CHAPTER 6 KEY

ch6 Key

1. On January 1, 2009, 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 2009? 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

Difficulty: Easy Hoyle - Chapter 06 #1

2. Safire Corp. recently acquired $500,000 of the bonds of Regency Co., one of its subsidiaries, paying more than the carrying value of the bonds. According to the most practical view of this intercompany transaction, to whom would the loss be attributed? A. To Regency because the bonds were issued by Regency B. The loss should be allocated between Safire and Regency based on the purchase price and the original face value of the debt C. The loss should be amortized over the life of the bonds and need not be attributed to either party D. The loss should be deferred until it can be determined to whom the attribution can be made E. To Safire because Safire is the controlling party in the business combination


3. Which one of the following characteristics of preferred stock would make the stock a dilutive security for 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 non-cumulative E. The preferred stock is participating

Difficulty: Medium Hoyle - Chapter 06 #3

4. Where do dividends paid to the non-controlling 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 non-cash investing and financing activities E. They do not appear on the consolidated statement of cash flows


5. Where do dividends paid by a subsidiary to the parent company 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 non-cash investing and financing activities E. They do not appear on the consolidated statement of cash flows


6. Where do intercompany sales of inventory appear on a consolidated statement of cash flows? A. They do not appear on the consolidated statement of cash flows B. Supplemental schedule of non-cash investing and financing activities C. Cash flows from operating activities D. Cash flows from investing activities E. Cash flows from financing activities


7. How do intercompany sales 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 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. They must be deducted in calculating cash flows from operating activities


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


On January 1, 2009, Riney Co. owned 85% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances:

The balance in Riney's Investment in Garvin Co. account was $569,500 and the non-controlling interest was $100,500. On January 1, 2009, Garvin Co. sold 10,000 shares of previously unissued common stock for $15 per share. Riney did not acquire any of these shares.

Hoyle - Chapter 06

9. What is the balance in Investment in Garvin Co. after the sale of the 10,000 shares of common stock? (Do not round calculation of new interest.) A. $569,500 B. $580,833 C. $558,167 D. $584,500 E. $615,000


10. What is the balance in Non-controlling Interest in Garvin Co. after the sale of the 10,000 shares of common stock? (Do not round calculation of new interest.) A. $100,500 B. $239,167 C. $261,833 D. $250,500 E. $205,000


11. Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par preferred stock and 60% of the outstanding common stock of Brett Co. When Brett reported net income of $780,000, what was the non-controlling interest in the subsidiary's income? A. $234,000 B. $273,000 C. $302,000 D. $312,000 E. $284,000

Difficulty: Hard Hoyle - Chapter 06 #11

Stoop Co. owned 80% of the common stock of Knight Co. Knight had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Stoop did not own any of Knight's preferred stock. Knight also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Knight's annual after-tax interest expense for the bonds was $22,000. Stoop did not own any of Knight's bonds. Knight reported income of $300,000 for 2009.

Hoyle - Chapter 06

12. What was the amount of Knight's earnings that should be included in calculating consolidated diluted earnings per share? A. $300,000 B. $240,000 C. $257,600 D. $322,000 E. $201,250


13. Knight's diluted earnings per share (rounded) is calculated to be A. $5.62 B. $3.26 C. $3.11 D. $5.03 E. $4.28


14. Campbell Inc. owned all of Gordon Corp. For 2009, Campbell reported net income (without consideration of its investment in Gordon) of $280,000 while the subsidiary reported $112,000. The subsidiary had bonds payable outstanding on January 1, 2009, with a book value of $297,000. The parent acquired the bonds on that date for $281,000. During 2009, Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is consolidated net income for 2009? A. $406,000 B. $374,000 C. $378,000 D. $410,000 E. $394,000


15. Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2009, 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 2009 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2010. What adjustment would have been required for the retained earnings balance as of January 1, 2010? 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


16. 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 purchased at a price equal to the book value of the underlying net assets. Tray used the initial value method to account for these shares. On January 1, 2009, Sparrish acquired in the open market $70,000 of Tray's 8% bonds. The bonds had originally been issued several years ago at 92, reflecting a 10% effective interest rate. On the date of 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 non-controlling interest's share of the subsidiary's net income? A. $42,000 B. $37,800 C. $39,600 D. $40,070 E. $44,080


17. 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 $185,000,000. If 90% of this company's equity was acquired by another, what portion of the value would be assigned to the non-controlling interest? A. $18,500,000 B. $7,000,000 C. $6,200,000 D. $2,400,000 E. $6,929,400


18. Cadion Co. owned control over Knieval Inc. Cadion reported sales of $420,000 during 2009 while Knieval reported $280,000. Inventory costing $28,000 was transferred from Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent was still in ending inventory at year's end. Total receivables on the consolidated balance sheet were $112,000 at the first of the year and $154,000 at year-end. No intercompany debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business combination from its customers? A. $602,000 B. $644,000 C. $686,000 D. $714,000 E. $592,000


19. 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, 2010, 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 $141,120 B. It should be increased by $176,400 C. It should be increased by $48,000 D. It should be decreased by $128,400 E. It is not affected since the shares were sold to outside parties


These questions are based on the following information and should be viewed as independent situations. Popper Co. purchased 80% of the common stock of Cocker Co. on January 1, 2004, when Cocker had the following stockholders' equity accounts.

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess cost being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2009. On January 1, 2009, 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.

Hoyle - Chapter 06

20. On January 1, 2009, 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


21. On January 1, 2009, Cocker issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock. How would this transaction affect the additional paid-in capital of the parent company? A. $0 B. Decrease it by $23,240 C. Decrease it by $68,250 D. Decrease it by $45,060 E. Decrease it by $43,680


22. On January 1, 2009, Cocker reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company? A. $0 B. Decrease it by $32,900 C. Decrease it by $45,700 D. Decrease it by $49,400 E. Decrease it by $50,500


23. If newly issued debt is 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. 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


24. The accounting problems encountered in consolidated intercompany debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except: A. Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances B. Subsequent interest revenue/expense must be removed although these balances fail to agree in amount C. A gain or loss must be recognized by both parent and subsidiary companies D. Changes in the investment, debt, interest revenue and interest expense accounts occur constantly because of the amortization process E. The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired, even though this balance does not appear on the financial records of either company


25. Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition? A. Any gain or loss is deferred on a consolidated income statement B. Any gain or loss is recognized on a consolidated income statement C. Interest revenue on the affiliated debt is recognized on a consolidated income statement D. Interest expense on the affiliated debt is recognized on a consolidated income statement E. Consolidated retained earnings is adjusted for the difference between the purchase price and the carrying value of the bonds


26. Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer? A. Subsidiary net income is not affected by a gain on bond transaction B. Subsidiary net income is not affected by a loss on bond transaction C. Parent Company net income is not affected by a gain on bond transaction D. Parent Company net income is not affected by a loss on bond transaction E. Consolidated net income is not affected by a gain or loss on bond transaction


27. 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. Non-controlling 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


28. Which of the following statements is true for a consolidated statement of cash flows? A. Parent's dividends and subsidiary's dividends are deducted as a financing activity B. Only parent's dividends are deducted as a financing activity C. Parent's dividends and its share of subsidiary's dividends are deducted as a financing activity D. All of parent's dividends and non-controlling interest of subsidiary's dividends are deducted as a financing activity E. Neither parent's or subsidiary's dividends are deducted as a financing activity


29. In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true? A. Parent company earnings per share equals consolidated earnings per share when the equity method is used B. Parent company earnings per share is equal to consolidated earnings per share when the initial value method is used C. Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value exceeds book value D. Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value is less than book value E. Preferred dividends are not deducted from net income for consolidated earnings per share


30. If a subsidiary issues additional common shares at below book value to outsiders, 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


31. If a parent acquires all of the additional common shares issued by its subsidiary at 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


32. If a subsidiary reacquires its outstanding shares from outside ownership for more than book value, which of the following statements is true? A. Additional paid-in capital on the parent company's books will decrease B. Investment in subsidiary will increase C. Treasury stock on the parent's books will increase D. Treasury stock on the parent's books will decrease E. No adjustment is necessary


33. If a subsidiary issues a stock dividend, which of the following statements is true? A. Investment in subsidiary on the parent's books will increase B. Investment in subsidiary on the parent's books will decrease C. Additional paid-in capital on the parent's books will increase D. Additional paid-in capital on the parent's books will increase E. No adjustment is necessary


34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2009, 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 2009. A. $1,000 gain B. $1,000 loss C. $2,000 loss D. $3,000 loss E. $3,000 gain


35. Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2009, when 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 2009. A. $3,000 gain B. $3,000 loss C. $1,000 gain D. $1,000 loss E. $2,000 gain


On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

Hoyle - Chapter 06

36. Determine the amount and account to be recorded for Nichols' investment in Smith. A. $1,324,000 for Investment in Smith B. $1,200,000 for Investment in Smith C. $1,200,000 for Investment in Smith's Common Stock and $124,000 for Investment in Smith's Preferred Stock D. $1,200,000 for Investment in Smith's Common Stock and $120,000 for Investment in Smith's Preferred Stock E. $1,448,000 for Investment in Smith's Common Stock


37. Compute the goodwill recognized in consolidation. A. $800,000 B. $310,000 C. $124,000 D. $0 E. $(196,000)


38. Compute the non-controlling interest in Smith at date of acquisition. A. $486,000 B. $480,000 C. $300,000 D. $150,000 E. $120,000


39. The consolidation entry at date of acquisition will include (referring to Smith): A. Debit Common stock $500,000 and debit Preferred stock $120,000 B. Debit Common stock $400,000 and debit Additional paid-in capital $160,000 C. Debit Common stock $500,000 and debit Preferred stock $300,000 D. Debit Common stock $500,000, debit Preferred stock $120,000 and debit Additional paid-in capital $200,000 E. Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in capital $200,000 and debit Retained earnings $500,000


40. If Smith's net income is $100,000 in the year following the acquisition, A. The portion allocated to the common stock (residual amount) is $92,800 B. $10,800 preferred stock dividend will be subtracted from net income attributed to common stock in arriving at non-controlling interest in subsidiary income C. The non-controlling interest balance will be $27,200 D. The preferred stock dividend will be ignored in non-controlling interest in subsidiary net income because Nichols owns the non-controlling interest of preferred stock E. The non-controlling interest in subsidiary net income is $30,800


The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000.

Hoyle - Chapter 06

41. How is the loss on sale of land reported on the consolidated statement of cash flows? 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


42. Where does the non-controlling interest in Stage's net income appear on a consolidated statement of cash flows? A. $30,000 added to net income as an operating activity on the consolidated statement of cash flows B. $30,000 deducted from net income as an operating activity on the consolidated statement of cash flows C. $30,000 increase as an investing activity on the consolidated statement of cash flows D. $30,000 decrease as an investing activity on the consolidated statement of cash flows E. Non-controlling interest in Stage's net income does not appear on a consolidated statement of cash flows


43. How will dividends be reported on consolidated statement of cash flows? A. $15,000 decrease as a financing activity B. $25,000 decrease as a financing activity C. $10,000 decrease as a financing activity D. $23,000 decrease as a financing activity E. $17,000 decrease as a financing activity


44. How is the amount of excess acquisition-date fair value over book value recognized on a consolidated statement of cash flows assuming the indirect method is used? A. It is ignored B. $6,000 subtracted from net income C. $4,800 subtracted from net income D. $6,000 added to net income E. $4,800 added to net income


45. Using the indirect method, where does the decrease in accounts receivable appear on a consolidated statement of cash flows? A. $8,000 increase to net income as an operating activity B. $8,000 decrease to net income as an operating activity C. $6,400 increase to net income as an operating activity D. $6,400 decrease to net income as an operating activity E. $8,000 increase as an investing activity


46. Using the indirect method, where does the decrease in accounts payable appear on a consolidated statement of cash flows? A. $7,000 increase to net income as an operating activity B. $7,000 decrease to net income as an operating activity C. $5,600 increase to net income as an operating activity D. $5,600 decrease to net income as an operating activity E. $7,000 increase as a financing activity


Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2009, are as follows:

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share.

Hoyle - Chapter 06

47. What is the adjusted book value of Jones after the sale of the shares? A. $200,000 B. $1,400,000 C. $1,280,000 D. $1,050,000 E. $1,440,000


48. What is the new percent ownership of Webb in Jones after the stock issuance? A. 75% B. 90% C. 80% D. 64% E. 60%


49. What adjustment is needed for Webb's investment in Jones account? A. $180,000 increase B. $180,000 decrease C. $30,000 increase D. $30,000 decrease E. No adjustment is necessary


Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2009 are as follows:

Assume Jones issues 20,000 new shares of its common stock for $15 per share. Of this total, Webb acquires 18,000 shares to maintain its 90% interest in Jones.

Hoyle - Chapter 06

50. What is the adjusted book value of Jones after the stock issuance? A. $1,500,000 B. $1,200,000 C. $1,350,000 D. $1,080,000 E. $1,335,000


51. After acquiring the additional shares, what adjustment is needed for Webb's investment in Jones account? A. $270,000 increase B. $270,000 decrease C. $27,000 increase D. $27,000 decrease E. No adjustment is necessary


Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2009, are as follows:

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.

Hoyle - Chapter 06

52. What is the new percent ownership Ryan owns in Chase? A. 80% B. 87.5% C. 90% D. 75% E. 82.5%


53. What is the adjusted book value of Chase Company after the issuance of the shares? A. $608,000 B. $720,000 C. $680,000 D. $760,000 E. $400,000


54. After acquiring the additional shares, what adjustment is needed for Ryan's investment in Chase account? A. $70,000 increase B. $70,000 decrease C. $15,000 increase D. $15,000 decrease E. No adjustment is necessary


Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2009 are as follows:

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share.

Hoyle - Chapter 06

55. What should the adjusted book value of Chase be after the treasury shares were purchased? A. $400,000 B. $480,000 C. $320,000 D. $336,000 E. $464,000


56. What is Ryan's percent ownership in Chase after the acquisition of the treasury shares (rounded)? A. 80% B. 95% C. 64% D. 76% E. 69%


57. When Ryan's new percent ownership is rounded to a whole number, what adjustment is needed for Ryan's investment in Chase account? A. $16,000 decrease B. $60,000 decrease C. $64,000 increase D. $64,000 decrease E. No adjustment is necessary


58. A special purpose entity can take all of the following forms except a A. Trust B. Partnership C. Joint venture D. Corporation E. Estate


59. 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


60. All of the following are potential losses or returns of a special purpose entity except 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 D. If the special purpose entity cannot repay liabilities, honoring a debt guarantee will produce a loss E. If leased asset declines below the residual value, honoring the guarantee will produce a loss


61. 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? A. The direct ability to make decisions about the entity's activities B. The indirect ability to make decisions about the entity's activities C. The obligation to absorb the expected losses of the entity if they occur D. No ability to make decisions about the entity's activities E. The right to receive the expected residual returns of the entity if they occur


62. Which of the following statements is false concerning variable interest entities (VIEs)? A. Sometimes VIEs do not have independent management B. Most VIEs are established for valid business purposes C. VIEs may be formed as a source of low-cost financing D. VIEs have little need for voting stock E. A VIE cannot take the form of a trust, partnership, joint venture, corporation or estate


63. 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 its sponsoring firm 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


64. Which of the following is not an indicator that requires a sponsoring firm to consolidate a variable interest entity (VIE) with its own financial statements? A. The sponsoring firm has the obligation to absorb the expected losses of the VIE if they occur B. The sponsoring firm receives risks and rewards of the VIE in proportion to equity ownership C. The sponsoring firm has the right to receive the expected residual returns of the VIE if they occur D. The sponsoring firm has direct ability to make decisions about the entity's activities E. The sponsoring firm has only indirect ability to make decisions about the entity's activities


65. A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock has a cumulative dividend. No dividends are in arrears. How is the non-controlling interest in the subsidiary's net income assigned? A. Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock B. There is no allocation to the non-controlling interest because the parent owns 100% of the common stock and net income belongs to the residual owners C. Income is assigned as 40 percent of the preferred stock dividends D. Income is assigned as 40 percent of the subsidiary's income before preferred stock dividends E. Income is assigned as 40 percent of the subsidiary's income after subtracting preferred stock dividends


66. A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock is non-cumulative. The current year's dividend was paid. How is the non-controlling interest in the subsidiary's net income assigned? A. Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock and their relative par values B. There is no allocation to the non-controlling interest because there are no dividends in arrears C. Income is assigned as 40 percent of the preferred stock dividends D. Income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends E. Income is assigned as 30 percent of the subsidiary's income after subtracting 60% of preferred stock dividends


67. Wolff Corporation owns 70 percent of the outstanding stock of Donald, Inc. During the current year, Donald made $75,000 in sales to Wolff. How does this transfer affect the consolidated statement of cash flows? A. Included as a decrease in the investing section B. Included as an increase in the operating section C. Included as a decrease in the operating section D. Included as an increase in the investing section E. Not reported in the consolidated statement of cash flows


68. Stahl Corporation owns 80 percent of the outstanding stock of MacDonald, Inc. During the current year, MacDonald made $125,000 in sales to Stahl. How does this transfer affect the consolidated statement of cash flows? A. Include 80 percent as a decrease in the investing section B. Include 100 percent as a decrease in the investing section C. Include 80 percent as a decrease in the operating section D. Include 100 percent as an increase in the operating section E. Not reported in the consolidated statement of cash flows


69. Pursley, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $50,000 Non-controlling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $80,000 for the year. What are the effects of these transactions on the consolidated statement of cash flows for the year?

A. A Above B. B Above C. C Above D. D Above E. E Above


70. Goehring, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $40,000 Non controlling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $100,000 for the year. What are the effects of these transactions on the consolidated statement of cash flows for the year? A. Increase in the financing section of $70,000 and decrease in the operating section of $30,000 B. Increase in the operating section of $70,000 and decrease in the financing section of $30,000 C. Increase in the operating section of $70,000 D. Decrease in the financing section of $30,000 E. No effects


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

Additional information for 2009:

Hoyle - Chapter 06

71. Net cash flow from operating activities was: A. $44,000 B. $44,800 C. $46,200 D. $50,000 E. $52,200


72. Net cash flow from financing activities was: A. $28,000 B. $35,000 C. $50,000 D. $63,000 E. $64,200


The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:

Additional information for 2009:

Hoyle - Chapter 06

73. Net cash flow from operating activities was: A. $92,000 B. $27,000 C. $63,000 D. $29,000 E. $33,000


74. Net cash flow from financing activities was: A. $61,000 B. $96,000 C. $100,000 D. $80,000 E. $99,000


75. How do subsidiary stock warrants outstanding affect consolidated earnings per share? A. They will be included in both basic and diluted earnings per share if they are dilutive B. They will only be included in diluted earnings per share if they are dilutive C. They will only be included in basic earnings per share if they are dilutive D. Only the warrants owned by the parent company affect consolidated earnings per share E. Because the warrants are for subsidiary shares, there will be no effect on consolidated earnings per share


76. A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. Which of the following statements is true? A. Since the sale was made at the end of the year, the parent's investment account is not affected B. Since the shares were sold for more than book value, the parent's investment account must be increased C. Since the shares were sold for more than book value, the parent's investment account must be decreased D. Since the shares were sold for more than book value but the parent did not buy any of the shares, the parent's investment account is not affected E. None of the above


77. A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the following statements is true? A. Since the sale was made at the end of the year, the parent's investment account is not affected B. Since the shares were sold for less than book value, the parent's investment account must be increased C. Since the shares were sold for less than book value, the parent's investment account must be decreased D. Since the shares were sold for less than book value but the parent did not buy any of the shares, the parent's investment account is not affected E. None of the above


78. A parent company owns a 70 percent interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares for $27 per share and the parent buys its 70 percent interest in the new shares. Which of the following statements is true? A. Since the sale was made at the end of the year, the parent's investment account is not affected B. Since the shares were sold for book value, the parent's investment account must be increased C. Since the shares were sold for book value, the parent's investment account must be decreased D. Since the shares were sold for book value and the parent bought 70 percent of the shares, the parent's investment account is not affected except for the price of the new shares E. None of the above


79. Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2009 (without consideration of its investment in Madrid, Inc.) of $1,500,000. For the same year, Madrid reports net income of $705,000. Carlson had bonds payable outstanding on January 1, 2009 with a carrying value of $1,200,000. Madrid acquired the bonds on January 3, 2009 for $1,090,000. During 2009, Carlson reported interest expense on the bonds in the amount of $96,000, while Madrid reported interest income of $94,000 for the same bonds. What is Carlson's share of consolidated net income? A. $2,064,000 B. $2,066,000 C. $2,176,000 D. $2,207,000 E. $2,317,000


80. Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On January 2, 2007, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2027 at a premium of $400,000. On January 1, 2009, Ernest acquired 30 percent of these same bonds at 97.6. Both companies use the straight-line method of amortization. What adjustment should be made to Davidson's 2010 beginning Retained Earnings as a result of this bond acquisition? A. $114,000 B. $122,000 C. $136,000 D. $144,000 E. $152,000


81. Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company. On January 2, 2007, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2, 2027 at a premium of $500,000. On January 1, 2009, Franklin acquired 20 percent of these same bonds at 97.66. Both companies use the straight-line method of amortization. What adjustment should be made to Franklin's 2010 beginning Retained Earnings as a result of this bond acquisition? A. $107,100 B. $113,400 C. $119,700 D. $144,000 E. $152,000


On January 1, 2009, 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:

Hoyle - Chapter 06

82. 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


83. Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved? A. $100,000 B. $0 C. $200,000 D. $812,500 E. $2,112,500


84. Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2009 while Kaspar reports $250,000. Kaspar transferred inventory during 2009 to Johnson at a price of $50,000. On December 31, 2009, 30 percent of the transferred goods are still in Johnson's inventory. Consolidated accounts receivable on January 1, 2009 was $120,000 and on December 31, 2009 is $130,000. Johnson uses the direct approach in preparing the statement of cash flows. How much is cash collected from customers on the consolidated statement of cash flows? A. $590,000 B. $610,000 C. $625,000 D. $635,000 E. $650,000


85. Parent Corporation loaned money to its subsidiary on a five-year note at the market interest rate. How would the note be accounted for in the consolidation process?

The note would be eliminated in the consolidation process with an entry debiting Notes Payable and crediting Notes Receivable.


86. What documents or other sources of information would be used to prepare a consolidated statement of cash flows?

The main source of information would be the consolidated income statement and the consolidated balance sheet.


87. Parent Corporation acquired some of its subsidiary's bonds on the bond market. The remaining life of the bonds was eight years and Parent expected to hold the bonds for the full eight years. How should the acquisition of the bonds have been viewed in the consolidation process?

In the consolidation process, the bonds would be treated as if they had been retired. A gain or loss would be recognized in the period in which they were acquired.


88. Parent Corporation acquired some of its subsidiary's bonds on the bond market, paying a price $40,000 higher than the bonds' carrying value. How should the difference between the purchase price and the carrying value be accounted for?

The $40,000 difference between the acquisition price and the carrying value would be recognized as a loss on early extinguishment of debt and would only be extraordinary under limited circumstances.


89. How are intercompany inventory transfers reflected on a consolidated statement of cash flows?

Intercompany inventory transfers are eliminated on the consolidation worksheet and therefore do not appear on the consolidated statement of cash flows.


90. Danbers Co. owned seventy-five percent of the common stock of Renz Corp. How does the issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process?

A stock dividend would not influence Danbers' ownership percentage and would not alter the consolidation process.


91. During 2009, Parent Corporation purchased at book value some of the outstanding bonds of its subsidiary. How would this acquisition have been reflected in the consolidated statement of cash flows?

The cash paid for the bonds would be shown under cash flows from financing activities.


92. On January 1, 2009, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro's outstanding preferred stock. In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for?

The investment in preferred stock account and Foxboro's preferred stock balance should be eliminated in consolidation so that only the parent's equity remains. No gain or loss should have been recognized.


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

The non-controlling interest should be reflected at its acquisition-date fair value.


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

The purchase might have been made by Parent Corporation because it had more available cash than the subsidiary and there was a desire to bring the bonds in from the market. Also, in some cases, the contract signed when the bonds were issued might prevent the subsidiary from purchasing its own bonds or it might require the payment of a price that would be higher than the market value of the bonds.


95. Parent Corporation had just purchased some of its subsidiary's outstanding bonds. What items related to these bonds will have to be accounted for in the consolidation process?

For each period that the parent owns the bonds, the bonds must be eliminated on the consolidation worksheet. Eliminating the bonds requires the elimination of the parent's investment account, the portion of the bonds payable that the parent acquired, interest expense of the issuer and interest income of the investor. In the year in which the parent acquired the bonds, a gain or loss must have been recognized. Over the life of the bonds, retained earnings must be debited or credited for the amount or the gain or loss, as adjusted by the previous years' difference between interest expense and interest income.


96. Parent Corporation recently acquired some of its subsidiary's outstanding bonds, at an amount which required the recognition of a loss. In what ways could the loss be allocated? Which allocation would you recommend? Why?

The loss could be assigned to the subsidiary since it originally issued the bonds. The loss could be assigned to the parent since the parent acquired the bonds. A method could be applied to divide the loss between the parent and subsidiary. Finally, the loss could be assigned to the parent because the parent controls the combined entity. The loss should probably be assigned to the parent, without regard to who issued and who purchased the bonds, since the parent is responsible for decision making for the combined entity.


97. How does the existence of a non-controlling interest affect the preparation of a consolidated statement of cash flows?

The non-controlling interest's share of the subsidiary's income would not appear on the consolidated statement of cash flows since it does not involve a cash flow. Dividends paid to the non-controlling interest represent cash outflows for the combined entity and should be shown as cash flows from financing activities.


98. On January 1, 2009, Bast Co. had a net book value of $2,100,000 as follows:

Fisher Co. acquired all of the outstanding preferred shares for $148,000 and 60% of the common stock for $1,281,000. Fisher believed that one of Bast's buildings, with a twelve-year life, was undervalued on the company's financial records by $70,000. Required: What is the amount of goodwill to be recognized from this purchase?


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 purchase price. On January 1, 2006, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a cash interest rate of 10% payable every December 31. Fargus acquired 40% of these bonds on January 1, 2008, for 95% of the face value. Both companies utilized the straight-line method of amortization.

Hoyle - Chapter 06

99. What balances would need to be considered in order to prepare the consolidation entry in connection with these intercompany bonds at December 31, 2008, the end of the first year of the intercompany investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.


100. What consolidation entry would have been recorded in connection with these intercompany bonds on December 31, 2008?






103. Skipen Corp. had the following stockholders' equity accounts:

The preferred stock was participating and is therefore considered to be equity. Vestin Corp. acquired 90% of this common stock for $2,250,000 and 70% of the preferred stock for $1,120,000. All of the subsidiary's assets and liabilities were determined to have fair values equal to their book values except for land which is undervalued by $130,000. Required: What amount was attributed to goodwill on the date of acquisition?


Thomas Inc. had the following stockholders' equity accounts as of January 1, 2009:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2009, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2009, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried decided used the equity method to account for this investment.

Hoyle - Chapter 06

104. What is the amount of goodwill resulting from this acquisition?


105. What was the non-controlling interest's share of consolidated net income for this period?

All residual net income is attributed to the controlling interest of Kuried as sole owner of common stock of Thomas.


106. What is the controlling interest share of Thomas' net income for the year ended December 31, 2009?


107. What was Kuried's balance in the Investment in Thomas Inc. account as of December 31, 2009?


108. Prepare all consolidation entries for 2009.


109. Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2007, for $644,000 in cash. Of this price, $42,000 was attributed to equipment with a ten-year remaining useful life. Goodwill of $56,000 had also been identified. Jet applied the partial equity method so that income would be accrued each period based solely on the earnings reported by the subsidiary. On January 1, 2010, Jet reported $280,000 in bonds outstanding with a book value of $263,200. Nittle purchased half of these bonds on the open market for $135,800. During 2010, Jet began to sell merchandise to Nittle. During that year, inventory costing $112,000 was transferred at a price of $140,000. All but $14,000 (at selling price) of these goods were resold to outside parties by year's end. Nittle still owed $50,400 for inventory shipped from Jet during December. The following financial figures were for the two companies for the year ended December 31, 2010.

Required: Prepare a consolidation worksheet for the year ended December 31, 2010.

CONSOLIDATION WORKSHEET For the Year Ended 12/31/2010


110. Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's convertible bonds. The following consolidated financial statements were for 2009 and 2010.

Additional Information: Bonds were issued during 2010 by the parent for cash. Amortization of a database acquired in the original combination amounted to $7,000 per year. A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash on May 11, 2010. Equipment was purchased by the subsidiary on July 23, 2010, using cash. Late in November 2010, the parent issued common stock for cash. During 2010, the subsidiary paid dividends of $14,000. Required: Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2010. Either the direct method or the indirect method may be used.


Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None of this stock is purchased by Panton.

Hoyle - Chapter 06

111. Describe how this transaction would affect Panton's books.

Prior to the issuance of the new shares, Panton owns a 90% interest in Glotfelty (18,000 shares out of 20,000 shares). The underlying book value of this investment is $540,000 ($600,000 x 90%). Subsequent to the issuance, total book value of the subsidiary will have risen by $200,000 (5,000 shares x $40) to $800,000. Panton's ownership, however, will only be 72% (18,000/25,000). The book value underlying Panton's investment is now $576,000 (72% of $800,000) so that a $36,000 increase must be recorded by the parent.


112. Prepare Panton's journal entry to recognize the impact of this transaction.

Difficulty: Easy

Hoyle - Chapter 06 #112

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $27 per share. None of this stock is purchased by Panton.

Hoyle - Chapter 06

113. Describe how this transaction would affect Panton's books.

Prior to the issuance of the new shares, Panton owns a 90% interest in Glotfelty (18,000 shares out of 20,000 shares). The underlying book value of this investment is $540,000 ($600,000 x 90%). Subsequent to the issuance, total book value of the subsidiary will have risen by $135,000 (5,000 shares x $27) to $735,000. Panton's ownership, however, will only be 72% (18,000/25,000). The book value underlying Panton's investment is now $529,200 (72% of $735,000) so that a $10,800 decrease must be recorded by the parent.


114. Prepare Panton's journal entry to recognize the impact of this transaction.

Difficulty: Easy

Hoyle - Chapter 06 #114

115. Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to Panton for $35 per share. Required: Describe how this transaction would affect Panton's books.

The investment price is above the book value of the subsidiary. In this case, however, the additional amount has been paid by the parent company, not by an outside party. Because the payment is made by Panton, the investment account will need an adjustment after recording the cost of the new shares. A change in ownership is accounted for as an equity transaction when controlling interest is retained. Book value equivalency prior to new issuance (90% x $600,000) $540,000 Book value of subsidiary after new issuance ($600,000 + $175,000) $775,000 Panton's ownership (23,000 shares/25,000 shares) x 92% Book value equivalency after new issuance $713,000 Investment account after new shares recorded (540,000 + $175,000) $715,000 Adjustment: Decrease investment and additional paid-in capital ($713,000 - $715,000) = $(2,000)


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