Advanced Accounting

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in ending inventories from downstream sales to an 80% owned affiliate?

100% of the intra-entity gross profits in ending inventory are deferred.

In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G credits Inventory because

From a consolidated perspective, the account is overstated by the amount of the intra-entity gross profit remaining in ending inventory.

In a period when a mid-term business combination occurs, only post-acquisition excess fair-value amortizations are added back to (blank) (blank) in computing cash flows from operating activities using the indirect method.

Net Income

In period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following *TA adjustments remains constant over the remaining life of the asset?

The asset account

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

fair

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 (blank) than the time-adjusted per share acquisition-date subsidiary far value.

less

When the parent applies the equity method and routinely transfers inventory downstream, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to

the Investment in Subsidiary account.

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.

B Company sells land to its parent A Company and records a gain on the sale. In the year of the sale, what accounts must be adjusted in preparing a consolidation worksheet?

The gain on sale must be removed. The land must be written down to its original cost to the consolidated entity.

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?

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.

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

True

In general, which of the following characteristics are needed to establish that an enterprise with an variable interest in a VIE has a controlling financial interest?

The enterprise is obligated to absorb significant losses of the VIE or is is entitled to receive significant benefits from the VIE. The enterprise has the power to direct the economically significant activities of the VIE.

True or false: The direction of intra-entity sales (upstream or downstream) does not affect the final balance of reported consolidated net income.

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.

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in beginning inventories from downstream sales to an 80% owned affiliate?

100% of the intra-entity gross profits in beginning inventory are recognized.

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.

When intra-entity gross profits from upstream sales are present in beginning inventory, which of the following describes the effect on consolidated statements?

The net income effect of the intra-entity inventory gross profit is transferred from the prior period to the current period. Consolidation Entry *G credits COGS which increases current period's consolidated net income.

In the presence of upstream intra-entity inventory transfers, from a consolidated view which of the following accounts becomes overstated in the year following the transfer?

The subsidiary's retained earnings.

What characteristics of Power Finance Company suggest that it qualifies as a variable interest entity?

Theequity investor's ownership at risk is less than 10% of total assets The equity investors bears little to no risk from ownership of the plant asset. the company was unale to obtain financing without additional financial support from twin peaks electric.

True or false: Consolidation Entry TL removes the gain on sale from an intra-entity land sale because the land remains under the control of the consolidated entity.

True

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

True

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

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

true or false: Intra-entity inventory profits resulting from upstream transfers affect the consolidated net income allocation to both the controlling and noncontrolling interests.

True

Why do the risks and rewards from a VIE often get distributed to the primary beneficiary rather than equity investors?

VIEs may separate ownership from the VIE's economic benefits and risks to enable beneficial contracting (e.g., financing) for a primary beneficiary. Contractual arrangements often specify that the VIE's risks and rewards go to the primary beneficiary. Equity investors frequently bear little economic risk in the VIE.

The fact that Twin Peaks (rather than the equity investor) has an obligation to absorb any losses of Power Finance points to a conclusion that Power Finance is a (Blank) (Blank) entity.

Variable Interest

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

only when paid to the noncontrolling interest.

Because consolidation worksheet entries are not posted to any affiliate's individual accounting records, intra-entity ending inventory gross profits from the previous year appear in the subsequent year's beginning inventory of the affiliate who now possesses the inventory. To correct for the presence of intra-entity gross profits in beginning inventory, Consolidation Entry *G.

reduces COGS.

In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry *TA is modified when the parent applies the equity method and the transfer was downstream. The modification replaces the adjustment to the parent's retained earnings with _________.

the Investment in Subsidiary account.

In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G debits COGS because

the debit to COGS reduces consolidated net income by the amount of the intra-entity gross profit.; the ending inventory component of COGS is overstated by the intra-entity gross profit remaining at year-end.

In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry *TA is modified when the parent applies the equity method and the transfer was downstream. The modification replaces the adjustment to the parent's retained earnings with an adjustment to the Investment in Subsidiary account because ________.

the debit to the Investment in Subsidiary account is needed to bring that account to zero in consolidation. the equity method has already reduced the parent's retained earnings for the intra-equity gain.

Consolidation worksheet entries are not posted to the books of the members of the consolidated group. Therefore, in years subsequent to an upstream intra-entity land sale that records a gain, a consolidation worksheet entry is needed to adjust

The land account the retained earnings beginning balance for the company that originally recorded the gain on sale of the land

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.

True or false: Assuming no carryover balances from operating accounts acquired in a previous year business combination, no special adjustments are required to prepare a consolidated statement of cash flows in periods subsequent to a business combination.

True

In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry TA

restores the amount of accumulated depreciation removed when the sale was recorded on the selling entity's books. ensures the exclusion of the intra-entity gain in the consolidated income statement. restores the historical cost balance for the transferred asset.

The parent company acquires all of a subsidiary's common stock but only 70 percent of its preferred shares. This preferred stock pays a 7 percent annual cumulative dividend. No dividends are in arrears at the current time. How is the noncontrolling interest's share of the subsidiary's income computed?

As 30 percent of the subsidiary's preferred dividend.

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

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.

What is the reason Consolidation Entry *G credits COGS for the intra-entity gross profit present in beginning inventory?

Because the credit to COGS increases the net income of the consolidated entity in the year the inventory is sold to outsiders.; To correct for the overstatement of the beginning inventory component of COGS.

What is the effect on consolidated COGS of intra-entity gross profits in beginning and ending inventories?

Consolidated COGS is increased by intra-entity gross profits in ending inventory and decreased by intra-entity gross profits in beginning inventory.

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.

Intra-entity gross profits in ending inventory are recognized in consolidated net income though a credit to COGS when the inventory is sold to outsiders. As a intra-entity transferred asset is used in the production process, the intra-entity gain is recognized in consolidated net income by consolidation entries that credit (Blank) (Blank)

Depreciation expense

In period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following individual affiliate accounts continue to be misstated from a consolidated perspective?

Depreciation expense. retained earnings of the selling affiliate accumulated depreciation

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

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

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 investment in debt securities must be eliminated. intra-entity interest revenue and expense must be eliminated. Intra-entity liabilities must be eliminated.

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

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

In general, an enterprise that has the power to direct the activities of a variable interest entity (VIE) and the obligation to absorb the losses of the VIE is the (Blank) (Blank) of the VIE

Primary Beneficiary

When intra-entity transfers of depreciable assets occur, what are the financial reporting objectives in preparing consolidated financial statements?

Recognize appropriate income effects from the sale and use of intra-entity transferred assets. Re-establish historical cost balances for the transferred assets. Defer intra-entity gains from intra-entity depreciable asset sales

After combining the individually recorded revenues of a parent and subsidiary, what is the effect on consolidated revenues of intra-entity inventory transfers?

Revenues from intra-entity transfers are not included in consolidated revenues.

When an intra-entity sale has occurred, consolidation worksheet entry TI removes both the related purchase (through a credit to COGS) and a debit to the related (BLANK) account

Sales or revenue

Which of the following Consolidation Entries has the net effect of increasing the current period's consolidated net income?

TI

How does Consolidation Entry *GL differ when an intra-entity gain resulted from downstream land transfers and the parent uses the equity method for its investment in its subsidiary?

The Investment in Subsidiary account is debited instead of the parent's Retained Earnings account.

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

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

Which of the following characteristics suggest that Twin Peaks is the primary beneficiary of Power Finance?

Twin Peaks is entitled to receive significant benefits from the Power Finance. Twin Peaks has the power to direct the economically significant activities of Power Finance. Twin Peaks is obligated to absorb significant losses of Power Finance.

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

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

cash flows from financing activities

What business types typically describe variable interest entities?

corporations trusts joint ventures across two or more business entities

Subsidiary dividends paid to its parent company

do not appear on the consolidated statement of cash flows.

When the parent employs the equity method, Consolidation Entry *GL debits the Investment in Subsidiary account for intra-entity gains that resulted from

downstream land transfers

In the consolidated income statement, the net income attributable to the noncontrolling interest is affected by

excess acquisition-date fair value amortizations. intra-entity gross profits from upstream inventory transfers.

In preparing consolidated financial statements, the gross profit or loss recorded by individual affiliates for intra-entity asset transfers is

excluded from net income.; excluded from inventory in the consolidated balance sheet.

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 (Blank)

goodwill

When the parent applies the equity method and routinely receives upstream inventory transfers from a subsidiary, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to

he subsidiary's retained earnings.

