Ch. 6 SmartBook
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.
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 results of operations from the viewpoint of the combined business entity.
In response to the evolving nature of control relationships among firms, the FASB expanded its definition of control beyond the long-standing criterion of a majority voting interest to include which of the following?
Control exercised through variable interest
In response to the evolving nature of control relationships among firms, the FASB expanded its definition of control beyond the long-standing criterion of a majority voting interest to include which of the following?
Control exercised through varibale interests
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
Why do the risks and rewards from a VIE often get distributed to the primary beneficiary rather than equity investors?
Equity investors frequently bear little economic risk in the VIE; Contractual arrangements often specify that the VIE's risks and rewards go to the primary beneficiary; VIEs may separate ownership from the VIE's economic benefits and risks to enable beneficial contracting (e.g., financing) for a 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?
Gain (or Loss) on Retirement of Bonds; Bonds Payable: Investment in Bonds
The primary beneficiary of a VIE _______.
Is deemed to have a controlling interest in the VIE; Typically exercises control through authority granted from governance documents or other contractual arrangements; Has the power to direct the VIE's activities.
When one affiliate within a consolidated group acquires the outstanding bonds of another affiliate from a third party the resulting intro-entity debt ________.
Is eliminated as part of the consolidation process
Variable interests entities are often established to provide _________.
Low-cost financing for asset purchases; Research and development arrangements; Leasing arrangements.
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.
Which of the following is NOT one of the names for the separate business structures that firms establish to help finance their operations at favorable rates?
Off-balance-sheet structures
Control over a VIE's decision-making process is typically exercised through ______.
Power granted contractually to a 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
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 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.
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
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.
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.
What characteristics of Power Finance Company suggest that it qualifies as a variable interest entity?
The equity investor's ownership at risk is less than 10% of total assets; The equity investor bears little to no risk from ownership of the plant asset; The company was unable to obtain financing without additional financial support from Twin Peaks Electric.
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.
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.
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
Which of the following characteristics suggest that Twin Peaks is the primary beneficiary of Power Finance?
Twin Peaks is entitled to receive significant benefits from the 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.
________ interest entities emerged over recent decades as a new type of business structure that provided effective control of one firm by another without overt ownership.
Variable
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.
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
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 statement support and _____________.
Obtain rights to the VIE's profits; Provide a small guaranteed return of the equity holders in exchange for financial control over the VIE; Will likely limit the decision-making ability of the equity investors.
If a subsidiary has no convertible securities or options outstanding, then consolidated EPS is computed using the _________ share of consolidated net income.
Parents
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
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.
Which of the following is NOT one of the names of the separate business structures that firms establish to help finance their operations at favorable rates?
Special-purpose business units
What does SPE stand for in terms of the names for the separate business structures that firms establish to help finance their operations at favorable rates?
Special-purpose entities
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.
Truw
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 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
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 interest revenue and expense must be eliminated; Intra-entity investment in debt securities must be eliminated; Intra-entity liabilities must be eliminated.
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.
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 amortization of the premium or discount on the books of the affiliated company that purchased the bonds from an outside third party; The income effect remaining in retained earnings.
In years subsequent to the acquisition of debt of one affiliate by another affiliate, consolidated worksheet entries continue to be necessary because ________.
The effective retirement of the debt has not been recognized on either of the affiliated company's books.
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.
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.
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.
Compared to Consolidation Entry *B when the parent uses the initial value method, then 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.
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 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 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
Assuming neither the parent nor its 90% owned subsidiary have dilutive securities or preferred shares, when 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
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.
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 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
In an acquisition-date consolidation, a primary beneficiary will include valuations of its VIE's assets, liabilities, at ______ value.
Fair
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?
Interest Expense; Discount on Bonds Payable; Interest Income
