Exam 6: Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Ryan Company purchased 80% of Chase Company for $270,000 when Chase's book value was $300,000. Chase has 50,000 shares outstanding and currently has a book value of $400,000.Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.After recording the acquisition of the additional shares, what adjustment is needed for Ryan's Investment in Chase account?

Which of the following statements are 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.

Ryan Company purchased 80% of Chase Company for $270,000 when Chase's book value was $300,000. Chase has 50,000 shares outstanding and currently has a book value of $400,000.Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.What is the new percent ownership Ryan owns in Chase?

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2021: Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2021, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2021, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment.Prepare all consolidation entries for 2021.

Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's convertible bonds. The following consolidated financial statements were for 2020 and 2021. Additional Information:Bonds were issued during 2021 by the parent for cash.Amortization of a database acquired in the original combination amounted to $7,000 per year.A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash on May 11, 2021.Equipment was purchased by the subsidiary on July 23, 2021, using cash.Late in November 2021, the parent issued common stock for cash.During 2021, the subsidiary paid dividends of $14,000.Required:Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2021. Either the direct method or the indirect method may be used.

Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2020, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2022, for 95% of the face value. Both companies utilized the straight-line method of amortization.What balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31, 2022, the end of the first year of the intra-entity investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.

Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open market. What items related to these bonds will have to be accounted for in the consolidation process?

On January 1, 2021, A. Hamilton, Inc. ("AHI") provides a loan for $3,000,000 to Reynolds Manufacturing Corp. ("RMC"). The terms of the loan require payment of the loan no later than January 1, 2026. RMC was in terrible financial condition and would cease operations absent securing a loan. Prior to requesting a loan from AHI, RMC exhausted all other possible avenues for funding. The terms of the loan agreement include provisions that require RMC to provide AHI with the following from January 1, 2021 through January 1, 2026: (i) 6% annual interest on the principal amount of the loan, which reflects a market rate of interest; (ii) 100% participation rights to RMC's profits less $17,000 in a guaranteed annual dividend to RMC's common shareholders; and (iii) complete decision-making authority over RMC's operations and financing decisions.At the end of the term of the loan, AHI is given the right to acquire RMC or, in its discretion, extend the term of the original loan an additional 5 years. At the date the loan was extended to RMC, RMC's common stock had an estimated fair value of $136,000 and a book value of $40,000. The $96,000 difference was attributed to an asset with a 3-year useful life remaining ("Asset"). At January 1, 2021, the balance sheets for AHI and RMC are as follows: In preparing the consolidation worksheet as of December 31, 2021 for AHI and RMC, which of the following worksheet entry descriptions reflects what AHI should do to consolidate the financial statements?

Ryan Company purchased 80% of Chase Company for $240,000 when Chase's book value was $300,000. Chase has 50,000 shares outstanding and currently has a book value of $400,000.Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share.When Ryan's new percent ownership is rounded to a whole number, what adjustment is needed for Ryan's investment in Chase account?

If new bonds are issued from a parent to its subsidiary, which of the following statements is false?

Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2019, when Cocker had the following stockholders' equity accounts. To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2022.Popper did not pay any premium when it acquired its original interest in Cocker. On January 1, 2022, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker.On January 1, 2022, Cocker issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock. How would this transaction affect the additional paid-in capital of the parent company?

On January 1, 2021, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: Compute the noncontrolling interest in Smith at date of acquisition.

Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2020, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2022, for 95% of the face value. Both companies utilized the straight-line method of amortization.What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2022?

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty's stock traded at $30 per share. At the present time, Glotfelty reports the following stockholders' equity: Glotfelty issues 5,000 shares of previously unissued stock to the public for $22 per share. None of this stock is purchased by Panton.Describe how this transaction would affect Panton's books.

How does the existence of a noncontrolling interest affect the preparation of a consolidated statement of cash flows?

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?

On January 1, 2021, Rhodes Co. owned 75% of the common stock of Brock Co. On that date, Brock's stockholders' equity accounts had the following balances: The balance in Rhodes's Investment in Brock Co. account was $570,000, and the noncontrolling interest was $190,000. On January 1, 2021, Brock Co. sold 10,000 shares of previously unissued common stock for $12 per share. Rhodes did not acquire any of these shares.What is the balance in Rhodes's Investment in Brock Co. account following the sale of the 10,000 shares of common stock?

If a subsidiary issues a stock dividend, which of the following statements is true?

What are the primary sources of information that are used for preparation of a consolidated statement of cash flows?

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?