advanced accounting final (chp 5-7)

Which of the following statements is false concerning a father-son-grandson configuration? A) This type of ownership pattern does not significantly alter the worksheet process. B) Most worksheet entries are simply made twice. C) The doubling of entries may seem overwhelming. D) The individual consolidation procedures remain unaffected. E) Consolidated financial statements are required for only the father and son companies.

E) Consolidated financial statements are required for only the father and son companies.

All of the following are examples of variable interests except: A) Guarantees of debt. B) Stock options. C) Lease residual value guarantees. D) Participation rights. E) Asset purchase options

B) Stock options.

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) Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances. B) Subsequent interest revenue/expense must be removed although these balances fail to agree in amount. C) A gain or loss must be recognized by both parent and subsidiary companies. D) Changes in the investment, debt, interest revenue, and interest expense accounts occur constantly because of the amortization process. E) The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired, even though this balance does not appear on the financial records of either company.

C) A gain or loss must be recognized by both parent and subsidiary companies.

Which of the following variable interests entitles a holder to residual profits, losses, and dividends? A) Participation rights B) Lease residual value guarantees C) Common stock D) Asset purchase options E) Subordinated debt instruments

C) Common Stock

Which of the following is not a potential loss or return of a variable interest entity? A) Entitles holder to residual profits. B) Entitles holder to benefit from increases in asset fair value. C) Entitles holder to receive shares of common stock. D) If the variable interest entity cannot repay liabilities, honoring a debt guarantee will produce a loss. E) If leased asset declines below the residual value, honoring the guarantee will produce a loss.

C) Entitles holder to receive shares of common stock.

Which of the following statements is true regarding the filing of income taxes for an affiliated group? A) Domestic subsidiaries greater than 50% ownership must file a consolidated tax return. B) Domestic subsidiaries greater than 60% ownership must file a consolidated tax return. C) Domestic subsidiaries greater than 80% ownership must file a consolidated tax return. D) Domestic subsidiaries greater than 80% ownership may file a consolidated tax return. E) Foreign subsidiaries must file a consolidated tax return.

D) Domestic subsidiaries greater than 80% ownership may file a consolidated tax return.

Which of the following statements is true concerning connecting affiliations and mutual ownerships? A) In a mutual ownership, at least two companies in the consolidated group own portions of a third company. B) There are at least four companies in a connecting affiliation. C) In a connecting affiliation, at least one subsidiary owns stock in the parent company. D) In a mutual ownership, the subsidiary owns a portion of the parent's stock. E) There are only two companies in a connecting affiliation.

D) In a mutual ownership, the subsidiary owns a portion of the parent's stock.

On January 1, 2018, 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 2018? A) The difference is added to the carrying value of the debt. B) The difference is deducted from the carrying value of the debt. C) The difference is treated as a loss from the extinguishment of the debt. D) The difference is treated as a gain from the extinguishment of the debt. E) The difference does not influence the consolidated financial statements.

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

If a subsidiary issues a stock dividend, which of the following statements is true? A) Investment in subsidiary on the parent's books will increase. B) Investment in subsidiary on the parent's books will decrease. C) Additional paid-in capital on the parent's books will increase. D) Additional paid-in capital on the parent's books will decrease. E) No adjustment is necessary.

E) No adjustment is necessary

A variable interest entity can take all of the following forms except a(n): A) Trust. B) Partnership. C) Joint venture. D) Corporation. E) Estate.

E) Estate

MacDonald, Inc. owns 80 percent of the outstanding stock of Stahl Corporation. During the current year, Stahl made $125,000 in sales to MacDonald. How does this transfer affect the consolidated statement of cash flows? A) Include 80 percent as a decrease in the investing section. B) Include 100 percent as a decrease in the investing section. C) Include 80 percent as a decrease in the operating section. D) Include 100 percent as an increase in the operating section. E) Not reported in the consolidated statement of cash flows.

E) Not reported in the consolidated statement of cash flows.

Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of cash flows? A) Cash flows from operating activities. B) Cash flows from investing activities. C) Cash flows from financing activities. D) Supplemental schedule of noncash investing and financing activities. E) They do not appear in the consolidated statement of cash flows.

E) They do not appear in the consolidated statement of cash flows

In computing the non-controlling interest's share of consolidated net income, how should the subsidiary's net income be adjusted for intra-entity transfers? a. The subsidiary's reported net income is adjusted for the impact of upstream transfers prior to computing the noncontrolling interest's allocation. b. The subsidiary's reported net income is adjusted for the impact of all transfers prior to computing the noncontrolling interest's allocation. c. The subsidiary's reported net income is not adjusted for the impact of transfers prior to computing the noncontrolling interest's allocation. d. The subsidiary's reported net income is adjusted for the impact of downstream transfers prior to computing the non-controlling interest's allocation.

a. The subsidiary's reported net income is adjusted for the impact of upstream transfers prior to computing the non-controlling interest's allocation.

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 a loss on retirement of the bonds. b) As a gain on retirement of the bonds. c. As an increase to interest expense over the remaining life of the bonds. d. Because the bonds now represent intra-entity debt, the difference is not reported.

b) As a gain on retirement of the bonds.

A subsidiary owns shares of its parent company. Which of the following is true concerning the treasury stock approach? a. It is one of several options to account for mutual holdings available under current accounting standards. b. The original cost of the subsidiary's investment is a reduction in consolidated stockholders' equity. c. The subsidiary accrues income on its investment by using the equity method. d. The treasury stock approach eliminates these shares entirely within the consolidation process.

b. The original cost of the subsidiary's investment is a reduction in consolidated stockholders' equity.

Which of the following is not a reason for two companies to file separate tax returns? a. The parent owns 68 percent of the subsidiary. b. They have no intra-entity transactions. c. Intra-entity dividends are tax-free only on separate returns. d. Neither company historically has had an operating tax loss.

c. Intra-entity dividends are tax-free only on separate returns.

How does the amortization of tax-deductible goodwill affect the computation of a parent company's income taxes? a. It is a deductible expense only if the parent owns at least 80 percent of subsidiary's voting stock. b. It is deductible only as impairments are recognized. c. It is a deductible item over a 15-year period. d. It is deductible only if a consolidated tax return is filed.

c. It is a deductible item over a 15-year period.

Which of the following is correct for two companies that want to file a consolidated tax return as an affiliated group? a. One company must hold at least 51 percent of the other company's voting stock. b. One company must hold at least 65 percent of the other company's voting stock. c. One company must hold at least 80 percent of the other company's voting stock. d. They cannot file one unless one company owns 100 percent of the other's voting stock.

c. One company must hold at least 80 percent of the other company's voting stock.

In a father-son-grandson business combination, which of the following is true? a. The father company always must have its total accrual-based income computed first. b. The computation of a company's accrual-based net income has no effect on the accrual-based net income of other companies within a business combination. c. A father-son-grandson configuration does not require consolidation unless one company owns shares in all of the other companies. d. All companies solely in subsidiary positions must have their accrual-based net income computed first within the consolidation process.

d. All companies solely in subsidiary positions must have their accrual-based net income computed first within the consolidation process.

Which of the following is not an advantage of filing a consolidated income tax return? A) The existence of deferred losses in ending inventory. B) The ability to use net operating losses of one company to offset profits of another company. C) The existence of intra-entity gross profit remaining in ending inventory. D) Transfers of inventory at a transfer price above cost. E) There is no difference between U.S. GAAP and tax accounting rules for dividends paid to a parent by an 85%-owned subsidiary.

A) The existence of deferred losses in ending inventory.

Where do intra-entity transfers of inventory appear in a consolidated statement of cash flows? A) They do not appear in the consolidated statement of cash flows. B) Supplemental schedule of noncash investing and financing activities. C) Cash flows from operating activities. D) Cash flows from investing activities. E) Cash flows from financing activities.

A) They do not appear in the consolidated statement of cash flows.

During 2017, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. For consolidation reporting purposes, when is the $14,000 intra-entity gross profit recognized? A) When goods are transferred to a third party by Lord. B) When Lord pays Von for the goods. C) When Von sold the goods to Lord. D) When Lord receives the goods. E) No gain can be recognized since the transfer was between related parties.

A) When goods are transferred to a third party by Lord.

Why might a consolidated group file separate income tax returns? A) There are no intra-entity transfers. B) There are no deferred intra-entity gross profits in ending inventory. C) One of the companies is a foreign company. D) Parent owns 68 percent of one company and 82 percent of another. E) All of these answer choices are correct.

