Advan Ch. 6

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. When Brett reported net income of $780,000, what was the noncontrolling interest in the subsidiary's income?

$302,000

Goehring, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $40,000 Noncontrolling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $100,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year?

. Decrease in the financing section of $30,000.

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 its sponsoring firm with low-cost financing. 3) VIE governing agreements often limit activities and decision making. 4) VIEs usually have a well-defined and limited business activity. A. 2 and 4.

1, 2, 3, and 4.

On January 1, 2011, 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 2011?

The difference is treated as a gain from the extinguishment of the debt.

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?

The investment in subsidiary will increase.

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?

The parent's additional paid-in capital will be decreased.

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

The preferred stock is convertible.

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

The sponsoring firm receives risks and rewards of the VIE in proportion to equity ownership.

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

They do not appear in the consolidated statement of cash flows.

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

They do not appear in the consolidated statement of cash flows.

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

They will only be included in diluted earnings per share if they are dilutive.

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 would the loss be attributed?

To Regency because Regency is the controlling party in the business combination.`

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

A VIE cannot take the legal form of a partnership or corporation.

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:

A gain or loss must be recognized by both parent and subsidiary companies.

If newly issued debt is issued from a parent to its subsidiary, which of the following statements is false?

A net gain or loss on the bond transaction will be reported.

If a subsidiary reacquires its outstanding shares from outside ownership for more than book value, which of the following statements is true?

Additional paid-in capital on the parent company's books will decrease.

Which of the following statements is true for a consolidated statement of cash flows

All of parent's dividends and noncontrolling interest of subsidiary's dividends are deducted as a financing activity.

Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition?

Any gain or loss is recognized on a consolidated income statement.

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

Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required.

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

Cash flows from financing activities.

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

Consolidated net income divided by parent's number of shares outstanding.

Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer?

Consolidated net income is not affected by a gain or loss on bond transaction.

Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2011, 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 2011.

D. $3,000 loss.

Which of the following is not a potential loss or return of a variable interest entity?

Entitles holder to receive shares of common stock.

A variable interest entity can take all of the following forms except a

Estate

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?

Income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends.

. 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?

Income is assigned as 40 percent of the preferred stock dividends.

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?

No ability to make decisions about the entity's activities.

If a subsidiary issues a stock dividend, which of the following statements is true?

No adjustment is necessary.

What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method?

Noncontrolling interest in net income of subsidiary would be added to net income.

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?

Not reported in the consolidated statement of cash flows.

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?

Not reported in the consolidated statement of cash flows.

In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true?

Parent company earnings per share equals consolidated earnings per share when the equity method is used.

Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2010, 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 2010 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2011. What adjustment would have been required for the retained earnings balance as of January 1, 2011?

Reduction of $19,000.

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

Since the shares were sold for book value and the parent bought 70 percent of the shares, the parent's investment account is not affected except for the price of the new shares.

A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

Since the shares were sold for less than book value, the parent's investment account must be decreased.

A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

Since the shares were sold for more than book value, the parent's investment account must be increased.

All of the following are examples of variable interests except

Stock options