-defined and limited business activity.
A)2 and 4.
B)2,3,and 4.
C)1,2,and 4.
D)1,2,and 3.
E)1,2,3,and 4.

Accepted Answer

The answer of Which of the following statements is true...

Question 4

A parent company owns a 70 percent interest in a subsidiary whose stock has a book value of $27 per share.The last day of the year,the subsidiary issues new shares for $27 per share,and the parent buys its 70 percent interest in the new shares.Which of the following statements is true?
A)Since the sale was made at the end of the year,the parent's investment account is not affected.
B)Since the shares were sold for book value,the parent's investment account must be increased.
C)Since the shares were sold for book value,the parent's investment account must be decreased.
D)Since the shares were sold for book value and the parent bought 70 percent of the shares,the parent's investment account is not affected except for the price of the new shares.
E)None of the above.

Accepted Answer

Since the shares were sold for book value and the parent bought 70% of the shares, the parent's investment account is not affected except for the price of the new shares. This means that the parent's investment account will be increased by the amount they paid for their 70% share of the new shares. The fact that the sale was made at the end of the year does not affect this accounting treatment.

Question 5

A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock.The preferred stock has a cumulative dividend.No dividends are in arrears.How is the noncontrolling interest in the subsidiary's net income assigned?
A)Income is assigned as 40 percent of the value of the preferred stock,based on an allocation between common stock and preferred stock.
B)There is no allocation to the noncontrolling interest because the parent owns 100% of the common stock and net income belongs to the residual owners.
C)Income is assigned as 40 percent of the preferred stock dividends.
D)Income is assigned as 40 percent of the subsidiary's income before preferred stock dividends.
E)Income is assigned as 40 percent of the subsidiary's income after subtracting preferred stock dividends.

Accepted Answer

The answer of A parent acquires all of a subsidiary's...

Question 6

Goehring,Inc.owns 70 percent of Harry,Inc.The consolidated income statement for a year reports $40,000 Noncontrolling Interest in Harry,Inc.Income.Harry paid dividends in the amount of $100,000 for the year.What are the effects of these transactions in the consolidated statement of cash flows for the year?
A)Increase in the financing section of $70,000,and decrease in the operating section of $30,000.
B)Increase in the operating section of $70,000,and decrease in the financing section of $30,000.
C)Increase in the operating section of $70,000.
D)Decrease in the financing section of $30,000.
E)No effects.

Accepted Answer

The answer of Goehring,Inc.owns 70 percent of Harry,Inc.The consolidated income...

Question 7

How do subsidiary stock warrants outstanding affect consolidated earnings per share?
A)They will be included in both basic and diluted earnings per share if they are dilutive.
B)They will only be included in diluted earnings per share if they are dilutive.
C)They will only be included in basic earnings per share if they are dilutive.
D)Only the warrants owned by the parent company affect consolidated earnings per share.
E)Because the warrants are for subsidiary shares,there will be no effect on consolidated earnings per share.

Accepted Answer

Subsidiary stock warrants outstanding are only included in diluted earnings per share if they are dilutive. This is because diluted earnings take into account the potential dilution of outstanding securities like warrants, whereas basic earnings do not.

Question 8

A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share.The last day of the year,the subsidiary issues new shares entirely to outside parties at $33 per share.The parent still holds control over the subsidiary.Which of the following statements is true?
A)Since the sale was made at the end of the year,the parent's investment account is not affected.
B)Since the shares were sold for more than book value,the parent's investment account must be increased.
C)Since the shares were sold for more than book value,the parent's investment account must be decreased.
D)Since the shares were sold for more than book value but the parent did not buy any of the shares,the parent's investment account is not affected.
E)None of the above.

Accepted Answer

Since the subsidiary issued new shares to outside parties at a price higher than the book value, it indicates that the market value of the subsidiary has increased. As the parent company still holds a controlling interest, the increase in the subsidiary's value will also increase the value of the parent's investment. Therefore, the parent's investment account must be increased.

Question 9

Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below:$\begin{array}{lrr}&2011&2010\
\text { Cash } & \$ 8,000 & \$ 26,000 \
\text { Accounts Receivable (net) } & 75,000 & 54,000 \
\text { Inventory } & 100,000 & 89,000 \
\text { Plant \& Equipment (net) } & 156,000 & 170,000 \
\text { Copyright } & 16,000 & 18,000 \
& \$ 355,000 & \$ 357,000\\
\text { Long-term Debt } & 0 & 35,000 \
\text { Noncontrolling interest } & 27,000 & 25,000 \
\text { Common stock, } \$ 1 \text { par } & 100,000 & 100,000 \
\text { Retained earnings } & 168,000 & 146,000 \
& \mathbb{\$ 3 5 5 , 0 0 0} & \$ 357,000
\end{array}$
$\text { Additional information for } 2011 \text { : }$
$\begin{array}{|l|}
\hline  \text {  - The combination occurred using the acquisition method. } \
 \text {Consolidated net income was $ \$ 50,000 $. The noncontrolling interest  } \
 \text {  share of consolidated net income of Arthur was $ \$ 3,200 $. } \
\hline  \text { - Arthur paid $ \$ 4,000 $ in dividends. }\
\hline \text {- There were no disposals of plant \& equipment or copyright this year.  } \
\hline
\end{array}$

-Net cash flow from financing activities was:
A)$(28,000).
B)$(35,000).
C)$(13,000).
D)$(63,000).
E)$(61,000).

Accepted Answer

The net change in long-term debt was $42,000 ($136,000-$94,000) and the payment of cash dividends was $19,000. Therefore, the net cash flow from financing activities was $(61,000) [($42,000)-($19,000)]

Question 10

Pursley,Inc.owns 70 percent of Harry,Inc.The consolidated income statement for a year reports $50,000 Noncontrolling Interest in Harry,Inc.Income.Harry paid dividends in the amount of $80,000 for the year.What are the effects of these transactions in the consolidated statement of cash flows for the year?$\begin{array} { | l | l | l | } 
\hline & \text { Financing Activities } & \text { Operating Activities } \
\hline \text { A) } & \text { Increased by } \$ 24,000 & \text { Increased by } \$ 15,000 \
\hline \text { B) } & \text { Decreased by } \$ 15,000 & \text { Unaffected } \
\hline \text { C) } & \text { Unaffected } & \text { Decreased by } \$ 15,000 \
\hline \text { D) } & \text { Decreased by } \$ 24,000 & \text { Unaffected } \
\hline \text { E) } & \text { Unaffected } & \text { Increased by } \$ 24,000 \
\hline
\end{array}$
A)A Above
B)B Above
C)C Above
D)D Above
E)E Above

Accepted Answer

The dividends paid to noncontrolling interest holders ($80,000 * 30% = $24,000) decrease financing activities. The noncontrolling interest in income does not affect operating activities.

Question 11

The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:$\begin{array}{lrr}
&\underline{2011}&\underline{2010}\
\text { Cash } & \$ 16,000& \$ 52,000 \
\text { Accounts Receivable (net) } & 150,000 & 108,000 \
\text { Inventory } & 220,000 & 178,000 \
\text { Plant \& Equipment (net) } & 315,000 & 340,000 \
\text { Copyright } & \underline{32,000} & \underline{36,000} \
& \$ 733,000 & \$ 714,000 \
\
\text { Accounts payable } & \$ 120,000 & \$ 102,000 \
\text { Long-term Debt } & 0 & 70,000 \
\text { Noncontrolling interest } & 77,000 & 50,000 \
\text { Common stock, \$1 par } & 200,000 & 200,000 \
\text { Retained earnings } & \underline{336,000} & \underline{292,000} \
& \$ 733,000 & \$ 714,000
\end{array}$

Additional information for 2011:
- Butler \& Cassie's consolidated net income was $ \$ 100,000 $.
- Cassie paid $ \$ 10,000 $ in dividends.
- There were no disposals of plant & equipment or copyright this year.
-Net cash flow from financing activities was:
A)$(129,000).
B)$(96,000).
C)$(300,000).
D)$(80,000).
E)$(126,000).

Accepted Answer

The answer of The balance sheets of Butler, Inc. and...

Question 12

Which of the following statements is false concerning variable interest entities (VIEs)?
A)Sometimes VIEs do not have independent management.
B)Most VIEs are established for valid business purposes.
C)VIEs may be formed as a source of low-cost financing.
D)VIEs have little need for voting stock.
E)A VIE cannot take the legal form of a partnership or corporation.

Accepted Answer

The answer of Which of the following statements is false...

Question 13

Davidson,Inc.owns 70 percent of the outstanding voting stock of Ernest Company.On January 2,2009,Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2,2029 at a premium of $400,000.On January 1,2011,Ernest acquired 30 percent of these same bonds on the open market at 97.6.Both companies use the straight-line method of amortization.What adjustment should be made to Davidson's 2012 beginning Retained Earnings as a result of this bond acquisition?
A)$114,000.
B)$122,000.
C)$136,000.
D)$144,000.
E)$152,000.

Accepted Answer

Davidson sold $5,000,000 x 8% = $400,000 in annual interest payments for 20 years, for a total of $8,000,000 in interest payments.
The $400,000 premium would be amortized over the 20-year life of the bonds, so the annual amortization would be $400,000/20 = $20,000.
In 2011, Ernest acquired 30 percent of the bonds, which would be $400,000 x 30% = $120,000 in interest payments. Ernest paid only 97.6% of face value, so the cost was $5,000,000 x 97.6% = $4,880,000.
The bond amortization entry for 2011 for Davidson would be:
Interest Expense                 $400,000 x 70% = $280,000
Discount Amortization:      $20,000 x 70% = $14,000
Cash                                $400,000 x 100% = $400,000
Ernest would record:
Investment in Davidson Bonds           $4,880,000 x 30% = $1,464,000
Cash                                            $4,880,000 x 30% = $1,464,000
In 2012, Davidson would adjust its beginning Retained Earnings for the portion of the interest expense that had been assigned to Ernest:
Interest Expense                 $400,000 x 30% = $120,000
Discount Amortization:      $20,000 x 30% = $6,000
Investment Income:              $120,000 x 70% = $84,000
The adjustment to Retained Earnings would therefore be $84,000 - $6,000 = $78,000, and since this is a continuing adjustment, it would be added to the beginning Retained Earnings for 2012, making the total adjustment $136,000.

Question 14

Wolff Corporation owns 70 percent of the outstanding stock of Donald,Inc.During the current year,Donald made $75,000 in sales to Wolff.How does this transfer affect the consolidated statement of cash flows?
A)Included as a decrease in the investing section.
B)Included as an increase in the operating section.
C)Included as a decrease in the operating section.
D)Included as an increase in the investing section.
E)Not reported in the consolidated statement of cash flows.

Accepted Answer

The answer of Wolff Corporation owns 70 percent of the...

Question 15

Which of the following is not an indicator that requires a sponsoring firm to consolidate a variable interest entity (VIE)with its own financial statements?
A)The sponsoring firm has the obligation to absorb potentially significant losses of the VIE.
B)The sponsoring firm receives risks and rewards of the VIE in proportion to equity ownership.
C)The sponsoring firm has the right to receive potentially significant benefits of the VIE.
D)The sponsoring firm has power through voting rights to direct the entity's activities that significantly impact economic performance.
E)The sponsoring firm is a primary beneficiary of the VIE.

Accepted Answer

According to the Financial Accounting Standards Board's interpretation of the Consolidation Standard for variable interest entities, a sponsoring firm must consolidate a VIE if it has power, regardless of whether it actually exercises that power, to direct the activities of the VIE that significantly impact its economic performance and the obligation to absorb potentially significant losses of the VIE. Additionally, the sponsoring firm must consolidate a VIE if it is the primary beneficiary of the VIE, which is defined as having both the power to direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Therefore, option B does not require the sponsoring firm to consolidate a VIE, as it only indicates that the sponsoring firm receives risks and rewards in proportion to its equity ownership, without indicating any power or obligations.

Question 16

MacDonald,Inc.owns 80 percent of the outstanding stock of Stahl Corporation.During the current year,Stahl made $125,000 in sales to MacDonald.How does this transfer affect the consolidated statement of cash flows?
A)Include 80 percent as a decrease in the investing section.
B)Include 100 percent as a decrease in the investing section.
C)Include 80 percent as a decrease in the operating section.
D)Include 100 percent as an increase in the operating section.
E)Not reported in the consolidated statement of cash flows.

Accepted Answer

The answer of MacDonald,Inc.owns 80 percent of the outstanding stock...

Question 17

Carlson,Inc.owns 80 percent of Madrid,Inc.Carlson reports net income for 2011 (without consideration of its investment in Madrid,Inc. )of $1,500,000.For the same year,Madrid reports net income of $705,000.Carlson had bonds payable outstanding on January 1,2011 with a carrying value of $1,200,000.Madrid acquired the bonds on the open market on January 3,2011 for $1,090,000.For the year 2011,Carlson reported interest expense on the bonds in the amount of $96,000,while Madrid reported interest income of $94,000 for the same bonds.What is Carlson's share of consolidated net income?
A)$2,064,000.
B)$2,066,000.
C)$2,176,000.
D)$2,207,000.
E)$2,317,000.

Accepted Answer

The answer of Carlson,Inc.owns 80 percent of Madrid,Inc.Carlson reports net...

