Question 1

Investor has a 40% ownership interest in the common stock of Investee.Investor paid $10,000 more than book value for its 40% interest and regards the excess as attributable to goodwill.If Investee reports income of $200,000 and pays dividends of $50,000, the operating activities of the consolidated statement of cash flows (indirect method) will reflect an adjustment of

Accepted Answer

The investor's share of the investee's income is 40% of $200,000, which is $80,000. However, since the excess paid is attributable to goodwill, it is not amortized, so the adjustment for the operating activities is the investor's share of the income, which is $80,000, minus the dividends received, which is 40% of $50,000 ($20,000). Therefore, the adjustment is $80,000 - $20,000 = $60,000.

Question 2

The cash purchase of a controlling interest in a firm requires disclosure on the consolidated statement of cash flows as a(n)

Accepted Answer

The cash purchase of a controlling interest in a firm is considered an investing activity. It should be disclosed in the investing activities section of the consolidated statement of cash flows and also in the schedule of noncash financing and investing activities.

Question 3

A parent company owns 80% of the common stock of its subsidiary.During the current year, the parent purchases an additional 10% interest from non-controlling shareholders.This cash transaction will appear in which section of the consolidated statement of cash flows? ?
$\begin{array} { r c c l } 
\text { Operating } & \text { Investing } & \text { Financing } & \text { No Adjustment } \\end{array}$
A)$\begin{array} { r c c l }  &\text {Yes } &&& \text { No } &&&& \text { No } &&&&& \text { No } \\end{array}$
B)$\begin{array} { r c c l } &\text {No } &&& \text { Yes } &&&& \text { No } &&&&& \text { No } \\end{array}$
C)$\begin{array} { r c c l } &\text {No } &&& \text { No } &&&& \text { Yes } &&&&& \text { No } \\end{array}$
D)$\begin{array} { r c c l } &\text {No } &&& \text { No } &&&& \text { No } & &&&&\text { Yes }
\end{array}$

Accepted Answer

C

Question 4

For two or more corporations to file a consolidated tax return, the parent must own what percentage of the voting power of all classes of stock and what percentage of the fair value of all the outstanding stock of the corporation?

Accepted Answer

To file a consolidated tax return, the parent company must own at least 80% of the voting power and fair value of all outstanding stock of the corporation(s) involved. This means that the parent company must have control over the subsidiaries, allowing them to be treated as one entity for tax purposes.

Question 5

A parent company purchased all the outstanding bonds of its subsidiary.This cash transaction will appear in which section of the consolidated statement of cash flows? ?
$\begin{array} { r c c l } 
\text { Operating } & \text { Investing } & \text { Financing } & \text { No Adjustment } \\end{array}$
A)$\begin{array} { r c c l }  &\text {Yes } &&& \text { No } &&&& \text { No } &&&&& \text { No } \\end{array}$
B)$\begin{array} { r c c l } &\text {No } &&& \text { Yes } &&&& \text { No } &&&&& \text { No } \\end{array}$
C)$\begin{array} { r c c l } &\text {No } &&& \text { No } &&&& \text { Yes } &&&&& \text { No } \\end{array}$
D)$\begin{array} { r c c l } &\text {No } &&& \text { No } &&&& \text { No } & &&&&\text { Yes }
\end{array}$

Accepted Answer

The answer of A parent company purchased all the outstanding...

Question 6

In a noncash purchase of a controlling interest in a firm, disclosure is required on the consolidated statement of cash flows as a(n)

Accepted Answer

A noncash purchase of a controlling interest in a firm is considered an investing activity and would be disclosed in the consolidated statement of cash flows under investing activities. In addition, the transaction would also be reported in the schedule of noncash financing and investing activity. Therefore, the best choice is D, which reflects both the investing activity and the schedule of noncash financing and investing activity.

Question 7

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

Accepted Answer

The purchase of intercompany bonds from parties outside the consolidated group is treated as a retirement of consolidated debt, and the payment is reported as a cash outflow from financing activities as it involves the payment of debt. The intercompany interest payments and amortization of premiums and/or discounts on intercompany bonds are reported as operating activities as they are related to the company's core operations.

Question 8

Consolidated Basic Earnings Per Share (BEPS) is calculated by dividing

Accepted Answer

The answer of Consolidated Basic Earnings Per Share (BEPS) is...

Question 9

Company P purchased an 80% interest in Company S on January 1, 2016, at a price in excess of book value, such that a patent arises in the consolidation process.As a result of amortizing the patent on the consolidated income statement, an adjustment would be required in which section of the consolidated statement of cash flows? ?
$\begin{array} { c c c l } 
\text { Operating } & \text { Investing } & \text { Financing } & \text { No Adjustment } \\end{array}$
A)$\begin{array} { c c c l } \text { Yes } &&&& \text { No } &&&& \text { No }&&& & \text { No } \\end{array}$
B)$\begin{array} { c c c l } \text {No } &&&& \text { Yes } &&&& \text { No } &&&&\text { No } \\end{array}$
C)$\begin{array} { c c c l } \text {No } &&&& \text { No } &&&& \text { Yes } &&&& \text { No } \\end{array}$
D)$\begin{array} { c c c l } \text {  No } &&&& \text { No } &&&&\text { No } &&&& \text { Yes }
\end{array}$

Accepted Answer

In the case of amortizing the patent, the adjustment affects only the operating section of the consolidated statement of cash flows as it is a non-cash expense. There would be no impact on the investing or financing sections. Therefore, the correct choice is A: Yes (for the operating section) and No for the remaining sections.

Question 10

Company P acquired 80% of the outstanding common stock of the Company S by issuing common stock with a market value of $550,000.The balance sheet of Company S was as follows on the acquisition date: 
$$\begin{array} { l r l r } 
\text { Assets } & & \text { Liabilities and Equity } & \
\text { Cash } & \$ 50,000 & \text { Liabilities } & \$ 120,000 \
\text { Inventory } & 120,000 & \text { Common stock, } \$ 10 \text { par } & 100,000 \
\text { Land } & 100,000 & \text { Other paid-in capital } & 150,000 \
\text { Building (net) } & 350,000 & \text { Retained earnings } & 250,000 \
\quad \text { Total } & \$ \underline { 620,000 } & \text { Total } & \$ \underline { 620,000 }
\end{array}$$ The market values were as follows: Inventory, $130,000; Land, $120,000; Building, $400,000.What is the amount that will appear as Cash Provided (Used) by Investing Activities on the consolidated statement of cash flows, as a result of this purchase?

Accepted Answer

The answer of Company P acquired 80% of the outstanding...

Question 11

The purchase of additional shares from the non-controlling interest of a subsidiary by the parent results in disclosure in which section of a cash flow statement?

Accepted Answer

The purchase of additional shares from the non-controlling interest of a subsidiary by the parent is a financing activity because it involves the inflow or outflow of funds related to the capital structure of the company. Therefore, it should be disclosed in the financing activities section of the cash flow statement.

Question 12

Company P acquired 75% of the outstanding common stock of the Company S by issuing common stock with a market value of $650,000 on January 1, 2016.The balance sheet of Company S was as follows on the acquisition date: 
$$\begin{array} { l r l r } 
\text { Assets } & & \text { Liabilities and Equity } & \
\text { Cash } & \$ 100,000 & \text { Liabilities } & \$ 100,000 \
\text { Inventory } & 90,000 & \text { Common stock, } \$ 10 \text { par } & 100,000 \
\text { Land } & 150,000 & \text { Other paid-in capital } & 200,000 \
\text { Building (net) } & 500,000 & \text { Retained earnings } & 440,000 \
\quad \text { Total } & \$ 840,000 & \text { Total } & \$ 840,000
\end{array}$$ The market values were as follows: Inventory, $180,000; Land, $150,000; Building, $600,000.What is the amount that will appear as Cash Provided (Used) by Financing Activities as a result of this purchase?

Accepted Answer

The purchase was made by issuing common stock, meaning there was no cash involved in this transaction. Therefore, there is no cash provided or used by financing activities.

Question 13

Which of the following is not true regarding diluted earnings per share (DEPS) when the subsidiary has outstanding dilutive securities which may require the issuance of subsidiary company shares only?

Accepted Answer

The statement in choice B is not true. When calculating diluted earnings per share (DEPS) for consolidated financial statements where the subsidiary has outstanding dilutive securities, the controlling interest's share of net income should be divided by the weighted average number of outstanding parent and subsidiary shares. This takes into account the potential effect of the dilutive securities on the parent and subsidiary's earnings per share. Choice A, C, and D are all true regarding the calculation of DEPS when the subsidiary has outstanding dilutive securities.

Question 14

Dividends paid by a subsidiary have the following effect on the consolidated cash flow

Accepted Answer

The answer of Dividends paid by a subsidiary have the...

Question 15

Amortization of excesses in periods subsequent to the purchase would affect which sections of a consolidated statement of cash flows?

Accepted Answer

Amortization of excesses is a non-cash expense that affects the company's net income and therefore the operating section of the consolidated statement of cash flows. It represents the allocation of the premium paid over the acquired company's identifiable net assets and is recorded as an intangible asset on the balance sheet. As it is a non-cash expense, it does not impact the cash flow from financing or investing activities.

Question 16

Ponti Company purchased the net assets of the Sorri Company for $800,000.The book value of the net assets of Sorri Company were as follows on the acquisition date: 
$$\begin{array} { l r } 
\text { Cash } & \$ 50,000 \
\text { Inventory } & 150,000 \
\text { Land } & 150,000 \
\text { Building (net) } & 400,000 \
\text { Liabilities } & ( 200,000 ) \
\quad \text { Net assets } & \$ 550,000 \

\end{array}$$ The market values were as follows: Inventory, $160,000; Land, $170,000; Building, $450,000.The excess purchase price is allocated to goodwill.On the consolidated statement of cash flows, what is the amount that will appear as cash applied to investing as a result of this purchase?

Accepted Answer

The excess purchase price is allocated to goodwill. Goodwill is not an asset that is recognized on the consolidated statement of cash flows. Therefore, the amount that will appear as cash applied to investing as a result of this purchase is the purchase price of $800,000 less the fair value of the net assets acquired, which is $550,000. This difference of $250,000 is the amount that will appear as cash applied to investing.

Question 17

The purchase of additional shares directly from a subsidiary by the parent results in disclosure in which section of a consolidated statement of cash flows?

Accepted Answer

The answer of The purchase of additional shares directly from...

Question 18

When the acquisition of a subsidiary occurs during a reporting period, the computation of both Basic earnings per share (BEPS) and Diluted earnings per share (DEPS) includes subsidiary income

Accepted Answer

When a subsidiary is acquired during a reporting period, both BEPS and DEPS should include subsidiary income for the partial period only and the number of subsidiary shares should be weighted for the partial period. This is because the subsidiary was not part of the parent company for the entire reporting period.

Question 19

Program Corporation owns 70% of Solution Company.Selected financial data for each for the current year follows: Consolidated basic earnings per share (BEPS) is (round to the nearest cent):
$\begin{array}{lr}
\text { Program Corporation: } & \
\text { Internally generated net income } & \$ 125,000 \
\text { Common shares outstanding } & 100,000\
\text { Solution Company: }\
\text { Net income (adjusted for intercompany profits) } & \$ 50,000 \
\text { Common shares outstanding } & 10,000
\end{array}$

Accepted Answer

To calculate the consolidated BEPS, we need to use the percentage of ownership of Program Corporation and the BEPS of both companies.

Consolidated BEPS = (Program Corporation BEPS x Program Corporation ownership) + (Solution Company BEPS x Solution Company ownership)

Consolidated BEPS = ($1.40 x 0.70) + ($1.50 x 0.30)

Consolidated BEPS = $0.98 + $0.45

Consolidated BEPS = $1.43

Rounding to the nearest cent, the consolidated BEPS is $1.60, which corresponds to answer choice C.

Question 20

Company P acquired 60% of the outstanding common stock of Company S by issuing common stock with a market value of $420,000 on January 1, 2016.The balance sheet of Company S was as follows on the acquisition date: 
$$\begin{array} { l r l r } 
\text { Assets } & & \text { Liabilities and Equity } & \
\text { Cash } & \$ 50,000 & \text { Liabilities } & \$ 80,000 \
\text { Inventory } & 100,000 & \text { Common stock, } \$ 10 \text { par } & 100,000 \
\text { Land } & 100,000 & \text { Other paid-in capital } & 120,000 \
\text { Building (net) } & 250,000 & \text { Retained earnings } & 200,000 \
\quad \text { Total } & \$ 500,000 & \text { Total } & \$ 500,000
\end{array}$$ The market values were as follows: Inventory, $130,000; Land, $150,000; Building, $400,000.The inventory was sold during 2016, the building has a 10-year life, and any excess purchase price is attributed to goodwill.What adjustment is needed to consolidated net income to arrive at cash flow-operations for 2017, under the indirect method, as a result of amortization of excesses from the purchase?

Accepted Answer

The answer of Company P acquired 60% of the outstanding...

Quiz 6: Cash Flow, Eps, and Taxation