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

File: Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

 

Multiple Choice:                                            

 

[QUESTION]

1. 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?
2. A) The difference is added to the carrying value of the debt.
3. B) The difference is deducted from the carrying value of the debt.
4. C) The difference is treated as a loss from the extinguishment of the debt.
5. D) The difference is treated as a gain from the extinguishment of the debt.
6. E) The difference does not influence the consolidated financial statements.

Answer: D

Learning Objective: 06-03

Topic: Intra-entity debt―Gain or loss for consolidation

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

2. 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?
3. A) To Safire because the bonds were issued by Safire.
4. B) The loss should be allocated between Safire and Regency based on the purchase price and the original face value of the debt.
5. C) The loss should be amortized over the life of the bonds and need not be attributed to either party.
6. D) The loss should be deferred until it can be determined to whom the attribution can be made.
7. E) To Regency because Regency is the controlling party in the business combination.

Answer: E

Learning Objective: 06-03

Topic: Intra-entity debt transactions―General

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

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

Answer: B

Learning Objective: 06-06

Topic: EPS―Consolidated diluted EPS

Topic: EPS―EPS of subsidiary by itself

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

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

Answer: C

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

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

Answer: E

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

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

Answer: A

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

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

Answer: D

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

 

[QUESTION]

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

Answer: C

Learning Objective: 06-06

Topic: EPS―Consolidated basic EPS

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

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:

 

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.

 

[QUESTION]

REFER TO: 06-01

9. What is the balance in Riney’s “Investment in Garvin Co. Account” following the sale of the 10,000 shares of common stock?
10. A) $552,000.
11. B) $560,000.
12. C) $460,000.
13. D) $404,000.
14. E) $672,000.

Answer: B

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $250,000 / $5 = 50,000 shares × .80 = 40,000 shares owned by parent

Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15) $150,000 = Total Equity after Stock Offering $840,000 × 40,000 Parent / 60,000 Total = $560,000 Parent’s Investment Account

 

[QUESTION]

REFER TO: 06-01

10. What amount should be attributed to the Noncontrolling Interest in Garvin Co. following the sale of the 10,000 shares of common stock?
11. A) $288,000.
12. B) $101,000.
13. C) $280,000.
14. D) $230,000.
15. E) $168,000.

Answer: C

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $250,000 / $5 = 50,000 shares × .80 = 40,000 shares owned by parent

Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15) $150,000 = Total Equity after Stock Offering $840,000 × 20,000/60,000 = $280,000 Noncontrolling Interest

 

[QUESTION]

11. 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?
12. A) $234,000.
13. B) $273,000.
14. C) $302,000.
15. D) $312,000.
16. E) $284,000.

Answer: C

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $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

 

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.

 

[QUESTION]

REFER TO: 06-02

12. What would Knight Co. report as consolidated basic earnings per share (rounded)?
13. A) $6.37
14. B) $6.40
15. C) $7.00
16. D) $5.68
17. E) $6.00

Answer: A

Learning Objective: 06-06

Topic: EPS―Subsidiary earnings for consolidated EPS

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: 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]

REFER TO: 06-02

13. What would Knight Co. report as consolidated diluted earnings per share (rounded)?
14. A) $4.00.
15. B) $. 4.71
16. C) $8.71.
17. D) $5.89.
18. E) $6.37.

Answer: D

Learning Objective: 06-06

Topic: EPS―EPS of subsidiary by itself

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: 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]

14. 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?
15. A) $406,000.
16. B) $374,000.
17. C) $378,000.
18. D) $410,000.
19. E) $394,000.

Answer: A

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: 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]

15. 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?
16. A) Reduction of $27,000.
17. B) Reduction of $4,000.
18. C) Reduction of $19,000.
19. D) Reduction of $30,000.
20. E) Reduction of $20,000.

Answer: C

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: 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]

16. 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?

1. A) $42,000.
2. B) $37,800.
3. C) $39,600.
4. D) $40,070.
5. E) $44,080.

Answer: A

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

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

 

[QUESTION]

17. 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?
18. A) $8,500,000.
19. B) $7,000,000.
20. C) $6,200,000.
21. D) $2,400,000.
22. E) $6,929,400.

Answer: B

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

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

 

[QUESTION]

18. 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?
19. A) $602,000.
20. B) $644,000.
21. C) $686,000.
22. D) $714,000.
23. E) $592,000.

Answer: A

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: 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]

19. 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?
20. A) It should be decreased by $210,000.
21. B) It should be increased by $210,000.
22. C) It should be increased by $168,000.
23. D) It should be decreased by $1,200.
24. E) It is not affected since the shares were sold to outside parties.

Answer: D

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:

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).

 

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.

 

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.

 

[QUESTION]

REFER TO: 06-03

20. 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?
21. A) Increase it by $28,700.
22. B) Increase it by $16,800.
23. C) $0.
24. D) Increase it by $280,000.
25. E) Increase it by $593,600.

Answer: C

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-No percentage change

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: No Adjustment is made to the APIC of the Parent as a Result of Sub’s Stock Issue because the same Level of Ownership Interest is Maintained

 

[QUESTION]

REFER TO: 06-03

21. On January 1, 2019, Cocker issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock.  How would this transaction affect the additional paid-in capital of the parent company?
22. A) $0.
23. B) Decrease it by $23,240.
24. C) Decrease it by $68,250.
25. D) Decrease it by $45,060.
26. E) Decrease it by $64,720.

Answer: E

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:

                  Consideration transferred ………………………………………………………     $682,000

                  Noncontrolling interest acquisition-date fair value ……………….        170,500

                  Increase in Sub book value (1,113,000-721,000)…………………….        392,000

                  Stock issue proceeds………………………………………………………………        210,000

            Subsidiary valuation basis……………………………………………………………    1,454,000

            New parent ownership (32,000 shs. ÷ 50,000 shs.) …………………….              64%

            Parent’s post-stock issue ownership balance…………………………….     $930,880

            Parent’s investment account ($682,000 + [80% × 392,000]) ……….        995,600

                  Required adjustment —decrease …………………………………………..      $(64,720)

 

[QUESTION]

REFER TO: 06-03

22. On January 1, 2019, Cocker reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper.  How would this transaction have affected the additional paid-in capital of the parent company?
23. A) $0.
24. B) Decrease it by $32,900.
25. C) Decrease it by $45,700.
26. D) Decrease it by $23,100.
27. E) Decrease it by $50,500.

Answer: D

Learning Objective: 06-07

Topic: Subsidiary stock―Treasury stock acquired

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:

Adjusted acquisition-date fair value ($852,500 + $392,000) …………………. $1,244,500

            Less Stock repurchase………………………………………………………………… $ ( 272,000)

            Adjusted fair value after stock repurchase………………………………….     $972,500

            New parent ownership (32,000 shs. ÷ 32,000 shs.) …………………….            100%

                  Fair value equivalency of parent’s ownership ………………………     $972,500

            Parent’s investment account ($682,000 + [80% × 392,000]) ……….        995,600

                  Required adjustment—decrease…………………………………………….     $ (23,100)

 

 

[QUESTION]

23. If new bonds are issued from a parent to its subsidiary, which of the following statements is false?
24. A) Any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment.
25. B) There will be $0 net gain or loss on the bond transaction.
26. C) Interest expense needs to be eliminated on the consolidated income statement.
27. D) Interest revenue needs to be eliminated on the consolidated income statement.
28. E) A net gain or loss on the bond transaction will be reported.

Answer: E

Learning Objective: 06-03

Topic: Intra-entity debt transactions―General

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

24. The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except:
25. A) Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances.
26. B) Subsequent interest revenue/expense must be removed although these balances fail to agree in amount.
27. C) A gain or loss must be recognized by both parent and subsidiary companies.
28. D) Changes in the investment, debt, interest revenue, and interest expense accounts occur constantly because of the amortization process.
29. E) The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired, even though this balance does not appear on the financial records of either company.

Answer: C

Learning Objective: 06-03

Topic: Intra-entity debt transactions―General

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

25. Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition?
26. A) Recognition of any gain or loss is deferred until the debt is extinguished for purposes of reporting such debt on consolidated financial statements.
27. B) Any gain or loss is recognized in the year of acquisition on a consolidated income statement.
28. C) Interest revenue generated from the debt of an affiliate is recognized on a consolidated income statement.
29. D) Interest expense recognized from carrying debt instruments is recognized on a consolidated income statement.
30. E) Consolidated retained earnings is adjusted to take into account the difference between the purchase price and carrying value of the debt.

Answer: B

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

26. Which of the following statements is false regarding the assignment of a gain or loss when an affiliate’s debt instrument is acquired on the open market?
27. A) Subsidiary net income is not affected by a gain on the debt transaction.
28. B) Subsidiary net income is not affected by a loss on the debt transaction.
29. C) Parent Company net income is not affected by a gain on the debt transaction.
30. D) Parent Company net income is not affected by a loss on the debt transaction.
31. E) Consolidated net income is not affected by a gain or loss on the debt transaction.

Answer: E

Learning Objective: 06-03

Topic: Intra-entity debt―Gain or loss for consolidation

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

27. What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method?
28. A) Parent’s dividends would be subtracted as a financing activity.
29. B) Gain on sale of land would be deducted from net income.
30. C) Noncontrolling interest in net income of subsidiary would be added to net income.
31. D) Proceeds from the sale of long-term investments would be added to investing activities.
32. E) Loss on sale of equipment would be added to net income.

Answer: C

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

28. Which of the following statements is true for a consolidated statement of cash flows?
29. A) Parent’s dividends and subsidiary’s dividends are deducted as a financing activity.
30. B) Only parent’s dividends are deducted as a financing activity.
31. C) Parent’s dividends and its share of subsidiary’s dividends are deducted as a financing activity.
32. D) All of parent’s dividends and noncontrolling interest of subsidiary’s dividends are deducted as a financing activity.
33. E) Neither parent’s nor subsidiary’s dividends are deducted as a financing activity.

Answer: D

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

29. In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true?
30. A) Parent company earnings per share equals consolidated earnings per share when the equity method is used.
31. B) Parent company earnings per share is equal to consolidated earnings per share when the initial value method is used.
32. C) Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value exceeds book value.
33. D) Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value is less than book value.
34. E) Preferred dividends are not deducted from net income for consolidated earnings per share.

Answer: A

Learning Objective: 06-06

Topic: EPS―Consolidated basic EPS

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

30. A subsidiary issues new shares of common stock at an amount below book value. Outsiders buy all of these shares. Which of the following statements is true?
31. A) The parent’s additional paid-in capital will be increased.
32. B) The parent’s investment in subsidiary will be increased.
33. C) The parent’s retained earnings will be increased.
34. D) The parent’s additional paid-in capital will be decreased.
35. E) The parent’s retained earnings will be decreased.

Answer: D

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

31. A subsidiary issues new shares of common stock. If the parent acquires all of these shares at an amount greater than book value, which of the following statements is true?
32. A) The investment in subsidiary will decrease.
33. B) Additional paid-in capital will decrease.
34. C) Retained earnings will increase.
35. D) The investment in subsidiary will increase.
36. E) No adjustment will be necessary.

Answer: D

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

32. If a subsidiary re-acquires its outstanding shares from outside ownership for more than the noncontrolling interest valuation basis at the date of buying such treasury stock, which of the following statements is true?
33. A) Additional paid-in capital on the parent company’s books will decrease.
34. B) Investment in subsidiary will increase.
35. C) Treasury stock on the parent’s books will increase.
36. D) Treasury stock on the parent’s books will decrease.
37. E) No adjustment is necessary.

Answer: A

Learning Objective: 06-07

Topic: Subsidiary stock―Treasury stock acquired

Difficulty: 3 Hard

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

33. If a subsidiary issues a stock dividend, which of the following statements is true?
34. A) Investment in subsidiary on the parent’s books will increase.
35. B) Investment in subsidiary on the parent’s books will decrease.
36. C) Additional paid-in capital on the parent’s books will increase.
37. D) Additional paid-in capital on the parent’s books will decrease.
38. E) No adjustment is necessary.

Answer: E

Learning Objective: 06-07

Topic: Subsidiary stock―Stock dividend issued

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2018, when there was an unamortized discount of $2,000 and a remaining life of 5 years, its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market for $11,000.  The bonds pay 6% interest annually on December 31.  The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2018.
35. A) $1,000 gain.
36. B) $1,000 loss.
37. C) $2,000 loss.
38. D) $3,000 loss.
39. E) $3,000 gain.

Answer: D

Learning Objective: 06-03

Topic: Intra-entity debt―Gain or loss for consolidation

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Bonds Purchase Price $11,000 – Bonds carrying amount ($10,000 – $2,000) = $3,000 Loss to Consolidation Income

 

[QUESTION]

35. Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2018, there was an unamortized premium of $2,000 with a remaining life of 10 years, Keenan’s parent, Ross, Inc., purchased the bonds in the open market for $19,000.  Keenan is a 90% owned subsidiary of Ross.  The bonds pay 8% interest annually on December 31.  The companies use the straight-line method to amortize interest revenue and expense.  Compute the consolidated gain or loss on a consolidated income statement for 2018.
36. A) $3,000 gain.
37. B) $3,000 loss.
38. C) $1,000 gain.
39. D) $1,000 loss.
40. E) $2,000 gain.

Answer: A

Learning Objective: 06-03

Topic: Intra-entity debt―Gain or loss for consolidation

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Bonds Purchase Price $19,000 – Bonds carrying amount ($20,000 + $2,000) = $3,000 Gain to Consolidation Income

 

REFERENCE: 06-04

On January 1, 2018, Nichols Company acquired 80% of Smith Company’s common stock and 40% of its non-voting, cumulative preferred stock.  The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred.  There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill.  The capital structure of Smith immediately prior to the acquisition is:

 

 

 

[QUESTION]

REFER TO: 06-04

36. With respect to Nichols’ investment in Smith, determine the amount to be recorded and identify which account should be adjusted to reflect such amount.
37. A) $1,324,000 for Investment in Smith.
38. B) $1,200,000 for Investment in Smith.
39. C) $1,200,000 for Investment in Smith’s Common Stock and $124,000 for Investment in Smith’s Preferred Stock.
40. D) $1,200,000 for Investment in Smith’s Common Stock and $120,000 for Investment in Smith’s Preferred Stock.
41. E) $1,448,000 for Investment in Smith’s Common Stock.

Answer: C

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: FV of Consideration Recorded for Each Class of Stock in the Investment Account

 

[QUESTION]

REFER TO: 06-04

37. Compute the goodwill recognized in consolidation.
38. A) $ 800,000.
39. B) $ 310,000.
40. C) $ 124,000.
41. D) $
42. E) $(196,000.)

Answer: B

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: 100% acquisition-date fair value: 100% Common Stock ($1,200,000 / .80 = $1,500,000) +  100% Preferred Stock ($124,000 / .40 = $310,000): Total acquisition-date fair value $1,500,000 + $310,000 = FV $1,810,000 – BV $1,500,000 = $310,000 Goodwill

 

[QUESTION]

REFER TO: 06-04

38. Compute the noncontrolling interest in Smith at date of acquisition.
39. A) $486,000.
40. B) $480,000.
41. C) $300,000.
42. D) $150,000.
43. E) $120,000.

Answer: A

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Common Stock Noncontrolling Interest at Acquisition = $1,200,000 / .80 = $1,500,000 × .20 = $300,000

Preferred Stock Noncontrolling Interest at Acquisition = $124,000 / .40 = $310,000 × .60 = $186,000

$300,000 + $186,000 = $486,000 Noncontrolling Interest at Acquisition Date

[QUESTION]

REFER TO: 06-04

39. The consolidation entry at date of acquisition will include (referring to Smith):
40. A) Debit Common stock $500,000 and debit Preferred stock $120,000.
41. B) Debit Common stock $400,000 and debit Additional paid-in capital $160,000.
42. C) Debit Common stock $500,000 and debit Preferred stock $300,000.
43. D) Debit Common stock $500,000, debit Preferred stock $120,000, and debit Additional paid-in capital $200,000.
44. E) Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in capital $200,000, and debit Retained earnings $500,000.

Answer: C

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: BV is Debited in Consolidation Entry for Acquisition-Date Preparation of Consolidated Balance Sheet

 

[QUESTION]

REFER TO: 06-04

40. If Smith’s net income is $100,000 in the year following the acquisition,
41. A) The portion allocated to the common stock (residual amount) is $92,800.
42. B) $10,800 preferred stock dividend will be subtracted from net income attributed to common stock in arriving at noncontrolling interest in consolidated income.
43. C) The noncontrolling interest in consolidated net income is $27,200.
44. D) The preferred stock dividend will be ignored in noncontrolling interest in consolidated net income because Nichols owns the noncontrolling interest of preferred stock.
45. E) The noncontrolling interest in consolidated net income is $30,800.

Answer: C

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $100,000 – Preferred Dividends ($6 × 3,000) $18,000 = $82,000 × .20 = $16,400 Income to NCI

Preferred Dividends $18,000 × .60 = $10,800 to NCI

$16,400 Income + $10,800 Preferred Dividends = $27,200 Income to NCI

 

REFERENCE: 06-05

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company.

(1.) Graham reports a loss on sale of land (to an outside party) of $5,000.  The land cost Graham $20,000.

