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

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 will dividends be reported in 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?

Keenan Company has had bonds payable of $20,000 outstanding for several years.On January 1,2018,there was an unamortized premium of $2,000 with a remaining life of 10 years,Keenan's parent,Ross,Inc. ,purchased the bonds in the open market for $19,000.Keenan is a 90% owned subsidiary of Ross.The bonds pay 8% 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.

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 was Kuried's balance in the Investment in Thomas Inc.account as of December 31,2018?

Which of the following statements is false regarding the assignment of a gain or loss when an affiliate's debt instrument is acquired on the open market?

What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method?

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 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?

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 \ 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 carrying amounts except for land,which is undervalued by $130,000. Required: What amount was attributed to goodwill on the date of acquisition?

On January 1,2018,Bast Co.had a net book value of $2,100,000 as follows: Preferred stock, cumulative, nonparticipating, nonvoting \ 140,000 Common stock, 22,400 shares \ 50 par value 1,120,000 Retained earnings Total shareholders' equity \ 2,100,000 Fisher Co.acquired all of the outstanding preferred shares for $148,000 and 60% of the common stock for $1,281,000.Fisher believed that one of Bast's buildings,with a twelve-year life,was undervalued on the company's financial records by $70,000. Required: What is the amount of goodwill to be recognized from this purchase?

Which of the following statements regarding consolidation of a VIE with its primary beneficiary is true?

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 31,2020?

Carlson,Inc.owns 80 percent of Madrid,Inc.Carlson reports net income for 2018 (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 1,2018 with a carrying value of $1,200,000.Madrid acquired the bonds on the open market on January 3,2018 for $1,090,000.For the year 2018,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.Assuming there are no excess amortizations or other intra-entity transactions,what is Carlson's share of consolidated net income?

A subsidiary issues new shares of common stock at an amount below book value.Outsiders buy all of these shares.Which of the following statements is true?

REFERENCE: 06-15 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 the public for $40 per share.None of this stock is purchased by Panton. -Prepare Panton's journal entry to recognize the impact of this transaction.

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

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 adjustment is needed for Webb's investment in Jones account?