Chapter 6 Exam 2

1. 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) $552,000.

B) $560,000.

C) $460,000.

D) $404,000.

E) $672,000.

Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15) $150,000 = Total Equity after Stock Offering $840,000 × 40,000 Parent / 60,000 Total = $560,000 Parent’s Investment Account

Explanation

Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15) $150,000 = Total Equity after Stock Offering $840,000 × 40,000 Parent / 60,000 Total = $560,000 Parent’s Investment Account

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

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

B) Supplemental schedule of noncash investing and financing activities.

C) Cash flows from operating activities.

D) Cash flows from investing activities.

E) Cash flows from financing activities.

Intra-entity transfers of inventory do not involve any cash flow. These transfers represent movements of inventory between different entities within the same consolidated group. Since no cash is involved, they do not appear in the consolidated statement of cash flows.

Explanation

Intra-entity transfers of inventory do not involve any cash flow. These transfers represent movements of inventory between different entities within the same consolidated group. Since no cash is involved, they do not appear in the consolidated statement of cash flows.

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) The preferred stock is callable.

B) The preferred stock is convertible.

C) The preferred stock is cumulative.

D) The preferred stock is noncumulative.

E) The preferred stock is participating.

The preferred stock being convertible means that it can be converted into common stock. This conversion would increase the number of outstanding shares and potentially dilute the earnings per share.

Explanation

The preferred stock being convertible means that it can be converted into common stock. This conversion would increase the number of outstanding shares and potentially dilute the earnings per share.

4. 27. All of the following are examples of variable interests except:

A) Guarantees of debt.

B) Stock options.

C) Lease residual value guarantees.

D) Participation rights.

E) Asset purchase options.

Variable interests refer to financial instruments or arrangements that have the potential to change in value based on certain factors. Guarantees of debt, lease residual value guarantees, participation rights, and asset purchase options are all examples of variable interests because their value can vary depending on the performance or outcome of certain events. However, stock options are not considered variable interests because their value is directly tied to the price of the underlying stock and does not change based on external factors.

Explanation

Variable interests refer to financial instruments or arrangements that have the potential to change in value based on certain factors. Guarantees of debt, lease residual value guarantees, participation rights, and asset purchase options are all examples of variable interests because their value can vary depending on the performance or outcome of certain events. However, stock options are not considered variable interests because their value is directly tied to the price of the underlying stock and does not change based on external factors.

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

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

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

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

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

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

The correct answer is C) Noncontrolling interest in net income of subsidiary would be added to net income. In a consolidated statement of cash flows, the noncontrolling interest in the net income of a subsidiary is added to the net income because it represents the portion of the subsidiary's income that belongs to the minority shareholders. This adjustment is necessary to reflect the true cash flows generated by the consolidated company.

Explanation

The correct answer is C) Noncontrolling interest in net income of subsidiary would be added to net income. In a consolidated statement of cash flows, the noncontrolling interest in the net income of a subsidiary is added to the net income because it represents the portion of the subsidiary's income that belongs to the minority shareholders. This adjustment is necessary to reflect the true cash flows generated by the consolidated company.

6. 26- A variable interest entity can take all of the following forms except a(n):

A) Trust.

B) Partnership.

C) Joint venture.

D) Corporation.

E) Estate.

A variable interest entity (VIE) is a legal entity that is created to hold a specific set of assets and liabilities. It is commonly used in situations where one company wants to have control over another entity without actually owning it. VIEs can take various forms, such as trusts, partnerships, joint ventures, and corporations. However, an estate is not a form that a VIE can take. An estate is typically used to describe the assets and liabilities left behind by a deceased person, and it is not structured in the same way as a VIE.

Explanation

A variable interest entity (VIE) is a legal entity that is created to hold a specific set of assets and liabilities. It is commonly used in situations where one company wants to have control over another entity without actually owning it. VIEs can take various forms, such as trusts, partnerships, joint ventures, and corporations. However, an estate is not a form that a VIE can take. An estate is typically used to describe the assets and liabilities left behind by a deceased person, and it is not structured in the same way as a VIE.

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

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

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

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

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

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

The correct answer is C) Consolidated net income divided by parent's number of shares outstanding. This is because consolidated earnings per share is calculated by dividing the consolidated net income (which includes the net income of both the parent and the subsidiary) by the number of shares outstanding for the parent company. Since the subsidiary has no convertible securities or warrants, its earnings per share is not factored into the calculation.

Explanation

The correct answer is C) Consolidated net income divided by parent's number of shares outstanding. This is because consolidated earnings per share is calculated by dividing the consolidated net income (which includes the net income of both the parent and the subsidiary) by the number of shares outstanding for the parent company. Since the subsidiary has no convertible securities or warrants, its earnings per share is not factored into the calculation.

8. 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) Reduction of $27,000.

B) Reduction of $4,000.

C) Reduction of $19,000.

D) Reduction of $30,000.

E) Reduction of $20,000.

Feedback: Bond Acquisition Price $288,000 – Bonds carrying amount $265,000 = $23,000 R/E Reduction.
Intra-Entity Interest $29,000 - $25,000 = $4,000 R/E Increase
$23,000 - $4,000 = $19,000 R/E Reduction

Explanation

Feedback: Bond Acquisition Price $288,000 – Bonds carrying amount $265,000 = $23,000 R/E Reduction.
Intra-Entity Interest $29,000 - $25,000 = $4,000 R/E Increase
$23,000 - $4,000 = $19,000 R/E Reduction

9. 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) $42,000.

B) $37,800.

C) $39,600.

D) $40,070.

E) $44,080.

Feedback: Sub’s income $140,000 × .30 = $42,000 NCI’s Portion of Income (gain or loss is assigned to the parent only)

Explanation

Feedback: Sub’s income $140,000 × .30 = $42,000 NCI’s Portion of Income (gain or loss is assigned to the parent only)

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

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

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

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

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

Feedback:
Subsidiary’s unamortized fair value of prior to new share issue
(12,000 × $56) $834,000
Parent's ownership 100%
Unamortized subsidiary fair value $834,000

Subsidiary unamortized fair value after issuing new
shares (above value plus 3,000 shares at $70 each) $1,044,000
Parent's ownership 12,000 ÷ 15,000 shares) 80%
Unamortized subsidiary fair value after stock issue $835,200

Investment in Odom increases by $1,200 ($835,200 less $834,000).

Explanation

Feedback:
Subsidiary’s unamortized fair value of prior to new share issue
(12,000 × $56) $834,000
Parent's ownership 100%
Unamortized subsidiary fair value $834,000

Subsidiary unamortized fair value after issuing new
shares (above value plus 3,000 shares at $70 each) $1,044,000
Parent's ownership 12,000 ÷ 15,000 shares) 80%
Unamortized subsidiary fair value after stock issue $835,200

Investment in Odom increases by $1,200 ($835,200 less $834,000).

11. 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) The investment in subsidiary will decrease.

B) Additional paid-in capital will decrease.

C) Retained earnings will increase.

D) The investment in subsidiary will increase.

E) No adjustment will be necessary.

When the parent acquires all the new shares of common stock at an amount greater than book value, it means that the parent is paying more than the recorded value of the subsidiary's assets and liabilities. This excess payment is considered goodwill and is recorded as an increase in the investment in subsidiary account on the parent's books. Therefore, the correct statement is that the investment in subsidiary will increase.

Explanation

When the parent acquires all the new shares of common stock at an amount greater than book value, it means that the parent is paying more than the recorded value of the subsidiary's assets and liabilities. This excess payment is considered goodwill and is recorded as an increase in the investment in subsidiary account on the parent's books. Therefore, the correct statement is that the investment in subsidiary will increase.

12. 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) $1,000 gain.

B) $1,000 loss.

C) $2,000 loss.

D) $3,000 loss.

E) $3,000 gain.

Feedback: Bonds Purchase Price $11,000 – Bonds carrying amount ($10,000 - $2,000) =
$3,000 Loss to Consolidation Income

Explanation

Feedback: Bonds Purchase Price $11,000 – Bonds carrying amount ($10,000 - $2,000) =
$3,000 Loss to Consolidation Income

13. 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) $3,000 gain.

B) $3,000 loss.

C) $1,000 gain.

D) $1,000 loss.

E) $2,000 gain.

Feedback: Bonds Purchase Price $19,000 – Bonds carrying amount ($20,000 + $2,000) =
$3,000 Gain to Consolidation Income

Explanation

Feedback: Bonds Purchase Price $19,000 – Bonds carrying amount ($20,000 + $2,000) =
$3,000 Gain to Consolidation Income

14. 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) $234,000.

B) $273,000.

C) $302,000.

D) $312,000.

E) $284,000.

Feedback: $780,000 Net Income – Preferred Dividends (10,000 × $10) = $680,000 × .40 = $272,000 Noncontrolling Interest
$100,000 Preferred Dividends × .30 = $30,000 Noncontrolling Interest
$272,000 from Income + $30,000 Preferred Dividends = $302,000 Noncontrolling Interest in Income

Explanation

Feedback: $780,000 Net Income – Preferred Dividends (10,000 × $10) = $680,000 × .40 = $272,000 Noncontrolling Interest
$100,000 Preferred Dividends × .30 = $30,000 Noncontrolling Interest
$272,000 from Income + $30,000 Preferred Dividends = $302,000 Noncontrolling Interest in Income

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

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

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

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

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

The correct answer is E) Consolidated net income is not affected by a gain or loss on the debt transaction. This means that when an affiliate's debt instrument is acquired on the open market, the gain or loss from the transaction does not impact the consolidated net income of the parent company and its subsidiaries. Consolidated net income is determined by combining the individual net incomes of the parent company and its subsidiaries, but the gain or loss from this specific debt transaction does not factor into that calculation.

Explanation

The correct answer is E) Consolidated net income is not affected by a gain or loss on the debt transaction. This means that when an affiliate's debt instrument is acquired on the open market, the gain or loss from the transaction does not impact the consolidated net income of the parent company and its subsidiaries. Consolidated net income is determined by combining the individual net incomes of the parent company and its subsidiaries, but the gain or loss from this specific debt transaction does not factor into that calculation.

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

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

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

The correct answer is E) To Regency because Regency is the controlling party in the business combination. In an intra-entity transaction, the controlling party is responsible for any gains or losses that arise from the transaction. Since Regency Corp. acquired the bonds of Safire Co., it is considered the controlling party in this scenario. Therefore, any loss resulting from the acquisition of the bonds should be attributed to Regency.

Explanation

The correct answer is E) To Regency because Regency is the controlling party in the business combination. In an intra-entity transaction, the controlling party is responsible for any gains or losses that arise from the transaction. Since Regency Corp. acquired the bonds of Safire Co., it is considered the controlling party in this scenario. Therefore, any loss resulting from the acquisition of the bonds should be attributed to Regency.

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

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

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

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

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

Intra-entity transfers of inventory do not affect the preparation of a consolidated statement of cash flows because the consolidated balance sheet and income statement are used in preparing the statement. This means that no special elimination is required for these transfers. Therefore, option D is the correct answer.

Explanation

Intra-entity transfers of inventory do not affect the preparation of a consolidated statement of cash flows because the consolidated balance sheet and income statement are used in preparing the statement. This means that no special elimination is required for these transfers. Therefore, option D is the correct answer.

18. 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) $6.37

B) $6.40

C) $7.00

D) $5.68

E) $6.00

Feedback: Sub net income (300,000) – preferred divs(4,000) = $296,000 x 80% = 236,800 included in consolidated EPS. Parent net income (400,000)+ portion of sub net income = (400,000 + 236,800) / 100,000 shares = $6.37

Explanation

Feedback: Sub net income (300,000) – preferred divs(4,000) = $296,000 x 80% = 236,800 included in consolidated EPS. Parent net income (400,000)+ portion of sub net income = (400,000 + 236,800) / 100,000 shares = $6.37

19. 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) 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.

When a subsidiary issues new shares of common stock at an amount below book value and outsiders buy all of these shares, it means that the shares are being sold at a discount. This discount is considered a loss for the parent company, resulting in a decrease in the parent's additional paid-in capital. Therefore, the correct answer is D) The parent's additional paid-in capital will be decreased.

Explanation

When a subsidiary issues new shares of common stock at an amount below book value and outsiders buy all of these shares, it means that the shares are being sold at a discount. This discount is considered a loss for the parent company, resulting in a decrease in the parent's additional paid-in capital. Therefore, the correct answer is D) The parent's additional paid-in capital will be decreased.

20. 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) 80.0%.

B) 87.5%.

C) 90.0%.

D) 75.0%.

E) 82.5%.

Feedback: Shares Outstanding 50,000 × .80 = 40,000 Parent’s Shares
50,000 + 30,000 = 80,000 New Outstanding Shares
40,000 + 30,000 = 70,000 Parent’s Shares after New Issue
70,000 / 80,000 = 87.5% New Ownership Percentage

Explanation

Feedback: Shares Outstanding 50,000 × .80 = 40,000 Parent’s Shares
50,000 + 30,000 = 80,000 New Outstanding Shares
40,000 + 30,000 = 70,000 Parent’s Shares after New Issue
70,000 / 80,000 = 87.5% New Ownership Percentage

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

A) Entitles holder to residual profits.

B) Entitles holder to benefit from increases in asset fair value.

C) Entitles holder to receive shares of common stock.

E) If leased asset declines below the residual value, honoring the guarantee will produce a loss.

The potential losses or returns of a variable interest entity are related to financial outcomes such as residual profits, increases in asset fair value, honoring a debt guarantee, or honoring a guarantee related to a leased asset. However, receiving shares of common stock is not a potential loss or return as it represents ownership in a company rather than a financial outcome.

Explanation

The potential losses or returns of a variable interest entity are related to financial outcomes such as residual profits, increases in asset fair value, honoring a debt guarantee, or honoring a guarantee related to a leased asset. However, receiving shares of common stock is not a potential loss or return as it represents ownership in a company rather than a financial outcome.

22. 29. Which of the following statements is true concerning variable interest entities (VIEs)? (1.) The role of the VIE equity investors can be fairly minor. (2.) A VIE may be created specifically to benefit the business enterprise that established it with low- cost financing. (3.) VIE governing agreements often limit activities and decision-making. (4.) VIEs usually have a well-defined and limited business activity.

A) 2 and 4.

B) 2, 3, and 4.

C) 1, 2, and 4.

D) 1, 2, and 3.

E) 1, 2, 3, and 4.

The correct answer is E) 1, 2, 3, and 4. This means that all of the statements concerning variable interest entities (VIEs) are true. Statement 1 suggests that the role of VIE equity investors can be minor. Statement 2 states that a VIE may be created to benefit the business enterprise with low-cost financing. Statement 3 mentions that VIE governing agreements often limit activities and decision-making. Statement 4 indicates that VIEs usually have a well-defined and limited business activity.

Explanation

The correct answer is E) 1, 2, 3, and 4. This means that all of the statements concerning variable interest entities (VIEs) are true. Statement 1 suggests that the role of VIE equity investors can be minor. Statement 2 states that a VIE may be created to benefit the business enterprise with low-cost financing. Statement 3 mentions that VIE governing agreements often limit activities and decision-making. Statement 4 indicates that VIEs usually have a well-defined and limited business activity.

23. 30- Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below:

	2018	2017
Cash	$ 8,000	$ 26,000
Accounts Receivable (net)	75,000	54,000
Inventory	100,000	89,000
Plant & Equipment (net)	156,000	170,000
Copyright	16,000	18,000
	$355,000	$357,000

Accounts payable	$ 60,000	$ 51,000
Long-term Debt	0	35,000
Noncontrolling interest	27,000	25,000
Common stock, $1 par	100,000	100,000
Retained earnings	168,000	146,000
	$355,000	$357,000

Additional information for 2018:

The combination occurred using the acquisition method. Consolidated net income was $50,000. The noncontrolling interest share of consolidated net income of Arthur was $3,200.

Arthur paid $4,000 in dividends.

There were no purchases or disposals of plant & equipment or copyright this year.

Net cash flow from operating activities was:

A) $43,000.

B) $44,800.

C) $46,200.

D) $50,000.

E) $25,000.

Feedback: $50,000 + Depreciation $14,000 ($170,000 - $156,000) + Amortization $2,000 ($18,000 -$16,000) – A/R $21,000 ($75,000 - $54,000) – Inventory $11,000 ($100,000 - $89,000) + A/P $9,000 ($60,000 - $51,000) = $43,000 Net Consolidated Cash Flow from Operations

Explanation

Feedback: $50,000 + Depreciation $14,000 ($170,000 - $156,000) + Amortization $2,000 ($18,000 -$16,000) – A/R $21,000 ($75,000 - $54,000) – Inventory $11,000 ($100,000 - $89,000) + A/P $9,000 ($60,000 - $51,000) = $43,000 Net Consolidated Cash Flow from Operations

24. 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) $8,500,000.

B) $7,000,000.

C) $6,200,000.

D) $2,400,000.

E) $6,929,400.

Feedback: FV Common Stock $62,000,000 + FV Preferred Stock $8,000,000 = $70,000,000 × .10 = $7,000,000 Noncontrolling Interest

Explanation

Feedback: FV Common Stock $62,000,000 + FV Preferred Stock $8,000,000 = $70,000,000 × .10 = $7,000,000 Noncontrolling Interest

25. 17 . If new bonds are issued from a parent to its subsidiary, which of the following statements is false?

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

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

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

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

When new bonds are issued from a parent to its subsidiary, any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment. This means that there will be $0 net gain or loss on the bond transaction, as stated in option B. Additionally, interest expense needs to be eliminated on the consolidated income statement, as stated in option C. Similarly, interest revenue needs to be eliminated on the consolidated income statement, as stated in option D. Therefore, the only statement that is false is option E, which states that a net gain or loss on the bond transaction will be reported.

Explanation

When new bonds are issued from a parent to its subsidiary, any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment. This means that there will be $0 net gain or loss on the bond transaction, as stated in option B. Additionally, interest expense needs to be eliminated on the consolidated income statement, as stated in option C. Similarly, interest revenue needs to be eliminated on the consolidated income statement, as stated in option D. Therefore, the only statement that is false is option E, which states that a net gain or loss on the bond transaction will be reported.

26.

On January 1, 2018, 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:

What is the total acquisition-date fair value of Involved?

A) $2,600,000

B) $4,812,500

C) $3,062,500

D) $2,312,500

E) $3,250,000

Feedback: Common Stock Noncontrolling Interest at Acquisition = $1,850,000 / .80 = $2,312,500
Preferred Stock Noncontrolling Interest at Acquisition = $750,000 / .30 = $2,500,000
$2,312,500 + $2,500,000 = $4,812,500 FV of Sub at Acquisition
$1,850,000 + $462,500 + $750,000 + $1,750,000 = $4,812,500

Explanation

Feedback: Common Stock Noncontrolling Interest at Acquisition = $1,850,000 / .80 = $2,312,500
Preferred Stock Noncontrolling Interest at Acquisition = $750,000 / .30 = $2,500,000
$2,312,500 + $2,500,000 = $4,812,500 FV of Sub at Acquisition
$1,850,000 + $462,500 + $750,000 + $1,750,000 = $4,812,500

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

A) Cash flows from operating activities.

B) Cash flows from investing activities.

C) Cash flows from financing activities.

D) Supplemental schedule of noncash investing and financing activities.

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

Dividends paid to the noncontrolling interest of a subsidiary are considered as a distribution of profits to the owners of the subsidiary. As a result, these dividends are categorized as cash flows from financing activities on the consolidated statement of cash flows. This is because financing activities involve transactions with owners or investors, and the payment of dividends to noncontrolling interests falls under this category.

Explanation

Dividends paid to the noncontrolling interest of a subsidiary are considered as a distribution of profits to the owners of the subsidiary. As a result, these dividends are categorized as cash flows from financing activities on the consolidated statement of cash flows. This is because financing activities involve transactions with owners or investors, and the payment of dividends to noncontrolling interests falls under this category.

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

A) Cash flows from operating activities.

B) Cash flows from investing activities.

C) Cash flows from financing activities.

D) Supplemental schedule of noncash investing and financing activities.

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

Dividends paid by a subsidiary to the parent company do not appear in the consolidated statement of cash flows. The reason for this is that dividends are considered a return of investment and not an operating, investing, or financing activity. Instead, dividends are typically reported separately in the notes to the financial statements or in a supplemental schedule of noncash investing and financing activities.

Explanation

Dividends paid by a subsidiary to the parent company do not appear in the consolidated statement of cash flows. The reason for this is that dividends are considered a return of investment and not an operating, investing, or financing activity. Instead, dividends are typically reported separately in the notes to the financial statements or in a supplemental schedule of noncash investing and financing activities.

29. 24- The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company.

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

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

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

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

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

Feedback: Land Sale of $5,000 Reduces Net Income as Operating Activity in Cash Flows

Explanation

Feedback: Land Sale of $5,000 Reduces Net Income as Operating Activity in Cash Flows

30. 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) Increase it by $28,700.

B) Increase it by $16,800.

C) $0.

D) Increase it by $280,000.

E) Increase it by $593,600.

Feedback: No Adjustment is made to the APIC of the Parent as a Result of Sub’s Stock Issue because the same Level of Ownership Interest is Maintained

Explanation

Feedback: No Adjustment is made to the APIC of the Parent as a Result of Sub’s Stock Issue because the same Level of Ownership Interest is Maintained

31. 31- Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2018 while Kaspar reports $250,000. Kaspar transferred inventory during 2018 to Johnson at a price of $50,000. On December 31, 2018, 30% of the transferred goods are still held in Johnson's inventory. Consolidated accounts receivable on January 1, 2018 was $120,000, and on December 31, 2018 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.

Feedback: Parent $400,000 + Sub $250,000 – Intra-Entity $50,000 – Increase in A/R $10,000 ($120,000 - $130,000) = $590,000

Explanation

Feedback: Parent $400,000 + Sub $250,000 – Intra-Entity $50,000 – Increase in A/R $10,000 ($120,000 - $130,000) = $590,000

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

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

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

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

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

The correct answer is D) The difference is treated as a gain from the extinguishment of the debt. When Riley Corp. acquired the outstanding bonds of its subsidiary for a purchase price lower than the carrying value, it resulted in a gain. This gain is recognized in the consolidated financial statements as a gain from the extinguishment of the debt.

Explanation

The correct answer is D) The difference is treated as a gain from the extinguishment of the debt. When Riley Corp. acquired the outstanding bonds of its subsidiary for a purchase price lower than the carrying value, it resulted in a gain. This gain is recognized in the consolidated financial statements as a gain from the extinguishment of the debt.