Advanced Chapter 6
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: a)variable interest held by enterprise involves a lease b) VIE has issued no voting stock c) other equity interests in the VIE have the obligation to absorb the expected losses of the VIE d) enterprise has a controlling financial interest in the VIE
D
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 a) par value b) carrying amount c) face value
b
The primary beneficiary of a VIE a) does not include any amount for a noncontrolling interest on its consoldated balance sheet. b) must include the VIE's assets and liabilities in its consolidated balance sheet. c) may exclude the VIE's revenues and expenses from its consolidated income statement. d) can effectively keep a VIE's debt and related assets off of its consolidated balance sheet.
b
In addition to consolidated statements that include balances from its VIEs, a primary beneficiary must also disclose no additional information about the VIE beyond the balances reported in the consolidated statements. 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. any changes in the risks that accompany the enterprise's involvement with the VIE.
b, c, d
What business types typically describe variable interest entities? A partnership with independent decision-making ability and unlimited business activities. Trusts. Corporations. Joint ventures across two or more other business entities.
b, c, d
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 a) fair value. b) zero. c) book value. d) par value.
a
Despite a total lack of ownership shares, Payton nonetheless consolidates 100% of Vicente's assets, liabilities and results of operation because Payton has a ______ financial interest in Vicente.
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 ______.
dividends
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
In computing consolidated EPS, net income shall exclude the income attributable to the _____ interest in the subsidiary.
noncontrolling
Subsidiary preferred stock not owned by the parent is a component of the ______ interest.
noncontrolling
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
In computing consolidated operating cash flows (indirect method) after a current mid-year business combination, the acquisition-date subsidiary balance of accounts receivable a) increases the parent's beginning balance of accounts receivable. b) decreases the parent's beginning balance of accounts receivable. c) is ignored in calculating the change in accounts receivable.
a
The accounts and amounts used to prepare a consolidated statement of cash flows are based on a) the consolidated income statement and comparative consolidated balance sheets. b) a consolidated worksheet that simultaneously produces row and columns for consolidated balance sheets, income statements, and cash flow statements. c) a consolidated worksheet combining the individual affiliated companies' separate statements of cash flows. d) the parent company's separate income statement and separate comparative balance sheets.
a
When a bond is issued at a discount, annual cash interest payments on the bond will a) be less than the amount of recognized interest expense. b) be the same as the amount of recognized interest expense. c) be more than the amount of recognized interest expense.
a
Variable interests entities are often established to provide low-cost financing for asset purchases. research and development arrangements. leasing arrangements. unlimited actions for the owners of the variable interest entity.
a, b, c
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 liabilities must be eliminated. intra-entity interest revenue and expense must be eliminated. Intra-entity gain or loss from the debt reacquisition must be deferred.
a, b, c
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 investment in debt securities is consolidated with the other assets of the consolidated entity. 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. The intra-entity debt is consolidated with the other debt of the consolidated entity.
a, b, c
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. Voting interests rather than other variable interests appear to provide financial control over Power Finance. The equity investor's ownership at risk is less than 10% of total assets.
a, b, d
Why do the risks and rewards from a VIE often get distributed to the primary beneficiary rather than equity investors? Contractual arrangements often specify that the VIE's risks and rewards go to the primary beneficiary. Equity investors, though giving up risks and rewards of the VIE retain financial control over the VIE. Equity investors frequently bear little economic risk in the VIE. VIEs may separate ownership from the VIE's economic benefits and risks to enable beneficial contracting (e.g., financing) for a primary beneficiary.
a, c, d
Assuming neither the parent nor its 90% owned subsidiary have dilutive securities or preferred shares, what EPS calculations are required for consolidated financial statements? a) Basic EPS = Consolidated net income divided by the parent's weighted shares outstanding. b) Basic EPS = Parent's share of consolidated net income divided by the parent's weighted average shares outstanding. c) Basic EPS = Consolidated net income divided by the parent's and subsidiary's weighted shares outstanding.
b
How does the statement of cash flows report the net cash outflow that occurs when a parent company acquires a business for cash? a) As a financing activity. b) As an investing activity. c) As an operating activity.
b
Why are consolidation procedures needed to adjust for the effect of intra-entity activities across the members of the consolidated group? A) To recognize intra-entity transfer prices as the appropriate valuation measure for intra-entity transferred assets. B) Consolidated statements must reflect the financial position and results of operations from the viewpoint of the combined business entity. C) To recognize intra-entity in consolidated statements in the period of the intra-entity activity.
b
The potential dilutive effect of a less-than-100% owned subsidiary's stock options can affect the parent's share of the consolidated net income. can affect the parent's computation of basic EPS. will not affect the parent's computation of basic EPS. will not affect the parent's share of the consolidated net income.
b, c
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? Bonds Payable. Discount on Bonds Payable Interest Expense. Interest Income.
b, c, d
Which of the following characteristics suggest that Twin Peaks is the primary beneficiary of Power Finance? The power to direct the economically significant activities of the Power Finance is held by the equity investor. 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.
b, c, d
A gain or loss from reacquisition of the debt of one company by an affiliated firm a) is typically recognized through an entry on the individual books of an affiliate. b) is typically not recognized on consolidated financial statements. c) is typically recognized via a consolidated worksheet entry rather than an entry on the individual books of an affiliate.
c
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 a) solely to the noncontrolling interest. b) equally to the parent and the noncontrolling interest. c) solely to the parent company. d) across the parent and noncontrolling interest according to relative common stock ownership percentages.
c
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 a) neither the primary beneficiary nor the noncontrolling interest. b) noncontrolling interest. c) primary beneficiary.
c
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 a) Payton owns 100% of the voting shares of Vicente. b) The loan agreement between the affiliates specifies that Payton receives 5% interest on the loan to Vicente. c) The noncontrolling interest owns 100% of the voting shares of Vicente.
c
In computing consolidated operating cash flows (indirect method) after a current mid-year business combination, the acquisition-date subsidiary balance of accounts payable a) is ignored in calculating the change in accounts payable. b) decreases the parent's beginning balance of accounts payable. c) increases the parent's beginning balance of accounts payable.
c
When a bond is purchased at a premium, annual cash interest receipts from the bond will a) be smaller than the amount of interest revenue recognized. b) be the same as the amount of interest revenue recognized. c) be larger than the amount of interest revenue recognized.
c
When a bond is purchased at a premium, the amount of the premium is amortized periodically. The premium amortization process decreases interest income and a) has no effect on the Investment in Bonds account. b) increases the Investment in Bonds account. c) decreases the Investment in Bonds account.
c
When one affiliate within a consolidated group acquires the outstanding bonds of another affiliate from a third party the resulting intra-entity debt a) is reported on the consolidated financial statements b) is removed on the individual affiliate's respective internal financial records c) is eliminated as part of the consolidation process.
c
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 _____ held by the consolidated entity.
cash
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 a) no further adjustment is needed to the Bonds Payable account. b) no further adjustment is needed to the Investment in Bonds account. c) the retirement gain or loss continues to be reported in consolidated net income. d) the parent's retained earnings are adjusted for previous years' income effects from the effective retirement.
d
Subsidiary dividends paid appear as a financing outflow on the consolidated statement of cash outflows a) only when paid to the controlling interest. b) when paid to either the noncontrolling or controlling interests. c) under no circumstances. d) only when paid to the noncontrolling interest.
d
Subsidiary dividends paid to its parent company a) are listed as an investing cash outflow on the consolidated statement of cash flows. b) are listed as an operating cash outflow on the consolidated statement of cash flows. c) are listed as a financing cash outflow on the consolidated statement of cash flows. d) do not appear on the consolidated statement of cash flows.
d
The amount of consolidated net income attributable to the noncontrolling interest of a VIE is typically a) dependent completely on the percentage of equity voting shares owned by the primary beneficiary. b) determined by voting stock ownership percentages of the equity investors. c) zero. d) determined by contractual arrangements specifying profit and loss distributions across the primary beneficiary and the noncontrolling interest.
d
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
A subsidiary has a debt outstanding that was originally issued at a discount. At the beginning of the current year, the parent company acquired the debt at a slight premium from outside parties. Which of the following statements is true? a) Although subsequent interest income and interest expense will not agree in amount, both balances should be eliminated for consolidation purposes. b) The interest income and interest expense will agree in amount and should be offset for consolidation purposes. c) In computing any noncontrolling interest allocation, the interest income should be included but not the interest expense. d) Whether the balances agree or not, both the subsequent interest income and interest expense should be reported in a consolidated income statement.
A
A parent company buys bonds on the open market that had been previously issued by its subsidiary. The price paid by the parent is less than the carrying amount of the bonds on the subsidiary's records. How should the parent report the difference between the price paid and the carrying amount of the bonds on its consolidated financial statements? a) As an increase to interest expense over the remaining life of the bonds. b) as a loss on retirement of the bonds c) as a gain on retirement of the bonds d) because the bonds now represent intra-entity debt, the difference is not reported
C
Compared to Consolidation Entry *B when the parent uses the initial value method, when the parent employs the equity method a) The parent's RE account is adjusted for the effect of previous years' income effects arising from the intra-entity debt. b) The Investment in Subsidiary account is adjusted for previous year's intra-entity debt income effects instead of the parent's RE account. c) No adjustment is required for the effect of previous years' income effects arising from the intra-entity debt.
b
When a bond is issued at a discount, the amount of the discount is amortized periodically. The discount amortization process increases interest expense and a) decreases the carrying amount of the bonds payable. b) increases the carrying amount of the bonds payable. c) has no effect on the carrying amount of the bonds payable.
b
When one affiliate within a consolidated group acquires the debt of another affiliate from a third party, then from a consolidated reporting viewpoint a) an Investment in Bonds account must be included in the asset section of the consolidated balance sheet. b) the reacquired debt is effectively retired. c) the reacquired debt remains in the liability section of the consolidated balance sheet. d) any related interest expense or interest income from the debt is reported on the consolidated income statement.
b
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
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
In the December 31, 2021, consolidation of Payton and Vicente, Consolidation Entry F serves to eliminate the intra-entity ______ ______ between the primary beneficiary and its variable interest entity.
management fee
A parent acquires a subsidiary through purchasing both common and preferred subsidiary shares. In determining the consideration transferred for the subsidiary, the parent includes a) the price paid for both the common and preferred shares. b) the price paid for only the common shares. c) the price paid for only the preferred shares.
a
If an affiliated entity is determined not to be a variable interest entity, then a) the voting interest model is applied to determine whether an enterprise must consolidated the entity. b) no enterprise is required to consolidated the entity. c) a primary beneficiary is identified and then is required to consolidated the entity.
a
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 a) the acquisition-date balance of the subsidiary's accounts receivable. b) the end-of-year balance of the subsidiary's accounts receivable. c) pre-acquisition subsidiary sales revenue.
a
When a subsidiary has both common and preferred shares in its capital structure, consolidation entries eliminate the parent's Investment in Subsidiary Preferred Stock account balance. bring the subsidiary's Common Stock account balance to zero. bring the subsidiary's Preferred Stock account balance to zero. ignore the subsidiary preferred stock not owned by the parent.
a, b, c
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 a) Vicente's net income after adding back the interest income on the loan from Payton. b) Vicente's net income after adding back the management fee paid to Payton. c) Vicente's net income adjusted for excess acquisition-date fair value amortization expense.
c
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 a) voting interests provide equity shareholders the right to receive significant benefits and the obligation to absorb significant losses. b) it does not qualify as the primary beneficiary of the VIE. c) voting interests provide equity shareholders the ability to exercise financial control over the VIE. d) it can exercise financial control over the VIE in its role as primary beneficiary.
d
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
The starting figure for preparing the operating section (indirect method) of a consolidated statement of cash flows is consolidated _____ _____.
net income
The investing section of a consolidated statement of cash flows is unaffected by the existence of a _____ interest.
noncontrolling
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 _____ _____ of the VIE
primary beneficiary
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
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
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 ______ interests.
voting
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 _____-_____ entity.
variable interest
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 obtain rights to the VIE's profits. will likely limit the decision-making ability of the equity investors. become regular creditors that rely on the equity investors for decision-making. provide a small guaranteed return to the equity holders in exchange for financial control over the VIE.
a, b, d
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? a) When the affiliated entity is not a variable interest entity. b) When variable interests allow a primary beneficiary to exercise financial control over a variable interest entity. c) When voting interests provide shareholders with all residual economic risks and benefits.
b
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 a) will be the same as used in computing basic EPS. b) may change when assuming the conversion of the dilutive securities. c) does not change when assuming the conversion of the dilutive securities.
b
In years subsequent to the acquisition of debt of one affiliate by another affiliate, consolidated worksheet entries continue to be necessary because a) the effective retirement of the debt has been recognized on the books of the affiliated company that originally issued the debt. b) the effective retirement of the debt has not been recognized on either of the affiliated company's books. c) the effective retirement of the debt has been recognized on the books of the affiliated company that purchased the debt.
b
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 power to direct the economically significant activities of the VIE is held by other parties. The enterprise is neither obligated to absorb significant losses of the VIE nor is is entitled to receive significant benefits from the VIE. The enterprise has the power to direct the economically significant activities of the VIE. The enterprise is obligated to absorb significant losses of the VIE or is is entitled to receive significant benefits from the VIE.
c, d
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 a) The gross amount of cash paid for the acquisition as an investing activity. b) The amount of cash received in the acquisition as a financing activity. c) The net cash paid for the acquisition (cash paid less cash received) as an operating activity. d) The net cash paid for the acquisition (cash paid less cash received) as an investing activity.
d
Subsidiary dividends paid appear as a financing outflow on the consolidated statement of cash outflows a) when paid to either the noncontrolling or controlling interests. b) under no circumstances. c) only when paid to the controlling interest. d) only when paid to the noncontrolling interest.
d
To prepare a consolidated statement of cash flows in the year of a business acquisition, the subsidiary's acquisition-date accounts receivable balance a) comprise a component of cash flows from financing activities. b) must be included in computing cash flows from operating activities. c) must be removed in computing cash flows from investing activities. d) must be removed in computing cash flows from operating activities.
d
For the January 1, 2021, consolidation of Payton and Vicente, the noncontrolling interest amount is reported at its January 1, 2021 ____ value.
fair
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 the parent applies the equity method, it recognizes on its books any retirement _____ or _____ from the acquisition of an affiliate's outstanding debt from a third party.
gain, loss
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 _______ _______ to preferred and common shares is required.
retained earnings
A potentially dilutive security will not be considered in the computation of diluted EPS if a) the effect of its inclusion in the diluted EPS calculation is to increase EPS. b) the effect of its inclusion in the diluted EPS calculation is limited to the denominator of the EPS ratio. c) the effect of its inclusion in the diluted EPS calculation is to decrease EPS.
a
Control over a VIE's decision-making process is typically exercised through a) power granted contractually to a primary beneficiary. b) common stock ownership majority voting power.
a
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. whether the parent was the original issuer of the reacquired bonds.
a, b, c
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
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. There is insufficient equity at risk to enable the entity to finance its activities without additional support. Equity holders' voting rights are used to direct the decision-making activities of the entity. The equity investors lack the ability to exercise financial control over the entity.
a, b, d
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 ongoing amortization of intra-entity discounts and premiums must be taken into account in the consolidation process. The intra-entity debt is consolidated with the other debt of the consolidated entity. The intra-entity interest payable and receivable must be eliminated. The intra-entity investment in debt securities is consolidated with the other assets of the consolidated entity.
a, c
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 a) The net cash paid for the acquisition (cash paid less 90% cash received) as an investing activity. b) The net cash paid for the acquisition (cash paid less cash received) as an investing activity. c) 100% of the cash received in the acquisition is a cash inflow from financing activities. d) 90% of the cash received in the acquisition is a cash inflow from financing activities.
b
True or false: Consolidated financial statements represent a business combination as a single economic entity.
true
Dane, Inc., owns Carlton Corporation. For the current year, Dane reports net income (without consideration of its investment in Carlton) of $218,000 and the subsidiary reports $100,000. The parent had a bond payable outstanding on January 1, with a carrying amount of $221,500. The subsidiary acquired the bond on that date for $209,500. During the current year, Dane reported interest expense of $32,700 while Carlton reported interest income of $30,900, both related to the intra-entity bond payable. What is consolidated net income? a) 331,800 b) 304,200 c) 328,200 d) 307,800
331,800 Dane's income from own operations $ 218,000 Carlton's income 100,000 Eliminate intra-entity interest income (30,900 ) Eliminate intra-entity interest expense 32,700 Recognize retirement gain on debt ($221,500 - $209,500) 12,000 Consolidated net income $ 331,800
Aceton Corporation owns 80 percent of the outstanding stock of Voctax, Inc. During the current year, Voctax made $140,000 in sales to Aceton. How does this transfer affect the consolidated statement of cash flows? a) The transaction should be included if payment has been made. b) Only 80 percent of the transfers should be included because the subsidiary made the sales. c) Because of the intra-entity nature of the transfers, the amount is not reported in the consolidated cash flow statement. d) Because the transfers were from a subsidiary organization, the cash flows are reported as investing activities.
C
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 _____ _____ of Power Finance
primary beneficiary
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? Retained Earnings Gain (or Loss) on Retirement of Bonds Investment in Bonds Bonds Payable
b, c, d
When a subsidiary has both cumulative preferred and common stock, its net income is allocated across the controlling and noncontrolling interests based on a) the percentage share of the common stock owned by the parent only. b) relative separate percentage ownership of the common and preferred stocks. c) the percentage share of the preferred stock owned by the noncontrolling interest only.
b
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: 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
Under what general conditions does an entity qualify as a variable interest entity? There is insufficient equity at risk to enable the entity to finance its activities without additional support. 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. Equity holders' voting rights are used to direct the decision-making activities of the entity.
a, b, c
Why do the risks and rewards from a VIE often get distributed to the primary beneficiary rather than equity investors? 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. VIEs may separate ownership from the VIE's economic benefits and risks to enable beneficial contracting (e.g., financing) for a primary beneficiary. Equity investors, though giving up risks and rewards of the VIE retain financial control over the VIE.