(2.) Noncontrolling interest in Stage’s net income was $30,000.

(3.) Graham paid dividends of $15,000.

(4.) Stage paid dividends of $10,000.

(5.) Excess acquisition-date fair value over book value amortization was $6,000.

(6.) Consolidated accounts receivable decreased by $8,000.

(7.) Consolidated accounts payable decreased by $7,000.

 

[QUESTION]

REFER TO: 06-05

41. How is the loss on sale of land reported on the consolidated statement of cash flows?
42. A) $20,000 added to net income as an operating activity.
43. B) $20,000 deducted from net income as an operating activity.
44. C) $15,000 deducted from net income as an operating activity.
45. D) $5,000 added to net income as an operating activity.
46. E) $5,000 deducted from net income as an operating activity.

Answer: D

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Land Sale of $5,000 Reduces Net Income as Operating Activity in Cash Flows

 

[QUESTION]

REFER TO: 06-05

42. Where does the noncontrolling interest in Stage’s net income appear on a consolidated statement of cash flows?
43. A) $30,000 added to net income as an operating activity on the consolidated statement of cash flows.
44. B) $30,000 deducted from net income as an operating activity on the consolidated statement of cash flows.
45. C) $30,000 increase as an investing activity on the consolidated statement of cash flows.
46. D) $30,000 decrease as an investing activity on the consolidated statement of cash flows.
47. E) Noncontrolling interest in Stage’s net income does not appear on a consolidated statement of cash flows.

Answer: E

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: NCI’s Income is NOT Reported on Consolidated Cash Flows

 

[QUESTION]

REFER TO: 06-05

43. How will dividends be reported in consolidated statement of cash flows?
44. A) $15,000 decrease as a financing activity.
45. B) $25,000 decrease as a financing activity.
46. C) $10,000 decrease as a financing activity.
47. D) $23,000 decrease as a financing activity.
48. E) $17,000 decrease as a financing activity.

Answer: E

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Dividends $15,000 + NCI Dividends $2,000 = $17,000 Decrease in Cash Flow for Financing

 

[QUESTION]

REFER TO: 06-05

44. How is the amount of excess acquisition-date fair value over book value recognized in a consolidated statement of cash flows assuming the indirect method is used?
45. A) It is ignored.
46. B) $6,000 subtracted from net income.
47. C) $4,800 subtracted from net income.
48. D) $6,000 added to net income.
49. E) $4,800 added to net income.

Answer: D

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $6,000 Excess Amortization is not a Cash Item and therefore Added Back to Net Income on the Cash Flow Statement

 

[QUESTION]

REFER TO: 06-05

45. Using the indirect method, where does the decrease in accounts receivable appear in a consolidated statement of cash flows?
46. A) $8,000 increase to net income as an operating activity.
47. B) $8,000 decrease to net income as an operating activity.
48. C) $6,400 increase to net income as an operating activity.
49. D) $6,400 decrease to net income as an operating activity.
50. E) $8,000 increase as an investing activity.

Answer: A

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: The $8,000 Receivables Decrease is Added to Net Income and Classified as an Operating Item

 

[QUESTION]

REFER TO: 06-05

46. Using the indirect method, where does the decrease in accounts payable appear in a consolidated statement of cash flows?
47. A) $7,000 increase to net income as an operating activity.
48. B) $7,000 decrease to net income as an operating activity.
49. C) $5,600 increase to net income as an operating activity.
50. D) $5,600 decrease to net income as an operating activity.
51. E) $7,000 increase as a financing activity.

Answer: B

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: The $7,000 Payables Decrease is Added to Net Income and Classified as an Operating Item

 

REFERENCE: 06-06

Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000.  There was no premium paid by Webb. Jones currently has 100,000 shares outstanding and a book value of $1,200,000.

 

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share.

 

[QUESTION]

REFER TO: 06-06

47. What is the adjusted book value of Jones after the sale of the shares?
48. A) $ 200,000.
49. B) $1,400,000.
50. C) $1,280,000.
51. D) $1,050,000.
52. E) $1,440,000.

Answer: B

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Beginning carrying amount $1,200,000 + Add’l Shares Sold $200,000 ($10 × 20,000) = $1,400,000 Current carrying amount

 

[QUESTION]

REFER TO: 06-06

48. What is the new percent ownership of Webb in Jones after the stock issuance?
49. A) 75%.
50. B) 90%.
51. C) 80%.
52. D) 64%.
53. E) 60%.

Answer: A

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Shares Outstanding 100,000 × .90 = 90,000 Parent’s Shares

100,000 + 20,000 = 120,000 New Outstanding Shares

90,000 / 120,000 = 75% New Ownership Percentage

 

[QUESTION]

REFER TO: 06-06

49. What adjustment is needed for Webb’s investment in Jones account?
50. A) $180,000 increase.
51. B) $180,000 decrease.
52. C) $ 45,000 decrease.
53. D) $ 45,000 increase.
54. E) No adjustment is necessary.

Answer: D

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:

Adjusted acquisition-date sub. fair value

                  Consideration transferred ………………………………………………………     $990,000

                  Noncontrolling interest acquisition-date fair value ……………….        110,000

                  Increase in Stamford book value…………………………………………….        200,000

                  Stock issue proceeds………………………………………………………………        200,000

            Subsidiary valuation basis……………………………………………………………    1,500,000

            New parent ownership (90,000 shs. ÷ 120,000 shs.) …………………..              75%

            Parent’s post-stock issue ownership balance……………………………. $1,125,000

            Parent’s investment account ($990,000 + [90% × 200,000]) ……….   1,170,000

                  Required adjustment —increase ……………………………………………        $45,000

 

REFERENCE: 06-07

Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000.  There was no premium paid by Webb. Jones currently has 100,000 shares outstanding and a book value of $1,200,000.

 

Assume Jones issues 20,000 new shares of its common stock for $15 per share.

[QUESTION]

REFER TO: 06-07

50. What is the adjusted book value of Jones after the stock issuance?
51. A) $1,500,000.
52. B) $1,200,000.
53. C) $1,350,000.
54. D) $1,080,000.
55. E) $1,335,000.

Answer: A

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Beginning BV $1,200,000 + Add’l Shares Sold $300,000 ($15 × 20,000) = $1,500,000 Current BV

 

[QUESTION]

REFER TO: 06-07

51. After acquiring the additional shares, what adjustment is needed for Webb’s investment in Jones account?
52. A) $270,000 increase.
53. B) $270,000 decrease.
54. C) $ 30,000 increase.
55. D) $ 30,000 decrease.
56. E) No adjustment is necessary.

Answer: D

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-No percentage change

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:

Adjusted acquisition-date sub. fair value

                  Consideration transferred ………………………………………………………     $990,000

                  Noncontrolling interest acquisition-date fair value ……………….        110,000

                  Increase in Stamford book value…………………………………………….        200,000

                  Stock issue proceeds………………………………………………………………        300,000

            Subsidiary valuation basis……………………………………………………………    1,600,000

            New parent ownership (90,000 shs. ÷ 120,000 shs.) …………………..              75%

            Parent’s post-stock issue ownership balance……………………………. $1,200,000

            Parent’s investment account ($990,000 + [90% × 200,000]) ……….   1,170,000

                  Required adjustment — increase …………………………………………..        $30,000

 

REFERENCE: 06-08

Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was $300,000.  Ryan paid no premium.  Chase has 50,000 shares outstanding and currently has a book value of $400,000.

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.

 

[QUESTION]

REFER TO: 06-08

52. What is the new percent ownership Ryan owns in Chase?
53. A) 80.0%.
54. B) 87.5%.
55. C) 90.0%.
56. D) 75.0%.
57. E) 82.5%.

Answer: B

Learning Objective: 06-07

Topic: Subsidiary Stock Transactions

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Shares Outstanding 50,000 × .80 = 40,000 Parent’s Shares

50,000 + 30,000 = 80,000 New Outstanding Shares

40,000 + 30,000 = 70,000 Parent’s Shares after New Issue

70,000 / 80,000 = 87.5% New Ownership Percentage

 

[QUESTION]

REFER TO: 06-08

53. What is the adjusted book value of Chase Company after the issuance of the shares?
54. A) $608,000.
55. B) $720,000.
56. C) $680,000.
57. D) $760,000.
58. E) $400,000.

Answer: D

Learning Objective: 06-07

Topic: Subsidiary Stock Transactions

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Beginning carrying amount $400,000 + Additional Shares Sold $360,000 ($12 × 30,000) = $760,000 Current carrying amount

 

[QUESTION]

REFER TO: 06-08

54. After acquiring the additional shares, what adjustment is needed for Ryan’s investment in Chase account?
55. A) $70,000 increase.
56. B) $70,000 decrease.
57. C) $12,188 decrease.
58. D) $12,188 increase.
59. E) No adjustment is necessary.

