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.Prepare all consolidation entries for 2021.

Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000. There was no premium paid by Webb. Jones currently has 100,000 shares outstanding and a book value of $1,200,000.Assume Jones issues 20,000 new shares of its common stock to outside parties for $15 per share.After acquiring the additional shares, what adjustment is needed for Webb's investment in Jones account?

How do intra-entity transfers of inventory affect the preparation of a consolidated statement of cash flows?

A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock has a cumulative dividend. No dividends are in arrears. How is the noncontrolling interest in the subsidiary's net income assigned?

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?

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?

How do outstanding subsidiary stock warrants affect the calculation of consolidated earnings per share?

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

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 receivable appear in a consolidated statement of cash flows?

Davis Company has had bonds payable of $12,000 outstanding for several years. On January 1, 2021, when there was an unamortized discount of $1,000 and a remaining life of 5 years, its 90% owned subsidiary, Jacobson Company, purchased the bonds in the open market for $13,000. The bonds pay 6% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2021.

Key Company has had bonds payable of $21,000 outstanding for several years. On January 1, 2021, there was an unamortized premium of $1,000 with a remaining life of 10 years, Key's parent, Peele, Inc., purchased the bonds in the open market for $18,000. Key is an 80% owned subsidiary of Peele. The bonds pay 7% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2021.

A parent company owns a 70% interest in a subsidiary whose stock has a valuation basis of $27 per share. On the last day of the year, the subsidiary issues new shares for $27 per share, and the parent buys its 70% interest in the new shares. Which of the following statements is true?

A parent company owns a controlling interest in a subsidiary whose stock has a valuation basis of $27 per share. On the last day of the year, the subsidiary issues new shares entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

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?

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 will dividends be reported in consolidated statement of cash flows?

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 Panton for $35 per share.Required:Describe how this transaction would affect Panton's books.

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.

Where do intra-entity transfers of inventory appear in a consolidated statement of cash flows?

A subsidiary issues new shares of common stock at an amount below book value. Outsiders buy all of these shares. Which of the following statements is true?

Which of the following statements is false concerning variable interest entities (VIEs)?