a, b, c
Comparative consolidated balance sheet data for Iverson, Inc., and its 80 percent-owned subsidiary Oakley Co. follow: 2021 2020 Cash $ 34,100 $ 17,750 Accounts receivable (net) 64,000 46,000 Merchandise inventory 95,450 51,250 Buildings and equipment (net) 93,300 111,000 Trademark 103,200 121,500 Totals $ 390,050 $ 347,500 Accounts payable $ 106,050 $ 86,750 Notes payable, long-term 0 31,800 Noncontrolling interest 62,250 53,250 Common stock, $10 par 200,000 200,000 Retained earnings (deficit) 21,750 (24,300 ) Totals $ 390,050 $ 347,500 Additional Information for Fiscal Year 2021 Iverson and Oakley's consolidated net income was $68,250. Oakley paid $6,000 in dividends during the year. Iverson paid $12,000 in dividends. Oakley sold $16,900 worth of merchandise to Iverson during the year. There were no purchases or sales of long-term assets during the year. In the 2021 consolidated statement of cash flows for Iverson Company: Net cash flows from financing activities were: a) (25,000) b) (42,000) c) (38,000) d) (37,000)
38,000 Cash flow from financing activities: Dividends to parent's interest $ (12,000 ) Dividends to noncontrolling interest (20% × $5,000) (1,000 ) Reduction in long-term notes payable (25,000 ) Cash flow from financing activities $ (38,000 )
Redfield Company reports current earnings of $445,000 while declaring $44,000 in cash dividends. Snedeker Company earns $142,000 in net income and declares $11,000 in dividends. Redfield has held a 70 percent interest in Snedeker for several years, an investment with an acquisition-date excess fair over book value attributable solely to goodwill. Redfield uses the initial value method to account for these shares. On January 1 of the current year, Snedeker acquired in the open market $52,000 of Redfield's 8 percent bonds. The bonds had originally been issued several years ago at 92, reflecting a 10 percent effective interest rate. On the date of purchase, the carrying amount of the bonds payable was $50,700. Snedeker paid $49,400 based on a 12 percent effective interest rate over the remaining life of the bonds. What is the noncontrolling interest's share of consolidated net income? a) 42,600 b)39,690 c) 39,300 d) 42,990
42,600 30% of $142,000 subsidiary net income; the intra-entity debt effects are attributed solely to the parent company. 30% × $142,000 = $42,600
Prairie Corporation is a primary beneficiary for Vintage Company, a variable interest entity. When Prairie obtained financial control over Vintage, any excess fair value over Prairie's book value was attributed solely to goodwill. Prairie owns 15 percent of Vintage Company's common stock and participation rights that entitle it to an additional 40 percent of Vintage's net income. In the current year, Prairie reports $400,000 of net income before consideration of its investment in Vintage. Vintage Company reports net income of $100,000. What amount of consolidated net income is attributable to the noncontrolling interest? a) 15,000 b) 85,000 c) 45,000 d) 60,000
45,000 Vintage Company net income $ 100,000 Less: Prairie Company 15% ownership share (15,000 ) Less: Prairie Company 40% participating rights (40,000 ) Net income attributable to noncontrolling interest $ 45,000
Aaron Company's books show current earnings of $400,000 and $40,000 in cash dividends. Zeese Company earns $100,000 in net income and declares $10,000 in dividends. Aaron has held a 70 percent interest in Zeese for several years, an investment with an acquisition-date excess fair over book value attributable solely to goodwill. Aaron uses the initial value method to account for these shares and includes dividend income in its internal earnings reports. On January 1 of the current year, Zeese acquired in the open market $50,000 of Aaron's 8 percent bonds. The bonds had originally been issued several years ago at 92, reflecting a 10 percent effective interest rate. On the date of purchase, the carrying amount of the bonds payable was $48,300. Zeese paid $46,600 based on a 12 percent effective interest rate over the remaining life of the bonds. What is consolidated net income for this year? a) 492,160 b) 499,160 c) 493,938 d) 500,258
493,938 Aaron net income $ 400,000 Less intra-entity dividends (initial value method) (7,000 ) $ 393,000 Zeese reported net income 100,000 Gain on extinguishment of debt ($48,300 - $46,600) 1,700 Eliminate interest expense on "retired" debt ($48,300 × 10%) 4,830 Eliminate interest income on "retired" debt ($46,600 × 12%) (5,592 ) Consolidated net income $ 493,938
Pesto Company possesses 80 percent of Salerno Company's outstanding voting stock. Pesto uses the initial value method to account for this investment. On January 1, 2017, Pesto sold 9 percent bonds payable with a $20.4 million face value (maturing in 20 years) on the open market at a premium of $860,000. On January 1, 2020, Salerno acquired 40 percent of these same bonds from an outside party at 96.6 percent of face value. Both companies use the straight-line method of amortization. For a 2021 consolidation, what adjustment should be made to Pesto's beginning Retained Earnings as a result of this bond acquisition? a) 553,520 increase b) 569,840 increase c) 536,320 increase d) 544,920 increase
536,320 increase For 2021, the adjustment to beginning retained earnings should recognize the gain on the retirement of the debt, the elimination of the 2020 interest expense, and the elimination of the 2020 interest income. Gain on Retirement of Bond: Original carrying amount $ 21,260,000 2017-2019 amortization ($860,000 ÷ 20 yrs. × 3 yrs.) (129,000 ) Carrying amount, January 1, 2021 $ 21,131,000 Percentage of bonds retired 40 % Carrying amount of retired bonds $ 8,452,400 Cash received ($8,160,000 × 96.6%) (7,882,560 ) Gain on retirement of bonds $ 569,840 Interest expense on Intra-Entity Debt—2020 Cash interest expense (9% × $8,160,000) $ 734,400 Premium amortization ($43,000 per year total × 40% retired portion of bonds) (17,200 ) Interest expense on intra-entity debt $ 717,200 Interest income on Intra-Entity Debt—2020 Cash interest income (9% × $8,160,000) $ 734,400 Discount amortization (0.034 × $8,160,000 ÷ 17 years) 16,320 Interest income on intra-entity debt $ 750,720 Adjustment to 1/1/21 Retained Earnings Recognition of 2020 gain on extinguishment of debt (above) $ 569,840 Elimination of 2020 intra-entity interest expense (above) 717,200 Elimination of 2020 intra-entity interest income (above) (750,720 ) Increase in retained earnings, 1/1/21 $ 536,320
Comparative consolidated balance sheet data for Iverson, Inc., and its 80 percent-owned subsidiary Oakley Co. follow: 2021 2020 Cash $ 34,100 $ 17,750 Accounts receivable (net) 64,000 46,000 Merchandise inventory 95,450 51,250 Buildings and equipment (net) 93,300 111,000 Trademark 103,200 121,500 Totals $ 390,050 $ 347,500 Accounts payable $ 106,050 $ 86,750 Notes payable, long-term 0 31,800 Noncontrolling interest 62,250 53,250 Common stock, $10 par 200,000 200,000 Retained earnings (deficit) 21,750 (24,300 ) Totals $ 390,050 $ 347,500 Additional Information for Fiscal Year 2021 Iverson and Oakley's consolidated net income was $68,250. Oakley paid $6,000 in dividends during the year. Iverson paid $12,000 in dividends. Oakley sold $16,900 worth of merchandise to Iverson during the year. There were no purchases or sales of long-term assets during the year. In the 2021 consolidated statement of cash flows for Iverson Company: Net cash flows from operating activities were: a) 61,350 b) 19,300 c) 38,600 d) 6,900
61,350 Net income $ 68,250 Depreciation 17,700 Trademark amortization 18,300 Increase in accounts receivable (18,000 ) Increase in inventory (44,200 ) Increase in accounts payable 19,300 (6,900 ) Cash flow from operations $ 61,350
Premier Company owns 90 percent of the voting shares of Stanton, Inc. Premier reports sales of $480,000 during the current year, and Stanton reports $264,000. Stanton sold inventory costing $28,800 to Premier (upstream) during the year for $57,600. Of this amount, 25 percent is still in ending inventory at year-end. Total receivables on the consolidated balance sheet were $81,800 at the first of the year and $119,100 at year-end. No intra-entity debt existed at the beginning or end of the year. Using the direct method, what is the consolidated amount of cash collected by the business combination from its customers? a) 686,400 b) 706,700 c) 744,000 d) 649,100
649,100 Parent's reported sales $ 480,000 Subsidiary's reported sales 264,000 Less: Intra-entity transfers (57,600 ) Sales to outsiders $ 686,400 Less: Increase in receivables (37,300 ) Cash generated by sales $ 649,100
