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Exam 6: Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flo

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Question 61

Multiple Choice

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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?

A) The parent's additional paid-in capital will be increased.
B) The parent's investment in subsidiary will be increased.
C) The parent's retained earnings will be increased.
D) The parent's additional paid-in capital will be decreased.
E) The parent's retained earnings will be decreased.

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Question 62

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Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2011 while Kaspar reports $250,000. Kaspar transferred inventory during 2011 to Johnson at a price of $50,000. On December 31, 2011, 30 percent of the transferred goods are still in Johnson's inventory. Consolidated accounts receivable on January 1, 2011 was $120,000, and on December 31, 2011 is $130,000. Johnson uses the direct approach in preparing the statement of cash flows. How much is cash collected from customers in the consolidated statement of cash flows?

A) $590,000.
B) $610,000.
C) $625,000.
D) $635,000.
E) $650,000.

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Question 63

Multiple Choice

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

What documents or other sources of information would be used to prepare a consolidated statement of cash flows?

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

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.

On January 1, 2011, Bast Co. had a net book value of $2,100,000 as follows: $\begin{array} { | l | r | } \hline \begin{array} { l } \text { Preferred stock, 2,000 shares } \$ 70 \text { par value, } \\\text { cumulative, nonparticipating, nonvoting }\end{array} & \$ 140,000 \\\hline \text { Common stock, 22,400 shares } \$ 50 \text { par value } & 1,120,000 \\\hline \text { Retained earnings } & 840,000 \\\hline \text { Total shareholders' equity } & \$ 2,100,000 \\\hline & \\\hline\end{array}$ 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?

Prepare all consolidation entries for 2011.

Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2011 (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, 2011 with a carrying value of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2011 for $1,090,000. For the year 2011, 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. What is Carlson's share of consolidated net income?

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?

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. $\begin{array} { l r } \text { Common stock - 40,000 shares outstanding } & \$ 140,000 \\\text { Additional paid-in capital } & 105,000 \\\text { Retained earnings } & 476,000 \\\hline \text { Total stockholders' equity } & \$ 721,000 \\\hline\end{array}$ 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, 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 $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?

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.) 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 was expensed by $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?

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?

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 balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31, 2012, the end of the first year of the intra-entity investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.

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?