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

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 Panton for $35 per share. Required: Describe how this transaction would affect Panton's books.

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?

Tray Co. reported current earnings of $560,000 while paying $56,000 in cash dividends. Sparrish Co. earned $140,000 in net income and distributed $14,000 in dividends. Tray held a 70% interest in Sparrish for several years, an investment that it originally acquired by transferring consideration equal to the book value of the underlying net assets. Tray used the initial value method to account for these shares. On January 1, 2011, Sparrish acquired in the open market $70,000 of Tray's 8% bonds. The bonds had originally been issued several years ago at 92, reflecting a 10% effective interest rate. On the date of the bond purchase, the book value of the bonds payable was $67,600. Sparrish paid $65,200 based on a 12% effective interest rate over the remaining life of the bonds. What is the non-controlling interest's share of the subsidiary's net income?

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

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 receivable appear in a consolidated statement of cash flows?

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: The consolidation entry at date of acquisition will include (referring to Smith):

Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's convertible bonds. The following consolidated financial statements were for 2010 and 2011. Additional Information: 1. Bonds were issued during 2011 by the parent for cash. 2. Amortization of a database acquired in the original combination amounted to $7,000 per year. 3. A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash on May 11, 2011. 4. Equipment was purchased by the subsidiary on July 23, 2011, using cash. 5. Late in November 2011, the parent issued common stock for cash. 6. During 2011, the subsidiary paid dividends of $14,000. Required: Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2011. Either the direct method or the indirect method may be used.

A variable interest entity can take all of the following forms except a(n)

All of the following are examples of variable interests except

Parker owned all of Odom Inc. Although the Investment in Odom Inc. account had a balance of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share. On January 1, 2011, Odom issued 3,000 new shares to the public for $70 per share. How does this transaction affect the Investment in Odom Inc. account?

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, 2013?

Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2011, 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 2011.

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

Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2009, for $644,000 in cash. Of this price, $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, 2012, 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 2012, 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, 2012. Required: Prepare a consolidation worksheet for the year ended December 31, 2012.

During 2011, Parent Corporation purchased at book value some of the outstanding bonds of its subsidiary. How would this acquisition have been reflected in the consolidated statement of cash flows?

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. Where does the non-controlling interest in Stage's net income appear on a consolidated statement of cash flows?

On January 1, 2011, Bast Co. had a net book value of $2,100,000 as follows: 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?

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: Compute the non-controlling interest in Smith at date of acquisition.

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2011: Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2011, 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 2011, 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 2011.

Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On January 2, 2009, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2029 at a premium of $400,000. On January 1, 2011, Ernest acquired 30 percent of these same bonds on the open market at 97.6. Both companies use the straight-line method of amortization. What adjustment should be made to Davidson's 2012 beginning Retained Earnings as a result of this bond acquisition?