Chapter 5 Of Acc 401

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Chapter 5 Of Acc 401 - Quiz

EXAM 2 for ACC 401


Questions and Answers
  • 1. 

    IFRS allows an alternative method for valuing the acquired subsidiary’s goodwill.  When is U.S. GAAP and IFRS valuation the same regardless of which valuation method is used under IFRS?

    • A.

      There is no noncontrolling interest in the acquired subsidiary.

    • B.

      There are no revaluations of the acquired subsidiary’s identifiable net assets.

    • C.

      There is no goodwill impairment.

    • D.

      It is the date of acquisition.

    Correct Answer
    A. There is no noncontrolling interest in the acquired subsidiary.
    Explanation
    When there is no noncontrolling interest in the acquired subsidiary, both U.S. GAAP and IFRS valuation methods will be the same regardless of which valuation method is used under IFRS. This means that the accounting treatment for valuing the acquired subsidiary's goodwill will be identical under both standards.

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  • 2. 

    Which is the best measure of fair value per share for the noncontrolling interest in a subsidiary at the date of acquisition, if the subsidiary’s stock is actively traded?

    • A.

      The parent’s acquisition cost per share.

    • B.

      The market value per share.

    • C.

      The parent’s acquisition cost per share less a discount per share for noncontrolling interest.

    • D.

      The present value of the subsidiary’s future cash flows, on a per share basis.

    Correct Answer
    B. The market value per share.
    Explanation
    The best measure of fair value per share for the noncontrolling interest in a subsidiary at the date of acquisition, if the subsidiary's stock is actively traded, is the market value per share. This is because the market value reflects the current price at which the stock is being traded in the market, and it represents the fair value of the shares. The market value per share takes into account the supply and demand dynamics in the market and is considered a reliable indicator of the true value of the shares.

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  • 3. 

    As compared with past practice, SFAS 160 requirements for displaying noncontrolling interests in the consolidated income statement:

    • A.

      Reduce consolidated net income

    • B.

      Reduce consolidated revenue

    • C.

      Increase consolidated net income

    • D.

      Increase consolidated revenue

    Correct Answer
    C. Increase consolidated net income
    Explanation
    SFAS 160, which stands for Statement of Financial Accounting Standards No. 160, introduces new requirements for displaying noncontrolling interests in the consolidated income statement. These requirements aim to improve transparency and provide more accurate information about the financial performance of a company. Under SFAS 160, noncontrolling interests are presented as a separate line item in the consolidated net income. This means that the net income attributable to noncontrolling interests is deducted from the consolidated net income. As a result, the consolidated net income increases because the portion of net income belonging to noncontrolling interests is no longer included in the consolidated net income.

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  • 4. 

    Noncontrolling interest is reported on the consolidated financial statements as:

    • A.

      An asset on the consolidated balance sheet

    • B.

      A distribution of consolidated net income on the consolidated income statement

    • C.

      An expense on the consolidated income statement

    • D.

      A liability on the consolidated balance sheet

    Correct Answer
    B. A distribution of consolidated net income on the consolidated income statement
    Explanation
    Noncontrolling interest is reported on the consolidated financial statements as a distribution of consolidated net income on the consolidated income statement. This means that the portion of net income attributable to the noncontrolling interest is distributed and shown as an expense on the consolidated income statement. This reflects the share of profits that belongs to the noncontrolling shareholders of a subsidiary company.

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  • 5. 

    U.S. GAAP and IFRS can differ on valuation of noncontrolling interests on the consolidated balance sheet.  Assume a parent owns 90% of a subsidiary, acquired several years ago.  Which statement is true?

    • A.

      IFRS allows noncontrolling interests to be reported at the current market value of the shares held by the noncontrolling interests.

    • B.

      IFRS requires noncontrolling interests to be reported at fair value at the date of acquisition, adjusted for the accumulated noncontrolling interests’ share of the subsidiary’s net income and dividends since acquisition

    • C.

      IFRS allows noncontrolling interests to be reported at 10% of the current fair value of the subsidiary’s identifiable net assets.

    • D.

      IFRS allows noncontrolling interests to be reported at 10% of the fair value of the subsidiary’s identifiable net assets at the date of acquisition, adjusted for the accumulated noncontrolling interests’ share of the subsidiary’s net income and dividends since acquisition.

    Correct Answer
    D. IFRS allows noncontrolling interests to be reported at 10% of the fair value of the subsidiary’s identifiable net assets at the date of acquisition, adjusted for the accumulated noncontrolling interests’ share of the subsidiary’s net income and dividends since acquisition.
    Explanation
    According to the given answer, under IFRS, noncontrolling interests are reported at 10% of the fair value of the subsidiary's identifiable net assets at the date of acquisition. This value is then adjusted for the accumulated noncontrolling interests' share of the subsidiary's net income and dividends since acquisition. This means that IFRS requires a specific valuation method for noncontrolling interests on the consolidated balance sheet, taking into account the fair value of the subsidiary's net assets and the noncontrolling interests' share of the subsidiary's financial performance since acquisition.

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  • 6. 

    Assume a parent acquires 75% of the stock of a subsidiary, in an acquisition in which goodwill is reported.  If goodwill is not impaired, on the consolidated income statement the noncontrolling interest in net income as measured by U.S. GAAP is:

    • A.

      Always less than noncontrolling interest in net income as measured using IFRS

    • B.

      Always the same as noncontrolling interest in net income as measured using IFRS

    • C.

      Always greater than noncontrolling interest in net income as measured using IFRS

    • D.

      Greater than the noncontrolling interest in net income as measured using IFRS, but only if the alternative valuation method allowed by IFRS is used

    Correct Answer
    B. Always the same as noncontrolling interest in net income as measured using IFRS
    Explanation
    The noncontrolling interest in net income represents the portion of the subsidiary's net income that is attributable to the minority shareholders. Under both U.S. GAAP and IFRS, the noncontrolling interest in net income is calculated based on the subsidiary's net income after deducting any goodwill impairment. Since the question states that goodwill is not impaired, the noncontrolling interest in net income will be the same under both U.S. GAAP and IFRS. Therefore, the correct answer is "Always the same as noncontrolling interest in net income as measured using IFRS."

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  • 7. 

    Noncontrolling interest is reported on the consolidated financial statements as:

    • A.

      A revenue on the consolidated income statement

    • B.

      An equity on the consolidated balance sheet

    • C.

      A reduction in retained earnings on the consolidated statement of retained earnings

    • D.

      An expense on the consolidated income statement

    Correct Answer
    B. An equity on the consolidated balance sheet
    Explanation
    Noncontrolling interest refers to the ownership interest in a subsidiary that is not owned by the parent company. It represents the portion of the subsidiary's equity that is held by outside shareholders. As such, it is reported as an equity item on the consolidated balance sheet. This is because noncontrolling interest represents the shareholders' ownership in the subsidiary and should be included in the overall equity section of the consolidated financial statements.

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  • 8. 

    Which statement is true concerning valuation of noncontrolling interests at the date of acquisition per U.S. GAAP?

    • A.

      Per-share value of the noncontrolling interest is likely to be higher than the acquisition price per share.

    • B.

      Market price per share is the best measure of noncontrolling interest value if the stock is not actively traded.

    • C.

      The main difference in per-share value between the controlling and noncontrolling interest is a control premium for the acquirer’s interest.

    • D.

      The per-share fair value of the controlling and noncontrolling interest is likely to be the same, due to market pressures.

    Correct Answer
    C. The main difference in per-share value between the controlling and noncontrolling interest is a control premium for the acquirer’s interest.
    Explanation
    The main difference in per-share value between the controlling and noncontrolling interest is a control premium for the acquirer’s interest. This means that the acquiring company is willing to pay a higher price per share for the controlling interest in order to gain control and decision-making power over the acquired company. The noncontrolling interest, on the other hand, does not have the same level of control and therefore does not command the same premium.

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  • 9. 

    An acquirer buys 75% of the stock of a target company for a price well in excess of the target’s book value.  The target company’s assets and liabilities are determined to be fairly reported on the target company’s books, and it does not have any previously unrecorded intangibles.  The acquirer is a non-U.S. company that reports using IFRS.  It uses the alternative valuation method for noncontrolling interests that is not allowed under U.S. GAAP.  Which statement is true?

    • A.

      The noncontrolling interest is initially reported at 25% of the target company’s book value.

    • B.

      Goodwill for the acquisition equals the acquisition price paid by the acquirer plus the fair value of the noncontrolling interest less the book value of the target.

    • C.

      Goodwill for the acquisition is the same as under U.S. GAAP.

    • D.

      Future noncontrolling interest in net income will be adjusted for the noncontrolling interest’s share of goodwill impairment, if any.

    Correct Answer
    A. The noncontrolling interest is initially reported at 25% of the target company’s book value.
    Explanation
    The correct answer is that the noncontrolling interest is initially reported at 25% of the target company's book value. This is because the acquirer uses the alternative valuation method for noncontrolling interests, which is allowed under IFRS but not under U.S. GAAP. Under this method, the noncontrolling interest is initially recognized at its proportionate share of the target company's identifiable net assets, which in this case is 25% of the book value.

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  • 10. 

    Where is the noncontrolling interest in consolidated net income reported?

    • A.

      As a contra equity account in the equity section of the consolidated balance sheet.

    • B.

      As a component of accumulated other comprehensive income.

    • C.

      On the consolidated income statement as a distribution of consolidated net income.

    • D.

      On the consolidated income statement as an expense, deducted to get consolidated net income.

    Correct Answer
    C. On the consolidated income statement as a distribution of consolidated net income.
    Explanation
    The noncontrolling interest in consolidated net income is reported on the consolidated income statement as a distribution of consolidated net income. This means that the portion of net income attributable to the noncontrolling interest is distributed to the noncontrolling shareholders. This is done to reflect the fact that the noncontrolling shareholders have a claim on the earnings of the subsidiary company.

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  • 11. 

    A parent owns 80% of a subsidiary’s voting stock.  On the consolidated balance sheet, at what value is consolidated intangible assets reported?

    • A.

      The parent’s book value of intangibles plus the subsidiary’s book value of intangibles.

    • B.

      The parent’s fair value of intangibles plus the subsidiary’s fair value of intangibles.

    • C.

      The parent’s book value of intangibles plus the subsidiary’s book value of intangibles, plus the unamortized revaluations of the subsidiary’s intangibles.

    • D.

      The parent’s book value of intangibles plus 80% of the subsidiary’s book value of intangibles, plus the unamortized revaluations of the subsidiary’s intangibles.

    Correct Answer
    C. The parent’s book value of intangibles plus the subsidiary’s book value of intangibles, plus the unamortized revaluations of the subsidiary’s intangibles.
    Explanation
    The correct answer is the parent’s book value of intangibles plus the subsidiary’s book value of intangibles, plus the unamortized revaluations of the subsidiary’s intangibles. This is because when preparing consolidated financial statements, the parent company includes its own intangible assets and the intangible assets of its subsidiary. Additionally, any revaluations of the subsidiary's intangible assets that have not been amortized need to be included in the consolidated balance sheet. Since the parent owns 80% of the subsidiary's voting stock, it is appropriate to include 80% of the subsidiary's book value of intangibles in the consolidation.

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  • 12. 

    A parent owns 85% of a subsidiary’s voting stock, in an acquisition accounted for as a bargain purchase.  The subsidiary had previously unreported identifiable intangible assets valued at $10,000,000 on the date of acquisition.  Which statement is true concerning consolidation eliminations at the date of acquisition?

    • A.

      15% of the goodwill recognized at the date of acquisition is attributed to the noncontrolling interest.

    • B.

      All of the previously unreported identifiable intangible assets are attributed to the controlling interest.

    • C.

      Less than 15% of the previously unreported identifiable intangible assets are attributed to the noncontrolling interest.

    • D.

      All of the goodwill recognized at the date of acquisition is attributed to the noncontrolling interest

    Correct Answer
    C. Less than 15% of the previously unreported identifiable intangible assets are attributed to the noncontrolling interest.
    Explanation
    In a consolidation elimination at the date of acquisition, the parent company includes the subsidiary's assets and liabilities in its financial statements. Since the parent owns 85% of the subsidiary's voting stock, it has control over the subsidiary and therefore, the majority of the previously unreported identifiable intangible assets, valued at $10,000,000, will be attributed to the controlling interest. The statement that "Less than 15% of the previously unreported identifiable intangible assets are attributed to the noncontrolling interest" is true because the parent company owns the majority of the subsidiary's voting stock.

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  • 13. 

    An acquired company’s assets all have fair values greater than book values.  When compared with an acquisition with goodwill, an acquisition reported as a bargain purchase generally results in:

    • A.

      Lower revaluation of plant & equipment

    • B.

      Lower revaluation of identifiable intangibles

    • C.

      Lower consolidated dividends

    • D.

      Lower noncontrolling interest in equity

    Correct Answer
    D. Lower noncontrolling interest in equity
    Explanation
    In an acquisition reported as a bargain purchase, the fair values of the acquired company's assets are greater than their book values. This means that the acquirer is paying less for the assets than their fair values. As a result, the acquirer will have a lower noncontrolling interest in equity because they are acquiring a larger portion of the company's assets at a lower cost.

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  • 14. 

    Which statement is false concerning a bargain purchase with noncontrolling interest, at the date of acquisition?

    • A.

      The noncontrolling interest is reported at its fair value.

    • B.

      The investment balance is reported at acquisition cost.

    • C.

      The subsidiary’s identifiable intangible assets are revalued to fair value.

    • D.

      The subsidiary’s tangible net assets are revalued to fair value.

    Correct Answer
    B. The investment balance is reported at acquisition cost.
    Explanation
    In a bargain purchase with noncontrolling interest, the investment balance is not reported at acquisition cost. Instead, it is reported at fair value. This is because a bargain purchase occurs when the fair value of the net assets acquired exceeds the consideration paid. In this situation, the acquirer recognizes a gain on the bargain purchase, which is calculated as the excess of the fair value of the net assets acquired over the consideration paid. Therefore, the investment balance is adjusted to reflect the fair value of the net assets acquired.

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  • 15. 

    Which statement is correct concerning consolidation eliminating entries for a bargain purchase, in subsequent years, when there is a 5% noncontrolling interest?

    • A.

      Entry (E) allocates less than 5% of the subsidiary’s beginning retained earnings to the noncontrolling interest.

    • B.

      Entry (C) eliminates less than 100% of the parent’s equity in net income of subsidiary.

    • C.

      Entry (R) allocates more than 5% of the subsidiary’s previously unreported identifiable intangibles to the noncontrolling interest.

    • D.

      Entry (O) shows no goodwill impairment loss.

    Correct Answer
    D. Entry (O) shows no goodwill impairment loss.
    Explanation
    Entry (O) shows no goodwill impairment loss. This means that in subsequent years, when there is a 5% noncontrolling interest, there is no impairment loss recorded for the goodwill of the subsidiary. This suggests that the subsidiary's goodwill is still considered to have its full value and is not impaired.

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  • 16. 

    X Company has no equity ownership in Y Company, but is its primary beneficiary.  X and Y were not previously under common control.  Which statement is true at the date X becomes Y’s primary beneficiary?

    • A.

      X does not consolidate Y.

    • B.

      There is no consolidated noncontrolling interest.

    • C.

      Consolidated noncontrolling interest equals the book value of Y’s net assets.

    • D.

      Consolidated noncontrolling interest equals the fair value of Y’s net assets.

    Correct Answer
    D. Consolidated noncontrolling interest equals the fair value of Y’s net assets.
    Explanation
    When X becomes Y's primary beneficiary, it implies that X has the power to direct the activities that most significantly impact Y's economic performance. As a result, X is required to consolidate Y's financial statements. In the consolidated financial statements, the noncontrolling interest represents the portion of Y's net assets that is not owned by X. Since X has no equity ownership in Y, the noncontrolling interest is equal to the fair value of Y's net assets.

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  • 17. 

    X Company has no equity ownership in Y Company, but is its primary beneficiary.  X and Y were previously under common control.  Which statement is true at the date X becomes Y’s primary beneficiary?

    • A.

      X does not consolidate Y.

    • B.

      There is no consolidated noncontrolling interest.

    • C.

      Consolidated noncontrolling interest equals the book value of Y’s net assets.

    • D.

      Consolidated noncontrolling interest equals the fair value of Y’s net assets.

    Correct Answer
    C. Consolidated noncontrolling interest equals the book value of Y’s net assets.
    Explanation
    When X becomes the primary beneficiary of Y Company, it means that X has the power to direct the activities that most significantly impact Y's economic performance and has the right to receive the majority of the benefits and losses from Y's activities. However, X Company does not have any equity ownership in Y Company. Therefore, X does not consolidate Y, which means that Y's financial statements are not combined with X's financial statements. Since there is no consolidation, there is also no consolidated noncontrolling interest. Consolidated noncontrolling interest represents the portion of a subsidiary's net assets that is not owned by the parent company. Since there is no consolidation, the consolidated noncontrolling interest does not exist. Therefore, the statement "Consolidated noncontrolling interest equals the book value of Y’s net assets" is true.

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  • 18. 

    P acquires 90% of S’s voting stock.  At the date of acquisition, S’s net assets are carried at amounts approximating fair value, but S has previously unreported leaseholds with a fair value of $20,000,000, 5-year life.  Elimination R credits the noncontrolling interest in equity in the amount of

    • A.

      10% of the unamortized value of the leaseholds as of the beginning of the current year

    • B.

      10% of the fair value of the leaseholds at the date of acquisition.

    • C.

      10% of the unamortized value of the leaseholds as of the end of the current year.

    • D.

      None of the leasehold value; it is attributed entirely to the controlling interest.

    Correct Answer
    A. 10% of the unamortized value of the leaseholds as of the beginning of the current year
    Explanation
    The correct answer is 10% of the unamortized value of the leaseholds as of the beginning of the current year. This is because when P acquires 90% of S's voting stock, it gains control over S and is required to eliminate the noncontrolling interest's share of S's equity. In this case, the noncontrolling interest's share is 10% of the unamortized value of the leaseholds, which is a previously unreported asset of S. Therefore, this amount needs to be eliminated from the noncontrolling interest's equity.

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  • 19. 

    A parent owns less than 100% of the voting stock of its subsidiary.  On its consolidated income statement, earnings per share is calculated using which of the following amounts in the numerator?

    • A.

      Consolidated net income

    • B.

      Consolidated net income less consolidated dividends

    • C.

      Consolidated net income plus noncontrolling interest in net income

    • D.

      Consolidated net income less noncontrolling interest in net income

    Correct Answer
    D. Consolidated net income less noncontrolling interest in net income
    Explanation
    When a parent owns less than 100% of the voting stock of its subsidiary, it means that there are noncontrolling interests in the subsidiary. Noncontrolling interests refer to the portion of the subsidiary's net income that is attributable to the shareholders who do not have voting control. Therefore, when calculating earnings per share on the consolidated income statement, it is appropriate to use consolidated net income less noncontrolling interest in net income in the numerator. This reflects the portion of the earnings that belong to the parent company's shareholders after accounting for the interests of the noncontrolling shareholders.

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  • 20. 

    A bargain purchase consolidation differs from a normal consolidation in which elimination entry or entries?

    • A.

      C

    • B.

      E and R

    • C.

      E and O

    • D.

      R

    Correct Answer
    D. R
    Explanation
    A bargain purchase consolidation differs from a normal consolidation in that it requires a "R" (revaluation) elimination entry. This entry is necessary when the fair value of the acquired assets exceeds the purchase price, resulting in a gain on bargain purchase. In a normal consolidation, there may be elimination entries for intercompany transactions (E) and unrealized profits (O), but the revaluation entry is specific to a bargain purchase consolidation.

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  • 21. 

    Which statement is true concerning the consolidated statement of cash flows?

    • A.

      When using the indirect method to determine cash from operating activities, the noncontrolling interest in net income is subtracted from consolidated net income.

    • B.

      Dividends paid by the subsidiary to the parent are shown as cash used for financing activities.

    • C.

      In determining cash from operating activities using the indirect method, goodwill impairment charges are added to consolidated net income.

    • D.

      Dividends received from unconsolidated subsidiaries accounted for using the equity method are included in cash flow from investing activities.

    Correct Answer
    C. In determining cash from operating activities using the indirect method, goodwill impairment charges are added to consolidated net income.
    Explanation
    When preparing the consolidated statement of cash flows using the indirect method, goodwill impairment charges are added to consolidated net income. This is because goodwill impairment charges are non-cash expenses that reduce net income but do not affect the actual cash flow. Therefore, they need to be added back to net income to accurately determine the cash generated from operating activities.

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  • 22. 

    On the consolidated statement of cash flows, cash received from intercompany sales between the parent and subsidiary are:

    • A.

      Reported in the operating activities section

    • B.

      Reported in the investing activities section

    • C.

      Reported in the financing activities section

    • D.

      Not reported

    Correct Answer
    D. Not reported
    Explanation
    Intercompany sales refer to the transactions between a parent company and its subsidiary. These sales are considered internal transactions and do not involve any external parties. Therefore, they are not reported on the consolidated statement of cash flows, which only includes cash flows from external sources. The statement focuses on the cash flows related to operating activities, investing activities, and financing activities that involve external parties. Since intercompany sales do not fall under any of these categories, they are not reported on the statement.

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  • 23. 

    On the consolidated statement of cash flows, cash dividends paid to the shareholders of the parent company are:

    • A.

      Reported in the operating activities section

    • B.

      Reported in the investing activities section

    • C.

      Reported in the financing activities section

    • D.

      Not reported

    Correct Answer
    C. Reported in the financing activities section
    Explanation
    Cash dividends paid to the shareholders of the parent company are reported in the financing activities section of the consolidated statement of cash flows. This section includes activities that involve obtaining or repaying capital, such as issuing or repurchasing shares, paying dividends, or borrowing or repaying loans. Cash dividends are considered a financing activity because they involve distributing profits to the shareholders, which reduces the company's retained earnings and represents a return of capital to the owners. Therefore, the cash outflows from paying dividends are reported in the financing activities section.

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  • 24. 

    On the consolidated statement of cash flows, where should dividends paid to noncontrolling shareholders appear?

    • A.

      Operating activities section

    • B.

      Investing activities section

    • C.

      Financing activities section

    • D.

      Does not appear on the statement

    Correct Answer
    C. Financing activities section
    Explanation
    Dividends paid to noncontrolling shareholders should appear in the Financing activities section of the consolidated statement of cash flows. This section includes cash flows related to the company's financing activities, such as issuing or repurchasing stocks, borrowing or repaying loans, and paying dividends to shareholders. Since dividends paid to noncontrolling shareholders represent a distribution of profits to these shareholders, it is considered a financing activity and should be reported in this section.

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  • 25. 

    In the operating section of the consolidated statement of cash flows, using the indirect method, all but which one of the following might appear?

    • A.

      Add amortization of bonds payable discount to net income

    • B.

      Add goodwill impairment to net income

    • C.

      Subtract noncontrolling interest in net income from net income

    • D.

      Subtract undistributed equity method income from net income

    Correct Answer
    C. Subtract noncontrolling interest in net income from net income
    Explanation
    In the operating section of the consolidated statement of cash flows, using the indirect method, noncontrolling interest in net income is not subtracted from net income. This is because noncontrolling interest represents the portion of the subsidiary's net income that does not belong to the parent company. Since the consolidated statement of cash flows is prepared to show the cash flows of the entire consolidated entity, including both the parent and subsidiary, noncontrolling interest is not subtracted from net income in this section.

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