Question 1

All of the following are examples of variable interests except:

Accepted Answer

A) Guarantees of debt. 
B) Stock options. 
C) Lease residual value guarantees. 
D) Participation rights. 
E) Asset purchase options.

Question 2

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

Accepted Answer

A) $30,000 added to net income as an operating activity on the consolidated statement of cash flows. 
B) $30,000 deducted from net income as an operating activity on the consolidated statement of cash flows. 
C) $30,000 increase as an investing activity on the consolidated statement of cash flows. 
D) $30,000 decrease as an investing activity on the consolidated statement of cash flows. 
E) Noncontrolling interest in Stage's net income does not appear on a consolidated statement of cash flows.

Question 3

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 is Ryan's percent ownership in Chase after the acquisition of the treasury shares (rounded)?

Accepted Answer

A) 80%. 
B) 95%. 
C) 64%. 
D) 76%. 
E) 69%.

Question 4

If a subsidiary issues a stock dividend,which of the following statements is true?

Accepted Answer

A) Investment in subsidiary on the parent's books will increase. 
B) Investment in subsidiary on the parent's books will decrease. 
C) Additional paid-in capital on the parent's books will increase. 
D) Additional paid-in capital on the parent's books will decrease. 
E) No adjustment is necessary.

Question 5

Which of the following variable interests entitles a holder to residual profits,losses,and dividends?

Accepted Answer

A) Participation rights 
B) Lease residual value guarantees 
C) Common stock 
D) Asset purchase options 
E) Subordinated debt instruments

Question 6

A parent company owns a controlling interest in a subsidiary whose stock has a valuation basis of $27 per share.On 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?

Accepted Answer

A) Since the sale was made at the end of the year,the parent's investment account is not affected. 
B) Since the shares were sold for less than the adjusted subsidiary value per share,the parent's investment account must be increased. 
C) Since the shares were sold for less than the adjusted subsidiary value per share,the parent's investment account must be decreased. 
D) Since the shares were sold for less than the adjusted subsidiary value per share,but the parent did not buy any of the shares,the parent's investment account is not affected. 
E) None of these answer choices are correct.

Question 7

A parent company owns a 70 percent interest in a subsidiary whose stock has a valuation basis of $27 per share.On 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?

Accepted Answer

A) Since the sale was made at the end of the year,the parent's investment account is not affected. 
B) Since the shares were sold for the same per share amount as the the adjusted subsidiary value per share,the parent's investment account must be increased. 
C) Since the shares were sold for the same per share amount as the the adjusted subsidiary value per share,the parent's investment account must be decreased. 
D) Since the shares were sold for the same per share amount as the the adjusted subsidiary value per share,and the parent bought 70 percent of the shares,the parent's investment account is not affected except for the total acquisition amount for the new shares. 
E) None of these answer choices are correct.

Question 8

REFERENCE: 06-02
Knight Co.owned 80% of the common stock of Stoop Co.Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding.Each preferred share received an annual per share dividend of $2 and is convertible into four shares of common stock.Knight did not own any of Stoop's preferred stock.Stoop also had 600 bonds outstanding,each of which is convertible into ten shares of common stock.Stoop's annual after-tax interest expense for the bonds was $2,000.Knight did not own any of Stoop's bonds.There are no excess amortizations or intra-entity transactions associated with this consolidation.Stoop reported net income of $300,000 for 2018.Knight has 100,000 shares of common stock outstanding and reported net income of $400,000 for 2018.
-What would Knight Co.report as consolidated basic earnings per share (rounded)?

Accepted Answer

A) $6.37 
B) $6.40 
C) $7.00 
D) $5.68 
E) $6.00

Question 9

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:
 $$\begin{array} { l r } 
\text { Common stock (\$5 par value) } & \$ 250,000 \
\text { Additional paid-in capital } & 110,000 \
\text { Retained earnings } & 330,000 \
\text { Total stockholders' equity } & \$ 690,000 \
\end{array}$$ 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 is the balance in Riney's "Investment in Garvin Co.Account" following the sale of the 10,000 shares of common stock?

Accepted Answer

A) $552,000. 
B) $560,000. 
C) $460,000. 
D) $404,000. 
E) $672,000.

Question 10

REFERENCE: 06-14
Thomas Inc.had the following stockholders' equity accounts as of January 1,2018: $\text { Preferred stock - } \$ 90 \text { par value, nonvoting and nonparticipating; }$

$\begin{array}{lr}
\text { 9\% cumulative dividend } & \$ 2,700,000 \
\text { Common stock }-\$ 25 \text { par value } & 5,600,000 \
\text { Retained earnings } & 14,000,000
\end{array}$
 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 the noncontrolling interest's share of consolidated net income for the year 2018?

Accepted Answer

The answer of REFERENCE: 06-14
Thomas Inc.had the following stockholders' equity...

Question 11

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 adjusted book value of Jones after the sale of the shares?

Accepted Answer

A) $ 200,000. 
B) $1,400,000. 
C) $1,280,000. 
D) $1,050,000. 
E) $1,440,000.

Question 12

Goehring,Inc.owns 70 percent of Harry Corp.The consolidated income statement for a year reports $40,000 Noncontrolling Interest in Harry Corp.'s Net Income.Harry paid dividends in the amount of $100,000 for the year.What are the effects of these transactions in the consolidated statement of cash flows for the year?

