Question 1

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011.
-What was the amount of Stoop'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.

Accepted Answer

E

Question 2

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011.
-Campbell Inc. owned all of Gordon Corp. For 2011, 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, 2011, with a book value of $297,000. The parent acquired the bonds on that date for $281,000. During 2011, Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is consolidated net income for 2011?
A) $406,000.
B) $374,000.
C) $378,000.
D) $410,000.
E) $394,000.

Accepted Answer

A

Question 3

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 would the loss be attributed?
A) To Safire because the bonds were issued by Safire.
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 Regency because Regency is the controlling party in the business combination.

Accepted Answer

E

Question 4

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011.
-Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2010, 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 2010 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2011. What adjustment would have been required for the retained earnings balance as of January 1, 2011?
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.

Accepted Answer

The correct answer is C.The adjustment to retained earnings is calculated as follows:Interest expense reported by Quasimota $29,000Less: Interest income reported by Vontkins (25,000)Adjustment to retained earnings $4,000

Question 5

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.

Accepted Answer

Dividends paid to noncontrolling interests are considered financing activities and will appear on the consolidated statement of cash flows under cash flows from financing activities.

Question 6

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.

Accepted Answer

The answer of Where do dividends paid by a subsidiary...

Question 7

On January 1, 2011, 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 2011?
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.

Accepted Answer

The difference between the carrying value and the purchase price of the bonds represents a gain from the extinguishment of debt, which should be recognized in the consolidated financial statements. Therefore, the correct answer is D, the difference is treated as a gain from the extinguishment of the debt.

Question 8

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011.
-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. If 90% of this company's total equity was acquired by another, what portion of the value would be assigned to the noncontrolling interest?
A) $8,500,000.
B) $7,000,000.
C) $6,200,000.
D) $2,400,000.
E) $6,929,400.

Accepted Answer

FV Common Stock $62,000,000 + FV Preferred Stock $8,000,000 = $70,000,000 × .10 = $7,000,000 Non-Controlling Interest

Question 9

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.

Accepted Answer

Consolidated earnings per share would be calculated by dividing the consolidated net income by the parent's number of shares outstanding, assuming the subsidiary has no convertible securities or warrants. This is because the consolidated earnings belong to the parent company, and the number of shares outstanding for the parent represents the ownership interest in the consolidated earnings.

Question 10

On January 1, 2011, Riney Co. owned 80% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances: $\begin{array}{lr}
\text { Common stock ( } \$ 5 \text { par value) } & \$ 250,000 \
\text { Additional paid-in capital } & 110,000 \
\text { Retained earnings } & 330,000\\text { Total stockholders' equity }&\$690,000
\end{array}$ The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling interest was $138,000. On January 1, 2011, 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 Investment in Garvin Co. after 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.

Accepted Answer

The balance in Investment in Garvin Co. is increased by the share of Garvin's net income and decreased by the share of Garvin's dividends. The sale of additional common stock by Garvin does not affect Riney's investment.

Question 11

On January 1, 2011, Riney Co. owned 80% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances: $\begin{array}{lr}
\text { Common stock ( } \$ 5 \text { par value) } & \$ 250,000 \
\text { Additional paid-in capital } & 110,000 \
\text { Retained earnings } & 330,000\\text { Total stockholders' equity }&\$690,000
\end{array}$ The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling interest was $138,000. On January 1, 2011, 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 Noncontrolling Interest in Garvin Co. after the sale of the 10,000 shares of common stock?
A) $138,000.
B) $101,000.
C) $280,000.
D) $230,000.
E) $168,000.

Accepted Answer

The answer of On January 1, 2011, Riney Co. owned...

Question 12

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011.
-Stoop'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.

Accepted Answer

The answer of Knight Co. owned 80% of the common...

Question 13

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, 2009, when Cocker had the following stockholders' equity accounts. $$\begin{array} { l r } 
\text { Common stock - 40,000 shares outstanding } & \$ 140,000 \
\text { Additional paid-in capital } & 105,000 \
\text { Retained earnings } & 476,000 \
\hline \text { Total stockholders' equity } & \$ 721,000 \
\hline
\end{array}$$ 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, 2012.
On January 1, 2012, 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, 2012, 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.

Accepted Answer

The answer of These questions are based on the following...

Question 14

Where do intra-entity sales 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.

Accepted Answer

Intra-entity sales of inventory involve transactions between two entities within the same consolidated group. Since they do not result in any cash inflows or outflows, they are not reported in the consolidated statement of cash flows.

Question 15

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011.
-Cadion Co. owned a controlling interest in Knieval Inc. Cadion reported sales of $420,000 during 2011 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 intra-entity 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.

Accepted Answer

The answer of Knight Co. owned 80% of the common...

Question 16

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 $10 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 $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011.
-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, 2011, 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 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.

Accepted Answer

The answer of Knight Co. owned 80% of the common...

Question 17

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, 2011, 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.

Accepted Answer

The answer of Parker owned all of Odom Inc. Although...

Question 18

On January 1, 2011, Riney Co. owned 80% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances: $\begin{array}{lr}
\text { Common stock ( } \$ 5 \text { par value) } & \$ 250,000 \
\text { Additional paid-in capital } & 110,000 \
\text { Retained earnings } & 330,000\\text { Total stockholders' equity }&\$690,000
\end{array}$ The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling interest was $138,000. On January 1, 2011, Garvin Co. sold 10,000 shares of previously unissued common stock for $15 per share. Riney did not acquire any of these shares.
-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 noncontrolling interest in the subsidiary's income?
A) $234,000.
B) $273,000.
C) $302,000.
D) $312,000.
E) $284,000.

Accepted Answer

$780,000 Net Income - Preferred Dividends (10,000 × $10) = $680,000 × .40 = $272,000 Non-Controlling Interest$100,000 Preferred Dividends × .30 = $30,000 Non-Controlling Interest$272,000 from Income + $30,000 Preferred Dividends = $302,000 Non-Controlling Interest in Income

Question 19

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 noncumulative.
E) The preferred stock is participating.

Accepted Answer

Convertible preferred stock can be converted into common stock, which may increase the number of outstanding common shares and decrease the earnings per share. This makes the stock a dilutive security. Callable, cumulative, noncumulative, and participating preferred stock do not necessarily impact the number of outstanding common shares and therefore do not inherently have a dilutive effect.

Question 20

How do intra-entity 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.

Accepted Answer

The answer of How do intra-entity sales of inventory affect...

Quiz 6: Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flo

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 would the loss be attributed?

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

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

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

Where do intra-entity sales of inventory appear in a consolidated statement of cash flows?

Which one of the following characteristics of preferred stock would make the stock a dilutive security for earnings per share?

How do intra-entity sales of inventory affect the preparation of a consolidated statement of cash flows?