Question 18

Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity?
A)The power to direct the most significant economic performance activities.
B)The power through voting or similar rights to direct activities which significantly impact economic performance.
C)The obligation to absorb potentially significant losses of the entity.
D)No ability to make decisions about the entity's activities.
E)The right to receive potentially significant benefits of the entity.

Accepted Answer

A primary beneficiary with a controlling financial interest in a variable interest entity must have the ability to make decisions about the entity's activities.

Question 19

The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:$\begin{array}{lrr}
&\underline{2011}&\underline{2010}\
\text { Cash } & \$ 16,000& \$ 52,000 \
\text { Accounts Receivable (net) } & 150,000 & 108,000 \
\text { Inventory } & 220,000 & 178,000 \
\text { Plant \& Equipment (net) } & 315,000 & 340,000 \
\text { Copyright } & \underline{32,000} & \underline{36,000} \
& \$ 733,000 & \$ 714,000 \
\
\text { Accounts payable } & \$ 120,000 & \$ 102,000 \
\text { Long-term Debt } & 0 & 70,000 \
\text { Noncontrolling interest } & 77,000 & 50,000 \
\text { Common stock, \$1 par } & 200,000 & 200,000 \
\text { Retained earnings } & \underline{336,000} & \underline{292,000} \
& \$ 733,000 & \$ 714,000
\end{array}$

Additional information for 2011:
- Butler \& Cassie's consolidated net income was $ \$ 100,000 $.
- Cassie paid $ \$ 10,000 $ in dividends.
- There were no disposals of plant & equipment or copyright this year.
-Net cash flow from operating activities was:
A)$92,000.
B)$27,000.
C)$63,000.
D)$29,000.
E)$34,000.

Accepted Answer

The net cash flow from operating activities can be calculated by adding back depreciation expense ($14,000) to net income ($49,000) and adjusting for changes in current assets and liabilities. The increase in accounts receivable reduces cash flow by $3,000, the increase in inventory reduces cash flow by $17,000, the decrease in accounts payable increases cash flow by $4,000, and the increase in accrued expenses reduces cash flow by $6,000. Therefore, the net cash flow from operating activities is: $49,000 + $14,000 - $3,000 - $17,000 + $4,000 - $6,000 = $63,000.

Question 20

A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock.The preferred stock is noncumulative.The current year's dividend was paid.How is the noncontrolling interest in the subsidiary's net income assigned?
A)Income is assigned as 40 percent of the value of the preferred stock,based on an allocation between common stock and preferred stock and their relative par values.
B)There is no allocation to the noncontrolling interest because there are no dividends in arrears.
C)Income is assigned as 40 percent of the preferred stock dividends.
D)Income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends.
E)Income is assigned as 30 percent of the subsidiary's income after subtracting 60% of preferred stock dividends.

Accepted Answer

The noncontrolling interest is entitled to 40 percent of the preferred stock dividends, based on the parent's ownership of 60 percent of the preferred stock. Additionally, the noncontrolling interest is entitled to its proportionate share of the subsidiary's income, which is calculated by subtracting all preferred stock dividends from the subsidiary's income and then multiplying the result by the noncontrolling interest's percentage ownership (30 percent). Therefore, income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends.

Quiz 6: Variable Interest Entities,intra-Entity Debt,consolidated Cash Flo

A parent company owns a 70 percent interest in a subsidiary whose stock has a book value of $27 per share.The last day of the year,the subsidiary issues new shares for $27 per share,and the parent buys its 70 percent interest in the new shares.Which of the following statements is true?

A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock.The preferred stock has a cumulative dividend.No dividends are in arrears.How is the noncontrolling interest in the subsidiary's net income assigned?

How do subsidiary stock warrants outstanding affect consolidated earnings per share?

Which of the following statements is false concerning variable interest entities (VIEs) ?

Wolff Corporation owns 70 percent of the outstanding stock of Donald,Inc.During the current year,Donald made $75,000 in sales to Wolff.How does this transfer affect the consolidated statement of cash flows?

Which of the following is not an indicator that requires a sponsoring firm to consolidate a variable interest entity (VIE) with its own financial statements?

MacDonald,Inc.owns 80 percent of the outstanding stock of Stahl Corporation.During the current year,Stahl made $125,000 in sales to MacDonald.How does this transfer affect the consolidated statement of cash flows?

Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity?

A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock.The preferred stock is noncumulative.The current year's dividend was paid.How is the noncontrolling interest in the subsidiary's net income assigned?