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

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

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

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.Assuming there are no excess amortizations or intra-entity transactions,and Brett reports net income of $780,000,what is the noncontrolling interest in the subsidiary's income?

Stevens Company has had bonds payable of $10,000 outstanding for several years.On January 1,2018,when there was an unamortized discount of $2,000 and a remaining life of 5 years,its 80% owned subsidiary,Matthews Company,purchased the bonds in the open market for $11,000.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 2018.

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

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

REFERENCE: 06-16 Panton,Inc.acquired 18,000 shares of Glotfelty Corp.several years agofor $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: Common stock, \ 10 par value (20,000 shares outstanding) \ 200,000 Additional paid in capital 100,000 Retained earnings Glotfelty issues 5,000 shares of previously unissued stock to the public for $22 per share.None of this stock is purchased by Panton. -Prepare Panton's journal entry to recognize the impact of this transaction.

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 noncontrolling interest in the subsidiary's net income assigned?

REFERENCE: 06-05 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 loss on sale of land reported on the consolidated statement of cash flows?

On January 1,2018,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 1,2023.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 1,2018 through January 1,2023: (i)6 percent annual interest on the principal amount of the loan,which reflects a market rate of interest; (ii)100 percent 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 1,2018,the balance sheets for AHI and RMC are as follows: -In preparing the consolidation worksheet as of December 31,2018 for AHI and RMC,which of the following worksheet entry descriptions reflects what AHI should do to consolidate the financial statements?

REFERENCE: 06-03 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 1,2016,when Cocker had the following stockholders' equity accounts. Common stock - 40,000 shares outstanding \ 140,000 Additional paid-in capital 105,000 Retained eamings 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 1,2019. Popper did not pay any premium when it acquired its original interest in Cocker.On January 1,2019,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 1,2019,Cocker issued 10,000 additional shares of common stock for $35 per share.Popper acquired 8,000 of these shares.How would this transaction affect the additional paid-in capital of the parent company?

REFERENCE: 06-05 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?

REFERENCE: 06-10 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: Cash \ 8,000 \ 26,000 Accounts Receivable (net) 75,000 54,000 Inventory 100,000 89,000 Plant \& Equipment (net) 156,000 170,000 Copyright \3 55,00 \3 57,000 Accounts payable \ 60,000 \ 51,000 Long-term Debt 0 35,000 Noncontrolling interest 27,000 25,000 Common stock, \1 par 100,000 100,000 Retained earnings \ 355,000 \ 357,000 Additional information for 2018: - The combination accured using the acquisition method. Consolidated net income was \5 0,000. The noncontrolling interest share of consolidated net incone of Arthur was \3 ,200. - Arthur paid \4 ,000 in dividends. - There were no purchases or disposals of plant a equipment or copyright this year. -Net cash flow from financing activities was:

REFERENCE: 06-13 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 1,2017,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 1,2019,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 31,2019?

MacDonald,Inc.owns 80 percent of the outstanding stock of Stahl Corporation.During the current year,Stahl made $125,000 in sales to MacDonald.How does this transfer affect the consolidated statement of cash flows?

REFERENCE: 06-02 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 2018.Knight has 100,000 shares of common stock outstanding and reported net income of $400,000 for 2018. -What would Knight Co.report as consolidated diluted earnings per share (rounded)?

REFERENCE: 06-10 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: Cash \ 8,000 \ 26,000 Accounts Receivable (net) 75,000 54,000 Inventory 100,000 89,000 Plant \& Equipment (net) 156,000 170,000 Copyright \3 55,00 \3 57,000 Accounts payable \ 60,000 \ 51,000 Long-term Debt 0 35,000 Noncontrolling interest 27,000 25,000 Common stock, \1 par 100,000 100,000 Retained earnings \ 355,000 \ 357,000 Additional information for 2018: - The combination accured using the acquisition method. Consolidated net income was \5 0,000. The noncontrolling interest share of consolidated net incone of Arthur was \3 ,200. - Arthur paid \4 ,000 in dividends. - There were no purchases or disposals of plant a equipment or copyright this year. -Net cash flow from operating activities was:

REFERENCE: 06-12 On January 1,2018,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 -What is the total acquisition-date fair value of Involved?

Parent Corporation acquired some of its subsidiary's bonds on the open bond market,paying a price $40,000 higher than the bonds' carrying value.How should the difference between the purchase price and the carrying value be accounted for?

REFERENCE: 06-11 The balance sheets of Butler,Inc.and its 70 percent-owned subsidiary,Cassie Corp. ,which Butler has owned for several years are presented below: 2018 2017 Cash \ 16,000 \ 52,000 Accounts Receivable (net) 150,000 108,000 Inventory 220,000 178,000 Plant \& Equipment (net) 315,000 340,000 Copy right 32,000 36,000 \ 733,000 \ 714,000 Accounts payable \ 120,000 \ 102,000 Long-term Debt 0 70,000 Noncontrolling interest 77,000 50,000 Common stock, \1 par 200,000 200,000 Retained earnings \ 733,000 \ 714,000 Additional information for 2018: - Butler & Cassie's consulidated net income was $100,000. - Cassie paid $10,000 in dividends. - There were no purchases or disposals of plant & equipment or copyright this year. -Net cash flow from operating activities was: