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

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.What was Kuried's balance in the Investment in Thomas Inc. account as of December 31, 2021?

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.What was the noncontrolling interest's share of consolidated net income for the year 2021?

All of the following are examples of variable interests except:

Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000. Jones currently has 100,000 shares outstanding and a book value of $1,200,000.Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share.What adjustment is needed for Webb's investment in Jones account?

In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true?

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company.(1.)Graham reports a loss on sale of land (to an outside party)of $5,000. The land cost Graham $20,000.(2.)Noncontrolling interest in Stage's net income was $30,000.(3.)Graham paid dividends of $15,000.(4.)Stage paid dividends of $10,000.(5.)Excess acquisition-date fair value over book value amortization was $6,000.(6.)Consolidated accounts receivable decreased by $8,000.(7.)Consolidated accounts payable decreased by $7,000.How is the amount of excess acquisition-date fair value over book value recognized in a consolidated statement of cash flows assuming the indirect method is used?

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company.(1.)Graham reports a loss on sale of land (to an outside party)of $5,000. The land cost Graham $20,000.(2.)Noncontrolling interest in Stage's net income was $30,000.(3.)Graham paid dividends of $15,000.(4.)Stage paid dividends of $10,000.(5.)Excess acquisition-date fair value over book value amortization was $6,000.(6.)Consolidated accounts receivable decreased by $8,000.(7.)Consolidated accounts payable decreased by $7,000.Where does the noncontrolling interest in Stage's net income appear on a consolidated statement of cash flows?

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, 2024?

Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below: Additional information for 2021:The combination occurred using the equity method. Consolidated net income was $50,000. The noncontrolling interest share of consolidated net income of Arthur was $3,200.Arthur paid $4,000 in dividends.There were no purchases or disposals of plant & equipment or copyright this year.Net cash flow from financing activities was:

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?

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?

Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $2 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $2,000. Knight did not own any of Stoop's bonds. There are no excess amortizations or intra-entity transactions associated with this consolidation. Stoop reported net income of $300,000 for 2021. Knight has 100,000 shares of common stock outstanding and reported net income of $400,000 for 2021.What would Knight Co. report as consolidated diluted earnings per share (rounded)?

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?

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: With respect to the acquisition-date consolidation worksheet, which of the following is accurate?

What condition(s)qualify an entity as a VIE?

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company.(1.)Graham reports a loss on sale of land (to an outside party)of $5,000. The land cost Graham $20,000.(2.)Noncontrolling interest in Stage's net income was $30,000.(3.)Graham paid dividends of $15,000.(4.)Stage paid dividends of $10,000.(5.)Excess acquisition-date fair value over book value amortization was $6,000.(6.)Consolidated accounts receivable decreased by $8,000.(7.)Consolidated accounts payable decreased by $7,000.Using the indirect method, where does the decrease in accounts payable appear in a 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?

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

Wolff corporation owns 70% of the outstanding stock of Sanders, Inc. During the current year, Sanders made $75,000 in sales to Wolff. How does this transfer affect the consolidated statement of cash flows?

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?