By decreasing COGS, Consolidation Entry *G (Blank) consolidated net income.

increases

The accounting effects of inventory sales across companies within a consolidated entity are removed when preparing consolidated financial statements because

intra-entity inventory transfers create no net change in the financial position of the consolidated reporting entity; from a consolidated perspective, neither a sale nor a purchase has occurred; consolidated statements reflect only transactions with outside parties.

Which of the following consolidated balances remain the same regardless of whether intra-entity gross profit in inventory results from upstream or downstream transfers?

inventory consolidated net income

Variable interests entities are often established to provide

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

Because the individual companies comprising a consolidated entity frequently maintain separate accounting records, the effects of intra-entity inventory transfers

must be identified and removed as part of the process of preparing consolidated financial statements.

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 primary beneficiary of VIE

must include the VIE's assets and liabilities in its consolidated balance sheet.

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

net income

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

noncontrolling

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

noncontrolling

Consolidation Entry *G credits COGS because the beginning inventory component of COGS is

overstated by the intra-entity gross profit.

Control over a VIE's decision-making process is typically exercised through

power granted contractually to a primary beneficiary.

Inventory transfers among affiliates within a consolidated entity

produce accounting effects that are eliminated in the preparation of consolidated financial statements; create neither profits nor losses to the consolidated entity.

If a VIE is unable to obtain needed creditor financing because the equity investments are too small, then non-equity investors may provide additional financial support and

provide a small guaranteed return to the equity holders in exchange for financial control over the VIE. obtain rights to the VIE's profits will likely limit the decision-making ability of the equity investors.

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.

When one affiliate within a consolidated group acquires the debt of another affiliate from a third party, then from a consolidated reporting viewpoint

the reacquired debt is effectively retired.

The accounting effects of intra-entity depreciable asset sales are removed in consolidation because no (Blank) of the asset occurred with an outside entity.

transfer

In the year of an intra-entity land transfer resulting in the recording of a gain, a consolidation entry is needed to

write-down the value of the land by the amount of the intra-entity gain. ensure the gain is not reported in the consolidated income statement.

When the parent applies the equity method and routinely transfers inventory downstream, which of the following consolidation entries are sometimes needed to bring the Investment in Subsidiary account to a zero balance?

(*G) for intra-entity gross profits in beginning inventory.; (D) for the parent's share of subsidiary dividends declared. (I) for the equity in subsidiary earnings recognized by the parent.

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.

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in ending inventory from upstream sales to an 80% owned affiliate?

80% of the intra-entity gross profits in ending inventory are deferred.

A subsidiary issues new ownership shares to outside parties at a price other than its book value per share. Although the parent acquires none of the newly issued shares, it continues to maintain control over the subsidiary. What is the effect on the parent's financial records?

Additional paid-in capital is adjusted. The investment account should be adjusted.

The purpose of consolidation entry TI is to

remove the effects of intra-entity sales and purchases for the consolidated reporting entity.

Gross profits frequently exist in ending inventory resulting from intra-entity inventory transfers. These gross profits are (BLANK) in the preparation of consolidated financial statements

removed

In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry ED

removes the overstatement of expense resulting from depreciating the inflated transfer price of the transferred asset. reduced accumulated depreciation for the current year's overstatement of depreciation expense.

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 (Blank) as of the debt reacquisition date.

retired

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.

When land is sold at a gain across members of a consolidated group, in years subsequent to the land sale, where does the gain reside?

In the seller's retained earnings account and the buyer's land account.

When an intra-entity sale of a depreciable asset occurs at a price in excess of the asset's carrying amount, which of the following result from a consolidated entity perspective?

Retained earnings of the selling affiliate become overstated. The carrying amount of the asset becomes overstated by the amount of the intra-entity gain. Depreciation expense becomes overstated.

In applying the equity method, why does the parent defer 100% of intra-entity inventory gross profits from downstream transfers even when owning a controlling, but less-than-100% ownership in the subsidiary.

The 100% deferral ensures that none of the intra-entity gross profit will be attributable to the noncontrolling interest.

For a 40% investment that provides the investor significant influence, 40% of intra-entity gross profits in ending inventory from downstream transfers are deferred from the investor's equity earnings when the equity method is applied. If, instead, the investor owns a 70% controlling interest in a subsidiary

100% of the intra-entity gross profits in ending inventory from downstream transfers are deferred from the investor's equity earnings.

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

Which of the following Consolidation Entries has the net effect of decreasing the current period's consolidated net income?

G

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

10

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

loan receivable