Answer: D

Learning Objective: 06-07

Topic: Subsidiary Stock Transactions

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:

Adjusted acquisition-date sub. fair value

                  Consideration transferred ………………………………………………………     $270,000

                  Noncontrolling interest acquisition-date fair value ……………….          67,500

                  Increase in Stamford book value…………………………………………….        100,000

                  Stock issue proceeds………………………………………………………………        360,000

            Subsidiary valuation basis……………………………………………………………        797,500

            New parent ownership (90,000 shs. ÷ 120,000 shs.) …………………..           87.5%

            Parent’s post-stock issue ownership balance…………………………….     $697,813

            Parent’s investment account

                              ($270,000 + [80% × 100,000]+360,000) ………………………….        710,000

                  Required adjustment —increase ……………………………………………        $12,188

REFERENCE: 06-09

Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was $300,000.  Ryan paid no premium.  Chase has 50,000 shares outstanding and currently has a book value of $400,000.

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share.

 

[QUESTION]

REFER TO: 06-09

55. What should the adjusted book value of Chase be after the treasury shares were purchased?
56. A) $400,000.
57. B) $480,000.
58. C) $320,000.
59. D) $336,000.
60. E) $464,000.

Answer: C

Learning Objective: 06-07

Topic: Subsidiary Stock Transactions

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Sub carrying amount before Stock Repurchase $400,000 – Stock Repurchase $80,000 (8,000 × $10) = Sub carrying amount after Stock Repurchase $320,000

 

[QUESTION]

REFER TO: 06-09

56. What is Ryan’s percent ownership in Chase after the acquisition of the treasury shares (rounded)?
57. A) 80%.
58. B) 95%.
59. C) 64%.
60. D) 76%.
61. E) 69%.

Answer: B

Learning Objective: 06-07

Topic: Subsidiary Stock Transactions

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Shares Outstanding 50,000 × .80 = 40,000 Parent’s Shares before Treasury Purchase

50,000 – 8,000 = 42,000 New Outstanding Shares after Treasury Purchase

40,000 / 42,000 = 95% New Ownership Percentage

 

[QUESTION]

REFER TO: 06-09

57. When Ryan’s new percent ownership is rounded to a whole number, what adjustment is needed for Ryan’s investment in Chase account?
58. A) $16,000 decrease.
59. B) $60,000 decrease.
60. C) $46,000 increase.
61. D) $46,000 decrease.
62. E) No adjustment is necessary.

Answer: A

Learning Objective: 06-07

Topic: Subsidiary Stock Transactions

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Investment balance = 270,000 + (80% x 100,000 increase in book value) = 350,000.  Adjusted sub value = (400,000 – 80,000) = 320,000.  320,000 x new ownership percentage 95% = 304,000.  350,000 – 304,000 = 46,000 decrease in investment account

 

[QUESTION]

58. A variable interest entity can take all of the following forms except a(n):
59. A) Trust.
60. B) Partnership.
61. C) Joint venture.
62. D) Corporation.
63. E) Estate.

Answer: E

Learning Objective: 06-01

Topic: VIE―Characteristics

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

59. All of the following are examples of variable interests except:
60. A) Guarantees of debt.
61. B) Stock options.
62. C) Lease residual value guarantees.
63. D) Participation rights.
64. E) Asset purchase options.

Answer: B

Learning Objective: 06-01

Topic: VIE―Characteristics

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

60. Which of the following is not a potential loss or return of a variable interest entity?
61. A) Entitles holder to residual profits.
62. B) Entitles holder to benefit from increases in asset fair value.
63. C) Entitles holder to receive shares of common stock.
64. D) If the variable interest entity cannot repay liabilities, honoring a debt guarantee will produce a loss.
65. E) If leased asset declines below the residual value, honoring the guarantee will produce a loss.

Answer: C

Learning Objective: 06-01

Topic: VIE―Characteristics

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

61. 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?
62. A) The power to direct the most significant economic performance activities.
63. B) The power through voting or similar rights to direct activities, which significantly impact economic performance.
64. C) The obligation to absorb potentially significant losses of the entity.
65. D) No ability to make decisions about the entity’s activities.
66. E) The right to receive potentially significant benefits of the entity.

Answer: D

Learning Objective: 06-01

Topic: VIE―Primary beneficiary

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

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

Answer: E

Learning Objective: 06-01

Topic: VIE―Characteristics

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

63. 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 the business enterprise that established it 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.

 

4. A) 2 and 4.
5. B) 2, 3, and 4.
6. C) 1, 2, and 4.
7. D) 1, 2, and 3.
8. E) 1, 2, 3, and 4.

Answer: E

Learning Objective: 06-01

Topic: VIE―Characteristics

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

64. Which of the following is not a factor that indicates a business enterprise that establishes a variable interest entity (VIE) should consolidate such VIE with its own financial statements?
65. A) The business enterprise establishing a VIE has the obligation to absorb potentially significant losses of the VIE.
66. B) The business enterprise establishing a VIE receives risks and rewards of the VIE in proportion to equity ownership.
67. C) The business enterprise establishing a VIE has the right to receive potentially significant benefits of the VIE.
68. D) The business enterprise establishing a VIE has power through voting rights to direct the entity’s activities that significantly impact economic performance.
69. E) The business enterprise establishing a VIE is a primary beneficiary for the VIE.

Answer: B

Learning Objective: 06-01

Topic: VIE―When consolidation required

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

65. 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?
66. A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock.
67. B) There is no allocation to the noncontrolling interest because the parent owns 100% of the common stock and net income belongs to the controlling interest.
68. C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends.
69. D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the subsidiary’s income before preferred stock dividends.
70. E) The noncontrolling interest in consolidated net income is assigned as 40 percent of the subsidiary’s income after subtracting preferred stock dividends.

Answer: C

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

66. 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?
67. A) The noncontrolling interest in consolidated net 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.
68. B) There is no allocation to the noncontrolling interest because there are no dividends in arrears.
69. C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends.
70. D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary’s income after subtracting all preferred stock dividends.
71. E) The noncontrolling interest in consolidated net income is assigned as 30 percent of the subsidiary’s income after subtracting 60% of preferred stock dividends.

Answer: D

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

67. 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?
68. A) Included as a decrease in the investing section.
69. B) Included as an increase in the operating section.
70. C) Included as a decrease in the operating section.
71. D) Included as an increase in the investing section.
72. E) Not reported in the consolidated statement of cash flows.

Answer: E

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

68. 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?
69. A) Include 80 percent as a decrease in the investing section.
70. B) Include 100 percent as a decrease in the investing section.
71. C) Include 80 percent as a decrease in the operating section.
72. D) Include 100 percent as an increase in the operating section.
73. E) Not reported in the consolidated statement of cash flows.

Answer: E

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

69. Pursley, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year reports $50,000 Noncontrolling Interest in Harry Corp.’s Net 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?

Answer: D

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

70. Goehring, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year reports $40,000 Noncontrolling Interest in Harry Corp.’s Net 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?
71. A) Increase in the financing section of $70,000, and decrease in the operating section of $30,000.
72. B) Increase in the operating section of $70,000, and decrease in the financing section of $30,000.
73. C) Increase in the operating section of $70,000.
74. D) Decrease in the financing section of $30,000.
75. E) No effects.

Answer: D

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

REFERENCE: 06-10

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:

 

	2018	2017
Cash	$    8,000	$  26,000
Accounts Receivable (net)	75,000	54,000
Inventory	100,000	89,000
Plant & Equipment (net)	156,000	170,000
Copyright	16,000	18,000
	$355,000	$357,000
Accounts payable	$  60,000	$  51,000
Long-term Debt	0	35,000
Noncontrolling interest	27,000	25,000
Common stock, $1 par	100,000	100,000
Retained earnings	168,000	146,000
	$355,000	$357,000

 

Additional information for 2018:

The combination occurred using the acquisition method.  Consolidated net income was $50,000.  The noncontrolling interest share of consolidated net income of Arthur was $3,200.

Arthur paid $4,000 in dividends.

There were no purchases or disposals of plant & equipment or copyright this year.

 

 

[QUESTION]

REFER TO: 06-10

71. Net cash flow from operating activities was:
72. A) $43,000.
73. B) $44,800.
74. C) $46,200.
75. D) $50,000.
76. E) $25,000.

