Chapter 4 Smartbook

Examining the Exhibit 4.6 consolidation worksheet when the parent accounts for its 80% owned subsidiary using the equity method, what balances that occur on the parent's (King Company) column are brought to zero via consolidation entries?

- Equity in Pawn's earnings - Investment in Pawn Company

Which of the following items enter into the computation of net income attributable to the noncontrolling interest?

- Excess acquisition-date fair value amortizations. - The noncontrolling interest's ownership percentage in the subsidiary. - The subsidiary's net income.

Once a parent achieves control over its subsidiary, subsequent purchases of noncontrolling interest shares

- are considered equity transactions with any difference between carrying amount and purchase price allocated to additional paid-in capital. - do not affect the overall valuation basis of the subsidiary for consolidated financial reporting.

Which of the following are reasons for one company to gain control over another with less than 100% ownership?

- the laws of some countries prevent complete ownership by a foreign firm. - some outside owners of the subsidiary company may have been unwilling to sell their shares. - the parent firm may not have resources sufficient to acquire all of its subsidiary shares.

In the Exhibit 4.6 consolidation worksheet, the parent accounts for its 80% owned subsidiary using the equity method. What balances in the worksheet are identical across the parent (King Co.) column and the consolidated totals column?

- Retained Earnings 12/31 - King Company's separate net income and the consolidated total for net income attributable to King Company. - Retained Earnings 1/1 - Dividends declared

Consolidation Entry S eliminates 100% of the subsidiary's beginning-of-the-period stockholders' equity accounts. In the presence of a noncontrolling interest, to what accounts is the total elimination allocated?

- The Investment in Subsidiary - The Noncontrolling Interest.

What amounts comprise the ending balance of the noncontrolling interest reported in the stockholders' equity section of the consolidated balance sheet?

- The noncontrolling interest beginning of the year balance - Net income attributable to the noncontrolling interest - Subsidiary dividends attributable to the noncontrolling interest

A parent company owns 80% of the voting stock of a subsidiary. In Consolidation Entry I, what percentage of the parent's balance in its Equity in Subsidiary Earnings account should be eliminated?

100%

In periods subsequent to an acquisition, how is consolidated net income generally computed in the presence of a 20% noncontrolling interest?

100% of the parent's net income plus 100% of the subsidiary's net income adjusted for excess acquisition-date fair value amortizations.

The amount for the noncontrolling interest is reported in the consolidated balance sheet in the

shareholders' equity section.

The combined credits to the noncontrolling interests in Consolidation Entries S and A equal the total balance of the noncontrolling interest as of the _____ of the period.

start

A parent sells a portion of its investment in a subsidiary company. Following the sale, if the parent maintains neither control nor significant influence over its former subsidiary, what is the appropriate accounting for the parent's retained investment?

Market-value method.

When a parent pays a control premium in a less-than-100% acquisition,

more goodwill will be allocated to the parent than to the noncontrolling interest relative to their proportionate ownership percentages.

How does Consolidation Entry A1 allocate the unamortized excess acquisition-date fair over book value for the subsidiary's identifiable asset and liabilities to the noncontrolling interest?

The excess unamortized acquisition-date fair value is allocated to the noncontrolling interest using their percentage ownership in the subsidiary.

True or false: During the current year Company A acquires additional shares of Company B stock increasing its 20% equity method investment to a 90% controlling interest. In its consolidated financial statements for the current year, Company A will report equity method income for its preacquisition ownership of Company B.

True

A parent sells a portion of its investment in a subsidiary company. Following the sale, if the parent loses control but retains significant influence over its former subsidiary, what is the appropriate accounting for the parent's retained investment?

Equity method of investment accounting.

Consolidation Entry A2 focuses on valuation and allocation of which of the following accounts?

Goodwill only.

Which of the following accounting treatment applies when a parent sells enough of its subsidiary's shares so that it no longer possesses control over the subsidiary?

The parent recognizes either a gain or loss on the shares sold.

True or false: Regardless of whether a parent obtains control in a single or multiple steps, the subsidiary's assets and liabilities are revalued in the entirety to fair value at the date control is obtained.

True

Following a sale, when a parent retains only a non-controlling portion of its former subsidiary's shares, what accounting is appropriate for the retained investment?

- A gain or loss is recognized on the revaluation of the retained investment to fair value. - The retained investment is revalued to fair value as of the date control is lost.

In consolidated financial reports, the _____ _____ represents a set of owners, in addition to the parent company, who have a legal claim to the subsidiary's net assets.

noncontrolling interest

Under IFRS accounting standards, the initial accounting valuation for the noncontrolling interest may be measured utilizing

- the noncontrolling interest share of the subsidiary's net identifiable assets. - the acquisition-date fair value. - an amount that excludes goodwill for the noncontrolling interest.

When the collective acquisition-date fair values of the subsidiary's identifiable net assets exceeds the sum of the acquisition-date fair values of the controlling and non-controlling interests, then the acquiring company recognizes a gain on _____ _____.

bargain purchase

When a parent applies the initial value method to account for its Investment in Subsidiary account, Consolidation Entry asterisk C provides which of the following adjustments to accrual accounting?

- An adjustment to the parent's RE for its share of excess fair value amortizations from acquisition date to the beginning of the current period. - An adjustment to the parent's RE for its share of the change in subsidiary RE from acquisition date to the beginning of the current period.

Examining the Exhibit 4.6 consolidation worksheet when the parent accounts for its 80% owned subsidiary using the equity method, what new financial statement balances are created in the consolidation process beyond the balances reflected in the parent (King Company) and subsidiary (Pawn Company) columns?

- Consolidated net income - Noncontrolling interest in Pawn at 12/31 - Net income attributable to noncontrolling interest

Why are two separate consolidation entries (A1 and A2) useful when the parent has paid a control premium for its controlling, but partial interest in a subsidiary?

- Because the presence of a control premium affects primarily the parent shares. - Because the unamortized acquisition-date excess fair values are allocated proportionately across ownership interests. - Because goodwill is not allocated proportionately across the ownership interests.

When a business acquisition resulting in control takes place midyear, how is the consolidation process affected?

- Only post-acquisition subsidiary revenues are included in consolidated totals. - Only post-acquisition subsidiary expenses are included in consolidated totals. - Subsidiary book value must be computed as of the acquisition date.

What accounting treatment applies when a parent sells some of its subsidiary's shares, but nonetheless retains control over the subsidiary?

- The parent recognizes any difference between the proceeds and the underlying carrying amount of the shares sold as an adjustment to APIC. - The sale of the subsidiary shares is considered a transaction within the consolidated entity.

Consolidation Entry A adjusts subsidiary assets and liabilities for any excess acquisition-date excess fair over book values. The Consolidation Entry A adjustment to the subsidiary's assets and liabilities is net of

previous period's excess fair over book value amortizations.

Company A owns a 40% equity method investment in Company B. Subsequently, Company A acquires a controlling interest in a Company B and now must prepare consolidated financial statements. If the date Company A obtains control occurs midyear, how are subsidiary revenues and expenses reported in consolidated income statement in the year of the business combination?

- Postacquisition subsidiary revenues and expenses are included in consolidated revenues and expenses. - Preacquisition subsidiary revenues and expenses are excluded from consolidated revenues and expenses.

A parent company owns 80% of the voting stock of a subsidiary. What percentage of the total beginning subsidiary's stockholders' equity elimination should Consolidation Entry S allocate to the noncontrolling interest?

20%

A Company establishes control with its most recent of a series of purchases of Company B's voting stock. What are the valuation implications for Company A's investment in Company B as of the date control is obtained?

Company B will be valued in total at its control-date fair value.

A parent sells a portion of its investment in a subsidiary company. Following the sale, if the parent nonetheless maintains control over its former subsidiary, what is the appropriate accounting for the parent's retained investment?

Consolidated financial statements.

A parent paid a control premium in acquiring an 80% voting interest in a subsidiary. How is the goodwill from the combination allocated across the controlling and noncontrolling interests?

Controlling and noncontrolling interest acquisition-date fair values are compared to relative fair values of subsidiary's identifiable net assets.

When the parent company employs the initial value method for its Investment in Subsidiary account, Entry _____ is unnecessary.

D

When the parent applies the equity method, which of the following balances are the same across the parent company accounts and consolidated balances?

Retained earnings.

Company A obtains control over Company B in a step acquisition. Upon achieving control, how does a parent account for its previous noncontrolling interest in Company B?

The parent's previously held noncontrolling interest is adjusted to fair value and a gain or loss is recognized.

True or false: Consolidation Entry E does not vary depending on the controlling percentage of the subsidiary owned by the parent.

True

True or false: IFRS accounting standards for the noncontrolling interest allow an initial measurement option, whereas US GAAP allows no initial measurement option.

True

In periods subsequent to acquisition, noncontrolling (NCI) interest valuation in consolidated financial reports is based on

acquisition-date fair value adjusted for the NCI's share of post-acquisition adjusted subsidiary net income less dividends.

A noncontrolling interest in a consolidated entity may be described as

an ownership interest in a subsidiary held by owners other than the parent company.

When a parent achieves ownership of a subsidiary through a series of stock acquisitions, the subsidiary's measurement basis for consolidated reporting is determined at the date the parent obtains _____.

control

The relevant criterion for the requirement to prepare consolidated financial statements is whether one company _____ the decision-making process of another company.

controls

The ending balance of the noncontrolling interest reported in a consolidated balance sheet includes a beginning balance, a portion of consolidated income, and a deduction for subsidiary _____ attributable to the noncontrolling interest.

dividends

Following the _____ _____ concept, a parent includes 100% of a subsidiary's net income in consolidated net income even when the parent owns less than 100% of its controlled subsidiary's voting stock.

economic unit

Despite the fact that 100% of a controlled subsidiary's assets and liabilities are consolidated with those of a parent in consolidation, only the parent's percentage ownership is used for internal accounting under the _____ method for subsidiary income accruals.

equity

According to the acquisition method, the noncontrolling interest valuation includes its share of the acquistion-date _____ value of the subsidiary's identifiable net assets adjusted for post-acquisition amortization.

fair

At the date of a business acquisition, the parent values any noncontrolling interest shares at _____ value.

fair

As long as control is maintained, when a parent sells a portion of its ownership shares in its subsidiary, no _____ or _____ is recognized in consolidated income.

gain loss

When the sum of the acquisition-date fair values of the controlling and non-controlling interests exceeds the collective acquisition-date fair values of the subsidiary's identifiable net assets, then the acquiring company recognizes _____.

goodwill

When a parent company obtains control of its subsidiary at a midyear date, the parent includes in consolidated totals subsidiary revenues and expenses only subsequent to the _____ date.

purchase

A primary difference between a single-step and multiple-step consolidation in the year control is obtained is the presence of a gain or loss on _____ to fair value of the parent's previously owned investments in the subsidiary.

remeasurement

Consolidated retained earnings equal the parent's retained earnings when the parent accounts for its Investment in Subsidiary using

the equity method.

Consolidation Entry I represents part of a sequence of worksheet entries that bring the Investment in Subsidiary account to a _____ balance.

zero

Company A establishes control with its most recent of a series of purchases of Company B's voting stock bring its ownership to 80%. The remaining 20% noncontrolling interest in Company B is valued at its estimated _____ value as of the date Company A establishes control.

fair

Following a sale, when a parent retains only a non-controlling portion of its former subsidiary's shares, the retained investment is revalued to _____ value as of the date control is lost.

fair

As part of the consolidation process which of the following are included in the calculation of the ending balance of the noncontrolling interest?

- The balance of the noncontrolling interest as of the beginning of the period. - Dividends from the subsidiary attributable to the noncontrolling interest. - The consolidated entity's net income attributable to the non-controlling interest.

The beginning balance of the noncontrolling interest (NCI) can be viewed as the NCI's ownership share multiplied by the sum of which of the following two components?

- The book value of the subsidiary as of the beginning of the period. - The unamortized excess acquisition-date subsidiary fair over book value as of the beginning of the period.

A parent company owns 80% of the voting stock of a subsidiary. What percentage of the subsidiary's net income (after excess acquisition-date fair value amortizations) is attributable to the noncontrolling interest?

20%

periods subsequent to an acquisition, how is consolidated net income generally computed in the presence of a 20% noncontrolling interest?

100% of the parent's net income plus 100% of the subsidiary's net income adjusted for excess acquisition-date fair value amortizations.

When a parent acquires additional shares in its controlled subsidiary from the noncontrolling interest, any excess of the consolidated book value of these shares over the price paid by the parent is recorded as

an increase in the parent's additional paid-in capital.

In Exhibit 4.6, the amount of net income that is included in the 12/31 consolidated retained earnings balance is the net income attributable to _____ Company.

parent

When a parent company employs the equity method. consolidation Entry D eliminates subsidiary dividends attributable to the _____ company.

parent

For an 80% owned subsidiary accounted for under the equity method, the parent includes in the Investment in Subsidiary account balance

- a deduction for 80% of subsidiary dividends declared since acquisition. - 80% of post-acquisition subsidiary earnings adjusted for excess acquisition-date fair value amortizations.

The allocation of goodwill across the controlling and noncontrolling interests

- compares acquisition date total fair values to the relative (proportional) fair values of the subsidiary's identifiable net assets. - does not always result in an allocation proportional to percentage ownership interests.

When a parent acquires a controlling, but less-than-100% interest in a subsidiary, the basic elements for establishing an acquisition-date subsidiary value include

- the fair value of the noncontrolling interest. - the fair value of the controlling interest.

A parent company owns 80% of the voting stock of a subsidiary. What percentage of the total excess fair value net adjustment should Consolidation Entry A allocate to the noncontrolling interest?

20%

A parent company owns 80% of the voting stock of a subsidiary. In Consolidation Entry D, what percentage of the subsidiary's balance in its Dividends Declared account should be eliminated?

80%