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

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

REFERENCE: 06-08 Ryan Company purchased 80% of Chase Company for $270,000 when Chase's book value was $300,000.Ryan paid no premium.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. -What is the adjusted book value of Chase Company after the issuance of the shares?

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. -Describe how this transaction would affect Panton's books.

REFERENCE: 06-09 Ryan Company purchased 80% of Chase Company for $270,000 when Chase's book value was $300,000.Ryan paid no premium.Chase has 50,000 shares outstanding and currently has a book value of $400,000. 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?

During 2018,Parent Corporation purchased at carrying value some of the outstanding bonds of its subsidiary.How would this acquisition have been reflected in the 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: 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 Panton for $35 per share. Required: Describe how this transaction would affect Panton's books.

Where do dividends paid to the noncontrolling interest of a subsidiary appear on a consolidated statement of cash flows?

Campbell Inc.owned all of Gordon Corp.For 2018,Campbell reported net income (without consideration of its investment in Gordon)of $280,000 while the subsidiary reported $112,000.There are no excess amortizations associated with this consolidation.The subsidiary had bonds payable outstanding on January 1,2018,with a book value of $297,000.The parent acquired the bonds on that date for $281,000.During 2018,Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000.What is consolidated net income for 2018?

REFERENCE: 06-09 Ryan Company purchased 80% of Chase Company for $270,000 when Chase's book value was $300,000.Ryan paid no premium.Chase has 50,000 shares outstanding and currently has a book value of $400,000. 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?

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

Johnson,Inc.owns control over Kaspar,Inc.Johnson reports sales of $400,000 during 2018 while Kaspar reports $250,000.Kaspar transferred inventory during 2018 to Johnson at a price of $50,000.On December 31,2018,30% of the transferred goods are still held in Johnson's inventory.Consolidated accounts receivable on January 1,2018 was $120,000,and on December 31,2018 is $130,000.Johnson uses the direct approach in preparing the statement of cash flows.How much is cash collected from customers in the consolidated statement of cash flows?

REFERENCE: 06-14 Thomas Inc.had the following stockholders' equity accounts as of January 1,2018: $\text { Preferred stock - } \$ 90 \text { par value, nonvoting and nonparticipating; }$ 9\% cumulative dividend \ 2,700,000 Common stock -\ 25 par value 5,600,000 Retained earnings 14,000,000 Kuried Co.acquired all of the voting common stock of Thomas on January 1,2018,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 2018,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 controlling interest share of Thomas' net income for the year ended December 31,2018?

Danbers Co.owned seventy-five percent of the common stock of Renz Corp.How does the issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process?

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 31,2021?

REFERENCE: 06-14 Thomas Inc.had the following stockholders' equity accounts as of January 1,2018: $\text { Preferred stock - } \$ 90 \text { par value, nonvoting and nonparticipating; }$ 9\% cumulative dividend \ 2,700,000 Common stock -\ 25 par value 5,600,000 Retained earnings 14,000,000 Kuried Co.acquired all of the voting common stock of Thomas on January 1,2018,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 2018,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 2018.

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?

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

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 receivable appear in a consolidated statement of cash flows?

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?

Jet Corp.acquired all of the outstanding shares of Nittle Inc.on January 1,2016,for $644,000 in cash.Of this consideration transferred,$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 1,2019,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 2019,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 31,2019. Required: Prepare a consolidation worksheet for the year ended December 31,2019.