Advanced Accoutning Exam 2

How does the existence of a control premium affect the consolidation process?

When the parent pays a control premium, the parent is allocated more than its proportionate share ownership of the goodwill recognized in the acquisition.

As part of the consolidation process which of the following are NOT included in the calculation of the ending balance of the noncontrolling interest?

Dividends paid by the parent company to parent company shareholders during the period.

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?

Income from subsidiary is recognized from date of acquisition to year-end.

Which of the following statements about intra-entity sales of inventory is true?

Gross profit from intra-entity sales should be deferred from consolidated income until that inventory has been sold to an unaffiliated third party.

What is the difference between upstream versus downstream inventory transfers in terms of their impact on the consolidation process? (a)

The direction of the intra-entity inventory sale does not impact the computation of total consolidated net income. (a)

What is the correct consolidating entry to adjust for the effects of upstream transfers of inventory left over from the prior year?

Debit Retained Earnings, credit COGS

A parent company transfers inventory to its 80% owned subsidiary. How much of the intra-entity gross profit in the transferred ending inventory serves to reduce the consolidated net income attributable to the noncontrolling interest?

0%

Parent Company sells land to Subsidiary Company resulting in an intra-entity gain in 2019, the year of transfer. In 2022, Subsidiary Company sells the land to an unrelated party for the same price it paid Parent Company in 2019. Which of the following statements is true?

A gain on the sale of land will be recognized in the consolidated income statement in 2022.

An enterprise that holds a variable interest in a variable interest entity (VIE) is required to consolidate the assets, liabilities, revenues, expenses, and noncontrolling interest of that entity if:

The enterprise has a controlling financial interest in the VIE.

Which of the following statements about diluted EPS is true?

Diluted EPS in consolidated income statements is affected by both the parent’s and the investee’s dilutive securities.

Which of the following indicates an entity qualifies as a Variable Interest Entity (VIE)?

The equity holders bear no downside risk nor potential upside reward associated with the economic performance of the entity.

When one affiliated within a consolidated group acquires the debt of another affiliate from a third party, then from a consolidated reporting viewpoint:

The reacquired debt is effectively retired.

The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except:

gain or loss must be recognized by both parent and subsidiary companies.

When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true of the subsidiary with respect to the presentation of consolidated financial statement information?

Pre-acquisition earnings are excluded from the consolidated income statement.

In the context of consolidation accounting, what does the term "non-controlling interest" refer to?

The portion of the investee's equity not owned by the parent company

The non-controlling interest account is a(n) ______________ account you see only on _____________________. 

owner's equity; consolidated balance sheets

Assume a parent acquires control over a subsidiary through a series of two acquisitions of subsidiary stock over time. When the parent makes the second aquistion that increases its total ownership to more than 50 percent, how should the parent account for its original acquisition?

The original investment should be adjusted to fair value at the date of the second acquisition with any resulting gain or loss recognized in net income.

Which of the following states the correct formula for calculating the ending noncontrolling interest balance in partial ownership consolidations?

Ending Noncontrolling Interest = Beg. Noncontrolling Interest Balance + Noncontrolling Interest's Share of Investee Net Income - Noncontrolling Interest's Share of Investee Dividends

In the presence of upstream intra-entity inventory transfers, from a consolidated view which of the following accounts becomes overstated in the year following the transfer?

The subsidiary’s retained earnings.

Entities can have both upstream and downstream transactions. How would these transfers affect the consolidation process? (b)

Upstream transactions affect the computation of the Noncontrolling Interest in Subsidiary’s Income. (b)

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2023. Carter sells one-third of the inventory in 2023.

In the consolidation worksheet for 2023, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2023 intra-entity transfers? 

Cost of goods sold 

In which situation would recognized profit from previous gross profit deferrals be split between the parent and noncontrolling interest?

Upstream Sales

Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity?

No ability to make decisions about the entity's activities

Which of the following statements are true concerning Variable Interest Entities?

1. The role of the Variable Interest Entity equity investors can be fairly minor.

2. A Variable Interest Entity may be created specifically to benefit the business enterprise that established it with low-cost financing.

3. Variable Interest Entity governing agreements often limit activities and decision-making.

4. Variable Interest Entities usually have a well-defined and limited business activity.

1, 2, 3, and 4

On January 1, 2024, Riley Corporation 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 2024?

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

Which of the following methods is used to value a noncontrolling interest under circumstances where a control premium is applied to determine the appropriate value for such interest?

Valuation models based on subsidiary discounted cash flows. 

Valuation models based on subsidiary residual income projections.

Comparison with comparable investments.

Fair value based on market trades.

All of the answer choices are acceptable methods

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

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

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, 2017, 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, 2019, for 95% of the face value. Both companies utilized the straight-line method of amortization.

Which entity would report the gain or loss on extinguishment of debt on their income statement?

The gain or loss would only appear on the consolidated income statement, not on the income statement of either the parent or the investee.

When a parent uses the equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is false at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

Parent company total assets equals consolidated total assets.

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

Entitles holder to receive shares of common stock.

All of the following are examples of variable interests except:

Stock options.

Guarantees of debt.

Lease residual value guarantees. 

Participation rights.

Asset purchase options.

Stock options.

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?

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

During 2017, Fine Co. sold inventory to its wholly-owned subsidiary, Torrey Co. The inventory cost $60,000 and was sold to Torrey for $88,000. For consolidation reporting purposes, when is the $28,000 intra-entity gross profit recognized?

When goods are transferred to a third party by Torrey.

Pepper Company purchases 25 percent of Salt Company in 2022. On January 1, 2023, Pepper Company purchases an additional 40 percent of Salt Company. How does Pepper Company account for its original 25 percent ownership investment in Salt on January 1, 2023?

The original investment is revalued to fair value, and Pepper records the difference between its old book value and fair value as a revaluation gain or loss.

Bonnie Company purchases 60 percent of Clyde Company on July 1, 2023. Consolidated net income for December 31, 2023 will equal which of the following?

Bonnie’s net income for the entire year, plus Clyde’s adjusted net income earned after July 1, 2023.

What are the four components of non-controlling interest that appear in the consolidation worksheet?

The beginning balance in the non-controlling interest, consolidated net income attributable to non-controlling interest, the non-controlling interest share of investee dividends, and the ending balance of non-controlling interest.

Under what circumstances will the allocation of goodwill between the parent and the noncontrolling interest NOT be on the basis of proportionate share ownership?

Whenever the parent pays a control premium.

In what financial statement will the noncontrolling interest account appear?

In the consolidated balance sheet, as an equity account.

Which of the following statements are true? Inventory transfers among affiliates within a consolidated entity:
I. Create neither profits nor losses to the consolidated entity.
II. Are included in the computation of consolidated net income.
III. Produce accounting effects that are eliminated in the preparation of consolidated financial statements.

I and III only

Which intra-entity inventory sales affect the consolidated net income attributable to the noncontrolling interest?

Only upstream intra-entity transfers.

In Year 1, Pineapple Company sells inventory to its wholly-owned subsidiary, Strawberry Company, which sells only 80 percent of this inventory to a third party in Year 1. Assuming Pineapple Company uses the equity method to account for its investment in Strawberry Company, which of the following accounts will Parent Company debit in Year 2 to eliminate the effects of deferred gross profit from Year 1 (i.e., in Entry *G)?

Investment in Investee

Which of the following statements about intra entity land transfers is FALSE?

When a parent sells land to its subsidiary, the non-controlling interest is decreased by its share of the deferred gain or loss on the sale.

Abbott Company sells inventory to its wholly owned subsidiary, Costello Company, at a 25% markup. That same year, Costello Company resells all of that inventory to a third party. At the end of the year, Abbott Company’s will need consolidation entries that do which of the following?

Reduce consolidated revenue and cost of goods sold.

In periods subsequent to a depreciable asset transfer from a subsidiary to a parent in which a gain is recorded, which of the following individual affiliate accounts continue to be misstated from a consolidated perspective?

A. Gain on sale from the intra-entity transfer

B. Depreciation expense

C. Retained earnings of the selling affiliate

D. Accumulated Depreciation

B, C, and D only

The criteria for identifying the primary beneficiary of a Variable Interest Entity (VIE) do NOT include:

Ownership of over 50 percent of the VIE’s outstanding shares

How is control over a Variable Interest Entity typically obtained?

Through contractual arrangements.

Any one of the following conditions will qualify an entity as a Variable Interest Entity (VIE) EXCEPT:

Most of the outstanding shares of the entity are owned by a single parent company.

How is the gain or loss reported when one entity purchases the outstanding bonds of an affiliated entity in the open market?

A. A loss is recognized in consolidated financial statements when the amount paid is greater than the carrying value on the date of purchase.

B. A gain is recognized in consolidated financial statements when the amount paid is less than the carrying value on the date of purchase.

C. A gain is recognized on the bond issuer’s private income statement when the amount paid is less than the carrying value on the date of purchase.

A and B

How do subsidiary dilutive securities affect the computation of diluted EPS on the consolidated income statement?
I. Subsidiary dilutive securities affect the parent’s percentage ownership of investee income.
II. Subsidiary dilutive securities affect the total amount of subsidiary net income.

Both I and II

Which of the following statements about the consolidation entry designed to eliminate the effects of intra-entity bond ownership (Entry B) is FALSE?

The elimination of interest expense in this entry increases consolidated net income in the current year.