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

On January 1, 2013, Riley Corp. acquired some of the outstanding bonds of one of its subsidiaries. The bonds had a carrying value of $421,620, and Riley paid $401,937 for them. How should you account for the difference between the carrying value and the purchase price in the consolidated financial statements for 2013?

Regency Corp. recently acquired $500,000 of the bonds of Safire Co., one of its subsidiaries, paying more than the carrying value of the bonds. According to the most practical view of this intra-entity transaction, to whom would the loss be attributed?

Parent Corporation loaned money to its subsidiary with a five-year note at the market interest rate. How would the note be accounted for in the consolidation process?

Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par preferred stock and 60% of the outstanding common stock of Brett Co. When Brett reported net income of $780,000, what was the non-controlling interest in the subsidiary's income?

Which of the following statements is true for a consolidated statement of cash flows?

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity: Common stock, \ 10 par value (20,000 shares outstanding) \ 200,000 Additional paid in capital 100,000 Retained earnings \ 600,000 Glotfelty issues 5,000 shares of previously unissued stock to the public for $27 per share. None of this stock is purchased by Panton. Describe how this transaction would affect Panton's books.

Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2013 (without consideration of its investment in Madrid, Inc.) of $1,500,000. For the same year, Madrid reports net income of $705,000. Carlson had bonds payable outstanding on January 1, 2013 with a carrying value of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2013 for $1,090,000. For the year 2013, Carlson reported interest expense on the bonds in the amount of $96,000, while Madrid reported interest income of $94,000 for the same bonds. What is Carlson's share of consolidated net income?

Parent Corporation recently acquired some of its subsidiary's outstanding bonds, at an amount which required the recognition of a loss. In what ways could the loss be allocated? Which allocation would you recommend? Why?

When a company has preferred stock in its capital structure, what amount should be used to calculate non-controlling interest in the preferred stock of the subsidiary when the company is acquired as a subsidiary of another company?

Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On January 2, 2011, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2031 at a premium of $400,000. On January 1, 2013, Ernest acquired 30 percent of these same bonds on the open market at 97.6. Both companies use the straight-line method of amortization. What adjustment should be made to Davidson's 2014 beginning Retained Earnings as a result of this bond acquisition?

Cadion Co. owned a controlling interest in Knieval Inc. Cadion reported sales of $420,000 during 2013 while Knieval reported $280,000. Inventory costing $28,000 was transferred from Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent was still in ending inventory at year's end. Total receivables on the consolidated balance sheet were $112,000 at the first of the year and $154,000 at year-end. No intra-entity debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business combination from its customers?

On January 1, 2013, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows: Common stock, \ 10 par value, 100,000 shares outstanding \ 1,000,000 Preferred stock, 7\% fully participating, \ 100 par value, 10,000 shares outstanding 1,000,000 Retained Earnings 2,000,000 Total stockholders' equity \ 4,000,000 Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?

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, 2012, 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, 2014, 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, 2014, 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.

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013: Preferred stock - \ 90 par value, nonvoting and nonparticipating; 9 \% cumulative dividend \2 ,700,000 Common stock - \2 5 par value 5,600,000 Retained earnings 14,000,000 Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, 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 2013, 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, 2013?

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013 are as follows: Jones Company: Shares outstanding 100,000 Book value of Jones \ 1,200,000 Book value per share \ 12 Webb Company: Shares owned of Jones 90,000 Book value of investment \ 1,080,000 Assume Jones issues 20,000 new shares of its common stock for $15 per share. Of this total, Webb acquires 18,000 shares to maintain its 90% interest in Jones. After acquiring the additional shares, what adjustment is needed for Webb's investment in Jones account?

On January 1, 2013, 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. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: Common stock, \ 10 par value (50,000 shares outstanding ) \5 00,000 Preferred stock, 6\% cumulative, \ 100 par value, 3,000 shares outstanding 300,000 Additional paid in capital 200,000 Retained earnings 500,000 Total stockholders' equity \1 ,500,000 The consolidation entry at date of acquisition will include (referring to Smith):

Skipen Corp. had the following stockholders' equity accounts: Preferred stock ( 8\% cumulative dividend) \ 700,000 Common stock 1,050,000 Additional paid-in capital 420,000 Retained earnings 1,330,000 Total \3 ,500,000 The preferred stock was participating and is therefore considered to be equity. Vestin Corp. acquired 90% of this common stock for $2,250,000 and 70% of the preferred stock for $1,120,000. All of the subsidiary's assets and liabilities were determined to have fair values equal to their book values except for land which is undervalued by $130,000. Required: What amount was attributed to goodwill on the date of acquisition?

These questions are based on the following information and should be viewed as independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2011, when Cocker had the following stockholders' equity accounts. Common stock - 40,000 shares outstanding \ 140,000 Additional paid-in capital 105,000 Retained earnings 476,000 Total stockholders' equity \ 721,000 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, 2014. On January 1, 2014, 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, 2014, 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?

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013: Preferred stock - \ 90 par value, nonvoting and nonparticipating; 9 \% cumulative dividend \2 ,700,000 Common stock - \2 5 par value 5,600,000 Retained earnings 14,000,000 Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, 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 2013, 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 is the amount of goodwill resulting from this acquisition?

On January 1, 2013, 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. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: Common stock, \ 10 par value (50,000 shares outstanding ) \5 00,000 Preferred stock, 6\% cumulative, \ 100 par value, 3,000 shares outstanding 300,000 Additional paid in capital 200,000 Retained earnings 500,000 Total stockholders' equity \1 ,500,000 Compute the non-controlling interest in Smith at date of acquisition.