Ch. 6 411

Which of the following is not a variable interest?

A.) Guarantee of indebtedness B.) Corporate bond rated BBB- by Standard & Poors C.) U.S. treasury bond.***Correct!!*** D.) Common stock

Which of the following is not automatically exempt from the consolidation guidance included in FASB ASC 810 ("Consolidations")

A.) Legal entities that qualify as investments accounted for at fair value in accordance with the specialized guidance in FASB ASC 946 ("Financial Services - Investment Companies") B.) Legal entities that administer employee benefit plans subject to FASB ASC 712 ("Compensation- Nonretirement Postemployment Benefits") C.) Legal entities that meet the definition of "businesses" as defined by FASB ASC 805 ("Business Combinations") ***Correct!!*** D.)Legal entities that are not-for-profit

Which of the following characteristics does not usually exist for a special purpose entity (SPE) that is used in a securitization transaction?

A.) The SPE is expected to seek strategic business opportunities that maximize returns to the SPE's equity investors.***Correct!!*** B.) The SPE is usually legally distinct from the sponsoring company that forms the SPE and is bankruptcy remote. C.) If the SPE is formed to securitize accounts receivable, then the SPE's security holders are only repaid if the securitized accounts receivable are collected. D.) All of the above

If a legal entity is within the scope of FASB ASC 810 ("Consolidations"), when can a reporting company completely skip an evaluation of whether the legal entity is a variable interest entity (i.e., the "variable interest entity model") and solely determine consolidation based on whether the reporting company owns a majority of the voting common stock of a legal entity (i.e., the "voting interest entity model")?

A.) The reporting company does not have the obligation to absorb the losses of the legal entity that could potentially be significant to the legal entity. B.) The legal entity satisfies none of the four conditions for the business-related scope exception. ***Correct!!*** C.) The reporting company does not have the power to direct the activities that most significantly impact the legal entity's business activities. D.) The legal entity is only capitalized with a bank loan and voting common stock.

FASB ASC 810 ("Consolidations") states that a Primary Beneficiary is the company that consolidates a variable interest entity (VIE). Which of the following is not a triggering condition for a reporting entity to be deemed the Primary Beneficiary of a VIE in which the reporting entity has a variable interest?

A.) The reporting entity owns a majority of the voting common stock of the VIE. ***Correct!!*** B.)The reporting entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance. C.) The reporting entity has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. D.) Both b and c, above, are not triggering conditions.

When a Primary Beneficiary initially consolidates a variable interest entity (VIE), the primary beneficiary must determine whether the VIE is a "business" as defined by FASB ASC 805 ("Business Combinations") because:

A.)The initial consolidation-date fair value of the VIE's identifiable net assets will depend on whether the VIE is a "business" B.) FASB ASC 805 only applies to acquisitions of "businesses," so the Primary Beneficiary can avoid consolidation if the VIE is not a business. C.) If the VIE is not a "business," then a gain or loss is always recognized upon initial consolidation by a Primary Beneficiary. D.) Goodwill is only recognized by the Primary Beneficiary when a consolidated VIE is a "business." ***Correct!!***

Special-Purpose entities

Are usually "robot-like" entities that have no distinct physical location, have no independent management or employees, and make no strategic business decisions

Assume that a Parent owns 75% of a Subsidiary that has 7% preferred stock outstanding with a reported par value of $600,000. Aside from the preferred dividends, no other dividends are paid (i.e., no dividends are paid to the common shareholders). The Parent Company owns 30 percent of the preferred stock. Assume that the Subsidiary reports net income of $125,000. During the year, the Parent company reported $300,000 of (pre-consolidation) income from its own operations (i.e., prior to any equity method adjustments by the Parent company). Compute the amount of consolidated net income attributable to the noncontrolling interest and the amount of net income attributable to the controlling interest.

Consolidated net income attributable to the controlling interest: $362,250 Consolidated net income attributable to the noncontrolling interest: $20,750 1st Step (CI): Find Div. 7% x $600,000= $42,000 2nd Step: Income from Sub. $125,000 - (Div.) $42,000= $83,000 3rd Step: 75% x $83,000= $62,250 4th Step: Add $300,000 income from Parent, $62,250+$300,000= $362,250 1st Step (NCI): 25% x $83,000= $20,750

Assume that a Parent owns 80 percent of a Subsidiary that has 6 percent preferred stock outstanding with a reported par value of $720,000. Aside from the preferred dividends, no other dividends are paid (i.e., no dividends are paid to the common shareholders). The Parent owns none of the preferred stock. Assume that the Subsidiary reports net income of $117,000. During the year, the Parent company reported $261,000 of (pre-consolidation) income from its own operations (i.e., prior to any equity method adjustments by the Parent company). Compute the amount of consolidated net income attributable to the noncontrolling interest and the amount of net income attributable to the controlling interest.

Consolidated net income attributable to the noncontrolling interest: $14,760 Consolidated net income attributable to the controlling interest: $320,040 1st Step (NCI): Find Div. 6% x $720,000= $43,200 2nd Step: NI from Sub.= $117,000-$43,200=$73,800 3rd Step: $73,800 x 20%= $14,760 1st Step (CI): 80% x $73,800= $59,040 2nd Step: Parent company income= $261,000 + $59,040= $320,040