Answer: A

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:  $50,000 + Depreciation $14,000 ($170,000 – $156,000) + Amortization $2,000 ($18,000 -$16,000) – A/R $21,000 ($75,000 – $54,000) – Inventory $11,000 ($100,000 – $89,000) + A/P $9,000 ($60,000 – $51,000) = $43,000 Net Consolidated Cash Flow from Operations

 

[QUESTION]

REFER TO: 06-10

72. Net cash flow from financing activities was:
73. A) $(28,000).
74. B) $(35,000).
75. C) $(13,000).
76. D) $(63,000).
77. E) $(61,000).

Answer: E

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:  Parent dividend paid $24,800 (income attributed to controlling interest $46,800 less increase in Retained Earnings $22,000) + Subsidiary dividends paid to NCI ($1,200) + repayment of debt ($35,000)

 

REFERENCE: 06-11

The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., which Butler has owned for several years are presented below:

 

	2018	2017
Cash	$  16,000	$  52,000
Accounts Receivable (net)	150,000	108,000
Inventory	220,000	178,000
Plant & Equipment (net)	315,000	340,000
Copyright	32,000	36,000
	$733,000	$714,000
Accounts payable	$120,000	$102,000
Long-term Debt	0	70,000
Noncontrolling interest	77,000	50,000
Common stock, $1 par	200,000	200,000
Retained earnings	336,000	292,000
	$733,000	$714,000

Additional information for 2018:

 

Butler & Cassie’s consolidated net income was $100,000.

Cassie paid $10,000 in dividends.

There were no purchases or disposals of plant & equipment or copyright this year.

 

[QUESTION]

REFER TO: 06-11

73. Net cash flow from operating activities was:
74. A) $92,000.
75. B) $27,000.
76. C) $63,000.
77. D) $29,000.
78. E) $34,000.

Answer: C

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $100,000 + Depreciation $25,000 ($340,000 – $315,000) + Amortization $4,000 ($36,000 – $32,000) – A/R $42,000 ($150,000 – $108,000) – Inventory $42,000 ($220,000 – $178,000) + A/P $18,000 ($120,000 – $102,000) = $63,000 Net Consolidated Cash Flow from Operations

 

[QUESTION]

REFER TO: 06-11

74. Net cash flow from financing activities was:
75. A) $(129,000).
76. B) $ (96,000).
77. C) $(300,000).
78. D) $ (80,000).
79. E) $(126,000).

Answer: A

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:  Parent dividend paid $56,000 (income to controlling interest $100,000 less increase in Retained Earnings $44,000) + NCI in subsidiary dividend ($3,000) + repayment of debt ($70,000) =  ($129,000)

 

 

 

[QUESTION]

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

Answer: B

Learning Objective: 06-06

Topic: EPS―Consolidated diluted EPS

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

76. A parent company owns a controlling interest in a subsidiary and on 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. The adjusted subsidiary value at the date of the new stock issuance was $27 per share. Which of the following statements is true?
77. A) Since the sale was made at the end of the year, the parent’s investment account is not affected.
78. B) Since the shares were sold for more than the adjusted subsidiary value per share, the parent’s investment account must be increased.
79. C) Since the shares were sold for more than the adjusted subsidiary value per share, the parent’s investment account must be decreased.
80. D) Since the shares were sold for more than the adjusted subsidiary value per share, but the parent did not buy any of the shares, the parent’s investment account is not affected.
81. E) None of these answer choices are correct.

Answer: B

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

77. A parent company owns a controlling interest in a subsidiary whose stock has a valuation basis of $27 per share. On 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?
78. A) Since the sale was made at the end of the year, the parent’s investment account is not affected.
79. B) Since the shares were sold for less than the adjusted subsidiary value per share, the parent’s investment account must be increased.
80. C) Since the shares were sold for less than the adjusted subsidiary value per share, the parent’s investment account must be decreased.
81. D) Since the shares were sold for less than the adjusted subsidiary value per share, but the parent did not buy any of the shares, the parent’s investment account is not affected.
82. E) None of these answer choices are correct.

Answer: C

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

78. A parent company owns a 70 percent interest in a subsidiary whose stock has a valuation basis of $27 per share. On 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?
79. A) Since the sale was made at the end of the year, the parent’s investment account is not affected.
80. B) Since the shares were sold for the same per share amount as the the adjusted subsidiary value per share, the parent’s investment account must be increased.
81. C) Since the shares were sold for the same per share amount as the the adjusted subsidiary value per share, the parent’s investment account must be decreased.
82. D) Since the shares were sold for the same per share amount as the the adjusted subsidiary value per share, and the parent bought 70 percent of the shares, the parent’s investment account is not affected except for the total acquisition amount for the new shares.
83. E) None of these answer choices are correct.

Answer: D

Learning Objective: 06-07

Topic: Subsidiary Stock Transactions

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

79. Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2018 (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, 2018 with a carrying value of $1,200,000.  Madrid acquired the bonds on the open market on January 3, 2018 for $1,090,000.  For the year 2018, 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.  Assuming there are no excess amortizations or other intra-entity transactions, what is Carlson’s share of consolidated net income?
80. A) $2,064,000.
81. B) $2,066,000.
82. C) $2,176,000.
83. D) $2,207,000.
84. E) $2,317,000.

Answer: C

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Income $1,500,000 + Loss on Bond Sale $110,000 – Bond Interest $94,000 + Bond Income $96,000 + Sub’s Income to Parent $564,000 ($705,000 × .80) = $2,176,000 Consolidated Income

 

REFERENCE: 06-12

On January 1, 2018, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc.  This price was based on paying $750,000 for 30 percent of Involved’s preferred stock, and $1,850,000 for 80 percent of its outstanding common stock.  As of the date of the acquisition, Involved’s stockholders’ equity accounts were as follows:

 

[QUESTION]

REFER TO: 06-12

80. What is the total acquisition-date fair value of Involved?
81. A) $2,600,000
82. B) $4,812,500
83. C) $3,062,500
84. D) $2,312,500
85. E) $3,250,000

Answer: B

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Common Stock Noncontrolling Interest at Acquisition = $1,850,000 / .80 = $2,312,500

Preferred Stock Noncontrolling Interest at Acquisition = $750,000 / .30 = $2,500,000

$2,312,500 + $2,500,000 = $4,812,500 FV of Sub at Acquisition

$1,850,000 + $462,500 + $750,000 + $1,750,000 = $4,812,500

 

[QUESTION]

REFER TO: 06-12

81. Assuming Involved’s accounts are correctly valued within the company’s financial statements, what amount of goodwill should be recognized for the Investment in Involved?
82. A) $(100,000.)
83. B) $
84. C) $ 200,000.
85. D) $ 812,500.
86. E) $2,112,500.

Answer: D

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Common Stock Noncontrolling Interest at Acquisition = $1,850,000 / .80 = $2,312,500 × .20 = $462,500

Preferred Stock Noncontrolling Interest at Acquisition = $750,000 / .30 = $2,500,000 × .70 = $1,750,000

(CS Parent $1,850,000) + (CS NCI $462,500) + (PS Parent $750,000) + (PS NCI $1,750,000) = $4,812,500 FV of Sub at Acquisition

FV $4,812,500 – carrying amount $4,000,000 = $812,500 Goodwill

 

[QUESTION]

82. Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2018 while Kaspar reports $250,000. Kaspar transferred inventory during 2018 to Johnson at a price of $50,000.  On December 31, 2018, 30% of the transferred goods are still held in Johnson’s inventory.  Consolidated accounts receivable on January 1, 2018 was $120,000, and on December 31, 2018 is $130,000.  Johnson uses the direct approach in preparing the statement of cash flows.  How much is cash collected from customers in the consolidated statement of cash flows?
83. A) $590,000.
84. B) $610,000.
85. C) $625,000.
86. D) $635,000.
87. E) $650,000.

Answer: A

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent $400,000 + Sub $250,000 – Intra-Entity $50,000 – Increase in A/R  $10,000 ($120,000 – $130,000) = $590,000

 

[QUESTION]

83. Which of the following variable interests entitles a holder to residual profits, losses, and dividends?
84. A) Participation rights
85. B) Lease residual value guarantees
86. C) Common stock
87. D) Asset purchase options
88. E) Subordinated debt instruments

Answer: C

Learning Objective: 06-01

Topic: VIE―Characteristics

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

84. Which of the following statements regarding consolidation of a VIE with its primary beneficiary is true?
85. A) The consolidation of a VIE with its primary beneficiary requires the business enterprise to follow a separate process than the one required for consolidations based on voting interests.
86. B) All intra-entity transactions between the primary beneficiary and the VIE are included in the consolidation.
87. C) Only intra-entity transactions between the primary beneficiary and the VIE resulting from intra-entity transfers are eliminated in the consolidation.
88. D) VIEs with controlling interests must include one hundred percent of the primary beneficiary’s net income in a consolidation.
89. E) The allocation of the VIE’s net income is based on an analysis of the underlying contractual arrangements between the primary beneficiary and other holders of variable interests.

Answer: E

Learning Objective: 06-02

Topic: VIE―Process of consolidation

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[REFERENCE 06-13]

On January 1, 2018, A. Hamilton, Inc. (“AHI”) provides a loan for $3,000,000 to Reynolds Manufacturing Corp. (“RMC”). The terms of the loan require payment of the loan no later than January 1, 2023. RMC was in terrible financial condition and would cease operations absent securing a loan. Prior to requesting a loan from AHI, RMC exhausted all other possible avenues for funding. The terms of the loan agreement include provisions that require RMC to provide AHI with the following from January 1, 2018 through January 1, 2023: (i) 6 percent annual interest on the principal amount of the loan, which reflects a market rate of interest; (ii) 100 percent participation rights to RMC’s profits less $17,000 in a guaranteed annual dividend to RMC’s common shareholders; and (iii) complete decision-making authority over RMC’s operations and financing decisions..

 

At the end of the term of the loan, AHI is given the right to acquire RMC or, in its discretion, extend the term of the original loan an additional 5 years. At the date the loan was extended to RMC, RMC’s common stock had an estimated fair value of $136,000 and a book value of $40,000. The $96,000 difference was attributed to an asset with a 3-year useful life remaining (“Asset”). At January 1, 2018, the balance sheets for AHI and RMC are as follows:

 

 

[QUESTION]

REFER TO: 06-13

 

85. With respect to the acquisition-date consolidation worksheet, which of the following is accurate?
86. A) The value of the noncontrolling interest is $40,000.
87. B) The total of all adjustments and eliminations equal $3,136,000.
88. C) The consolidated total long-term debt equals $3,688,000.
89. D) The total consolidated assets equal $9,794,000.
90. E) The total liabilities and equity on a consolidated basis equals $5,614,000.

Answer: B

Learning Objective: 06-02

Topic: VIE―Process of consolidation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-13

86. In preparing the consolidation worksheet as of December 31, 2018 for AHI and RMC, which of the following worksheet entry descriptions reflects what AHI should do to consolidate the financial statements?
87. A) Consolidation Entry A is recorded to allocate the excess fair value to the noncontrolling interest and record a credit to the Asset in connection with a fair valuation on the date AHI obtains control of RMC as follows:

Noncontrolling interest                        $96,000

Asset                                                                        $96,000

1. B) Consolidation Entry P is recorded to eliminate the long-term receivable and debt representing AHI’s initial investment in RMC as follows:

Loan receivable from RMC     $3,000,000

Long-term debt                                         $3,000,000

1. C) Consolidation Entry S is recorded to eliminate the interest payment on the loan from RMC to AHI as follows:

Interest expense                               $180,000

Interest income                                              $180,000

1. D) Consolidation Entry E is recorded to amortize the excess fair value allocation to the Asset over its remaining useful life as follows:

Other operating expenses                     $32,000

Asset                                                                        $32,000

1. E) Consolidation Entry P is recorded to eliminate the beginning stockholders’ equity of the VIE and recognize the 100% equity ownership of the noncontrolling interest as follows:

Retained earnings – RMC 1/1/18         $ 6,000

Common stock – RMC                                    $34,000

Retained Earnings-AHI                                     $40,000

 

Answer: D

Learning Objective: 06-02

Topic: VIE―Process of consolidation

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

 

Essay:

 

[QUESTION]

87. Parent Corporation loaned money to its subsidiary with a five-year note at the market interest rate. How would the note be accounted for in the consolidation process?

 

Answer: The note would be eliminated in the consolidation process with an entry debiting Notes Payable and crediting Notes Receivable.

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

88. What are the primary sources of information that are used for preparation of a consolidated statement of cash flows?

 

Answer: The main source of information would be the consolidated income statement and the consolidated balance sheet.

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

89. Parent Corporation acquired some of its subsidiary’s bonds on the open bond market. The remaining life of the bonds was eight years, and Parent expected to hold the bonds for the full eight years.  How would the acquisition of the bonds affect the consolidation process?

 

Answer: In the consolidation process, the bonds would be treated as if they had been retired.  A gain or loss would be recognized in the period in which they were acquired.   Intra-entity interest revenue and expense would be eliminated.

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

90. Parent Corporation acquired some of its subsidiary’s bonds on the open bond market, paying a price $40,000 higher than the bonds’ carrying value. How should the difference between the purchase price and the carrying value be accounted for?

 

Answer: The $40,000 difference between the acquisition price and the carrying value would be recognized as a loss on retirement of bonds.

Learning Objective: 06-03

Topic: Intra-entity debt―Gain or loss for consolidation

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

91. How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows?

 

Answer: Intra-entity inventory transfers are eliminated on the consolidation worksheet and, therefore, do not appear in the consolidated statement of cash flows.

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

92. Danbers Co. owned seventy-five percent of the common stock of Renz Corp. How does the issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process?

 

Answer: A stock dividend would not influence Danbers’ ownership percentage and would not alter the consolidation process.

Learning Objective: 06-07

Topic: Subsidiary stock―Stock dividend issued

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

93. During 2018, Parent Corporation purchased at carrying value some of the outstanding bonds of its subsidiary. How would this acquisition have been reflected in the consolidated statement of cash flows?

 

Answer: The cash paid for the bonds on the open market would be shown under cash flows from financing activities.   If the bonds were acquired directly from the subsidiary, the cash received and the cash paid has no effect on the consolidated entity.  Therefore, in a direct intra-entity transaction, there is no effect in the consolidated statement of cash flows.

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

94. On January 1, 2018, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro’s outstanding preferred stock.  In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for?

 

Answer: The investment in preferred stock account and Foxboro’s preferred stock balance should be eliminated in consolidation so that only the parent’s equity remains.  No gain or loss should be recognized.

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

95. When a company has preferred stock in its capital structure, what amount should be used to calculate noncontrolling interest in the preferred stock of the subsidiary when the company is acquired as a subsidiary of another company?

 

Answer: The noncontrolling interest should be reflected at its acquisition-date fair value.

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

96. Parent Corporation acquired some of its subsidiary’s outstanding bonds. Why might Parent purchase the bonds, rather than the subsidiary buying its own bonds?

 

Answer: The purchase might have been made by Parent Corporation because it had more available cash than the subsidiary and there was a desire to bring the bonds in from the market.  Also, in some cases, the contract signed when the bonds were issued might prevent the subsidiary from purchasing its own bonds or it might require the payment of a price that would be higher than the market value of the bonds.

Learning Objective: 06-03

Topic: Intra-entity debt transactions―General

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

97. Parent Corporation had just purchased some of its subsidiary’s outstanding bonds on the open market. What items related to these bonds will have to be accounted for in the consolidation process?

 

Answer: For each period that the parent owns the bonds, the bonds must be eliminated on the consolidation worksheet.  Eliminating the bonds on the consolidation worksheet requires the elimination of: (i) the parent’s investment account; (ii) the portion of the bonds payable that the parent acquired; (iii) interest expense of the issuer; and (iv) interest income of the investor.  In the year in which the parent acquired the bonds, a gain or loss must have been recognized.  Over the life of the bonds, retained earnings must be debited or credited for the amount of the gain or loss, as adjusted by the previous years’ difference between interest expense and interest income.

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 3 Hard

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

98. Parent Corporation recently acquired some of its subsidiary’s outstanding bonds at an amount which required the recognition of a loss. In what ways could the loss be allocated?  Which allocation would you recommend?  Why?

 

Answer: The loss could be assigned to the subsidiary since it originally issued the bonds.  The loss could be assigned to the parent since the parent acquired the bonds.  A method could be applied to divide the loss between the parent and subsidiary.  Finally, the loss could be assigned to the parent because the parent controls the combined entity.  The loss should probably be assigned to the parent, without regard to who issued and who purchased the bonds, since the parent is responsible for decision-making for the combined entity.

Learning Objective: 06-03

Topic: Intra-entity debt―Gain or loss for consolidation

Difficulty: 3 Hard

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

99. How does the existence of a noncontrolling interest affect the preparation of a consolidated statement of cash flows?

 

Answer: The noncontrolling interest’s share of the subsidiary’s income would not appear in the consolidated statement of cash flows.  Dividends paid to the noncontrolling interest represent cash outflows for the combined entity to outside parties, and should be shown as cash flows from financing activities.

Learning Objective: 06-05

Topic: Consolidated statement of cash flows

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

 

 

Problems:

 

[QUESTION]

100. On January 1, 2018, Bast Co. had a net book value of $2,100,000 as follows:

 

Preferred stock, 2,000 shares $70 par value, cumulative, nonparticipating, nonvoting	$   140,000
Common stock, 22,400 shares $50 par value	1,120,000
Retained earnings	840,000
Total shareholders’ equity	$2,100,000

Fisher Co. acquired all of the outstanding preferred shares for $148,000 and 60% of the common stock for $1,281,000.  Fisher believed that one of Bast’s buildings, with a twelve-year life, was undervalued on the company’s financial records by $70,000.

Required:

What is the amount of goodwill to be recognized from this purchase?

 

Answer:

 

Consideration transferred for 60% interest in common stock	$1,281,000
Consideration transferred for100% interest in preferred stock	148,000
Noncontrolling interest in common stock (40%): [$1,281,000/.60] – $1,281,000	854,000
Total fair value	$2,283,000
Book value	2,100,000
Excess acquisition-date fair value over book value	183,000
Assigned to building	70,000
Goodwill	$   113,000

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

REFERENCE: 06-13

Fargus Corporation owned 51% of the voting common stock of Sanatee, 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 price.

On January 1, 2017, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2019, for 95% of the face value. Both companies utilized the straight-line method of amortization.

 

[QUESTION]

REFER TO: 06-13

101. What balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31, 2019, the end of the first year of the intra-entity investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.

Answer:

Carrying amount of bonds payable, January 1, 2019
Book value, January 1, 2017 ($1,400,000 × 1.08) original issue	$1,512,000
Amortization- 2017-2018 [($112,000 premium ÷ 10 years) × 2 years]	(22,400)
Book value of bonds payable, January 1, 2019	$1,489,600
Carrying amount of 40% of bonds payable (intra-entity portion),
January 1, 2019	$  595,840
Gain on retirement of bonds, January 1, 2019:
Purchase price ($560,000 face value × 95%) of investment	$(532,000)
Book value of liability (calculated above)	595,840
Gain on retirement of bonds	$   63,840
Carrying amount of bonds payable, December 31, 2019
Carrying amount, January 1, 2019 (calculated above)	$1,489,600
Amortization – 2019	(     11,200)
Carrying amount of bonds payable, December 31, 2019	$1,478,400
Cash payment ($560,000 face value × 10%)	$56,000
Amortization of premium for 2019 ($11,200 × 40%)	(4,480)
Intra-entity interest expense	$51,520
Carrying amount of 40% of bonds payable (intra-entity portion)
December 31, 2019 ($595,840-4,480 premium amortization)	$591,360
Carrying amount of investment, December 31, 2019
Carrying amount of investment, January 1, 2019 (purchase price)	$532,000
Amortization – 2019 ($28,000 discount ÷ 8 years remaining)	3,500
Carrying amount of bonds payable, December 31, 2019	$535,500
Cash receipt ($560,000 face value × 10%)	$56,000
Amortization of discount for 2019	3,500
Intra-entity interest revenue	$59,500

 

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-13

102. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2019?

Answer:

 

Bonds Payable	560,000
Premium on Bonds Payable	31,360
Interest Income	59,500
Investment in Bonds		535,500
Interest Expense		51,520
Gain on retirement		63,840

Learning Objective: 06-03

Topic: Intra-entity debt―Gain or loss for consolidation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-13

103. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2020?

Answer:

 

Bonds Payable	$560,000
Premium on Bonds Payable	26,880
Interest Income	59,500
Investment in Bonds		539,000
Interest Expense		51,520
Retained Earnings, 1/1/20 (Fargus Corp.)		55,860

Learning Objective: 06-03

Topic: Intra-entity debt transactions―General

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-13

104. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2021?

Answer:

 

Bonds Payable	$560,000
Premium on Bonds Payable	22,400
Interest Income	59,500
Investment in Bonds		542,500
Interest Expense		51,520
Retained Earnings, 1/1/21 (Fargus Corp.)		47,880

Learning Objective: 06-03

Topic: Intra-entity debt transactions―General

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

105. Skipen Corp. had the following stockholders’ equity accounts:

 

The preferred stock was participating and is therefore considered to be equity.  Vestin Corp. acquired 90% of this common stock for $2,250,000 and 70% of the preferred stock for $1,120,000.  All of the subsidiary’s assets and liabilities were determined to have fair values equal to their carrying amounts except for land, which is undervalued by $130,000.

Required:

What amount was attributed to goodwill on the date of acquisition?

Answer:

Consideration transferred for 90% interest in common stock	$2,250,000
Consideration transferred for 70% interest in preferred stock	1,120,000
Noncontrolling interest in common stock (10%): [$2,250,000/.90] – $2,250,000	250,000
Noncontrolling interest in preferred stock (30%):
[$1,120,000/.7] – $1,120,000	480,000
Total fair value of Skipen – date of acquisition	$4,100,000
Carrying amount	3,500,000
Excess acquisition-date fair value over book value	600,000
Assigned to land	130,000
Goodwill	$   470,000

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

REFERENCE: 06-14

Thomas Inc. had the following stockholders’ equity accounts as of January 1, 2018:

 

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2018, for $20,656,000.  The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000.  A database valued at $656,000 was recognized and amortized over five years.

During 2018, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends.  Kuried used the equity method to account for this investment.

 

[QUESTION]

REFER TO: 06-14

106. What is the amount of goodwill resulting from this acquisition?

Answer:

Consideration transferred for 100% interest in common stock	$20,656,000
Noncontrolling interest in preferred stock (100%):	3,060,000
Total fair value of Thomas 1/1/18	$23,716,000
Carrying amount	22,300,000
Excess acquisition-date fair value over book value	1,416,000
Assigned to database	656,000
Goodwill	$     760,000

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-14

107. What was the noncontrolling interest’s share of consolidated net income for the year 2018?

Answer:

All residual net income is attributed to the controlling interest of Kuried as sole owner of common stock of Thomas.

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-14

108. What is the controlling interest share of Thomas’ net income for the year ended December 31, 2018?

Answer:

Database	$  656,000
Amortization period in years	÷           5
Annual amortization of database	$  131,200
Thomas net income (book)	$  630,000
Amortization of database	(131,200)
	498,800
Preferred stock dividend (9% × $2,700,000)	(243,000)
Net income residual to common stockholders (100% to Kuried as controlling interest)	$ 255,800

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-14

109. What was Kuried’s balance in the Investment in Thomas Inc. account as of December 31, 2018?

Answer:

 

Database	$     656,000
Amortization period in years	÷              5
Annual amortization of database	$     131,200
Investment in Thomas Inc., 12/31/18
Acquisition consideration, 1/1/13	$20,656,000
Equity accrual ($630,000 – $243,000)	387,000
Dividends collected ($504,000 – $243,000)	(261,000)
Database amortization (from above)	(131,200)
Investment in Thomas Inc., 12/31/18	$20,650,800

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-14

110. Prepare all consolidation entries for 2018.

Answer:

 

Consolidation Entries
Consolidation Entries S and A (combined)
Common Stock (Thomas Inc.)	5,600,000
Preferred Stock (Thomas Inc.)	2,700,000
Retained Earnings, 1/1/18 (Thomas Inc.)	14,000,000
Database	656,000
Goodwill	760,000
Investment in Thomas Inc.		20,656,000
Noncontrolling Interest in Thomas Inc.		3,060,000
Consolidated Entry I
Equity Income of Subsidiary	387,000
Investment in Thomas Inc.		387,000
Consolidation Entry D
Investment in Thomas Inc.	261,000
Dividends Paid		261,000
Consolidation Entry E
Amortization Expense	131,200
Database		131,200

 

Learning Objective: 06-04

Topic: Subsidiary preferred stock

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

111. Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2016, for $644,000 in cash. Of this consideration transferred, $42,000 was attributed to equipment with a ten-year remaining useful life.  Goodwill of $56,000 had also been identified.  Jet applied the partial equity method so that income would be accrued each period based solely on the earnings reported by the subsidiary.

On January 1, 2019, Jet reported $280,000 in bonds outstanding with a book value of $263,200.  Nittle purchased half of these bonds on the open market for $135,800.

During 2019, Jet began to sell merchandise to Nittle.  During that year, inventory costing $112,000 was transferred at a price of $140,000.  All but $14,000 (at Jet’s selling price) of these goods were resold to outside parties by year’s end.  Nittle still owed $50,400 for inventory shipped from Jet during December.

The following financial figures were for the two companies for the year ended December 31, 2019.

 

	Jet Corp.	Nittle Inc.
Revenues	$(894,600)	$(652,400)
Cost of goods sold	483,000	277,200
Expenses	187,600	225,400
Interest expense-bonds	33,600	0
Interest income-bond investment	0	(15,400)
Equity in income of Nittle Inc.	(165,200)	0
Net income	$(355,600)	$  (165,200)
Retained earnings, January 1, 2019	$(483,000)	$(505,400)
Net income (above)	(355,600)	(165,200)
Dividends paid	217,000	85,400
Retained earnings, December 31, 2019	$(621,600)	$(585,200)
Cash and receivables	$186,200	$109,200
Inventory	239,400	121,800
Investment in Nittle Inc.	851,200	0
Investment in Jet Corp. bonds	0	137,200
Land, buildings, and equipment (net)	348,600	757,400
Total assets	$ 1,625,400	$1,125,600
Accounts payable	$(315,000)	$(232,400)
Bonds payable	(280,000)	(140,000)
Discount on bonds payable	11,200	0
Common stock	(420,000)	(168,000)
Retained earnings, December 31, 2019 (above)	(621,600)	(585,200)
Total liabilities and stockholders’ equity	$(1,625,400)	$(1,125,600)

 

Required:

Prepare a consolidation worksheet for the year ended December 31, 2019.

Answer:

CONSOLIDATION WORKSHEET

For the Year Ended   12/31/2019

 

	Jet	Nittle	Consolidated Entries		Consolidated
Account	Corp	Inc.	DR	CR	Balance
Revenues	(   894,600)	(   652,400)	(TI) 140,000		(1,407,000)
Cost of Goods Sold	483,000	277,200	(G)      2,800	(TI) 140,000	623,000
Expenses	187,600	225,400	(E)     4,200		417,200
Interest Expense – Bonds	33,600			(B)  16,800	16,800
Interest Income – Bond Investment		(     15,400)	(B)   15,400
Loss on extinguishment of debt			(B)     4,200		4,200
Equity in Nittle Income	(   165,200)		(I)    165,200
Net Income	(   355,600)	(   165,200)			(   345,800)
R/E, 1/1/19, Jet Corp.	(   483,000)		(*C) 12,600		(   470,400)
R/E, 1/1/19, Nittle Inc.		(   505,400)	(S)   505,400
Net Income	(   355,600)	(   165,200)			(   345,800)
Dividends Paid	217,000	85,400		(D)  85,400	217,000
R/E, 12/31/19	(   621,600)	(   585,200)			(   599,200)
Cash & Receivables	186,200	109,200		(P)   50,400	245,000
Inventory	239,400	121,800		(G)     2,800	358,400
Investment in Nittle	851,200		(D)   85,400	(*C) 12,600
				(S) 673,400
				(A) 85,400
				(I) 165,200
Investment in Jet Corp. Bonds		137,200		(B) 137,200
Land, Buildings, & Equipment (net)	348,600	757,400	(A)   29,400	(E)    4,200	1,131,200
Goodwill			(A)   56,000		56,000
Total Assets	1,625,400	1,125,600			1,790,600
Accounts Payable	(   315,000)	(   232,400)	(P)     50,400		(   497,000)
Bonds Payable	(   280,000)	(   140,000)	(B) 140,000		(   280,000)
Discount on Bonds Payable	11,200			(B)   5,600	5,600
Common Stock	(   420,000)	(   168,000)	(S)   168,000		(   420,000)
R/E, 12/31/19	(   621,600)	(   585,200)			(   599,200)
Total Liabilities & Stockholders’ Equity	(1,625,400)	(1,125,600)	1,379,000	1,379,000	(1,790,600)

Learning Objective: 06-03

Topic: Intra-entity debt―Effect on consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

112. Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary’s convertible bonds. The following consolidated financial statements were for 2017 and 2018.

Additional Information:

1. Bonds were issued during 2018 by the parent for cash.
2. Amortization of a database acquired in the original combination amounted to $7,000 per year.
3. A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash on May 11, 2018.
4. Equipment was purchased by the subsidiary on July 23, 2018, using cash.
5. Late in November 2018, the parent issued common stock for cash.
6. During 2018, the subsidiary paid dividends of $14,000.

Required:

Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2018.  Either the direct method or the indirect method may be used.

Answer:

 

 

ALLEN CO. AND BREWER INC. Statement of Cash Flows – Direct Method For the Year Ending December 31, 2018
Cash flows from operating activities
Cash received from customers		$1,246,000
Cash payments
To suppliers	$1,008,000
For interest expense	42,000	(1,050,000)
Net cash provided by operating activities		$   196,000
Cash flows from investing activities
Proceeds from sale of building	$     70,000
Purchase of equipment	(245,000)
Net cash used by investing activities		(175,000)
Cash flows from financing activities
Payment of cash dividends	$ (142,800)
Issuance of bonds	160,000
Issuance of common stock	45,800
Net cash provided by financing activities		$    63,000
Net increase in cash		$    84,000
Cash, January 1, 2018		112,000
Cash, December 31, 2018		$  196,000
The above statement uses the direct method for calculating cash flows from operating activities. The following presentation would be included for the direct method as a reconciliation of net income to net cash from operations, as well as being the presentation of cash flow from operating activities for the indirect method:

 

 

ALLEN CO. AND BREWER INC. Statement of Cash Flows – Indirect Method For the Year Ending December 31, 2018
Cash flows from operating activities
Consolidated net income		$  322,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	$   133,000
Amortization of database	7,000
Gain on sale of building	(28,000)
Decrease in accounts receivable	14,000
Increase in inventory	(196,000)
Decrease in accounts payable	(56,000)	$(126,000)
Net cash provided by operating activities		$  196,000

Learning Objective: 06-05
Topic: Consolidated statement of cash flows

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

REFERENCE: 06-15

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30 per share. At the present time, Glotfelty reports the following stockholders’ equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share.  None of this stock is purchased by Panton.

 

[QUESTION]

REFER TO: 06-15

113. Describe how this transaction would affect Panton’s books.

Answer:

The investment account and APIC will be increased by $63,000 as shown below:

 

                  Consideration transferred ………………………………………………………     $540,000

                  Noncontrolling interest acquisition-date fair value ……………….        135,000

                  Increase in Sub book value (600,000-450,000)……………………….        150,000

                  Stock issue proceeds………………………………………………………………        200,000

            Subsidiary valuation basis……………………………………………………………    1,025,000

            New parent ownership (18,000 shs. ÷ 25,000 shs.) …………………….              72%

            Parent’s post-stock issue ownership balance…………………………….     $738,000

            Parent’s investment account ($540,000 + [90% × 150,000]) ……….        675,000

                  Required adjustment —increase ……………………………………………        $63,000

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-15

114. Prepare Panton’s journal entry to recognize the impact of this transaction.

Answer:

Investment in Glotfelty                                                                        63,000

Additional Paid in Capital                                                                    63,000

 

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

REFERENCE: 06-16

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years agofor $30 per share when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30 per share. At the present time, Glotfelty reports the following stockholders’ equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $22 per share.  None of this stock is purchased by Panton.

 

[QUESTION]

REFER TO: 06-16

115. Describe how this transaction would affect Panton’s books.

Answer:

The investment account and APIC would be decreased by $1,800, as shown below:

 

                  Consideration transferred ………………………………………………………     $540,000

                  Noncontrolling interest acquisition-date fair value ……………….        135,000

                  Increase in Sub book value (600,000-450,000)……………………….        150,000

                  Stock issue proceeds………………………………………………………………        110,000

            Subsidiary valuation basis……………………………………………………………        935,000

            New parent ownership (18,000 shs. ÷ 25,000 shs.) …………………….              72%

            Parent’s post-stock issue ownership balance…………………………….     $673,200

            Parent’s investment account ($540,000 + [90% × 150,000]) ……….        675,000

                  Required adjustment —decrease …………………………………………..          $1,800

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 06-16

116. Prepare Panton’s journal entry to recognize the impact of this transaction.

Answer:

Additional paid in capital                                                         1,800

Investment in Glotfelty                                                                                    1,800

 

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

117. Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30 per share. At the present time, Glotfelty reports the following stockholders’ equity:

Glotfelty issues 5,000 shares of previously unissued stock to Panton for $35 per share.

Required: Describe how this transaction would affect Panton’s books.

 

Answer:

The investment account and APIC will be increased by $70,000, as shown below:

 

                  Consideration transferred ………………………………………………………     $540,000

                  Noncontrolling interest acquisition-date fair value ……………….        135,000

                  Increase in Sub book value (600,000-450,000)……………………….        150,000

                  Stock issue proceeds………………………………………………………………        175,000

            Subsidiary valuation basis……………………………………………………………    1,000,000

            New parent ownership (23,000 shs. ÷ 25,000 shs.) …………………….              92%

            Parent’s post-stock issue ownership balance…………………………….     $920,000

            Parent’s investment account

                              ($540,000 + [90% × 150,000]+175,000) ………………………….        850,000

                  Required adjustment —increase ……………………………………………        $70,000

 

Learning Objective: 06-07

Topic: Subsidiary stock―New issue-Percentage change

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement