Midterm Exam II ACCT 4140

On January 1, 2021, 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 2021?

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

What is the difference between upstream versus downstream inventory transfers in terms of their impact on the consolidation process?

The direction of the intra-entity inventory sale does not impact the computation of total consolidated net income.

An enterprise that holds a variable interest in a variable interest entity (VIE) is required to consolidate the assets, liabilities, revenues, expenses, and noncontrolling interest of that entity if?

The enterprise has a controlling financial interest in the VIE

When one affiliated 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

How does the existence of a control premium affect the consolidation process?

When the parent pays a control premium, the parent is allocated more than its proportionate share ownership of the goodwill recognized in the acquisition.

On January 1, 2020, Grand Haven, Inc., reports net assets of $911,550 although equipment (with a four-year remaining life) having a book value of $482,000 is worth $566,750 and an unrecorded patent is valued at $46,800. Van Buren Corporation pays $834,480 on that date to acquire an 80 percent equity ownership in Grand Haven. If the patent has a remaining life of nine years, at what amount should the patent be reported on Van Buren's consolidated balance sheet at December 31, 2021?

$36,400

Dodd Co. acquired 75% of the common stock of Wallace Corp. for $1,800,000. The fair value of Wallace's net assets was $2,100,000, and the book value was $1,900,000. The noncontrolling interest shares of Wallace Corp. are not actively traded and no control premium exists. What is the dollar amount of noncontrolling interest that should appear in a consolidated balance sheet prepared at the date of acquisition?

$600,000.

A parent company transfers inventory to its 80% owned subsidiary. How much of the intra-entity gross profit in the transferred ending inventory serves to reduce the consolidated net income attributable to the noncontrolling interest?

0%

Duncan Inc. owned all of the outstanding stock of Brandt Co. The subsidiary had bonds payable outstanding on January 1, 2020, with a book value of $270,000. The parent acquired the bonds on that date for $291,000. Subsequently, Duncan reported interest income of $26,000 in 2020 while Brandt reported interest expense of $31,000. Consolidated financial statements were prepared for 2021. What adjustment would be required for the retained earnings balance as of January 1, 2021?

Reduction of $16,000.

On January 1, 2020, Chamberlain Corporation pays $654,400 for a 60 percent ownership in Neville. Annual excess fair-value amortization of $23,400 results from the acquisition. On December 31, 2021, Neville reports revenues of $554,000 and expenses of $380,000 and Chamberlain reports revenues of $805,000 and expenses of $462,000. The parent figures contain no income from the subsidiary. What is consolidated net income attributable to Chamberlain Corporation?

$433,360

Colbert Inc. acquired 100% of Stewart Manufacturing on January 2, 2020. During 2020, Colbert sold Stewart $640,000 of goods, which had cost $450,000. Stewart still owned 18% of the goods at the end of the year. In 2021, Colbert sold goods with a cost of $820,000 to Stewart for $1,000,000, and Stewart still owned 15% of the goods at year-end. For 2021, the cost of goods sold totaled $5,800,000 for Colbert, and $1,300,000 for Stewart. What was consolidated cost of goods sold for 2021?

$6,092,800.

Gordon Co. reported current earnings of $580,000 while paying $58,000 in cash dividends. Lane Co. earned $150,000 in net income and distributed $15,000 in dividends. Gordon held a 75% interest in Lane for several years, an investment that it originally acquired by transferring consideration equal to the book value of the underlying net assets. Gordon used the initial value method to account for these shares. On January 1, 2021, Lane acquired in the open market $75,000 of Gordon'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 $68,200. Lane paid $66,000 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?

$37,500.

1Hudson Corp. owned a 85% interest in Martin Co. Martin frequently made sales of inventory to Hudson. The sales, which include a markup over cost of 25%, were $460,000 in 2020 and $520,000 in 2021. At the end of each year, Hudson still owned 40% of the goods. Net income for Martin was $932,000 during 2021. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest for 2021?

$139,080

McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan's total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following? Book Value FV Building (10 Year Life). $10,000. $8,000 Equipment (4 Year Life) $14,000. $18,000 Land $5,000. $12,000

$2,000 decrease

Carlson, Inc. owns 80% of Madrid, Inc. Carlson reports net income for 2021 (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, 2021 with a carrying value of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2021 for $1,090,000. For the year 2021, 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?

$2,176,000.

Daniels Inc. acquired 85% of the outstanding common stock of Noyce Corp.in 2021. Noyce currently owes Daniels $400,000 for inventory acquired during 2022. In preparing consolidated financial statements for 2022, what amount of Noyce's liability should be eliminated?

$400,000

Parent Company sells land to Subsidiary Company resulting in an intra-entity gain in 2019, the year of transfer. In 2022, Subsidiary Company sells the land to an unrelated party for the same price it paid Parent Company in 2019. Which of the following statements is true?

A gain on the sale of land will be recognized in the consolidated income statement in 2022.

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.

In periods subsequent to a depreciable asset transfer from a subsidiary to a parent in which a gain is recorded, which of the following individual affiliate accounts continue to be misstated from a consolidated perspective?

B, C, and D only

What is the correct consolidating entry to adjust for the effects of upstream transfers of inventory left over from the prior year?

Debit Retained Earnings, credit COGS

Which of the following statements about diluted EPS is true?

Diluted EPS in consolidated income statements is affected by both the parent's and the investee's dilutive securities.

As part of the consolidation process which of the following are NOT included in the calculation of the ending balance of the noncontrolling interest?

Dividends paid by the parent company to parent company shareholders during the period.

Which of the following statements about intra-entity sales of inventory is true?

Gross profit from intra-entity sales should be deferred from consolidated income until that inventory has been sold to an unaffiliated third party

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?

Income from subsidiary is recognized from date of acquisition to year-end.

Which of the following indicates an entity qualifies as a Variable Interest Entity (VIE)?

The equity holders bear no downside risk nor potential upside reward associated with the economic performance of the entity