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

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Question 31

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How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows?

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Question 32

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Vontkins Inc.owned all of Quasimota Co.The subsidiary had bonds payable outstanding on January 1,2017,with a book value of $265,000.The parent acquired the bonds on that date for $288,000.Subsequently,Vontkins reported interest income of $25,000 in 2017 while Quasimota reported interest expense of $29,000.Consolidated financial statements were prepared for 2018.What adjustment would be required for the retained earnings balance as of January 1,2018?

A) Reduction of $27,000.
B) Reduction of $4,000.
C) Reduction of $19,000.
D) Reduction of $30,000.
E) Reduction of $20,000.

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Question 33

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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: $\begin{array} { | l | r | } \hline \text { Common stock, } \$ 10 \text { par value (20,000 shares outstanding) } & \$ 200,000 \\\hline \text { Additional paid in capital } & 100,000 \\\hline \text { Retained earnings } & \underline { 300,000 } \\\hline & \underline { \$ 600,000 } \\\hline\end{array}$ 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.

A company had common stock with a total par value of $18,000,000 and fair value of $62,000,000;and 7% preferred stock with a total par value of $6,000,000 and a fair value of $8,000,000.The book value of the company was $85,000,000.Assuming ninety percent (90%) of the company's total equity is acquired,what amount must be attributed to the noncontrolling interest?

Which of the following statements is true concerning variable interest entities (VIEs) ? (1) ) The role of the VIE equity investors can be fairly minor. (2) ) A VIE may be created specifically to benefit the business enterprise that established it with low-cost financing. (3) ) VIE governing agreements often limit activities and decision-making. (4) ) VIEs usually have a well-defined and limited business activity.

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

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: $\begin{array} { l r } \text { Common stock, } \$ 10 \text { par value ( } 50,000 \text { shares outstanding } ) & \$ 500,000 \\\text { Preferred stock, } 6 \% \text { cumulative, } \$ 100 \text { par value, } & \\3,000 \text { shares outstanding } & 300,000 \\\text { Additional paid in capital } & 200,000 \\\text { Retained earnings } & \underline { 500,000 } \\\quad \text { Total stockholders' equity } & \$ \underline { \underline { 1,500,000 } }\end{array}$ -Compute the noncontrolling interest in Smith at date of acquisition.

How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants?

REFERENCE: 06-07 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. Assume Jones issues 20,000 new shares of its common stock for $15 per share. -What is the adjusted book value of Jones after the stock issuance?

Which of the following is not a factor that indicates a business enterprise that establishes a variable interest entity (VIE) should consolidate such VIE with its own financial statements?

Parent Corporation acquired some of its subsidiary's outstanding bonds.Why might Parent purchase the bonds,rather than the subsidiary buying its own bonds?

Parent Corporation loaned money to its subsidiary with a five-year note at the market interest rate.How would the note be accounted for in the consolidation process?

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 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?

Pursley,Inc.owns 70 percent of Harry Corp.The consolidated income statement for a year reports $50,000 Noncontrolling Interest in Harry Corp.'s Net 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? $\begin{array} {cc} & \text { Financing Activities } & \text { Operating Activities } \\\end{array}$ A) $\begin{array} {cc} & \text { Increased by } \$ 24,000 && \text { Increased by } \$ 15,000 \\\end{array}$ B) $\begin{array} {cc} & \text { Decreased by } \$ 15,000 && \text { Unaffected } \\\end{array}$ C) $\begin{array} {cc} & \text { Unaffected } &&&&&& \text { Decreased by } \$ 15,000 \\\end{array}$ D) $\begin{array} {cc} & \text { Decreased by } \$ 24,000 && \text { Unaffected } \\\end{array}$ E) $\begin{array} {cc} & \text { Unaffected } &&&&&& \text { Increased by } \$ 24,000 \\\end{array}$

Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity?

REFERENCE: 06-07 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. Assume Jones issues 20,000 new shares of its common stock for $15 per share. -After acquiring the additional shares,what adjustment is needed for Webb's investment in Jones account?

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: $\begin{array} { l r } \text { Common stock, } \$ 10 \text { par value ( } 50,000 \text { shares outstanding } ) & \$ 500,000 \\\text { Preferred stock, } 6 \% \text { cumulative, } \$ 100 \text { par value, } & \\3,000 \text { shares outstanding } & 300,000 \\\text { Additional paid in capital } & 200,000 \\\text { Retained earnings } & \underline { 500,000 } \\\quad \text { Total stockholders' equity } & \$ \underline { \underline { 1,500,000 } }\end{array}$ -With respect to Nichols' investment in Smith,determine the amount to be recorded and identify which account should be adjusted to reflect such amount.

REFERENCE: 06-11 The balance sheets of Butler,Inc.and its 70 percent-owned subsidiary,Cassie Corp. ,which Butler has owned for several years are presented below: $\begin{array}{lrr}&2018&2017\\\text { Cash } & \$ 16,000 & \$ 52,000 \\\text { Accounts Receivable (net) } & 150,000 & 108,000 \\\text { Inventory } & 220,000 & 178,000 \\\text { Plant \& Equipment (net) } & 315,000 & 340,000 \\\text { Copy right } &3 2 , 0 0 0& 36,000\\& \$ 733,000 & \$ 714,000\\\\\text { Accounts payable } & \$ 120,000 & \$ 102,000 \\\text { Long-term Debt } & 0 & 70,000 \\\text { Noncontrolling interest } & 77,000 & 50,000 \\\text { Common stock, \$1 par } & 200,000 & 200,000 \\\text { Retained earnings } & \underline{336,000} & \underline{292,000} \\& \$ 733,000 & \$ 714,000\end{array}$ Additional information for 2018: - Butler & Cassie's consulidated net income was $100,000. - Cassie paid $10,000 in dividends. - There were no purchases or disposals of plant & equipment or copyright this year. -Net cash flow from financing activities was:

If new bonds are issued from a parent to its subsidiary,which of the following statements is false?

How do intra-entity transfers of inventory affect the preparation of a consolidated statement of cash flows?