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

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. -Using the indirect method, where does the decrease in accounts payable appear in a consolidated statement of cash flows?

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

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011. -Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2010, 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 2010 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2011. What adjustment would have been required for the retained earnings balance as of January 1, 2011?

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2011, are as follows: Jones Company: Shares outstanding 100,000 Book value of Jones \ 1,200,000 Book value per share \ 12 Webb Company: Shares owned of Jones 90,000 Book value of investment \ 1,080,000 Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. -What adjustment is needed for Webb's investment in Jones account?

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: Common stock, \ 10 par value (50,000 shares outstanding) \ 500,000 Preferred stock, 6\% cumulative, \ 100 par value, 3,000 shares outstanding 300,000 Additional paid in capital 200,000 Retained earnings 500,000 Total stockholders' equity \1 ,500,000 -Compute the goodwill recognized in consolidation.

Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2011, when there was an unamortized discount of $2,000 and a remaining life of 5 years, its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market for $11,000. The bonds pay 6% 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.

On January 1, 2011, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows: Common stock, \ 10 par value, 100,000 shares outstanding \ 1,000,000 Preferred stock, 7\% fully participating, \ 100 par value, 10,000 shares outstanding 1,000,000 Retained Earnings 2,000,000 Total stockholders' equity \ 4,000,000 -Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?

When a company has preferred stock in its capital structure, what amount should be used to calculate noncontrolling interest in the preferred stock of the subsidiary when the company is acquired as a subsidiary of another company?

MacDonald, Inc. owns 80 percent of the outstanding stock of Stahl Corporation. During the current year, Stahl made $125,000 in sales to MacDonald. How does this transfer affect the consolidated statement of cash flows?

On January 1, 2011, Riney Co. owned 80% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances: Common stock ( \ 5 par value) \ 250,000 Additional paid-in capital 110,000 Retained earnings 330,000 Total stockholders' equity \6 90,000 The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling interest was $138,000. On January 1, 2011, Garvin Co. sold 10,000 shares of previously unissued common stock for $15 per share. Riney did not acquire any of these shares. -Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par preferred stock and 60% of the outstanding common stock of Brett Co. When Brett reported net income of $780,000, what was the noncontrolling interest in the subsidiary's income?

Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer?

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011. -Campbell Inc. owned all of Gordon Corp. For 2011, 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, 2011, with a book value of $297,000. The parent acquired the bonds on that date for $281,000. During 2011, Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is consolidated net income for 2011?

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. Common stock - 40,000 shares outstanding \ 140,000 Additional paid-in capital 105,000 Retained earnings 476,000 Total stockholders' equity \ 721,000 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 reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company?

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity: Common stock, \ 10 par value (20,000 shares outstanding) \ 200,000 Additional paid in capital 100,000 Retained earnings \ 600,000 Glotfelty issues 5,000 shares of previously unissued stock to the public for $27 per share. None of this stock is purchased by Panton. -Describe how this transaction would affect Panton's books.

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

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, 2012?

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011. -What was the amount of Stoop's earnings that should be included in calculating consolidated diluted earnings per share?

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2011 are as follows: Jones Company: Shares outstanding 100,000 Book value of Jones \ 1,200,000 Book value per share \ 12 Webb Company: Shares owned of Jones 90,000 Book value of investment \ 1,080,000 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?

Pursley, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $50,000 Noncontrolling Interest in Harry, Inc. 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? Financing Activities Operating Activities A) Increased by \ 24,000 Increased by \ 15,000 B) Decreased by \ 15,000 Unaffected C) Unaffected Decreased by \ 15,000 D) Decreased by \ 24,000 Unaffected E) Unaffected Increased by \ 24,000

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. Common stock - 40,000 shares outstanding \ 140,000 Additional paid-in capital 105,000 Retained earnings 476,000 Total stockholders' equity \ 721,000 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 $35 per share. Popper acquired 8,000 of these shares. How would this transaction affect the additional paid-in capital of the parent company?