Accepted Answer

A) Increase in the financing section of $70,000,and decrease in the operating section of $30,000. 
B) Increase in the operating section of $70,000,and decrease in the financing section of $30,000. 
C) Increase in the operating section of $70,000. 
D) Decrease in the financing section of $30,000. 
E) No effects.

Question 13

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:
 $$\begin{array} { l r } 
\text { Common stock, } \$ 10 \text { par value ( } 50,000 \text { shares outstanding } ) & \$ 500,000 \
\text { Preferred stock, } 6 \% \text { cumulative, } \$ 100 \text { par value, } & \
3,000 \text { shares outstanding } & 300,000 \
\text { Additional paid in capital } & 200,000 \
\text { Retained earnings } & \underline { 500,000 } \
\quad \text { Total stockholders' equity } & \$ \underline { \underline { 1,500,000 } }
\end{array}$$
-If Smith's net income is $100,000 in the year following the acquisition,

Accepted Answer

A) The portion allocated to the common stock (residual amount)is $92,800. 
B) $10,800 preferred stock dividend will be subtracted from net income attributed to common stock in arriving at noncontrolling interest in consolidated income. 
C) The noncontrolling interest in consolidated net income is $27,200. 
D) The preferred stock dividend will be ignored in noncontrolling interest in consolidated net income because Nichols owns the noncontrolling interest of preferred stock. 
E) The noncontrolling interest in consolidated net income is $30,800.

Question 14

Cadion Co.owned a controlling interest in Knieval Inc.Cadion reported sales of $420,000 during 2018 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 from its customers?

Accepted Answer

A) $602,000. 
B) $644,000. 
C) $686,000. 
D) $714,000. 
E) $592,000.

Question 15

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 1,2018,Odom issued 3,000 new shares to the public for $70 per share.How does this transaction affect the Investment in Odom Inc.account?

Accepted Answer

A) It should be decreased by $210,000. 
B) It should be increased by $210,000. 
C) It should be increased by $168,000. 
D) It should be decreased by $1,200. 
E) It is not affected since the shares were sold to outside parties.

Question 16

A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock.The preferred stock has a cumulative dividend.No dividends are in arrears.How is the noncontrolling interest in the subsidiary's net income assigned?

Accepted Answer

A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value of the preferred stock,based on an allocation between common stock and preferred stock. 
B) There is no allocation to the noncontrolling interest because the parent owns 100% of the common stock and net income belongs to the controlling interest. 
C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends. 
D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the subsidiary's income before preferred stock dividends. 
E) The noncontrolling interest in consolidated net income is assigned as 40 percent of the subsidiary's income after subtracting preferred stock dividends.

Question 17

The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except:

Accepted Answer

A) Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances. 
B) Subsequent interest revenue/expense must be removed although these balances fail to agree in amount. 
C) A gain or loss must be recognized by both parent and subsidiary companies. 
D) Changes in the investment,debt,interest revenue,and interest expense accounts occur constantly because of the amortization process. 
E) The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired,even though this balance does not appear on the financial records of either company.

Question 18

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 1,2018,Sparrish acquired in the open market $70,000 of Tray's 8% bonds.The bonds had originally been issued several years ago at a price that would yield 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 noncontrolling interest's share of the subsidiary's net income?

Accepted Answer

A) $42,000. 
B) $37,800. 
C) $39,600. 
D) $40,070. 
E) $44,080.

Question 19

REFERENCE: 06-14
Thomas Inc.had the following stockholders' equity accounts as of January 1,2018: $\text { Preferred stock - } \$ 90 \text { par value, nonvoting and nonparticipating; }$

$\begin{array}{lr}
\text { 9\% cumulative dividend } & \$ 2,700,000 \
\text { Common stock }-\$ 25 \text { par value } & 5,600,000 \
\text { Retained earnings } & 14,000,000
\end{array}$
 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 amount of goodwill resulting from this acquisition?

Accepted Answer

The answer of REFERENCE: 06-14
Thomas Inc.had the following stockholders' equity...

Question 20

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. $$\begin{array} { l r } 
\text { Common stock - 40,000 shares outstanding } & \$ 140,000 \
\text { Additional paid-in capital } & 105,000 \
\text { Retained eamings } & 476,000 \
\text { Total stockholders' equity } & \$ 721,000 \
\end{array}$$ 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 issued 10,000 additional shares of common stock for $21 per share.Popper did not acquire any of this newly issued stock.How would this transaction affect the additional paid-in capital of the parent company?

Accepted Answer

A) $0. 
B) Decrease it by $23,240. 
C) Decrease it by $68,250. 
D) Decrease it by $45,060. 
E) Decrease it by $64,720.

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

All of the following are examples of variable interests except:

If a subsidiary issues a stock dividend,which of the following statements is true?

Which of the following variable interests entitles a holder to residual profits,losses,and dividends?

A parent company owns a 70 percent interest in a subsidiary whose stock has a valuation basis of $27 per share.On 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?

A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock.The preferred stock has a cumulative dividend.No dividends are in arrears.How is the noncontrolling interest in the subsidiary's net income assigned?

The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except: