Adv Acct CH 6 Hoyle

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1.
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.
2.
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.
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 noncumulative.
E. The preferred stock is participating.
4.
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.
5.
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.
6.
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.
7.
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.
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, 2011, Riney Co. owned 80% 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 $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.
9.
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.
10. 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.
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
noncontrolling interest in the subsidiary's income?
A. $234,000.
B. $273,000.
C. $302,000.
D. $312,000.
E. $284,000.
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.
12. 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.
13. 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.
14. 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.
15. 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.
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 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.
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 $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.
18. 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.
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, 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.
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.
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.
20. 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.
21. On January 1, 2012, 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, 2012, 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 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.
EThe 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. 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.
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 noncontrolling 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. 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.
31. 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.
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 decrease.
34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2011,
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 2011.
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, 2011,
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 2011.
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:
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 noncontrolling 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 noncontrolling interest in subsidiary income.
C. the noncontrolling interest balance will be $27,200.
D the preferred stock dividend will be ignored in noncontrolling interest in subsidiary net income because
. Nichols owns the noncontrolling interest of preferred stock.
E. the noncontrolling 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.) 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 was expensed by $6,000.
(6.) Consolidated accounts receivable decreased by $8,000.
(7.) Consolidated accounts payable decreased by $7,000.
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 noncontrolling 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. Noncontrolling interest in Stage's net income does not appear on a consolidated statement of cash flows.
43. How will dividends be reported in 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 in 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 in 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 in 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, 2011, are as follows:
Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per
share.
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.
Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of
January 1, 2011 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.
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?
Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of
January 1, 2011, are as follows:
Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.
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?
Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of
January 1, 2011 are as follows:
Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share.
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.
58. A variable interest 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. Which of the following is not a potential loss or return of a variable interest entity?
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 variable interest 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 power to direct the most significant economic performance activities.
B. The power through voting or similar rights to direct activities which significantly impact economic
performance.
C. The obligation to absorb potentially significant losses of the entity.
D. No ability to make decisions about the entity's activities.
E. The right to receive potentially significant benefits of the entity.
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 legal form of a partnership or corporation.
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 potentially significant losses of the VIE.
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 potentially significant benefits of the VIE.
D.The sponsoring firm has power through voting rights to direct the entity's activities that significantly
impact economic performance.
E. The sponsoring firm is a primary beneficiary fo the VIE.
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 noncontrolling 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 noncontrolling 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 noncumulative. The current year's dividend was paid. How is the noncontrolling interest in the
. common stock and preferred stock and their relative par values.
B. There is no allocation to the noncontrolling interest because there are no dividends in arrears.
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. MacDonald, Inc. owns 80 percent of the outstanding stock of Stahl Corporation. During the current year,
Stahl made $125,000 in sales to MacDonald. 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
Noncontrolling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $80,000 for the year.
What are the effects of these transactions in 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 Noncontrolling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $100,000 for
the year. What are the effects of these transactions in 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 consolidated balance
sheets of Anderson, Inc. and Arthur Corp. are presented below:
Additional information for 2011:
71. Net cash flow from operating activities was:

A. $43,000.
B. $44,800.
C. $46,200.
D. $50,000.
E. $25,000.
72. Net cash flow from financing activities was:

A. $(28,000).
B. $(35,000).
C. $(13,000).
D. $(63,000).
E. $(61,000).
The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:
73. Net cash flow from operating activities was:

A. $92,000.
B. $27,000.
C. $63,000.
D. $29,000.
E. $34,000.
74. Net cash flow from financing activities was:
A. $(129,000).
B. $(96,000).
C. $(300,000).
D. $(80,000).
E. $(126,000).
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?
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
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?
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.
DSince 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.
79. Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2011 (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, 2011 with a carrying value of $1,200,000. Madrid
acquired the bonds on the open market on January 3, 2011 for $1,090,000. For the year 2011, 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, 2009,
Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2029 at a
premium of $400,000. On January 1, 2011, Ernest acquired 30 percent of these same bonds on the open
market at 97.6. Both companies use the straight-line method of amortization. What adjustment should be
made to Davidson's 2012 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, 2009, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2, 2029 at a
premium of $500,000. On January 1, 2011, Franklin acquired 20 percent of these same bonds on the open
market at 97.66. Both companies use the straight-line method of amortization. What adjustment should be
made to Franklin's 2012 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, 2011, 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:
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 2011 while Kaspar
reports $250,000. Kaspar transferred inventory during 2011 to Johnson at a price of $50,000. On December
31, 2011, 30 percent of the transferred goods are still in Johnson's inventory. Consolidated accounts
receivable on January 1, 2011 was $120,000, and on December 31, 2011 is $130,000. Johnson uses the
direct approach in preparing the statement of cash flows. How much is cash collected from customers in 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 with a five-year note at the market interest rate. How
would the note be accounted for in the consolidation process?
86. What documents or other sources of information would be used to prepare a consolidated statement of cash
flows?
87. Parent Corporation acquired some of its subsidiary's bonds on the open bond market. The remaining life of
the bonds was eight years, and Parent expected to hold the bonds for the full eight years. How would the
acquisition of the bonds affect the consolidation process?
88. Parent Corporation acquired some of its subsidiary's bonds on the open 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?
89. How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected
in a 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?
91. During 2011, 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?
92. On January 1, 2011, 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?
93. When a company has preferred stock in its capital structure, what amount should be used to calculate
noncontrolling interest in the preferred stock of the subsidiary when the company is acquired as a
subsidiary of another company?
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?
95. Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open market. What
items related to these bonds will have to be accounted for in the consolidation process?
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?
97. How does the existence of a noncontrolling interest affect the preparation of a consolidated statement of
cash flows?
98. On January 1, 2011, 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 acquisition price.
On January 1, 2010, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10%
interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2012, for 95% of the
face value. Both companies utilized the straight-line method of amortization.
99. What balances would need to be considered in order to prepare the consolidation entry in connection with
these intra-entity bonds at December 31, 2012, the end of the first year of the intra-entity investment?
Prepare schedules to show numerical answers for balances that would be needed for the entry.
100.What consolidation entry would be recorded in connection with these intra-entity bonds on December 31,
2012?
2013?
2014?
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, 2011:
Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2011, 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 2011, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends.
Kuried used the equity method to account for this investment.
104.What is the amount of goodwill resulting from this acquisition?
105.What was the noncontrolling interest's share of consolidated net income for the year 2011?
106.What is the controlling interest share of Thomas' net income for the year ended December 31, 2011?
107.What was Kuried's balance in the Investment in Thomas Inc. account as of December 31, 2011?
108.Prepare all consolidation entries for 2011.
109.Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2009, 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, 2012, 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 2012, 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 Jet's 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, 2012.
Required:
Prepare a consolidation worksheet for the year ended December 31, 2012.
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 2010 and 2011.
Additional Information:
Bonds were issued during 2011 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,
2011.
Equipment was purchased by the subsidiary on July 23, 2011, using cash.
Late in November 2011, the parent issued common stock for cash.
During 2011, 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, 2011. 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.
111.Describe how this transaction would affect Panton's books.
112.Prepare Panton's journal entry to recognize the impact of this transaction.
Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is
113.Describe how this transaction would affect Panton's books.
114.Prepare Panton's journal entry to recognize the impact of this transaction.
115.Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is
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.
ch6 Key
1.
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.
B.
C.
D.
E.
The difference is added to the carrying value of the debt.

The difference is deducted from the carrying value of the debt.
The difference is treated as a loss from the extinguishment of the debt.
The difference is treated as a gain from the extinguishment of the debt.
The difference does not influence the consolidated financial statements.
AACSB: Reflective thinking

AICPA FN: Measurement
Blooms: Comprehension
Difficulty: Easy
Hoyle - Chapter 06 #1
Learning Objective: 06-02 Understand the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created
whenever one company acquires an affiliates debt instrument from an outside party.
2.
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.
Difficulty: Easy
3.
Which one of the following characteristics of preferred stock would make the stock a dilutive security
for earnings per share?
A.
B.
C.
D.
E.
The preferred stock is callable.

The preferred stock is convertible.
The preferred stock is cumulative.
The preferred stock is noncumulative.
The preferred stock is participating.
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 06-05 Compute basic and diluted earnings per share for a business combination.
4.
Where do dividends paid to the noncontrolling interest of a subsidiary appear on a consolidated

A.
B.
C.
D.
E.
Cash flows from operating activities.

Cash flows from investing activities.
Cash flows from financing activities.
Supplemental schedule of noncash investing and financing activities.
They do not appear in the consolidated statement of cash flows.
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 06-04 Prepare a consolidated statement of cash flows.
5.
Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of
cash flows?
A.
B.
C.
D.
E.

Blooms: Knowledge
Difficulty: Easy
6.
Where do intra-entity sales of inventory appear in a consolidated statement of cash flows?

A.
B.
C.
D.
E.

Difficulty: Easy
7.
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.
Difficulty: Easy
Learning Objective: 06-06 Understand the accounting for subsidiary stock transactions that impact the underlying value recorded within the parents Investment
account and the consolidated financial statements.
8.
How would consolidated earnings per share be calculated if the subsidiary has no convertible securities
or warrants?
A.
B.
C.
D.
E.
Parent's earnings per share plus subsidiary's earnings per share.

Parent's net income divided by parent's number of shares outstanding.
Consolidated net income divided by parent's number of shares outstanding.
Average of parent's earnings per share and subsidiary's earnings per share.
Consolidated income divided by total number of shares outstanding for the parent and subsidiary.
Blooms: Knowledge
Difficulty: Easy
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:
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.
Hoyle - Chapter 06
9.
What is the balance in Investment in Garvin Co. after the sale of the 10,000 shares of common stock?
A.
B.
C.
D.
E.
$552,000.
$560,000.
$460,000.
$404,000.
$672,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
10.
What is the balance in Noncontrolling Interest in Garvin Co. after the sale of the 10,000 shares of
common stock?
A.
B.
C.
D.
E.
$138,000.
$101,000.
$280,000.
$230,000.
$168,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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
noncontrolling interest in the subsidiary's income?
A.
B.
C.
D.
E.
$234,000.
$273,000.
$302,000.
$312,000.
$284,000.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the noncontrolling interest and are initially valued
at acquisition-date fair value.
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.
Hoyle - Chapter 06
12.
What was the amount of Stoop's earnings that should be included in calculating consolidated diluted
earnings per share?
A.
B.
C.
D.
E.
$300,000.
$240,000.
$257,600.
$322,000.
$201,250.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
13.
Stoop's diluted earnings per share (rounded) is calculated to be

A.
B.
C.
D.
E.
$5.62.
$3.26.
$3.11.
$5.03.
$4.28.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
14.
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.
B.
C.
D.
E.
$406,000.
$374,000.
$378,000.
$410,000.
$394,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
15.
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.
B.
C.
D.
E.
Reduction of $27,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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 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.
B.
C.
D.
E.
$42,000.
$37,800.
$39,600.
$40,070.
$44,080.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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 $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.
B.
C.
D.
E.
$8,500,000.
$7,000,000.
$6,200,000.
$2,400,000.
$6,929,400.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
18.
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.
B.
C.
D.
E.
$602,000.
$644,000.
$686,000.
$714,000.
$592,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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, 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.
B.
C.
D.
E.
It should be decreased by $141,120.

It should be increased by $176,400.
It should be increased by $48,000.
It should be decreased by $128,400.
It is not affected since the shares were sold to outside parties.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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.
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.
Hoyle - Chapter 06
20.
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.
B.
C.
D.
E.
Increase it by $28,700.
$0.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
21.
On January 1, 2012, 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.
B.
C.
D.
E.
$0.
Decrease it by $23,240.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
22.
On January 1, 2012, 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.
B.
C.
D.
E.
$0.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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.
Difficulty: Medium
24.
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.
EThe 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.
Difficulty: Medium
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.
Blooms: Knowledge
Difficulty: Medium
26.
Which of the following statements is false regarding the assignment of a gain or loss on intercompany
bond transfer?
A.
B.
C.
D.
E.
Subsidiary net income is not affected by a gain on bond transaction.

Subsidiary net income is not affected by a loss on bond transaction.
Parent Company net income is not affected by a gain on bond transaction.
Parent Company net income is not affected by a loss on bond transaction.
Consolidated net income is not affected by a gain or loss on bond transaction.

Blooms: Knowledge
Difficulty: Medium
27.
What would differ between a statement of cash flows for a consolidated company and an
unconsolidated company using the indirect method?
A.
B.
C.
D.
E.
Parent's dividends would be subtracted as a financing activity.

Gain on sale of land would be deducted from net income.
Noncontrolling interest in net income of subsidiary would be added to net income.
Proceeds from the sale of long-term investments would be added to investing activities.
Loss on sale of equipment would be added to net income.
Difficulty: Easy
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 noncontrolling 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.
Blooms: Knowledge
Difficulty: Medium
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.
Blooms: Knowledge
Difficulty: Medium
30.
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.
B.
C.
D.
E.
The parent's additional paid-in capital will be increased.

The parent's investment in subsidiary will be increased.
The parent's retained earnings will be increased.
The parent's additional paid-in capital will be decreased.
The parent's retained earnings will be decreased.

Blooms: Analysis
Difficulty: Medium
31.
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.
B.
C.
D.
E.
The investment in subsidiary will decrease.

Additional paid-in capital will decrease.
Retained earnings will increase.
The investment in subsidiary will increase.
No adjustment will be necessary.

Blooms: Analysis
Difficulty: Medium
32.
If a subsidiary reacquires its outstanding shares from outside ownership for more than book value,
which of the following statements is true?
A.
B.
C.
D.
E.
Additional paid-in capital on the parent company's books will decrease.

Investment in subsidiary will increase.
Treasury stock on the parent's books will increase.
Treasury stock on the parent's books will decrease.
No adjustment is necessary.

Blooms: Analysis
Difficulty: Medium
33.
If a subsidiary issues a stock dividend, which of the following statements is true?

A.
B.
C.
D.
E.
Investment in subsidiary on the parent's books will increase.

Investment in subsidiary on the parent's books will decrease.
Additional paid-in capital on the parent's books will increase.
Additional paid-in capital on the parent's books will decrease.

Blooms: Knowledge
Difficulty: Medium
34.
Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2011,
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
2011.
A.
B.
C.
D.
E.
$1,000 gain.
$1,000 loss.
$2,000 loss.
$3,000 loss.
$3,000 gain.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
35.
Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2011,
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 2011.
A.
B.
C.
D.
E.
$3,000 gain.
$3,000 loss.
$1,000 gain.
$1,000 loss.
$2,000 gain.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
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.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
37.
Compute the goodwill recognized in consolidation.

A.
B.
C.
D.
E.
$800,000
$310,000.
$124,000.
$0.
$(196,000).
AACSB: Analytic
Blooms: Application
Difficulty: Medium
38.
Compute the noncontrolling interest in Smith at date of acquisition.

A.
B.
C.
D.
E.
$486,000.
$480,000.
$300,000.
$150,000.
$120,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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 noncontrolling interest in subsidiary income.
C. the noncontrolling interest balance will be $27,200.
D the preferred stock dividend will be ignored in noncontrolling interest in subsidiary net income
. because Nichols owns the noncontrolling interest of preferred stock.
E. the noncontrolling interest in subsidiary net income is $30,800.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
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.) 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 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.
B.
C.
D.
E.
$20,000 added to net income as an operating activity.

$20,000 deducted from net income as an operating activity.
$5,000 added to net income as an operating activity.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
42.
Where does the noncontrolling 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. Noncontrolling interest in Stage's net income does not appear on a consolidated statement of cash
flows.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
43.
How will dividends be reported in consolidated statement of cash flows?

A.
B.
C.
D.
E.
$15,000 decrease as a financing activity.

AACSB: Analytic
Blooms: Application
Difficulty: Medium
44.
How is the amount of excess acquisition-date fair value over book value recognized in a consolidated
statement of cash flows assuming the indirect method is used?
A.
B.
C.
D.
E.
It is ignored.
$6,000 subtracted from net income.
$4,800 subtracted from net income.
$6,000 added to net income.
$4,800 added to net income.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
45.
Using the indirect method, where does the decrease in accounts receivable appear in a consolidated
A.
B.
C.
D.
E.
$8,000 increase to net income as an operating activity.

$8,000 decrease to net income as an operating activity.
$8,000 increase as an investing activity.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
46.
Using the indirect method, where does the decrease in accounts payable appear in a consolidated
A.
B.
C.
D.
E.

$7,000 increase as a financing activity.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as
of January 1, 2011, 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.
B.
C.
D.
E.
$200,000.
$1,400,000.
$1,280,000.
$1,050,000.
$1,440,000.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
48.
What is the new percent ownership of Webb in Jones after the stock issuance?
A.
B.
C.
D.
E.
75%.
90%.
80%.
64%.
60%.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
49.
What adjustment is needed for Webb's investment in Jones account?

A.
B.
C.
D.
E.
$180,000 increase.
$180,000 decrease.
$30,000 increase.
$30,000 decrease.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as
of January 1, 2011 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.
B.
C.
D.
E.
$1,500,000.
$1,200,000.
$1,350,000.
$1,080,000.
$1,335,000.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
51.
After acquiring the additional shares, what adjustment is needed for Webb's investment in Jones
account?
A.
B.
C.
D.
E.
$270,000 increase.
$270,000 decrease.
$27,000 increase.
$27,000 decrease.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as
of January 1, 2011, 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.
B.
C.
D.
E.
80%.
87.5%.
90%.
75%.
82.5%.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
53.
What is the adjusted book value of Chase Company after the issuance of the shares?
A.
B.
C.
D.
E.
$608,000.
$720,000.
$680,000.
$760,000.
$400,000.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
54.
After acquiring the additional shares, what adjustment is needed for Ryan's investment in Chase
account?
A.
B.
C.
D.
E.
$70,000 increase.
$70,000 decrease.
$15,000 increase.
$15,000 decrease.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as
of January 1, 2011 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.
B.
C.
D.
E.
$400,000.
$480,000.
$320,000.
$336,000.
$464,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
56.
What is Ryan's percent ownership in Chase after the acquisition of the treasury shares (rounded)?
A.
B.
C.
D.
E.
80%.
95%.
64%.
76%.
69%.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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.
B.
C.
D.
E.
$16,000 decrease.
$60,000 decrease.
$64,000 increase.
$64,000 decrease.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
58.
A variable interest entity can take all of the following forms except a
A.
B.
C.
D.
E.
Trust.
Partnership.
Joint venture.
Corporation.
Estate.

Blooms: Knowledge
Difficulty: Easy
Learning Objective: 06-01 Describe a variable interest entity; a primary beneficiary; and the factors used to decide when a variable interest entity is subject to
consolidation.
59.
All of the following are examples of variable interests except

A.
B.
C.
D.
E.
Guarantees of debt.
Stock options.
Lease residual value guarantees.
Participation rights.
Asset purchase options.

Blooms: Knowledge
Difficulty: Medium
consolidation.
60.
Which of the following is not a potential loss or return of a variable interest entity?
A.
B.
C.
D.
E.
Entitles holder to residual profits.

Entitles holder to benefit from increases in asset fair value.
Entitles holder to receive shares of common stock.
If the variable interest entity cannot repay liabilities, honoring a debt guarantee will produce a loss.
If leased asset declines below the residual value, honoring the guarantee will produce a loss.

Difficulty: Medium
consolidation.
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 power to direct the most significant economic performance activities.
B. The power through voting or similar rights to direct activities which significantly impact economic
performance.
C. The obligation to absorb potentially significant losses of the entity.
D. No ability to make decisions about the entity's activities.
E. The right to receive potentially significant benefits of the entity.
Blooms: Knowledge
Difficulty: Easy
consolidation.
62.
Which of the following statements is false concerning variable interest entities (VIEs)?
A.
B.
C.
D.
E.
Sometimes VIEs do not have independent management.

Most VIEs are established for valid business purposes.
VIEs may be formed as a source of low-cost financing.
VIEs have little need for voting stock.
A VIE cannot take the legal form of a partnership or corporation.

Blooms: Knowledge
Difficulty: Medium
consolidation.
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.
B.
C.
D.
E.
2 and 4.
2, 3, and 4.
1, 2, and 4.
1, 2, and 3.
1, 2, 3, and 4.

Blooms: Knowledge
Difficulty: Easy
consolidation.
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 potentially significant losses of the VIE.
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 potentially significant benefits of the VIE.
D.The sponsoring firm has power through voting rights to direct the entity's activities that significantly
impact economic performance.
E. The sponsoring firm is a primary beneficiary fo the VIE.
Blooms: Knowledge
Difficulty: Medium
consolidation.
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 noncontrolling interest in the
. common stock and preferred stock.
B There is no allocation to the noncontrolling interest because the parent owns 100% of the common
. stock and net income belongs to the residual owners.
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.

Blooms: Analysis
Difficulty: Medium
66.
A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock. The
preferred stock is noncumulative. The current year's dividend was paid. How is the noncontrolling
interest in the subsidiary's net income assigned?
. common stock and preferred stock and their relative par values.
B. There is no allocation to the noncontrolling interest because there are no dividends in arrears.
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.

Blooms: Analysis
Difficulty: Medium
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.
B.
C.
D.
E.
Included as a decrease in the investing section.

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

Include 100 percent as a decrease in the investing section.
Include 80 percent as a decrease in the operating section.
Include 100 percent as an increase in the operating section.
Not reported in the consolidated statement of cash flows.
AACSB: Analytic
Blooms: Analysis
Difficulty: Easy
69.
Pursley, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports
$50,000 Noncontrolling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $80,000
for the year. What are the effects of these transactions in the consolidated statement of cash flows for
the year?
A.
B.
C.
D.
E.
A Above
B Above
C Above
D Above
E Above
AACSB: Analytic
Blooms: Application
Difficulty: Medium
70.
Goehring, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports
$40,000 Noncontrolling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $100,000
for the year. What are the effects of these transactions in the consolidated statement of cash flows for
the year?
A.
B.
C.
D.
E.
Increase in the financing section of $70,000, and decrease in the operating section of $30,000.
Increase in the operating section of $70,000, and decrease in the financing section of $30,000.
Increase in the operating section of $70,000.
Decrease in the financing section of $30,000.
No effects.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated
balance sheets of Anderson, Inc. and Arthur Corp. are presented below:
Hoyle - Chapter 06
71.
Net cash flow from operating activities was:

A.
B.
C.
D.
E.
$43,000.
$44,800.
$46,200.
$50,000.
$25,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
72.
Net cash flow from financing activities was:

A.
B.
C.
D.
E.
$(28,000).
$(35,000).
$(13,000).
$(63,000).
$(61,000).
AACSB: Analytic
Blooms: Application
Difficulty: Hard
The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented
below:
Hoyle - Chapter 06
73.
Net cash flow from operating activities was:

A.
B.
C.
D.
E.
$92,000.
$27,000.
$63,000.
$29,000.
$34,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
74.
Net cash flow from financing activities was:

A.
B.
C.
D.
E.
$(129,000).
$(96,000).
$(300,000).
$(80,000).
$(126,000).
AACSB: Analytic
Blooms: Application
Difficulty: Hard
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.
Blooms: Knowledge
Difficulty: Medium
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?
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
Difficulty: Medium
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?
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
Difficulty: Medium
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?
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.
Difficulty: Medium
79.
Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2011 (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, 2011 with a carrying value
of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2011 for $1,090,000. For
the year 2011, 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.
B.
C.
D.
E.
$2,064,000.
$2,066,000.
$2,176,000.
$2,207,000.
$2,317,000.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
80.
Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On January 2,
2009, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2029
at a premium of $400,000. On January 1, 2011, Ernest acquired 30 percent of these same bonds on the
open market at 97.6. Both companies use the straight-line method of amortization. What adjustment
should be made to Davidson's 2012 beginning Retained Earnings as a result of this bond acquisition?
A.
B.
C.
D.
E.
$114,000.
$122,000.
$136,000.
$144,000.
$152,000.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
81.
Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company. On January
2, 2009, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2, 2029
at a premium of $500,000. On January 1, 2011, Franklin acquired 20 percent of these same bonds on the
open market at 97.66. Both companies use the straight-line method of amortization. What adjustment
should be made to Franklin's 2012 beginning Retained Earnings as a result of this bond acquisition?
A.
B.
C.
D.
E.
$107,100.
$113,400.
$119,700.
$144,000.
$152,000.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
On January 1, 2011, 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.
B.
C.
D.
E.
$2,600,000
$4,812,500
$3,062,500
$2,312,500
$3,250,000
AACSB: Analytic
Blooms: Application
Difficulty: Medium
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.
B.
C.
D.
E.
$(100,000).
$0.
$200,000.
$812,500.
$2,112,500.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
84.
Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2011 while
Kaspar reports $250,000. Kaspar transferred inventory during 2011 to Johnson at a price of $50,000. On
December 31, 2011, 30 percent of the transferred goods are still in Johnson's inventory. Consolidated
accounts receivable on January 1, 2011 was $120,000, and on December 31, 2011 is $130,000. Johnson
uses the direct approach in preparing the statement of cash flows. How much is cash collected from
customers in the consolidated statement of cash flows?
A.
B.
C.
D.
E.
$590,000.
$610,000.
$625,000.
$635,000.
$650,000.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
85.
Parent Corporation loaned money to its subsidiary with 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.
Blooms: Knowledge
Difficulty: Easy
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.
Blooms: Knowledge
Difficulty: Easy
87.
Parent Corporation acquired some of its subsidiary's bonds on the open bond market. The remaining life
of the bonds was eight years, and Parent expected to hold the bonds for the full eight years. How would
the acquisition of the bonds affect 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. Intra-entity interest revenue and
expense would be eliminated.
Blooms: Knowledge
Difficulty: Easy
88.
Parent Corporation acquired some of its subsidiary's bonds on the open 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.
Difficulty: Easy
89.
How are intra-entity inventory transfers treated on the consolidation worksheet and how are they
reflected in a consolidated statement of cash flows?
Intra-entity inventory transfers are eliminated on the consolidation worksheet and therefore do not
appear in the consolidated statement of cash flows.
Blooms: Knowledge
Difficulty: Medium
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.
Difficulty: Medium
91.
During 2011, 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 on the open market would be shown under cash flows from financing
activities. If the bonds were acquired directly from the subsidiary, the cash received and the cash paid
has no effect on the consolidated entity. Therefore, in a direct intra-entity transaction, there is no effect
in the consolidated statement of cash flows.
Blooms: Knowledge
Difficulty: Medium
92.
On January 1, 2011, 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 be recognized.

Blooms: Knowledge
Difficulty: Easy
93.
When a company has preferred stock in its capital structure, what amount should be used to calculate
noncontrolling interest in the preferred stock of the subsidiary when the company is acquired as a
subsidiary of another company?
The noncontrolling interest should be reflected at its acquisition-date fair value.

Blooms: Knowledge
Difficulty: Easy
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.
Blooms: Synthesis
Difficulty: Medium
95.
Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open market.
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.
Blooms: Knowledge
Difficulty: Hard
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.
Blooms: Evaluation
Difficulty: Hard
97.
How does the existence of a noncontrolling interest affect the preparation of a consolidated statement of
cash flows?
The noncontrolling interest's share of the subsidiary's income would not appear in the consolidated
statement of cash flows. Dividends paid to the noncontrolling interest represent cash outflows for the
combined entity to outside parties, and should be shown as cash flows from financing activities.
Blooms: Knowledge
Difficulty: Medium
98.
On January 1, 2011, 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?
AACSB: Analytic
Blooms: Application
Difficulty: Medium
Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was
acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or
other allocation was recorded in connection with the acquisition price.
On January 1, 2010, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a
10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2012, 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 intra-entity bonds at December 31, 2012, the end of the first year of the intra-entity
investment? Prepare schedules to show numerical answers for balances that would be needed for the
entry.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
100.
What consolidation entry would be recorded in connection with these intra-entity bonds on December
31, 2012?
AACSB: Analytic
Blooms: Application
Difficulty: Medium
101.
31, 2013?
AACSB: Analytic
Blooms: Application
Difficulty: Hard
102.
31, 2014?
AACSB: Analytic
Blooms: Application
Difficulty: Hard
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?
AACSB: Analytic
Blooms: Application
Difficulty: Medium
Thomas Inc. had the following stockholders' equity accounts as of January 1, 2011:
Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2011, 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 2011, Thomas reported earning $630,000 in net income and paid $504,000 in total cash
dividends. Kuried used the equity method to account for this investment.
Hoyle - Chapter 06
104.
What is the amount of goodwill resulting from this acquisition?
AACSB: Analytic
Blooms: Application
Difficulty: Medium
105.
What was the noncontrolling interest's share of consolidated net income for the year 2011?
All residual net income is attributed to the controlling interest of Kuried as sole owner of common stock
of Thomas.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
106.
What is the controlling interest share of Thomas' net income for the year ended December 31, 2011?
AACSB: Analytic
Blooms: Application
Difficulty: Medium
107.
What was Kuried's balance in the Investment in Thomas Inc. account as of December 31, 2011?
AACSB: Analytic
Blooms: Application
Difficulty: Medium
108.
Prepare all consolidation entries for 2011.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
109.
Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2009, 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, 2012, 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 2012, 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 Jet's 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, 2012.
Required:
Prepare a consolidation worksheet for the year ended December 31, 2012.
CONSOLIDATION WORKSHEET
For the Year Ended 12/31/2012
AACSB: Analytic
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 2010 and 2011.
Additional Information:
Bonds were issued during 2011 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,
2011.
Equipment was purchased by the subsidiary on July 23, 2011, using cash.
Late in November 2011, the parent issued common stock for cash.
During 2011, 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, 2011. 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:
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.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
112.
Prepare Panton's journal entry to recognize the impact of this transaction.
AACSB: Analytic
Blooms: Analysis
Difficulty: Easy
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.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
114.
Prepare Panton's journal entry to recognize the impact of this transaction.
AACSB: Analytic
Blooms: Application
Difficulty: Easy
115.
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)
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
ch6 Summary
Category
# of Questions
AACSB: Analytic
70
45
115
Blooms: Analysis
11
Blooms: Application
64
14
Blooms: Evaluation
1
Blooms: Knowledge
25
Blooms: Synthesis
1
Difficulty: Easy
32
Difficulty: Hard
15
Difficulty: Medium
68
Hoyle - Chapter 06
131
Learning Objective: 06-01 Describe a variable interest entity; a primary beneficiary; and the factors used to decide
7
when a variable interest entity is subject to consolidation.
Learning Objective: 06-02 Understand the consolidation procedures to eliminate all intra-entity debt accounts and
25
recognize any associated gain or loss created whenever one company acquires an affiliates debt instrument from an
outside party.
Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the
20
noncontrolling interest and are initially valued at acquisition-date fair value.
25
6
Learning Objective: 06-06 Understand the accounting for subsidiary stock transactions that impact the underlying value
31
recorded within the parents Investment account and the consolidated financial statements.

Adv Acct CH 6 Hoyle

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ch6

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

59. All of the following are examples of variable interests except

Additional information for 2011:

71. Net cash flow from operating activities was:

72. Net cash flow from financing activities was:

Additional information for 2011:

73. Net cash flow from operating activities was:

82. What is the total acquisition-date fair value of Involved?

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

108.Prepare all consolidation entries for 2011.

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

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

The difference is added to the carrying value of the debt.

AACSB: Reflective thinking

The preferred stock is callable.

Where do dividends paid to the noncontrolling interest of a subsidiary appear on a consolidated

Cash flows from operating activities.

Cash flows from operating activities.

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

They do not appear in the consolidated statement of cash flows.

Parent's earnings per share plus subsidiary's earnings per share.

Stoop's diluted earnings per share (rounded) is calculated to be

It should be decreased by $141,120.

Subsidiary net income is not affected by a gain on bond transaction.

AACSB: Reflective thinking

Parent's dividends would be subtracted as a financing activity.

The parent's additional paid-in capital will be increased.

AACSB: Reflective thinking

The investment in subsidiary will decrease.

AACSB: Reflective thinking

Additional paid-in capital on the parent company's books will decrease.

AACSB: Reflective thinking

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

Investment in subsidiary on the parent's books will increase.

AACSB: Reflective thinking

Compute the goodwill recognized in consolidation.

Compute the noncontrolling interest in Smith at date of acquisition.

The consolidation entry at date of acquisition will include (referring to Smith):

If Smith's net income is $100,000 in the year following the acquisition,

$20,000 added to net income as an operating activity.

How will dividends be reported in consolidated statement of cash flows?

$15,000 decrease as a financing activity.

$8,000 increase to net income as an operating activity.

$7,000 increase to net income as an operating activity.

What adjustment is needed for Webb's investment in Jones account?

What is the new percent ownership Ryan owns in Chase?

AACSB: Reflective thinking

All of the following are examples of variable interests except

AACSB: Reflective thinking

Entitles holder to residual profits.

AACSB: Reflective thinking

Which of the following characteristics is not indicative of an enterprise qualifying as a primary

Sometimes VIEs do not have independent management.

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

Included as a decrease in the investing section.

Include 80 percent as a decrease in the investing section.

Additional information for 2011:

Net cash flow from operating activities was:

Net cash flow from financing activities was: