Chapter 6 Exam 2

32 Questions | Total Attempts: 117

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Chapter 6 Exam 2

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Questions and Answers
  • 1. 
    1.  On January 1, 2018, Riley Corp. acquired some of the outstanding bonds of one of its subsidiaries.       The bonds had a carrying value of $421,620, and Riley paid $401,937 for them.  How should you       account for the difference between the carrying value and the purchase price in the consolidated       financial statements for 2018?
    • A. 

      A) The difference is added to the carrying value of the debt.

    • B. 

      B) The difference is deducted from the carrying value of the debt.

    • C. 

      C) The difference is treated as a loss from the extinguishment of the debt.

    • D. 

      D) The difference is treated as a gain from the extinguishment of the debt.

    • E. 

      E) The difference does not influence the consolidated financial statements.

  • 2. 
    2.  Regency Corp. recently acquired $500,000 of the bonds of Safire Co., one of its subsidiaries, paying          more than the carrying value of the bonds.  According to the most practical view of this intra-entity      transaction, to whom should the loss be attributed?
    • A. 

      A) To Safire because the bonds were issued by Safire.

    • B. 

      B) The loss should be allocated between Safire and Regency based on the purchase price and the           original face value of the debt.

    • C. 

      C) The loss should be amortized over the life of the bonds and need not be attributed to either       party.

    • D. 

      D) The loss should be deferred until it can be determined to whom the attribution can be made.

    • E. 

      E) To Regency because Regency is the controlling party in the business combination.

  • 3. 
    3.  Which one of the following characteristics of preferred stock would make the stock a dilutive security      for purposes of calculating earnings per share?
    • A. 

      A) The preferred stock is callable.

    • B. 

      B) The preferred stock is convertible.

    • C. 

      C) The preferred stock is cumulative.

    • D. 

      D) The preferred stock is noncumulative.

    • E. 

      E) The preferred stock is participating.

  • 4. 
    4.  Where do dividends paid to the noncontrolling interest of a subsidiary appear on a consolidated       statement of cash flows?
    • A. 

      A) Cash flows from operating activities.

    • B. 

      B) Cash flows from investing activities.

    • C. 

      C) Cash flows from financing activities.

    • D. 

      D) Supplemental schedule of noncash investing and financing activities.

    • E. 

      E) They do not appear in the consolidated statement of cash flows.

  • 5. 
    5.  Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of       cash flows?
    • A. 

      A) Cash flows from operating activities.

    • B. 

      B) Cash flows from investing activities.

    • C. 

      C) Cash flows from financing activities.

    • D. 

      D) Supplemental schedule of noncash investing and financing activities.

    • E. 

      E) They do not appear in the consolidated statement of cash flows.

  • 6. 
    6.  Where do intra-entity transfers of inventory appear in a consolidated statement of cash flows?
    • A. 

      A) They do not appear in the consolidated statement of cash flows.

    • B. 

      B) Supplemental schedule of noncash investing and financing activities.

    • C. 

      C) Cash flows from operating activities.

    • D. 

      D) Cash flows from investing activities.

    • E. 

      E) Cash flows from financing activities.

  • 7. 
    7.  How do intra-entity transfers of inventory affect the preparation of a consolidated statement of cash      flows?
    • A. 

      A) They must be added in calculating cash flows from investing activities.

    • B. 

      B) They must be deducted in calculating cash flows from investing activities.

    • C. 

      C) They must be added in calculating cash flows from operating activities.

    • D. 

      D) Because the consolidated balance sheet and income statement are used in preparing the      consolidated statement of cash flows, no special elimination is required.

    • E. 

      E) They must be deducted in calculating cash flows from operating activities.     

  • 8. 
    8.  How would consolidated earnings per share be calculated if the subsidiary has no convertible      securities or warrants?
    • A. 

      A) Parent's earnings per share plus subsidiary's earnings per share.

    • B. 

      B) Parent's net income divided by parent's number of shares outstanding.

    • C. 

      C) Consolidated net income divided by parent's number of shares outstanding.

    • D. 

      D) Average of parent's earnings per share and subsidiary's earnings per share.

    • E. 

      E) Consolidated income divided by total number of shares outstanding for the parent and      subsidiary.

  • 9. 
    9-  On January 1, 2018, 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 $  690,000        The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling      interest was $138,000.  On January 1, 2018, Garvin Co. sold 10,000 shares of previously unissued      common stock for $15 per share.  Riney did not acquire any of these shares.     What is the balance in Riney’s “Investment in Garvin Co. Account” following the sale of the 10,000      shares of common stock?
    • A. 

      A) $552,000.

    • B. 

      B) $560,000.

    • C. 

      C) $460,000.

    • D. 

      D) $404,000.

    • E. 

      E) $672,000.

  • 10. 
    10 .  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.  Assuming there are no excess amortizations or intra-         entity transactions, and Brett reports net income of $780,000, what is the  noncontrolling interest in         the subsidiary's income?
    • A. 

      A) $234,000.

    • B. 

      B) $273,000.

    • C. 

      C) $302,000.

    • D. 

      D) $312,000.

    • E. 

      E) $284,000.

  • 11. 
    11-  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 $2 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 $2,000.  Knight did not own any of Stoop's bonds.  There are no excess amortizations or intra-        entity transactions associated with this consolidation. Stoop reported net income of $300,000 for        2018.  Knight has 100,000 shares of common stock outstanding and reported net income of $400,000        for 2018.    What would Knight Co. report as consolidated basic earnings per share (rounded)?
    • A. 

      A) $6.37

    • B. 

      B) $6.40

    • C. 

      C) $7.00

    • D. 

      D) $5.68

    • E. 

      E) $6.00

  • 12. 
    12.  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. 

      A) Reduction of $27,000.

    • B. 

      B) Reduction of $4,000.

    • C. 

      C) Reduction of $19,000.

    • D. 

      D) Reduction of $30,000.

    • E. 

      E) Reduction of $20,000.

  • 13. 
    13. Tray Co. reported current earnings of $560,000 while paying $56,000 in cash dividends.  Sparrish Co.             earned $140,000 in net income and distributed $14,000 in dividends.  Tray held a 70% interest in       Sparrish for several years, an investment that it originally acquired by transferring consideration equal            to the book value of the underlying net assets.  Tray used the initial value method to account for these       shares.       On January 1, 2018, Sparrish acquired in the open market $70,000 of Tray's 8% bonds.  The bonds       had originally been issued several years ago at a price that would yield a 10% effective interest rate.        On the date of the bond purchase, the book value of the bonds payable was $67,600.  Sparrish paid       $65,200 based on a 12% effective interest rate over the remaining life of the bonds.       What is the noncontrolling interest's share of the subsidiary's net income?
    • A. 

      A) $42,000.

    • B. 

      B) $37,800.

    • C. 

      C) $39,600.

    • D. 

      D) $40,070.

    • E. 

      E) $44,080.

  • 14. 
    14.  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?
    • A. 

      A) $8,500,000.

    • B. 

      B) $7,000,000.

    • C. 

      C) $6,200,000.

    • D. 

      D) $2,400,000.

    • E. 

      E) $6,929,400.

  • 15. 
    15.  Parker owned all of Odom Inc.  Although the Investment in Odom Inc. account had a balance of        $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share.  On        January 1, 2018, Odom issued 3,000 new shares to the public for $70 per share.  How does this        transaction affect the Investment in Odom Inc. account?
    • A. 

      A) It should be decreased by $210,000.

    • B. 

      B) It should be increased by $210,000.

    • C. 

      C) It should be increased by $168,000.

    • D. 

      D) It should be decreased by $1,200.

    • E. 

      E) It is not affected since the shares were sold to outside parties.

  • 16. 
    16-  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, 2016, when          Cocker had the following stockholders' equity accounts.         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, 2019.         Popper did not pay any premium when it acquired its original interest in Cocker. On January 1,         2019,  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, 2019, 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?                     
    • A. 

      A) Increase it by $28,700.

    • B. 

      B) Increase it by $16,800.

    • C. 

      C) $0.     

    • D. 

      D) Increase it by $280,000.

    • E. 

      E) Increase it by $593,600.

  • 17. 
    17 .  If new bonds are issued from a parent to its subsidiary, which of the following statements is false?
    • A. 

      Any premium or discount on bonds payable is exactly offset by a premium or discount on        bond investment.

    • B. 

      B) There will be $0 net gain or loss on the bond transaction.

    • C. 

      C) Interest expense needs to be eliminated on the consolidated income statement.

    • D. 

      D) Interest revenue needs to be eliminated on the consolidated income statement.

    • E. 

      E) A net gain or loss on the bond transaction will be reported.

  • 18. 
    18.  Which of the following statements is false regarding the assignment of a gain or loss when an         affiliate’s debt instrument is acquired on the open market?
    • A. 

      A) Subsidiary net income is not affected by a gain on the debt transaction.

    • B. 

      B) Subsidiary net income is not affected by a loss on the debt transaction.           

    • C. 

      C) Parent Company net income is not affected by a gain on the debt transaction.

    • D. 

      D) Parent Company net income is not affected by a loss on the debt transaction.

    • E. 

      E) Consolidated net income is not affected by a gain or loss on the debt transaction.

  • 19. 
    19.   What would differ between a statement of cash flows for a consolidated company and an         unconsolidated company using the indirect method?
    • A. 

      A) Parent's dividends would be subtracted as a financing activity.

    • B. 

      B) Gain on sale of land would be deducted from net income.

    • C. 

      C) Noncontrolling interest in net income of subsidiary would be added to net income.

    • D. 

      D) Proceeds from the sale of long-term investments would be added to investing activities.

    • E. 

      E) Loss on sale of equipment would be added to net income.

  • 20. 
    20.  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. 

      A) The parent's additional paid-in capital will be increased.

    • B. 

      B) The parent's investment in subsidiary will be increased.

    • C. 

      C) The parent's retained earnings will be increased.

    • D. 

      D) The parent's additional paid-in capital will be decreased.

    • E. 

      E) The parent's retained earnings will be decreased.

  • 21. 
    21.  A subsidiary issues new shares of common stock.  If the parent acquires all of these shares at an         amount greater than book value, which of the following statements is true?
    • A. 

      A) The investment in subsidiary will decrease.

    • B. 

      B) Additional paid-in capital will decrease.

    • C. 

      C) Retained earnings will increase.

    • D. 

      D) The investment in subsidiary will increase.

    • E. 

      E) No adjustment will be necessary.

  • 22. 
    22.  Stevens Company has had bonds payable of $10,000 outstanding for several years.  On January 1,        2018, 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 2018.
    • A. 

      A) $1,000 gain.

    • B. 

      B) $1,000 loss.

    • C. 

      C) $2,000 loss.

    • D. 

      D) $3,000 loss.

    • E. 

      E) $3,000 gain.

  • 23. 
    23.  Keenan Company has had bonds payable of $20,000 outstanding for several years.  On January 1,        2018, there was an unamortized premium of $2,000 with a remaining life of 10 years, Keenan's        parent, Ross, Inc., purchased the bonds in the open market for $19,000.  Keenan is a 90% owned        subsidiary of Ross.  The bonds pay 8% 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 2018.
    • A. 

      A) $3,000 gain.

    • B. 

      B) $3,000 loss.

    • C. 

      C) $1,000 gain.

    • D. 

      D) $1,000 loss.

    • E. 

      E) $2,000 gain.

  • 24. 
    24-  The following information has been taken from the consolidation worksheet of Graham Company         and its 80% owned subsidiary, Stage Company.
    • A. 

      A) $20,000 added to net income as an operating activity.

    • B. 

      B) $20,000 deducted from net income as an operating activity.

    • C. 

      C) $15,000 deducted from net income as an operating activity.

    • D. 

      D) $5,000 added to net income as an operating activity.

    • E. 

      E) $5,000 deducted from net income as an operating activity.

  • 25. 
    25-  Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was        $300,000.  Ryan paid no premium.  Chase has 50,000 shares outstanding and currently has a book         value of $400,000.        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?
    • A. 

      A) 80.0%.

    • B. 

      B) 87.5%.

    • C. 

      C) 90.0%.

    • D. 

      D) 75.0%.

    • E. 

      E) 82.5%.

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