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

A parent company owns a 70 percent 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 for $27 per share, and the parent buys its 70 percent interest in the new shares. Which of the following statements is true?

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

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

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, 2009, when Cocker had the following stockholders' equity accounts. 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, 2012. On January 1, 2012, 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, 2012, 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?

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?

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

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 $33 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

Cadion Co. owned a controlling interest in Knieval Inc. Cadion reported sales of $420,000 during 2011 while Knieval reported $280,000. Inventory costing $28,000 was transferred from Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent was still in ending inventory at year's end. Total receivables on the consolidated balance sheet were $112,000 at the first of the year and $154,000 at year-end. No intra-entity debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business combination from its customers?

On January 1, 2009, 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: If Smith's net income is $100,000 in the year following the acquisition,

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. How is the amount of excess acquisition-date fair value over book value recognized in a consolidated statement of cash flows assuming the indirect method is used?

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2011 are as follows: Assume Jones issues 20,000 new shares of its common stock for $15 per share. Of this total, Webb acquires 18,000 shares to maintain its 90% interest in Jones. After acquiring the additional shares, what adjustment is needed for Webb's investment in Jones account?

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?

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2011 are as follows: Assume Jones issues 20,000 new shares of its common stock for $15 per share. Of this total, Webb acquires 18,000 shares to maintain its 90% interest in Jones. What is the adjusted book value of Jones after the stock issuance?

Skipen Corp. had the following stockholders' equity accounts: 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 book values except for land which is undervalued by $130,000. Required: What amount was attributed to goodwill on the date of acquisition?

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?

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 payable appear in a consolidated statement of cash flows?

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, 2010, 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, 2012, 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, 2014?

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity: Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None of this stock is purchased by Panton. Describe how this transaction would affect Panton's books.

Pursley, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $50,000 Non-controlling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $80,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year?

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2011 are as follows: Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. What is Ryan's percent ownership in Chase after the acquisition of the treasury shares (rounded)?