Question 1

Peters Inc. consolidates a variable interest entity even though it owns none of the entity's equity. The appropriate values of the VIE's assets exceed those of its liabilities. The difference between the VIE's assets and liabilities is reported on Peters' balance sheet:

Accepted Answer

When a company consolidates a variable interest entity (VIE), the difference between the VIE's assets and liabilities is reported as "noncontrolling interest" in the equity section of the consolidating company's balance sheet.

Question 2

A company decides it is required to consolidate a special interest entity. The assets and liabilities of that entity are consolidated at book value, and not revalued to fair value, when

Accepted Answer

When a company and a special interest entity are under common control, the assets and liabilities of that entity are consolidated at book value, as they are considered to be within the same reporting entity, thus not requiring revaluation to fair value.

Question 3

Tyvo is a separate legal entity that securitizes receivables for a variety of financial institutions. It was formed with an investment of $100 million. Qualitative analysis is inconclusive regarding whether Tyvo is a variable interest entity. Quantitative analysis indicates that Tyvo's expected future cash flows are as follows, in millions (assume all cash flows occur at the end of the first year):
$$\begin{array} { | c | c | } 
\hline \text { Expected Cash Flows } & \text { Probability } \
\hline \$ 84 & 0.40 \
\hline 144 & 0.60 \
\hline
\end{array}$$ A risk-adjusted discount rate of 20% is appropriate.
Tyvo is likely to be considered a variable interest entity, per U.S. GAAP, if its equity financing is less than what amount?

Accepted Answer

The answer of Tyvo is a separate legal entity that...

Question 4

Ulon is a separate legal entity that provides leasing services. It was formed with an investment of $85 million, of which $76.4 million was financed by debt, and the remainder was provided by outside equity interests. Qualitative analysis is inconclusive in determining whether Ulon is a variable interest entity. Quantitative analysis indicates that Ulon's expected future cash flows are as follows, in millions (assume a one-year time frame, with cash flows occurring at the end of the year):
$$\begin{array} { | c | c | } 
\hline \text { Expected Cash Flows } & \text { Probability } \
\hline \$ 115.00 & 0.60 \
\hline 80.50 & 0.30 \
\hline 46.00 & 0.10 \
\hline
\end{array}$$ A risk-adjusted discount rate of 15% is appropriate.
Is Ulon likely to be a variable interest entity, per U.S. GAAP?

Accepted Answer

To determine if Ulon is likely a variable interest entity, we need to calculate the expected losses and compare them to the equity interest. The expected cash flows are given, so we calculate the expected value (EV) of these cash flows: EV = (115 * 0.60) + (80.5 * 0.30) + (46 * 0.10) = 69 + 24.15 + 4.6 = 97.75 million. The initial investment is $85 million, so the expected profit is $97.75 million - $85 million = $12.75 million. Since there are no expected losses (the calculation shows expected profit instead), the focus shifts to the equity investment's adequacy to absorb variability. However, the correct answer hinges on understanding the criteria for a variable interest entity, particularly regarding the sufficiency of equity investment to absorb losses, which is misinterpreted in the provided choices. The actual determination involves more nuanced criteria, including the entity's ability to finance its activities independently or the equity investors' rights and obligations. Given the information and the misalignment with U.S. GAAP criteria for variable interest entities, the explanation provided does not accurately reflect the correct approach to determining a variable interest entity status based on expected losses or equity investment sufficiency.

Question 5

If a subsidiary has a different accounting year-end than its parent,

Accepted Answer

The subsidiary's year-end can differ from that of the parent, but it is generally allowed a difference of up to three months to facilitate consolidation and reporting processes.

Question 6

A parent company uses IFRS and has a subsidiary whose books are maintained following U.S. GAAP. The consolidated financial statements of the parent include the subsidiary's accounts, reported using:

Accepted Answer

When consolidating financial statements, the parent company must convert the subsidiary's accounts to the parent's accounting framework, which in this case is IFRS, to ensure consistency across the consolidated financial statements.

Question 7

A parent company uses U.S. GAAP and presents its financial statements in U.S. dollars. It has a subsidiary in Singapore whose books are maintained in Singapore dollars, following IFRS. The subsidiary's accounts are included in the consolidated financial statements of the parent:

Accepted Answer

When a parent company consolidates its financial statements, it must convert the subsidiary's financials to the parent's presentation currency (U.S. dollars in this case) and accounting framework (U.S. GAAP). This ensures consistency and comparability within the consolidated financial statements.

Question 8

The consolidated balance sheet of a parent and subsidiary reports account balances as if the parent accounted for its investment in the subsidiary as a:

Accepted Answer

A consolidated balance sheet treats the parent and subsidiary as a single entity, similar to a merger, by combining their financial statements as if they were one entity.

Question 9

When consolidating the balance sheets of a parent and its subsidiary at the date of acquisition, the overall effect of consolidation eliminating entries is to:

Accepted Answer

The correct answer is D because during consolidation, the parent's investment in the subsidiary is eliminated against the subsidiary's equity accounts, and the subsidiary's assets and liabilities are adjusted to their fair values at the date of acquisition. This process ensures that the consolidated balance sheet reflects the fair value of the acquired assets and liabilities, rather than their historical cost.

Question 10

Which account balance is always reported at the same amount on the parent's balance sheet and on the consolidated balance sheet of the parent and its subsidiary at the date of acquisition?

Accepted Answer

The answer of Which account balance is always reported at...

Question 11

Which one of the following accounts of an acquired company will not appear on a consolidated balance sheet at the date of acquisition?

Accepted Answer

Treasury stock represents the shares that the acquired company has bought back from investors and does not appear on the consolidated balance sheet because it is essentially stock that the company has reacquired and is not considered an asset.

Question 12

Which one of the following balances appears on a consolidated balance sheet at the date of acquisition?

Accepted Answer

Identifiable intangible assets reported on the parent's books appear on a consolidated balance sheet at the date of acquisition because they are part of the assets acquired and need to be recognized at their fair value as part of the purchase price allocation process.

Question 13

Porwal Parts acquires all the voting stock of Stonegate Supplies for $40 million. Stonegate's book value was $10 million at the date of acquisition. Stonegate's assets and liabilities are carried at amounts approximating fair value, but it has previously unrecognized brand names valued at $8,000,000. Consolidation eliminating entry (R), at the date of acquisition, includes a(n):

Accepted Answer

Eliminating entries are:
 11ee52c7_4d4d_3955_90ce_5bc04b4f59d3_TBCB1002_00

Question 14

Porwal Parts acquires all the voting stock of Stonegate Supplies for $50 million. Stonegate's book value was $11 million at the date of acquisition, consisting of capital stock of $1 million, retained earnings of $12 million, and accumulated other comprehensive loss of $2 million. Stonegate's assets and liabilities are carried at amounts approximating fair value, and it has no previously unreported identifiable intangible assets. Consolidation eliminating entry (E), at the date of acquisition, includes a(n):

Accepted Answer

Eliminating entries are:
 11ee52c7_4d4d_6066_90ce_d9df79003439_TBCB1002_00

Question 15

GMI acquires all of the voting stock of ELI for an acquisition cost that is $4 million above the book value of ELI's net assets. At the date of acquisition, ELI's equipment was overvalued by $2 million and its reported intangible assets were undervalued by $6 million.
Consolidation eliminating entry R, at the date of acquisition, includes a(n):

Accepted Answer

Eliminating entry (R) is:
 11ee52c7_4d4d_6067_90ce_a33e91ce86ed_TBCB1002_00

Question 16

Palm Corporation acquired all the stock of Sequoia Company, at an acquisition cost that was $5,000,000 in excess of Sequoia's $1,000,000 book value. All of Sequoia's assets and liabilities are carried at amounts approximating fair value, except that land is overvalued by $500,000 and long-term debt is overvalued by $200,000. Which of the following is false concerning the consolidation eliminating entries at the date of acquisition?

Accepted Answer

Eliminating entries are:
 11ee52c7_4d4d_6068_90ce_576cec4811d3_TBCB1002_00

Question 17

Pringle Corporation acquired all the stock of Sunny Company, at an acquisition cost of $30 million. Sunny's book value at the time was $10 million. Sunny's current assets and all liabilities were carried at amounts approximating fair value. However, its plant assets were overvalued by $6 million. Sunny also has previously unreported developed technology valued at $4 million.
Which of the following is false concerning the consolidation eliminating entries at the date of acquisition?

Accepted Answer

Eliminating entries are:
 11ee52c7_4d4d_8779_90ce_f17c17233d44_TBCB1002_00

Question 18

PMC Corporation acquired all of the stock of SVB Company, at an acquisition cost of $10 million in cash. SVB's book value at the time was $8 million. SVB's net assets are reported at amounts approximating market value at the date of acquisition. However, it has previously unreported brand names and favorable lease agreements, valued at a total of $3 million. Which of the following is true concerning consolidation of PMC and SVB at the date of acquisition?

Accepted Answer

11ee52c7_4d4d_ae8a_90ce_817b09003633_TBCB1002_00

Question 19

Power Inc. acquires all the voting stock of Signal Company for $30,000,000 in cash. At the date of acquisition, Signal's balance sheet is as follows:
$$\begin{array} { | l | c | c | } 
\hline & \begin{array} { c } 
\text { Book Value } \
\text { Dr (Cr) }
\end{array} & \begin{array} { c } 
\text { Fair Value } \
\text { Dr (Cr) }
\end{array} \
\hline \text { Tangible assets } & \$ 15,000,000 & \$ 14,000,000 \
\hline \text { Goodwill } & 5,000,000 & 7,000,000 \
\hline \text { Liabilities } & \{ 12,000,000 \} & \{ 12,000,000 \} \
\hline \text { Equity } & \{ 8,000,000 \} & \
\hline
\end{array}$$ What amount of consolidated goodwill is recognized for this acquisition in eliminating entry (R) at the date of acquisition?

Accepted Answer

The answer of Power Inc. acquires all the voting stock...

Question 20

Use the following information to answer bellow Questions :
Precision Company acquires all of Springfield Company's voting stock for $5,000,000 in cash. Information on Springfield's assets and liabilities at the date of acquisition is as follows:
 $$\begin{array} { | l | c | c | } 
\hline & \begin{array} { c } 
\text { Book Value } \
\text { Dr (Cr) }
\end{array} & \begin{array} { c } 
\text { Fair Value } \
\text { Dr (Cr) }
\end{array} \
\hline \text { Current assets } & \$ 500,000 & \$ 700,000 \
\hline \text { Land, buildings and equipment } \{ \text { net } \} & 2,000,000 & 3,500,000 \
\hline \text { Liabilities } & \{ 600,000 \} & \{ 550,000 \} \
\hline \text { Capital stock } & \{ 500,000 \} & \
\hline \text { Retained earnings } & \{ 1,400,000 \} & \
\hline
\end{array}$$ In addition, Springfield Company has unrecorded identifiable intangible assets, in the form of brand names and lease agreements, with a total estimated fair value of $400,000.
-In eliminating entry (R) on the consolidation working paper, the credit to investment is:

Accepted Answer

The credit to investment is calculated as the purchase price minus the fair value of net identifiable assets. The fair value of net identifiable assets is $4,050,000 ($700,000 + $3,500,000 + $400,000 - $550,000). The credit to investment is $5,000,000 - $4,050,000 = $950,000. However, the question asks for the credit to investment in the eliminating entry, which is the fair value of net assets, $4,050,000, minus the book value of net assets, $1,950,000 ($500,000 + $2,000,000 - $600,000), resulting in $2,100,000. Therefore, the correct answer is $3,100,000 ($5,000,000 - $1,900,000).

Quiz 3: Consolidated Financial Statements: Date of Acquisition