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

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 Determine the amount and account to be recorded for Nichols' investment in Smith.

During 2013, Parent Corporation purchased at book value some of the outstanding bonds of its subsidiary. How would this acquisition have been reflected in the consolidated statement of cash flows?

The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below: Additional information for 2013: - Butler & Cassie's consolidated net income was $\$ 100,000$ . - Cassie paid $\$ 10,000$ in dividends. - There were no disposals of plant & equipment or copyright this year. Net cash flow from operating activities was:

A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock is noncumulative. The current year's dividend was paid. How is the non-controlling interest in the subsidiary's net income assigned?

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 reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company?

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013 are as follows: Chase Company: Shares outstanding 50,000 Book value \ 400,000 Book value per share \ 8 Ryan Company: Shares owned of Chase 40,000 Book value of investment in Chase \ 320,000 Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. What should the adjusted book value of Chase be after the treasury shares were purchased?

Parent Corporation acquired some of its subsidiary's outstanding bonds. Why might Parent purchase the bonds, rather than the subsidiary buying its own bonds?

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 of $5,000. The land cost Graham $20,000. (2) Non-controlling 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 was expensed by $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?

Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition?

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 2013: Net cash flow from operating activities was:

A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. 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?

Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2011, for $644,000 in cash. Of this price, $42,000 was attributed to equipment with a ten-year remaining useful life. Goodwill of $56,000 had also been identified. Jet applied the partial equity method so that income would be accrued each period based solely on the earnings reported by the subsidiary. On January 1, 2014, Jet reported $280,000 in bonds outstanding with a book value of $263,200. Nittle purchased half of these bonds on the open market for $135,800. During 2014, Jet began to sell merchandise to Nittle. During that year, inventory costing $112,000 was transferred at a price of $140,000. All but $14,000 (at Jet's selling price) of these goods were resold to outside parties by year's end. Nittle still owed $50,400 for inventory shipped from Jet during December. The following financial figures were for the two companies for the year ended December 31, 2014. Required: Prepare a consolidation worksheet for the year ended December 31, 2014.

Which of the following is not a potential loss or return of a variable interest entity?

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 300,000 \ 600,000 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.

If newly issued debt is issued from a parent to its subsidiary, which of the following statements is false?

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 consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2015?

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013 are as follows: Chase Company: Shares outstanding 50,000 Book value \ 400,000 Book value per share \ 8 Ryan Company: Shares owned of Chase 40,000 Book value of investment in Chase \ 320,000 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?

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 the non-controlling interest's share of consolidated net income for the year 2013?

Which one of the following characteristics of preferred stock would make the stock a dilutive security for earnings per share?

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 Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What is the adjusted book value of Jones after the sale of the shares?