ATCG 413 Chapter 6

Why are consolidation procedures needed to adjust for the effect of intra-entity activities across the members of the consolidated group?

Consolidated statements must reflect the financial position and results of operations from the viewpoint of the combined business entity.

What business types typically describe variable interest entities?

Corporations. Joint ventures across two or more other business entities. Trusts.

In years subsequent to the acquisition of bonds payable of one affiliate by another affiliate, which of the following accounts are affected by continuing bonds payable (and investment in bonds) discount amortizations on the affiliated companies' books?

Discount on Bonds Payable Interest Income. Interest Expense.

True or false: The consolidated statement of cash flows is prepared from the individual cash flow statements of the separate companies comprising the business combination.

False

For the January 1, 2021, consolidation of Payton and Vicente, Consolidation Entry P eliminates Vicente's long-term debt against Payton's from Vicente.

Loan Receivable

True or false: Consolidated financial statements represent a business combination as a single economic entity.

True

In evaluating an entity's status as a VIE, if equity at risk is less than % of total assets, the risk is deemed insufficient and the entity is considered a VIE.

10

When the parent acquires none of a post-acquisition subsidiary stock issue but maintains a controlling interest, the change in the carrying amount of the parent's investment account is recorded as

additional paid-in capital.

In computing consolidated EPS, the numerator contains earnings

attributable only to the controlling interest.

If the consolidated entity has dilutive securities in its capital structure, then in addition to basic EPS the consolidated financial statements must also disclose EPS.

diluted

Subsidiary dividends paid to its parent company

do not appear on the consolidated statement of cash flows.

For the January 1, 2021, consolidation of Payton and Vicente, the noncontrolling interest amount is reported at its January 1, 2021 value.

fair

A business enterprise is required to consolidate the assets, liabilities, and results of operations of a VIE in which it holds no equity interest if

it can exercise financial control over the VIE in its role as primary beneficiary.

When a subsidiary company issues additional shares of its own common stock to outside third parties, the parent will need to decrease its investment account if the per share price received for the additional shares issued is than the time-adjusted per share acquisition-date subsidiary fair value.

less

Variable interests entities are often established to provide

low-cost financing for asset purchases. research and development arrangements. leasing arrangements.

If a less-than-100% owned subsidiary has dilutive securities in its capital structure, the parent's share of subsidiary earnings used in deriving diluted EPS

may change when assuming the conversion of the dilutive securities.

To prepare a consolidated statement of cash flows in the year of a business acquisition, the subsidiary's acquisition-date accounts receivable balance

must be removed in computing cash flows from operating activities.

The starting figure for preparing the operating section (indirect method) of a consolidated statement of cash flows is consolidated

net income

For the January 1, 2021, consolidation of Payton and Vicente, Consolidation Entry S allocates the entire amount of Vicente's owners' equity balances to the interest.

noncontrolling

Subsidiary preferred stock not owned by the parent is a component of the interest.

noncontrolling

Subsidiary dividends paid appear as a financing outflow on the consolidated statement of cash outflows

only when paid to the noncontrolling interest.

When one affiliate within a consolidated group acquires the debt of another affiliate from a third party, from a consolidated view this liability is effectively as of the debt reacquisition date.

retired

US GAAP specifies separate models (voting vs. variable interests) in assessing financial control. IFRS employs a consolidation model for assessing financial control across voting and variable interests.

single

Because a parent company likely controls intra-entity debt reacquisition activity, the textbook attributes the gain or loss from retirement on such intra-entity debt

solely to the parent company.

In computing consolidated diluted EPS, the presence of subsidiary dilutive securities will potentially affect

the amount of consolidated net income attributable to the common shares. the numerator of the diluted EPS ratio. the parent's percentage ownership to apply to the earnings attributable to common shares.

When a subsidiary company has outstanding bonds payable that are convertible to common shares, it must assume conversion in computing diluted EPS. Assuming the convertible bonds are dilutive, what are the effects of the conversion on the subsidiary's diluted EPS ratio?

the denominator will increase by the number of common shares issued in the assumed conversion. the numerator will increase by the after-tax income saving from assumed conversion.

When a subsidiary company issues additional shares of common stock that are not purchased by the parent,

the parent's Investment in Subsidiary account may need to be adjusted. the parent's percentage ownership in the subsidiary will change.

In years subsequent to the acquisition of bonds payable of one affiliate by another affiliate, when the parent uses either the initial value or partial equity method

the parent's retained earnings are adjusted for previous years' income effects from the effective retirement.

If an affiliated entity is determined not to be a variable interest entity, then

the voting interest model is applied to determine whether an enterprise must consolidated the entity.

The potential dilutive effect of a less-than-100% owned subsidiary's stock options

will not affect the parent's computation of basic EPS. can affect the parent's share of the consolidated net income.

Under what general conditions does an entity qualify as a variable interest entity?

The equity investors lack the ability to exercise financial control over the entity. Equity investors' returns are capped by contractual arrangements with variable interest holders. There is insufficient equity at risk to enable the entity to finance its activities without additional support.

True or false: IFRS defines control comprehensively to include control achieved through voting interests, contractual power, decision-making rights, etc.

True

True or false: When one affiliate within a consolidated group acquires the debt of another affiliate from a third party at a price less than the debt's carrying amount, the gain on reacquisition of the debt is recognized immediately by the consolidated entity.

True

Consolidation is required when one company possesses a controlling financial interest over another company. When is a majority voting interest not effective in identifying a controlling financial interest in an affiliated entity?

When variable interests allow a primary beneficiary to exercise financial control over a variable interest entity.

In allocating the income effect of a gain or loss from retirement of the debt of one affiliate that has been purchased by another affiliate, the entire income effect is allocated to the interest.

controlling

A gain or loss from reacquisition of the debt of one company by an affiliated firm

is typically recognized via a consolidated worksheet entry rather than an entry on the individual books of an affiliate.

In computing consolidated EPS, net income shall exclude the income attributable to the interest in the subsidiary.

noncontrolling

In computing cash flows from operating activities (indirect method), normally the increase in account receivable is deducted from net income. In a period accompanied by a business combination, however, any change in accounts receivable must be adjusted for

the acquisition-date balance of the subsidiary's accounts receivable.

The accounts and amounts used to prepare a consolidated statement of cash flows are based on

the consolidated income statement and comparative consolidated balance sheets.

Clark Company acquires Transport Company in exchange for a cash payment to the former owners of Transport. Included in the assets received by Clark is Transport Company's cash balance. The current year consolidated statement of cash flows would report

The net cash paid for the acquisition (cash paid less cash received) as an investing activity.

Which of the following arrangements are considered encompassed within the IASB's control definition?

The obtaining of decision-making rights over an investee that dominate voting rights. Majority voting rights over the decision-making of an entity held by an investor. Less than 50% voting interest where the remaining shares are diffusely held across many owners.

In consolidating a business entity VIE, any excess of the VIE's total business fair value over the collective fair values of its net assets is recognized as

goodwill

True or false: The existence of subsidiary preferred stock has no impact on the valuation principles for an acquired subsidiary's assets and liabilities.

True

A subsidiary issues new ownership shares that results in the maintenance of the previous relative ownership percentages of the parent and noncontrolling interests. What is the effect on the parent's Additional Paid-In Capital account?

no effect

A subsidiary issues new ownership shares that results in the maintenance of the previous relative ownership percentages of the parent and noncontrolling interests. What is the effect on the parent's investment account?

An increase in the investment account.

How does the statement of cash flows report the net cash outflow that occurs when a parent company acquires a business for cash?

As an investing activity.

Assuming neither the parent nor its 90% owned subsidiary have dilutive securities or preferred shares, what EPS calculations are required for consolidated financial statements?

Basic EPS = Parent's share of consolidated net income divided by the parent's weighted average shares outstanding.

Why did Antioch decrease its Investment in Winchester Company balance as a result of Winchester's post-acquisition stock issue?

Because the $14.40 price per share is less than the $16.40 ($1,640,000/100,000 shares) time-adjusted acquisition-date per share value of Winchester. Because Antioch's 72% share of Winchester's post-stock issue value is smaller than its 90% pre-stock issue value.

Consolidation Entry B adjusts which of the following accounts generated by the affiliates preparing consolidated financial statements in the year of an intra-entity bond reacquisition?

Bonds Payable Investment in Bonds Gain (or Loss) on Retirement of Bonds

Which of the following consolidation procedures are needed when one affiliate within a consolidated group acquires the debt of another affiliate from a third party?

intra-entity interest revenue and expense must be eliminated. Intra-entity liabilities must be eliminated. Intra-entity investment in debt securities must be eliminated. The intra-entity interest payable and receivable must be eliminated. The ongoing amortization of intra-entity discounts and premiums must be taken into account in the consolidation process.