Advanced Accounting Chapter 6

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

1. will likely limit the decision-making ability of the equity investors 2. Provide a small guaranteed return to the equity holders in exchange for financial control over the VIE 3. Obtain rights t the VIE's profits

In computing consolidated EPS, the numerator contains earnings

Attributable only to the controlling interest

6-3 When a bond is issued at a premium, annual cash interest receipts from the bind will

Be larger than the amount of interest revenue recognized

6-3 When one affiliate within a consolidated group acquires the outstanding bonds (originally issued at a premium) 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 value

6-5 In computing consolidated operating cash flows (indirect method) after a current mid-year business combination, the acquisition-date subsidiary balance of accounts payable

Increases the parent's beginning balance pf accounts payable

6-3 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

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 dilutive securities

6-7 When a subsidiary declares and issues a stock dividend, what is the accounting effect on the parent's financial records?

No effect

6-5 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 accounts receivable must be adjusted for

The acquisition-date balance of the subsidiary's accounts receivable

6-7 When a subsidiary reacquired some of its own shares, how are the treasury shares accounted for on the consolidated worksheet?

The balance in the subsidiary's Treasury Stock account is brought to a zero in consolidation

6-5 The accounts and amounts used to prepare a consolidated statement of cash flows are based on

The consolidated income statement and comparative consolidated balance sheet

6-6 A potentially dilutive security will not be considered in the computation of diluted EPS if

The effect of its inclusion in the diluted EPS is to increase EPS.

6-5 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

The net cash paid for the acquisition (cash paid less cash received) as an investing activity

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

The net cash paid for the acquisition (cash paid less cash received) as an investing activity

6-5 T/F: 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

T/F: IFRS defines control comprehensively to include control achieved through voting interests, contractual power, decision-making rights, ect

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

How does the statement of cash lows report the net cash outflow that occurs when a parent company acquires a business for cash?

as an investing activity

6-3 When a bond is issued at a discount, annual cash interest payments on the bond will

be less than the amount of recognized interest

6-5 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

6-3 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

6-6 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 a parent acquires control over a subsidiary with preferred shares outstanding, the subsidiary preferred shares not acquired by the parent are initially valued at

fair value

6-3 When the parent applies the equity method, it recognizes on its books any retirement __________ or ____________ from the acquisition on an affiliate's outstanding debt from a third party.

gain or loss

In the December 31, 2018 consolidation of Prescott and Valente, Consolidation Entry IE serves to eliminate the intra-entity ______ expense and income between the primary beneficiary and its variable interest entity.

interest

6-7 Subsequent to acquisition, when a parent acquires the outstanding noncontrolling interest shares of its subsidiary, credit to the parents additional paid-in capital

is needed whenever the cash paid to reacquire the noncontrolling shares is less than the consolidation value of the non- controlling interest

6-5 To prepare a consolidated statement of cash flows in the year of a business acquisition, the subsidiary's acquisition-date accounts receivable balance

must be removed in computing cash flows from operating activities

In a period when a mid-term business combination occurs, only post-acquisition excess fair-value amortizations are added back to ___________ ______________ in computing cash flows from operating activities using the indirect method

net income

6-4 Subsidiary preferred stock not owned by the parent is a component of the ______ interest

noncontrolling

For the January 1, 2018 consolidation of Prescott and Valente, Consolidation Entry S allocates the entire amount of Valente's owners' equity balances to the ________ interest

noncontrolling

6-5 Subsidiary dividends paid appear as a financing outflow on the consolidated statement of cash outflows

only when paid to the noncontrolling interest

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

power granted contractually to a primary beneficiary

When a subsidiary has both common and preferred shares in its capital structure, consolidation is made simpler by combining Consolidation Entry S and A because no allocation of the subsidiary's _________ _____________ to preferred and common shares is required

retained earnings

6-3 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

A parent acquired a subsidiary through purchasing both common and preferred subsidiary shares. In determining the consideration transferred for the subsidiary, the parent includes

the price paid for both the common and preferred shares

6-3 When 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

In periods subsequent to the obtaining of financial control, a primary beneficiary's consolidation of its VIE follows the same general process as it the entity were consolidated based on ______ interest

voting

Why do the risks and rewards from a VIE often get distributed to the primary beneficiary rather than equity investors

1. VIEs may separate ownership from the VIE's economic benefits and risks to enable beneficial contracting (e.g. financing) for a primary beneficiary 2. Contractual arrangements often specify that the VIE's risks and rewards go to the primary beneficiary 3. Equity investors frequently bear little economic risk in the VIE

6-6 In computing consolidated diluted EPS, the presence of subsidiary dilutive securities will potentially affect

1. the numerator of the diluted EPS ratio 2. the parents percentage ownership to apply to the earnings attributable to common shares 3. the amount of consolidated net income attributable to the common shares

6-7 When a subsidiary company issues additional shares of common stock that are not purchased by the parent

1. the parent's percentage ownership in the subsidiary will change 2. the parent's investment in subsidiary account may need to be adjusted

6-6 If a less-than-share 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

6-7 A subsidiary issues new ownership shares that results in the maintenance of the previous relative ownership percentages of the parent and noncontrolling interests. What is the effect on the parent's investment account?

an increase in the investment account Question: but why would that parents investment account increase??

6-5 How does the statement of cash flows report the net cash outflow that occurs when a parent company acquires a business for cash

as an investing activity

6-5 Subsidiary dividends paid to its parent company

do not appear on the consolidated statement of cash flows

6-7 When a subsidiary company issues additional shares of its own common stock to outside third parties, the parent will need to decrease its investment account if the per share price received for the additional shares issued is ________ than the time-adjusted per share acquisition subsidiary fair value

less

6-6 In computing consolidated diluted EPS, the presence of subsidiary dilutive securities will potentially affect:

1. The parent's percentage ownership to apply to the earnings attributable to common shares. 2. The amount of consolidated net income attributable to the common shares 3. The numerator of the diluted EPS ratio

Under what general conditions does an entity qualify as a variable interest entity?

1. The equity investors lack the ability to exercise financial control over the entity 2. There is insufficient equity at risk to enable the entity to finance its activities without additional support

6-3 In allocating the income effect of a gain or loss from retirement of the debt of one affiliate that had been purchased by another affiliate, the entire income effect is allocated to the _____ interest

controlling

6-4 A subsidiary has cumulative, nonparticipating preferred stock owned entirely by the noncontrolling interest. In allocating the consolidated net income the noncontrolling interest share will include the annual preferred stock

dividend

6-7 To compute the effect of a post-acquisition subsidiary stock issue on the parent's investment account, the parent's share of the post-issue subsidiary valuation is compared to the parent's pre-issue _________ ________ investment balance

equity method

US GAAP specifies separate models (voting vs. variable interests) in assessing financial control. IFRS employs a _______ consolidating model for assessing financial control across voting and variable interests

single

6-7 When a subsidiary issues shares of common stock subsequent to its acquisition, the parent recognizes no gain or loss on the transaction because

the additional investment is from owners and is thus an equity transaction

6-3 Consolidation Entry B adjusts which of the following accounts generated by the affiliates

1. Gain or loss on retirement of bonds 2. Bonds Payable 3. Investment in Bonds

6-3 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

1. Interest Expense 2. Discount on Bond Payable 3. Interest Income

Variable interests entities are ofter established to provide

1. Leasing arrangements 2.Low-cost financing for asset purchases 3. Research and development arrangements

In general, Which of the following characteristics are needed to establish that an enterprise with a variable interest in a VIE has a controlling financial interest

1. The power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance 2. The obligation to absorb losses of the entity that could potentially be significant to that variable interest entity

In the Twain Peaks Electric Company example, what must Twin Peaks do to qualify for a lower interest rate in financing its plant acquisition?

1. Twin Peaks must establish a separate legal entity that isolates the newly acquired plant asset from its other risky assets 2. Twin Peaks must guarantee the debt of the separate legal entity that will own the newly acquired plant asset 3. Twin Peaks must agree to limit additional debt

In addition to consolidated statements that include balance from its VIEs, a primary beneficiary must also disclose

1. any changes in the risks that accompany the enterprise's involvement with the VIE 2. The purpose and nature of the VIE's activities

When a subsidiary has both common and preferred shares in its capital structure, consolidation entries

1. eliminate the parent's investment in Subsidiary Preferred Stock account balance. 2.bring the subsidiary's Common Stock account balance to zero 3.bring the subsidiary's Preferred Stock Account balance to zero.

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

It can exercise financial control over the VIE in its role as primary beneficiary

In an acquisition-date consolidation, a primary beneficiary will include valuations of its VIE's assets, liabilities, at ________ value

fair

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

6-3 Why are consolidated 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 result of operations from the viewpoint of the combined business entity

Despite a total lack of ownership shares, Prescott nonetheless consolidates 100% of Valente's assets, liabilities and results of operation because Prescott has a ______ financial interest in Valente

controlling

Why did the amount of Little's earnings for diluted EPS increase to $88,000 from the $62,000 amount attributable to basic EPS?

1. The assumed conversion of the preferred shares increased the earnings available to the common shares assumed outstanding 2. The assumed conversion of the convertible bonds increased the earnings available to the common shares assumed outstanding

6-1 What characteristics of Power Finance Company suggest that it qualifies as a variable interest entity?

1. The equity investor's ownership at risk is less than 10% of total assets 2. The equity investor bears little to no risk from ownership of the plant asset 3. The company was unable to obtain financing without additional financial support from Twin Peaks Electric

6-7 When the noncontrolling interest ownership percentage increases following a post-acquisition subsidiary stock issue, what is the effect on the noncontrolling interest shown on the consolidated worksheet?

1. The noncontrolling interest is allocated its new percentage of the subsidiary's new book value 2. The noncontrolling interest is allocated its new percentage of the unamortized acquisitiong- date fair value adjustments

6-7 pg 261 In the Giant- Small example, what is the January 1, 2018 equity balance for Giant's investment in Small BEFORE the 20,000 new shares issued by Small?

510,000

6-1 What characteristics of Valente, Inc. suggest that it is a variable interest entity?

1. The equity investors ceded their decision-making power to Prescott in exchange for a loan. 2. Valente was unable to obtain financing on its own to continue its operations 3. Future residual profits and losses will not be distributed according to equity interests beyond a guaranteed fixed amount

6-7 Why does Giant increase its investment in Small account after Small's new stock issue

1. Because the $10 price per share exceeds the $8.50 time-adjusted acquisition-date per share value of Small and Giant

6-3 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?

1. Intra-entity liabilities must be eliminated 2. Intra-entity investment in debt securities must be eliminated 3. Intra-entity interest revenue and expense must be eliminated

Which of the following arrangements are considered encompassed within the IASB's control definition?

1. Majority voting rights over the decision-making of an entity help by an investor 2. Less than 50% voting interest where the remaining shares are diffusely help across many owners 3. The obtaining of decision-making rights over an investee that dominate voting rights

6-3 In years subsequent to the acquisition of bonds payable of one affiliate by another affiliate, consolidated worksheet entries reflect different amounts depending on

1. The amortization of the premium or discount on the books of the affiliated company that purchased the bonds from an outside third party 2. The income effect remaining in retained earnings 3. The amortization of the original premium or discount on the book of the affiliated company that is issued the bonds

6-3 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