E) All of these answer choices are correct

Which of the following statements is true regarding a subsidiary's investment in the parent company's stock? A) The treasury stock approach focuses on the parent's control over its subsidiary. B) For consolidation, both the parent and subsidiary must defer gross profit on remaining inventory from intra-entity transfers. C) In consolidation, the parent's retained earnings will not be reduced by the dividends it paid to the subsidiary. D) This corporate combination is known as mutual ownership. E) All of these answer choices are true statements.

E) All of these answer choices are true statements

On November 8, 2018, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. For consolidated financial statement reporting purposes, when must the gain on the sale of the land be recognized? A) Proportionately over a designated period of years. B) When Wood Co. sells the land to a third party. C) No gain may be recognized. D) As Wood uses the land. E) When Wood Co. begins using the land productively.

B) When Wood Co. sells the land to a third party.

What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method? A) Parent's dividends would be subtracted as a financing activity. B) Gain on sale of land would be deducted from net income. C) Noncontrolling interest in net income of subsidiary would be added to net income. D) Proceeds from the sale of long-term investments would be added to investing activities. E) Loss on sale of equipment would be added to net income.

C) Noncontrolling interest in net income of subsidiary would be added to net income.

Which of the following statements is true for a consolidated statement of cash flows? A) Parent's dividends and subsidiary's dividends are deducted as a financing activity. B) Only parent's dividends are deducted as a financing activity. C) Parent's dividends and its share of subsidiary's dividends are deducted as a financing activity. D) All of parent's dividends and noncontrolling interest of subsidiary's dividends are deducted as a financing activity. E) Neither parent's nor subsidiary's dividends are deducted as a financing activity.

D) All of parent's dividends and noncontrolling interest of subsidiary's dividends are deducted as a financing activity.

Which of the following statements is true concerning an intra-entity transfer of a depreciable asset? A) Net income attributable to the noncontrolling interest is never affected by a gain on the transfer. B) Net income attributable to the noncontrolling interest is always affected by a gain on the transfer. C) Net income attributable to the noncontrolling interest is affected by a downstream gain only. D) Net income attributable to the noncontrolling interest is affected only when the transfer is upstream. E) Net income attributable to the noncontrolling interest is increased by an upstream gain in the year of transfer.

D) Net income attributable to the noncontrolling interest is affected only when the transfer is upstream.

Which of the following statements is true regarding goodwill? A) For accounting purposes, goodwill may be amortized over a period not to exceed 40 years. B) For accounting purposes, goodwill may be amortized over a period not to exceed 20 years. C) For tax purposes, goodwill amortization cannot be deductible. D) For tax purposes, goodwill amortization may be deductible over a 20-year period. E) For tax purposes, goodwill amortization may be deductible over a 15-year period.

E) For tax purposes, goodwill amortization may be deductible over a 15-year period.

On January 1, Balanger Company buys 10 percent of the outstanding shares of its parent, Altgeld, Inc. Although the total book and fair values of Altgeld's net assets equaled $3.2 million, the price paid for these shares was $340,000. During the year, Altgeld reported $415,000 of separate operating income (no subsidiary income was included) and declared dividends of $35,000. How are the shares of the parent owned by the subsidiary reported at December 31? a. Consolidated stockholders' equity is reduced by $340,000. b. An investment balance of $378,000 is eliminated for consolidation purposes. c. Consolidated stockholders' equity is reduced by $378,000. d. An investment balance of $358,000 is eliminated for consolidation purposes.

a. Consolidated stockholders' equity is reduced by $340,000.

Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition? A) Recognition of any gain or loss is deferred until the debt is extinguished for purposes of reporting such debt on consolidated financial statements. B) Any gain or loss is recognized in the year of acquisition on a consolidated income statement. C) Interest revenue generated from the debt of an affiliate is recognized on a consolidated income statement. D) Interest expense recognized from carrying debt instruments is recognized on a consolidated income statement. E) Consolidated retained earnings is adjusted to take into account the difference between the purchase price and carrying value of the debt.

B) Any gain or loss is recognized in the year of acquisition on a consolidated income statement.

Which of the following is true concerning the treasury stock approach in accounting for a subsidiary's investment in parent company stock? A) The original cost of the subsidiary's investment reduces long-term liabilities. B) The cost of parent shares is treated as if the shares are no longer outstanding. C) The subsidiary must apply the equity method in accounting for the investment if the treasury stock approach is used. D) The treasury stock approach increases total stockholders' equity. E) The cost of parent shares is treated as if the shares are no longer issued.

B) The cost of parent shares is treated as if the shares are no longer outstanding.

Where do dividends paid to the noncontrolling interest of a subsidiary appear on a consolidated statement of cash flows? A) Cash flows from operating activities. B) Cash flows from investing activities. C) Cash flows from financing activities. D) Supplemental schedule of noncash investing and financing activities. E) They do not appear in the consolidated statement of cash flows.

C) Cash flows from financing activities.

Which of the following statements is true concerning variable interest entities (VIEs)? (1.) The role of the VIE equity investors can be fairly minor. (2.) A VIE may be created specifically to benefit the business enterprise that established it with low-cost financing. (3.) VIE governing agreements often limit activities and decision-making. (4.) VIEs usually have a well-defined and limited business activity. A) 2 and 4. B) 2, 3, and 4. C) 1, 2, and 4. D) 1, 2, and 3. E) 1, 2, 3, and 4.

E) 1, 2, 3, and 4.

Which of the following statements is false concerning variable interest entities (VIEs)? A) Sometimes VIEs do not have independent management. B) Most VIEs are established for valid business purposes. C) VIEs may be formed as a source of low-cost financing. D) VIEs have little need for voting stock. E) A VIE cannot take the legal form of a partnership or corporation.

E) A VIE cannot take the legal form of a partnership or corporation.

If new bonds are issued from a parent to its subsidiary, which of the following statements is false? A) Any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment. B) There will be $0 net gain or loss on the bond transaction. C) Interest expense needs to be eliminated on the consolidated income statement. D) Interest revenue needs to be eliminated on the consolidated income statement. E) A net gain or loss on the bond transaction will be reported.

E) A net gain or loss on the bond transaction will be reported.

Regency Corp. recently acquired $500,000 of the bonds of Safire Co., one of its subsidiaries, paying more than the carrying value of the bonds. According to the most practical view of this intra-entity transaction, to whom should the loss be attributed? A) To Safire because the bonds were issued by Safire. B) The loss should be allocated between Safire and Regency based on the purchase price and the original face value of the debt. C) The loss should be amortized over the life of the bonds and need not be attributed to either party. D) The loss should be deferred until it can be determined to whom the attribution can be made. E) To Regency because Regency is the controlling party in the business combination.

E) To Regency because Regency is the controlling party in the business combination.

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. Whether the balances agree or not, both the subsequent interest income and interest expense should be reported in a consolidated income statement. 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. Although subsequent interest income and interest expense will not agree in amount, both balances should be eliminated for consolidation purposes.

d. Although subsequent interest income and interest expense will not agree in amount, both balances should be eliminated for consolidation purposes.

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 the transfers were from a subsidiary organization, the cash flows are reported as investing activities. d. Because of the intra-entity nature of the transfers, the amount is not reported in the consolidated cash flow statement.

d. Because of the intra-entity nature of the transfers, the amount is not reported in the consolidated cash flow statement.

In a father-son-grandson combination, which of the following statements is true? A) Companies that are solely in subsidiary positions must have their accrual-based net income computed first in the consolidation process. B) Father-son-grandson configurations never require consolidation unless one company owns 100% of at least one other member of the combined group. C) The order of the computation of accrual-based net income is not important in the consolidation process. D) The parent must have its accrual-based net income computed first in the consolidation process. E) None of these answer choices are correct.

A) Companies that are solely in subsidiary positions must have their accrual-based net income computed first in the consolidation process.

How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Stendall to Edgar? A) Consolidated cost of goods sold would have remained $2,140,000. B) Consolidated cost of goods sold would have been more than $2,140,000 because of the controlling interest in the subsidiary. C) Consolidated cost of goods sold would have been less than $2,140,000 because of the noncontrolling interest in the subsidiary. D) Consolidated cost of goods sold would have been more than $2,140,000 because of the noncontrolling interest in the subsidiary. E) The effect on consolidated cost of goods sold cannot be predicted from the information provided.

A) Consolidated cost of goods sold would have remained $2,140,000.

Which of the following statements is true regarding mutual ownership between a parent and its subsidiary? A) The shares of the parent held by a subsidiary should be treated as outstanding stock on the consolidated balance sheet. B) Only the subsidiary's shares held by the parent should be eliminated in consolidation. C) The treasury stock approach is required to reflect parent shares held by the subsidiary. D) The treasury stock approach is required to eliminate subsidiary shares held by the parent company. E) The parent company does not need to file consolidated financial statements if there is mutual ownership.

C) The treasury stock approach is required to reflect parent shares held by the subsidiary.

How do intra-entity transfers of inventory affect the preparation of a consolidated statement of cash flows? A) They must be added in calculating cash flows from investing activities. B) They must be deducted in calculating cash flows from investing activities. C) They must be added in calculating cash flows from operating activities. D) Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required. E) They must be deducted in calculating cash flows from operating activities.

D) Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required.

Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity? A) The power to direct the most significant economic performance activities. B) The power through voting or similar rights to direct activities, which significantly impact economic performance. C) The obligation to absorb potentially significant losses of the entity. D) No ability to make decisions about the entity's activities. E) The right to receive potentially significant benefits of the entity.

D) No ability to make decisions about the entity's activities.

Wolff Corporation owns 70 percent of the outstanding stock of Donald, Inc. During the current year, Donald made $75,000 in sales to Wolff. How does this transfer affect the consolidated statement of cash flows? A) Included as a decrease in the investing section. B) Included as an increase in the operating section. C) Included as a decrease in the operating section. D) Included as an increase in the investing section. E) Not reported in the consolidated statement of cash flows.

E) Not reported in the consolidated statement of cash flows.

Which one of the following characteristics of preferred stock would make the stock a dilutive security for purposes of calculating earnings per share? A) The preferred stock is callable. B) The preferred stock is convertible. C) The preferred stock is cumulative. D) The preferred stock is noncumulative. E) The preferred stock is participating.

B) The preferred stock is convertible.

Bensman Corporation is computing EPS. One of its subsidiaries has stock warrants outstanding. How do these convertible items affect Bensman's EPS computation? a. No effect is created because the stock warrants were for the subsidiary company's shares. b. The stock warrants are not included in the computation unless they are anti-dilutive. c. The effect of the stock warrants must be computed in deriving the amount of subsidiary income to be included in making the diluted EPS calculation. d. The stock warrants are included only in basic EPS but never in diluted EPS.

c. The effect of the stock warrants must be computed in deriving the amount of subsidiary income to be included in making the diluted EPS calculation.

If a subsidiary re-acquires its outstanding shares from outside ownership for more than the noncontrolling interest valuation basis at the date of buying such treasury stock, which of the following statements is true? A) Additional paid-in capital on the parent company's books will decrease. B) Investment in subsidiary will increase. C) Treasury stock on the parent's books will increase. D) Treasury stock on the parent's books will decrease. E) No adjustment is necessary.

A) Additional paid-in capital on the parent company's books will decrease.

When indirect control is present, which of the following statements is true? A) At least one company within the consolidated entity holds a parent and a subsidiary relationship. B) The parent company owns a percent of subsidiary and subsidiary owns a percent of the parent. C) Consolidated financial statements are required for only one subsidiary. D) Recognition of income for an indirectly owned subsidiary is ignored. E) Only dividend income is recognized for an indirectly owned subsidiary.

A) At least one company within the consolidated entity holds a parent and a subsidiary relationship.

Evanston Co. owned 60% of Montgomery Corp. Montgomery owned 75% of Noir Inc., and Noir owned 15% of Montgomery. This pattern of ownership would be called... A) Mutual ownership. B) Direct control. C) Indirect control. D) An affiliated group. E) A connecting affiliation.

A) Mutual ownership.

In a tax-free business combination, A) The income tax basis for acquired assets and liabilities is adjusted to current fair value. B) Any goodwill created by the combination may be amortized in calculating taxable income. C) The subsidiary's assets and liabilities are assigned an income tax basis of zero dollars, so that they will have no future income tax consequences. D) Any goodwill created by the combination must be deducted in total in calculating taxable income. E) The subsidiary's cost basis for assets are retained for income tax calculations.

E) The subsidiary's cost basis for assets are retained for income tax calculations.

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. The VIE has issued no voting stock. b. The variable interest held by the enterprise involves a lease. c. The enterprise has a controlling financial interest in the VIE. d. Other equity interests in the VIE have the obligation to absorb the expected losses of the VIE.

c. The enterprise has a controlling financial interest in the VIE.

Arcola, Inc., acquires all 40,000 shares of Tuscola Company for $725,000. A year later, when Arcola's equity adjusted balance in its investment in Tuscola equals $800,000, Tuscola issues an additional 10,000 shares to outside investors for $25 per share. Which of the following best describes the effect of Tuscola's stock issue on Arcola's investment account? a. No effect because the shares were all sold to outside parties. b. The investment account is reduced because Arcola now owns a smaller percentage of Tuscola. c. The investment account is increased because Arcola's share of Tuscola's value has increased. d. No effect because Arcola maintains control over Tuscola despite the new stock issue.

c. The investment account is increased because Arcola's share of Tuscola's value has increased.

A subsidiary issues new shares of common stock at an amount below book value. Outsiders buy all of these shares. Which of the following statements is true? A) The parent's additional paid-in capital will be increased. B) The parent's investment in subsidiary will be increased. C) The parent's retained earnings will be increased. D) The parent's additional paid-in capital will be decreased. E) The parent's retained earnings will be decreased.

D) The parent's additional paid-in capital will be decreased.

On January 1, 2018, a subsidiary buys 12 percent of the outstanding voting stock of its parent corporation. The payment of $400,000 exceeded book value of the acquired shares by $80,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported separate company income of $1,000,000 (excluding investment income from the subsidiary), and paid $120,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2018? A) Consolidated stockholders' equity is reduced by $400,000. B) Consolidated stockholders' equity is reduced by $320,000. C) Included in current assets. D) Included in noncurrent assets. E) There is no effect on the consolidated balance sheet, because the effects have been eliminated.

A) Consolidated stockholders' equity is reduced by $400,000.

How would net income attributable to the noncontrolling interest be different if the transfers had been for the same amount and cost, but from Stendall to Edgar? A) Net income attributable to the noncontrolling interest would have decreased by $6,000. B) Net income attributable to the noncontrolling interest would have increased by $24,000. C) Net income attributable to the noncontrolling interest would have increased by $20,000. D) Net income attributable to the noncontrolling interest would have decreased by $18,000. E) Net income attributable to the noncontrolling interest would have decreased by $56,000.

A) Net income attributable to the noncontrolling interest would have decreased by $6,000.

In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true? A) Parent company earnings per share equals consolidated earnings per share when the equity method is used. B) Parent company earnings per share is equal to consolidated earnings per share when the initial value method is used. C) Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value exceeds book value. D) Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value is less than book value. E) Preferred dividends are not deducted from net income for consolidated earnings per share.

A) Parent company earnings per share equals consolidated earnings per share when the equity method is used.

Parent sold land to its subsidiary resulting in a gain in 2016, the year of transfer. The subsidiary sold the land to an unrelated third party for a gain in 2019. Which of the following statements is true? A) A gain will be recognized in the consolidated income statement in 2016. B) A gain will be recognized in the consolidated income statement in 2019. C) No gain will be recognized in the 2019 consolidated income statement. D) Only the parent company will recognize a gain in 2019. E) The subsidiary will recognize a gain in 2016.

B) A gain will be recognized in the consolidated income statement in 2019.

Which of the following statements is true regarding an intra-entity transfer of land? A) A loss is always recognized but a gain is deferred in a consolidated income statement. B) A loss and a gain are deferred until the land is sold to an outside party. C) A loss and a gain are always recognized in a consolidated income statement. D) A gain is always recognized but a loss is deferred in a consolidated income statement. E) Recognition of a gain or loss is deferred by adjusting stockholders' equity through comprehensive income.

B) A loss and a gain are deferred until the land is sold to an outside party.

An intra-entity transfer took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year subsequent to the year of transfer? A) A worksheet entry is made with a debit to investment in subsidiary for an upstream transfer. B) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer. C) A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when the parent uses the equity method. D) A worksheet entry is made with a debit to retained earnings for an upstream transfer, regardless of the method used to account for the investment. E) No worksheet entry is necessary.

C) A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when the parent uses the equity method.

Under current U.S. tax law for consolidated tax returns: A) One entity in the group can use another entity's net operating loss carryforward to its advantage. B) The parent can use the net operating loss carryforward of another entity in the group. C) A net operating loss carryforward if an entity will be unusable when consolidated tax returns are prepared. D) A net operating loss carryforward of an entity in the group can only be used by that entity. E) Since the tax return is for all entities in one consolidated group, the net operating loss carryforward of one entity must be pro-rated to all other entities in the group.

D) A net operating loss carryforward of an entity in the group can only be used by that entity.

Which of the following conditions will allow two companies to file a consolidated income tax return? A) One company owns less than 50 percent of the other company's voting stock but has the ability to significantly influence the other company. B) One company holds 50 percent of the other company's voting stock. C) One company holds 75 percent of the other company's voting stock D) One company holds 83 percent of the other company's voting stock. E) None of the above.

D) One company holds 83 percent of the other company's voting stock.

A subsidiary issues new shares of common stock. If the parent acquires all of these shares at an amount greater than book value, which of the following statements is true? A) The investment in subsidiary will decrease. B) Additional paid-in capital will decrease. C) Retained earnings will increase. D) The investment in subsidiary will increase. E) No adjustment will be necessary.

D) The investment in subsidiary will increase.

How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants? A) Parent's earnings per share plus subsidiary's earnings per share. B) Parent's net income divided by parent's number of shares outstanding. C) Consolidated net income divided by parent's number of shares outstanding. D) Average of parent's earnings per share and subsidiary's earnings per share. E) Consolidated income divided by total number of shares outstanding for the parent and subsidiary.

C) Consolidated net income divided by parent's number of shares outstanding.

A parent company owns a controlling interest in a subsidiary and on the last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. The adjusted subsidiary value at the date of the new stock issuance was $27 per share. Which of the following statements is true? A) Since the sale was made at the end of the year, the parent's investment account is not affected. B) Since the shares were sold for more than the adjusted subsidiary value per share, the parent's investment account must be increased. C) Since the shares were sold for more than the adjusted subsidiary value per share, the parent's investment account must be decreased. D) Since the shares were sold for more than the adjusted subsidiary value per share, but the parent did not buy any of the shares, the parent's investment account is not affected. E) None of these answer choices are correct.

B) Since the shares were sold for more than the adjusted subsidiary value per share, the parent's investment account must be increased.

Which of the following is not a factor that indicates a business enterprise that establishes a variable interest entity (VIE) should consolidate such VIE with its own financial statements? A) The business enterprise establishing a VIE has the obligation to absorb potentially significant losses of the VIE. B) The business enterprise establishing a VIE receives risks and rewards of the VIE in proportion to equity ownership. C) The business enterprise establishing a VIE has the right to receive potentially significant benefits of the VIE. D) The business enterprise establishing a VIE has power through voting rights to direct the entity's activities that significantly impact economic performance. E) The business enterprise establishing a VIE is a primary beneficiary for the VIE.

B) The business enterprise establishing a VIE receives risks and rewards of the VIE in proportion to equity ownership.

How do outstanding subsidiary stock warrants affect the calculation of consolidated earnings per share? A) They will be included in both basic and diluted earnings per share if they are dilutive. B) They will only be included in diluted earnings per share if they are dilutive. C) They will only be included in basic earnings per share if they are dilutive. D) Only the warrants owned by the parent company affect consolidated earnings per share. E) Because the warrants are for subsidiary shares, there will be no effect on consolidated earnings per share.

B) They will only be included in diluted earnings per share if they are dilutive.

On January 1, 2018, a subsidiary buys 8 percent of the outstanding voting stock of its parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary), and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2018? A) Included in current assets. B) Included in noncurrent assets. C) Consolidated stockholders' equity is reduced by $350,000. D) Consolidated stockholders' equity is reduced by $300,000. E) There is no effect on the consolidated balance sheet, because the effects have been eliminated.

C) Consolidated stockholders' equity is reduced by $350,000.

A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock has a cumulative dividend. No dividends are in arrears. How is the noncontrolling interest in the subsidiary's net income assigned? A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock. B) There is no allocation to the noncontrolling interest because the parent owns 100% of the common stock and net income belongs to the controlling interest. C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends. D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the subsidiary's income before preferred stock dividends.

C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends.

A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock is noncumulative. The current year's dividend was paid. How is the noncontrolling interest in the subsidiary's net income assigned? A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock and their relative par values. B) There is no allocation to the noncontrolling interest because there are no dividends in arrears. C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends. D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends. E) The noncontrolling interest in consolidated net income is assigned as 30 percent of the subsidiary's income after subtracting 60% of preferred stock dividends.

D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends.

The parent company acquires all of a subsidiary's common stock but only 70 percent of its preferred shares. This preferred stock pays a 7 percent annual cumulative dividend. No dividends are in arrears at the current time. How is the non-controlling interest's share of the subsidiary's income computed? a. As 30 percent of the subsidiary's preferred dividend. b. No allocation is made because the dividends have been paid. c. As 30 percent of the subsidiary's income after all dividends have been subtracted. d. Income is assigned to the preferred stock based on total par value and 30 percent of that amount is allocated to the noncontrolling interest.

a. As 30 percent of the subsidiary's preferred dividend.

An intra-entity transfer took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year after the year of transfer? A) A worksheet entry is made with a debit to retained earnings for an upstream transfer. B) A worksheet entry is made with a credit to retained earnings for an upstream transfer. C) A worksheet entry is made with a debit to retained earnings for a downstream transfer. D) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer. E) No worksheet entry is necessary.

B) A worksheet entry is made with a credit to retained earnings for an upstream transfer.

Which of the following statements is true regarding the subsidiary's investment in its parent's common stock? A) All of the parent company's common stock is eliminated. B) The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to treasury stock. C) The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to retained earnings. D) The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to additional paid-in capital. E) The investment in parent company's common stock is not eliminated in consolidation.

B) The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to treasury stock.

An intra-entity transfer of a depreciable asset took place whereby the transfer price exceeded the book value of the asset. Which statement is true with respect to the year following the year in which the transfer occurred? A) A worksheet entry is made with a debit to gain for a downstream transfer. B) A worksheet entry is made with a debit to gain for an upstream transfer. C) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method. D) A worksheet entry is made with a debit to retained earnings for a downstream transfer, regardless of the method used account for the investment. E) No worksheet entry is necessary.

C) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method.

Which of the following statements is false regarding the assignment of a gain or loss when an affiliate's debt instrument is acquired on the open market? A) Subsidiary net income is not affected by a gain on the debt transaction. B) Subsidiary net income is not affected by a loss on the debt transaction. C) Parent Company net income is not affected by a gain on the debt transaction. D) Parent Company net income is not affected by a loss on the debt transaction. E) Consolidated net income is not affected by a gain or loss on the debt transaction.

E) Consolidated net income is not affected by a gain or loss on the debt transaction.

The benefits of filing a consolidated tax return include all of the following except A) Gross profits from intra-entity transfers are not taxed until such amounts are recognized for financial statement reporting purposes. B) Recognition of gross profits from intra-entity transfers is deferred for income tax recognition purposes. C) The issuance of dividends between related entities are not taxable. D) Losses incurred by an affiliated company can be used to reduce taxable income earned by other members to that affiliated group. E) Gross profits on intra-entity transfers are taxed before they are recognized for financial statement reporting purposes in the year of the transfer, but any such losses are deferred.

E) Gross profits on intra-entity transfers are taxed before they are recognized for financial statement reporting purposes in the year of the transfer, but any such losses are deferred.

How is goodwill amortized? A) It is not amortized for reporting purposes or for tax purposes. B) It is not amortized for reporting purposes, but is amortized over a 5-year life for tax purposes. C) It is not amortized for tax purposes, but is amortized over a 5-year life for reporting purposes. D) It is not amortized for tax purposes, but is amortized over a 15-year life for reporting purposes. E) It is not amortized for reporting purposes, but is amortized over a 15-year life for tax purposes.

E) It is not amortized for reporting purposes, but is amortized over a 15-year life for tax purposes

Which of the following statements regarding consolidation of a VIE with its primary beneficiary is true? A) The consolidation of a VIE with its primary beneficiary requires the business enterprise to follow a separate process than the one required for consolidations based on voting interests. B) All intra-entity transactions between the primary beneficiary and the VIE are included in the consolidation. C) Only intra-entity transactions between the primary beneficiary and the VIE resulting from intra-entity transfers are eliminated in the consolidation. D) VIEs with controlling interests must include one hundred percent of the primary beneficiary's net income in a consolidation. E) The allocation of the VIE's net income is based on an analysis of the underlying contractual arrangements between the primary beneficiary and other holders of variable interests.

E) The allocation of the VIE's net income is based on an analysis of the underlying contractual arrangements between the primary beneficiary and other holders of variable interests.

What is the primary reason we defer financial statement recognition of gross profits on intra-entity sales for goods that remain within the consolidated entity at year-end? a. Revenues and COGS must be recognized for all intra-entity sales regardless of whether the sales are upstream or downstream. b. Intra-entity sales result in gross profit overstatements regardless of amounts remaining in ending inventory. c. Gross profits must be deferred indefinitely because sales among affiliates always remain in the consolidated group. d. When intra-entity sales remain in ending inventory, control of the goods has not changed.

d. When intra-entity sales remain in ending inventory, control of the goods has not changed.