Exam 6: Variable Interest Entities, intercompany Debt, consolidated Statement of Cash Flows, and Other Issues

REFERENCE: Ref.06_08 Ryan Company owns 80% of Chase Company.The original balances presented for Ryan and Chase as of January 1,2009,are as follows: Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. -What is the new percent ownership Ryan owns in Chase?

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?

How are intercompany inventory transfers reflected on a consolidated statement of cash flows?

Parent Corporation had just purchased some of its subsidiary's outstanding bonds.What items related to these bonds will have to be accounted for in the consolidation process?

REFERENCE: Ref.06_02 Stoop Co.owned 80% of the common stock of Knight Co.Knight 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 $10 and is convertible into four shares of common stock.Stoop did not own any of Knight's preferred stock.Knight also had 600 bonds outstanding,each of which is convertible into ten shares of common stock.Knight's annual after-tax interest expense for the bonds was $22,000.Stoop did not own any of Knight's bonds.Knight reported income of $300,000 for 2009. -Campbell Inc.owned all of Gordon Corp.For 2009,Campbell reported net income (without consideration of its investment in Gordon)of $280,000 while the subsidiary reported $112,000.The subsidiary had bonds payable outstanding on January 1,2009,with a book value of $297,000.The parent acquired the bonds on that date for $281,000.During 2009,Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000.What is consolidated net income for 2009?

REFERENCE: Ref.06_16 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 $27 per share.None of this stock is purchased by Panton. -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.

REFERENCE: Ref.06_15 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. -Prepare Panton's journal entry to recognize the impact of this transaction.

REFERENCE: Ref.06_11 The balance sheets of Butler,Inc.and its 70 percent-owned subsidiary,Cassie Corp. ,are presented below: Additional information for 2009: -Net cash flow from operating activities was:

If a subsidiary reacquires its outstanding shares from outside ownership for more than book value,which of the following statements is true?

All of the following are examples of variable interests except

REFERENCE: Ref.06_02 Stoop Co.owned 80% of the common stock of Knight Co.Knight 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 $10 and is convertible into four shares of common stock.Stoop did not own any of Knight's preferred stock.Knight also had 600 bonds outstanding,each of which is convertible into ten shares of common stock.Knight's annual after-tax interest expense for the bonds was $22,000.Stoop did not own any of Knight's bonds.Knight reported income of $300,000 for 2009. -Cadion Co.owned control over Knieval Inc.Cadion reported sales of $420,000 during 2009 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 intercompany 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?

REFERENCE: Ref.06_07 Webb Company owns 90% of Jones Company.The original balances presented for Jones and Webb as of January 1,2009 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?

Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company.On January 2,2007,Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2,2027 at a premium of $500,000.On January 1,2009,Franklin acquired 20 percent of these same bonds at 97.66.Both companies use the straight-line method of amortization.What adjustment should be made to Franklin's 2010 beginning Retained Earnings as a result of this bond acquisition?

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

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 2009 and 2010. Additional Information: Bonds were issued during 2010 by the parent for cash. Amortization of a database acquired in the original combination amounted to $7,000 per year. A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash on May 11,2010. Equipment was purchased by the subsidiary on July 23,2010,using cash. Late in November 2010,the parent issued common stock for cash. During 2010,the subsidiary paid dividends of $14,000. Required: Prepare a consolidated statement of cash flows for this business combination for the year ending December 31,2010.Either the direct method or the indirect method may be used.

Which one of the following characteristics of preferred stock would make the stock a dilutive security for earnings per share?

REFERENCE: Ref.06_16 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 $27 per share.None of this stock is purchased by Panton. -Prepare Panton's journal entry to recognize the impact of this transaction.

REFERENCE: Ref.06_04 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 noncontrolling interest in Smith at date of acquisition.

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

REFERENCE: Ref.06_09 Ryan Company owns 80% of Chase Company.The original balances presented for Ryan and Chase as of January 1,2009 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)?