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

REFERENCE: 06-04 On January 1,2018,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.There was no premium in the value of consideration transferred.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 ) \ 500,000 Preferred stock, 6\% cumulative, \ 100 par value, 3,000 shares outstanding 300,000 Additional paid in capital 200,000 Retained earnings Total stockholders' equity \ -Compute the goodwill recognized in consolidation.

Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of cash flows?

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 -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?

A parent company owns a controlling interest in a subsidiary and on the last day of the year,the subsidiary issues new shares entirely to outside parties at $33 per share.The parent still holds control over the subsidiary.The adjusted subsidiary value at the date of the new stock issuance was $27 per share.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 new percent ownership Ryan owns in Chase?

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

On January 1,2018,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 2018?

Parent Corporation acquired some of its subsidiary's bonds on the open bond market.The remaining life of the bonds was eight years,and Parent expected to hold the bonds for the full eight years.How would the acquisition of the bonds affect the consolidation process?

REFERENCE: 06-06 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. Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. -What is the new percent ownership of Webb in Jones after the stock issuance?

REFERENCE: 06-04 On January 1,2018,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.There was no premium in the value of consideration transferred.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 ) \ 500,000 Preferred stock, 6\% cumulative, \ 100 par value, 3,000 shares outstanding 300,000 Additional paid in capital 200,000 Retained earnings Total stockholders' equity \ -The consolidation entry at date of acquisition will include (referring to Smith):

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 balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31,2019,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.

If a subsidiary re-acquires its outstanding shares from outside ownership for more than the noncontrolling interest valuation basis at the date of buying such treasury stock,which of the following statements is true?

What are the primary sources of information that are used for preparation of a consolidated statement of cash flows?

REFERENCE: 06-01 On January 1,2018,Riney Co.owned 80% of the common stock of Garvin Co.On that date,Garvin's stockholders' equity accounts had the following balances: Common stock ( \5 par value) \ 250,000 Additional paid-in capital 110,000 Retained earnings 330,000 Total stockholders' equity \ 690,000 The balance in Riney's Investment in Garvin Co.account was $552,000,and the noncontrolling interest was $138,000.On January 1,2018,Garvin Co.sold 10,000 shares of previously unissued common stock for $15 per share.Riney did not acquire any of these shares. -What amount should be attributed to the Noncontrolling Interest in Garvin Co.following the sale of the 10,000 shares of common stock?

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 should the loss be attributed?

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. -After acquiring the additional shares,what adjustment is needed for Ryan's investment in Chase account?

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

A subsidiary issues new shares of common stock.If the parent acquires all of these shares at an amount greater than book value,which of the following statements is true?

On January 1,2018,Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co.At the same time,Parent purchased sixty percent of Foxboro's outstanding preferred stock.In preparing consolidated financial statements,how should the acquisition of the preferred stock be accounted for?

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