Chapter 6

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

True

In the Giant-Small example, what is the January 1, 2021, equity method balance for Giant's investment in Small before the 20,000 new share issue by Small?

$510,000

In evaluating an entity's status as a VIE, if equity at risk is less than (1)% of total assets, the risk is deemed insufficient and the entity is considered a VIE.

1. 10

For the January 1, 2021, consolidation of Payton and Vicente, Consolidation Entry P eliminates Vicente's long-term debt against Payton's (1) (2) from Vicente.

1. Loan 2. Receivable

The effects of intra-entity inventory transfers do not appear on the consolidated statement of cash flows because such transfers do not affect the amount of (1) held by the consolidated entity.

1. cash

Despite a total lack of ownership shares, Payton nonetheless consolidates 100% of Vicente's assets, liabilities and results of operation because Payton has a (1) financial interest in Vicente.

1. controlling

In the December 31, 2021, consolidation of Payton and Vicente, Consolidation Entry F serves to eliminate the intra-entity (1) (2) between the primary beneficiary and its variable interest entity.

1. management 2. fee

The investing section of a consolidated statement of cash flows is unaffected by the existence of a (1) interest.

1. noncontrolling

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 (1) (2) entity.

1. variable 2. interest

In periods subsequent to the obtaining of financial control, a primary beneficiary's consolidation of its VIE follows the same general process as if the entity were consolidated based on (1) interests.

1. voting

Compared to Consolidation Entry *B when the parent uses the initial value method, when the parent employs the equity method

The Investment in Subsidiary account is adjusted for previous year's intra-entity debt income effects instead of the parent's RE account.

Select all that apply Why did Big's common stock ownership of Little decrease from 90% to 62% for computation of consolidated diluted EPS?

The assumed conversion of the convertible bonds increased the number of common shares assumed outstanding. The assumed conversion of the preferred shares increased the number of common shares assumed outstanding.

Select all that apply Why did the amount of Little's earnings for diluted EPS increase to $89,800 from the $62,000 amount attributable to basic EPS?

The assumed conversion of the preferred shares increased the earnings available to the common shares assumed outstanding. The assumed conversion of the convertible bonds increased the earnings available to the common shares assumed outstanding.

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

The company was unable to obtain financing without additional financial support from Twin Peaks Electric. The equity investor bears little to no risk from ownership of the plant asset. The equity investor's ownership at risk is less than 10% of total assets.

Alpha Company acquires 90% of Zeta Company in exchange for a cash payment to former owners of Zeta. Included in the assets received by Alpha is Zeta's 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.

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.

For the December 31, 2021, consolidation of Payton and Vicente, the noncontrolling interest is allocated all Vicente's net income after excess acquisition-date fair value amortization ($20,000 - $12,500) because

The noncontrolling interest owns 100% of the voting shares of Vicente.

Select all that apply 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.

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

True or false: Because the impact of intra-entity transfers is removed in consolidation, no additional adjustments for intra-entity transfers are needed in preparing a consolidated statement of cash flows.

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: In addition to consolidated financial statements, additional disclosures should be made about an enterprise's involvement with a VIE concerning the significant judgments and assumptions made to determine whether the enterprise must consolidate the VIE.

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

Select all that apply What business types typically describe variable interest entities?

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

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

Twin Peaks is obligated to absorb significant losses 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.

Select all that apply 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.

For the December 31, 2021, consolidation of Payton and Vicente, the net income attributable to the noncontrolling interest is determined by the noncontrolling interest's percentage ownership in Vicente multiplied by

Vicente's net income adjusted for excess acquisition-date fair value amortization expense.

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.

When a bond is purchased at a premium, annual cash interest receipts from the bond will

be larger than the amount of interest revenue recognized.

When a bond is issued at a discount, annual cash interest payments on the bond will

be less than the amount of recognized interest expense.

One affiliate within a consolidated group acquires the outstanding bonds of another affiliate from a third party. The consolidated gain or loss on the effective retirement is computed by comparing the price paid for the bond purchase to the bond's

carrying amount

When a bond is purchased at a premium, the amount of the premium is amortized periodically. The premium amortization process decreases interest income and

decreases the Investment in Bonds account.

The amount of consolidated net income attributable to the noncontrolling interest of a VIE is typically

determined by contractual arrangements specifying profit and loss distributions across the primary beneficiary and the noncontrolling interest.

Subsidiary dividends paid to its parent company

do not appear on the consolidated statement of cash flows.

When a parent acquires control over a subsidiary with preferred shares outstanding, the subsidiary preferred shares not acquired by the parent are initially valued at

fair value.

When a bond is issued at a discount, the amount of the discount is amortized periodically. The discount amortization process increases interest expense and

increases the carrying amount of the bonds payable.

Select all that apply 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 ongoing amortization of intra-entity discounts and premiums must be taken into account in the consolidation process. The intra-entity interest payable and receivable must be eliminated.

Select all that apply The primary beneficiary of a VIE

is deemed to have a controlling interest in the VIE. typically exercises control through authority granted from governance documents or other contractual arrangements. has the power to direct the VIE's activities.

When one affiliate within a consolidated group acquires the outstanding bonds of another affiliate from a third party the resulting intra-entity debt

is eliminated as part of the consolidation process.

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 primary beneficiary of a VIE

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

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

only when paid to the noncontrolling interest.

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

power granted contractually to a primary beneficiary.

Consolidation Entry F eliminates fees or other sources of income and expense between a consolidated VIE and its primary beneficiary. The income effect in the consolidated financial statements of Consolidation Entry F is attributable to the

primary beneficiary.

When a subsidiary has both cumulative preferred and common stock, its net income is allocated across the controlling and noncontrolling interests based on

relative separate percentage ownership of the common and preferred stocks.

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 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.

When a subsidiary issues shares of common stock subsequent to its acquisition, the parent recognizes no gain or loss on the transaction because

the additional investments is from owners and is thus an equity transaction.

Select all that apply In years subsequent to the acquisition of bonds payable of one affiliate by another affiliate, consolidated worksheet entries reflect differing amounts depending on

the amortization of the original premium or discount on the books of the affiliated company that issued the bonds. the income effect remaining in retained earnings. the amortization of the premium or discount on the books of the affiliated company that purchased the bonds from an outside third party.

Select all that apply 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.

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

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

Select all that apply 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

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

Select all that apply 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.

In an acquisition-date consolidation, a primary beneficiary will include valuations of its VIE's assets, liabilities, at (1) value.

1. fair

In a period when a mid-term business combination occurs, only post-acquisition excess fair-value amortizations are added back to (1) (2) in computing cash flows from operating activities using the indirect method.

1. net 2. income

Select all that apply In addition to consolidated statements that include balances from its VIEs, a primary beneficiary must also disclose

any changes in the risks that accompany the enterprise's involvement with the VIE. the purpose and nature of the VIE's activities. any restrictions on the VIE's assets or settlement of its liabilities reported in the consolidated balance sheet.

In computing consolidated EPS, the numerator contains earnings

attributable only to the controlling interest.

Select all that apply When a subsidiary has both common and preferred shares in its capital structure, consolidation entries

bring the subsidiary's Common Stock account balance to zero. eliminate the parent's Investment in Subsidiary Preferred Stock account balance. bring the subsidiary's Preferred Stock account balance to zero.

In computing consolidated operating cash flows (indirect method) after a current mid-year business combination, the acquisition-date subsidiary balance of accounts payable

increases the parent's beginning balance of accounts payable.

In computing consolidated operating cash flows (indirect method) after a current mid-year business combination, the acquisition-date subsidiary balance of accounts receivable

increases the parent's beginning balance of accounts receivable.

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.

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.

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.

If the consolidated entity has dilutive securities in its capital structure, then in addition to basic EPS the consolidated financial statements must also disclose (1) EPS.

1. diluted

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 (1).

1. goodwill

If a subsidiary has no convertible securities or options outstanding, then consolidated EPS is computed using the (1) share of consolidated net income.

1. parent's

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 (1) interest.

1. controlling

A subsidiary has cumulative, nonparticipating preferred stock owned entirely by the noncontrolling interest. In allocating consolidated net income, the noncontrolling interest share will include 100% of the annual preferred stock (1).

1. dividend

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

1. fair

When the parent applies the equity method, it recognizes on its books any retirement (1) or (2) from the acquisition of an affiliate's outstanding debt from a third party.

1. gain 2. loss

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 (1) than the time-adjusted per share acquisition-date subsidiary fair value.

1. less

The starting figure for preparing the operating section (indirect method) of a consolidated statement of cash flows is consolidated (1) (2).

1. net 2. income

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 (1) as of the debt reacquisition date.

1. retired

Subsidiary preferred stock not owned by the parent is a component of the (1) interest.

1. noncontrolling

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 (1) interest.

1. noncontrolling

In computing consolidated EPS, net income shall exclude the income attributable to the (1) interest in the subsidiary.

1. noncontrolling

If Power Finance's electric plant is financially successful, the fact that Twin Peaks will receive the residual profits points to Twin Peaks as the (1) (2) of Power Finance.

1. primary 2. beneficiary

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 (1) (2) of the VIE

1. primary 2. beneficiary

When a subsidiary has both common and preferred shares in its capital structure, consolidation is made simpler by combining Consolidation Entries S and A because no allocation of the subsidiary's (1) (2) to preferred and common shares is required.

1. retained 2. earnings

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.

Select all that apply Why does Giant increase its Investment in Small account after Small's new stock issue?

Because Giant's 60% share of Small's post-stock issue value is greater than its 75% pre-stock issue value. Because the $10 price per share exceeds the $8.50 time-adjusted acquisition-date per share value of Small and Giant.

Select all that apply 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

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.

Select all that apply 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.

Select all that apply 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.

Select all that apply 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.

Select all that apply 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?

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

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

When a subsidiary issues shares of common stock subsequent to its acquisition, the parent will accordingly adjust its Investment in Subsidiary account and

its Additional-Paid in Capital account.

Select all that apply Variable interests entities are often established to provide

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

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.

A potentially dilutive security will not be considered in the computation of diluted EPS if

the effect of its inclusion in the diluted EPS calculation is to increase EPS.

In years subsequent to the acquisition of debt of one affiliate by another affiliate, consolidated worksheet entries continue to be necessary because

the effective retirement of the debt has not been recognized on either of the affiliated company's books.

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

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.

A parent acquires a subsidiary through purchasing both common and preferred subsidiary shares. In determining the consideration transferred for the subsidiary, the parent includes

the price paid for both the common and preferred shares.

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