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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

In computing consolidated EPS, the numerator contains earnings

attributable only to the controlling interest.

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.

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.

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.

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

noncontrolling

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

power granted contractually to a primary beneficiary.

In computing consolidated diluted EPS, the presence of subsidiary dilutive securities will potentially affect

the numerator of the diluted EPS ratio. the amount of consolidated net income attributable to the common shares. the parent's percentage ownership to apply to the earnings attributable to common shares.

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.

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. - There is insufficient equity at risk to enable the entity to finance its activities without additional support. - Equity investors' returns are capped by contractual arrangements with variable interest holders.

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

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

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.

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

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.

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.

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.

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.

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.

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.

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 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 Expense. Interest Income.

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?

Gain (or Loss) on Retirement of Bonds Investment in Bonds Bonds Payable

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

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. The company was unable to obtain financing without additional financial support from Twin Peaks Electric.

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.

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

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

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.

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 premium or discount on the books of the affiliated company that purchased the bonds from an outside third party. 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.

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.

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.

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

The primary beneficiary of a VIE

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

Variable interests entities are often established to provide

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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

parent's

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

True

What business types typically describe variable interest entities?

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

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

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

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