Question 1

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.

Accepted Answer

When a subsidiary issues new shares below book value and outsiders purchase them, the parent's ownership percentage decreases, leading to a decrease in the parent's additional paid-in capital.

Question 2

On January 1, 2021, 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. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  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.

Accepted Answer

The answer of On January 1, 2021, Nichols Company acquired...

Question 3

Davis Company has had bonds payable of $12,000 outstanding for several years. On January 1, 2021, when there was an unamortized discount of $1,000 and a remaining life of 5 years, its 90% owned subsidiary, Jacobson Company, purchased the bonds in the open market for $13,000. 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 2021.
A) $1,000 gain.
B) $1,000 loss.
C) $2,000 gain.
D) $2,000 loss.
E) $3,000 gain.

Accepted Answer

The bonds were purchased for $13,000, which is $2,000 more than their book value of $11,000 ($12,000 face value - $1,000 unamortized discount). This results in a $2,000 loss on the consolidated income statement.

Question 4

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) Recognition of any gain or loss is deferred until the debt is extinguished for purposes of reporting such debt on consolidated financial statements.
B) Any gain or loss is recognized in the year of acquisition on a consolidated income statement.
C) Interest revenue generated from the debt of an affiliate is recognized on a consolidated income statement.
D) Interest expense recognized from carrying debt instruments is recognized on a consolidated income statement.
E) Consolidated retained earnings is adjusted to take into account the difference between the purchase price and carrying value of the debt.

Accepted Answer

The answer of Which of the following statements is true...

Question 5

On January 1, 2021, 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. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  Compute the goodwill recognized in consolidation.
A) $800,000.
B) $310,000.
C) $124,000.
D) $0.
E) $(196,000).

Accepted Answer

The answer of On January 1, 2021, Nichols Company acquired...

Question 6

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 decrease.
E) No adjustment is necessary.

Accepted Answer

A stock dividend by a subsidiary does not affect the parent's investment account or additional paid-in capital; it only changes the composition of the subsidiary's equity.

Question 7

On January 1, 2021, 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. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  Compute the noncontrolling interest in Smith at date of acquisition.
A) $486,000.
B) $480,000.
C) $300,000.
D) $150,000.
E) $120,000.

Accepted Answer

The answer of On January 1, 2021, Nichols Company acquired...

Question 8

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 (to an outside party) of $5,000. The land cost Graham $20,000.(2.) Noncontrolling 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 amortization was $6,000.(6.) Consolidated accounts receivable decreased by $8,000.(7.) Consolidated accounts payable decreased by $7,000.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.

Accepted Answer

The loss on sale of land is a non-cash item that reduces net income. To adjust for this in the operating activities section of the cash flow statement, the $5,000 loss is added back to net income.

Question 9

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.

Accepted Answer

When a parent company acquires new shares of a subsidiary at an amount greater than book value, the investment in the subsidiary increases as the parent is investing more capital into the subsidiary.

Question 10

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.

Accepted Answer

Consolidated net income is affected by a gain or loss on the debt transaction because it reflects the overall financial performance of the entire group, including the effects of such transactions.

Question 11

Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2019, 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, 2022.Popper did not pay any premium when it acquired its original interest in Cocker. On January 1, 2022, 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, 2022, 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 $23,100.
E) Decrease it by $50,500.

Accepted Answer

The answer of Popper Co. acquired 80% of the common...

Question 12

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.

Accepted Answer

The answer of In reporting consolidated earnings per share when...

Question 13

Key Company has had bonds payable of $21,000 outstanding for several years. On January 1, 2021, there was an unamortized premium of $1,000 with a remaining life of 10 years, Key's parent, Peele, Inc., purchased the bonds in the open market for $18,000. Key is an 80% owned subsidiary of Peele. The bonds pay 7% 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 2021.
A) $3,000 gain.
B) $3,000 loss.
C) $4,000 gain.
D) $4,000 loss.
E) $2,000 gain.

Accepted Answer

The answer of Key Company has had bonds payable of...

Question 14

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.

Accepted Answer

In a consolidated statement of cash flows, the noncontrolling interest in net income of a subsidiary is added to net income to adjust for the portion of the subsidiary's income not attributable to the parent company.

Question 15

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 noncontrolling interest of subsidiary's dividends are deducted as a financing activity.
E) Neither parent's nor subsidiary's dividends are deducted as a financing activity.

Accepted Answer

The answer of Which of the following statements is true...

Question 16

On January 1, 2021, 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. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  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 noncontrolling interest in consolidated income.
C) The noncontrolling interest in consolidated net income is $27,200.
D) The preferred stock dividend will be ignored in noncontrolling interest in consolidated net income because Nichols owns the noncontrolling interest of preferred stock.
E) The noncontrolling interest in consolidated net income is $30,800.

Accepted Answer

The answer of On January 1, 2021, Nichols Company acquired...

Question 17

If a subsidiary re-acquires its outstanding shares from outside ownership for more than the noncontrolling interest valuation basis at the date of buying such treasury stock, 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.

Accepted Answer

When a subsidiary re-acquires its shares for more than the noncontrolling interest valuation, the excess paid reduces the additional paid-in capital on the parent company's books.

Question 18

If new bonds are issued from a parent to its subsidiary, which of the following statements is false?
A) Any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment.
B) 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.

Accepted Answer

When bonds are issued between a parent and its subsidiary, any premium or discount on the bonds payable is offset by a corresponding premium or discount on the bond investment, resulting in no net gain or loss. Therefore, statement E is false.

Question 19

On January 1, 2021, 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. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:  With respect to Nichols' investment in Smith, determine the amount to be recorded and identify which account should be adjusted to reflect such amount.
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.

Accepted Answer

The answer of On January 1, 2021, Nichols Company acquired...

Question 20

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:
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.

Accepted Answer

A gain or loss is recognized by the business combination, not by both the parent and subsidiary companies individually.

Quiz 6: Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

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?

Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition?

If a subsidiary issues a stock dividend, which of the following statements is true?

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?

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?

In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true?

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

Which of the following statements is true for a consolidated statement of cash flows?

If a subsidiary re-acquires its outstanding shares from outside ownership for more than the noncontrolling interest valuation basis at the date of buying such treasury stock, which of the following statements is true?

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

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: