Chapter 5, 6

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Chapter 5  In preparing consolidated financial statements, the gross profit or loss recorded by individual affiliates for intra-entity asset transfers is – excluded from net income; excluded from inventory in the consolidated balance sheet  The accounting effects of inventory sales across companies within a consolidated entity are removed when preparing consolidated financial statements because – consolidated statements reflect only transactions with outside parties; intra-entity inventory transfers create no net change in the financial position of the consolidated reporting entity; from a consolidated perspective, neither a sale nor a purchase has occurred  The purpose of consolidation entry TI is to – remove the effects of intra-entity sales and purchases for the consolidated reporting entity  In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G debits COGS because: - the ending inventory component of COGS is overstated by the intra-entity gross profit remaining at year-end; the debit to COGS reduces consolidated net income by the amount of the intra-entity gross profit  Because consolidation worksheet entries are not posted to any affiliate's individual accounting records, intra-entity ending inventory gross profits from the previous year appear in the subsequent year's beginning inventory of the affiliate who now possesses the inventory. To correct for the presence of intra-entity gross profits in beginning inventory, Consolidation Entry *G – reduces COGS  Inventory transfers among affiliates within a consolidated entity – produce accounting effects that are eliminated in the preparation of consolidated financial statements; create neither profits nor losses to the consolidated entity  By decreasing COGS, Consolidation Entry *G ___ consolidated net income. Increases  Because the individual companies comprising a consolidated entity frequently maintain separate accounting records, the effects of intra-entity inventory transfers – must be identified and removed as part of the process of preparing consolidated financial statements  When an intra-entity sale has occurred, consolidation worksheet entry TI removes both the related purchase (through a credit to COGS) and a debit to the related ___ account. – sales  In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G credits Inventory because – from a consolidated perspective, the account is overstated by the amount of the intra-entity profit remaining in ending inventory  When intra-entity gross profits exist in a parent company's beginning inventory, the current year consolidated worksheet should contain an entry to – remove the intra-entity gross profit from the seller’s beginning retained earnings  Consolidation Entry G credits COGS in the year following transfer because the beginning inventory component of COGS is – overstated by the intra-entity gross profit  How does the ASC describe the effect of intra-entity gross profit remaining in ending inventory on the noncontrolling interest? – any intra-entity income or loss may be allocated between the parent and noncontrolling interest  What is the reason Consolidation Entry *G credits COGS for the intra-entity gross profit present in beginning inventory? – to correct for the overstatement of the beginning inventory component of COGS; because the credit to COGS increases the net income of the consolidated entity in the year the inventory was sold to outsiders  The accounting effects of inventory sales across companies within a consolidated entity are removed when preparing consolidated financial statements because – from a consolidated perspective, neither a sale nor a purchase has occurred; consolidated statements reflect only

transactions with outside parties; intra-entity inventory transfers create no net change in the financial position of the consolidated reporting entity  After combining the individually recorded revenues of a parent and subsidiary, what is the effect on consolidated revenues of intra-entity inventory transfers? – revenues from intra-entity transfers are not included in consolidated revenues  Intra-entity gross profits in beginning inventory require adjustment in the current consolidation worksheet because the previous year's consolidation entries are never ___ to the individual affiliates' books. – posted  In the presence of a 10% noncontrolling interest, how much intra-entity gross profit remaining in ending inventory should be eliminated in consolidation? – 100%  When the parent applies the equity method and routinely transfers inventory downstream, any intra-entity gross profits remaining in the consolidated entity's ending inventory – does not affect the noncontrolling interest  What is the effect on consolidated COGS of intra-entity gross profits in beginning and ending inventories? – consolidated COGS is increased by intra-entity gross profits in ending inventory and decreased by intra-entity gross profits in beginning inventory  When the parent applies the equity method and routinely transfers inventory downstream, which of the following consolidation entries are sometimes needed to bring the Investment in Subsidiary account to a zero balance? – (D) for the parent’s share of subsidiary dividends declared; (I) for the equity in subsidiary earnings recognized by the parent; (*G) for intra-entity gross profits in beginning inventory  Which of the following Consolidation Entries has the net effect of increasing the current period's consolidated net income? - *G  When the parent applies the equity method and routinely transfers inventory downstream to its 80% owned subsidiary, any intra-entity gross profits remaining in the consolidated entity's ending inventory, - are allocated 100% to the parent company’s share of consolidated net income  How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in ending inventory from upstream sales to an 80% owned affiliate? – 80% of the intra- equity gross profits in ending inventory are deferred  When the parent applies the equity method and routinely transfers inventory downstream, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to – the investment in Subsidiary account  Intra-entity gross profits in beginning inventory require adjustment in the current consolidation worksheet because the previous year's consolidation entries are never ___ to the individual affiliates' books. – posted  Which of the following Consolidation Entries has the net effect of decreasing the current period's consolidated net income? – G  When intra-entity gross profits from upstream sales are present in beginning inventory, which of the following describes the effect on consolidated statements? – Consolidation Entry *G credits COGS which increases current period’s consolidated net income; the net income effect of the intra-entity inventory gross profit is transferred from the prior period to the current period  When intra-entity gross profits exist in a parent company's beginning inventory, the current year consolidated worksheet should contain an entry to – remove the intra-entity gross profit from the seller’s beginning retained earnings  As part of Consolidation Entry S, the debit to the subsidiary's RE is reduced due to intra-entity gross profits in beginning inventory. What effect does this reduction have on the beginning-of-

the-year balance of the noncontrolling interest? – the beginning balance of the noncontrolling interest is entered as a smaller amount  Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from downstream sales. Comparing Exhibits 5.7 and 5.4, how are the final consolidated totals affected by the investment accounting method choice? – no effect  In the presence of upstream intra-entity inventory transfers, from a consolidated view which of the following accounts becomes overstated in the year following the transfer? – the subsidiary’s retained earnings  Intra-entity inventory profits resulting from upstream transfers affect the consolidated net income allocation to both the controlling and noncontrolling interests. – true  The parent's accounting method choice (e.g., equity vs. initial value method) has no effect on the ultimate totals reported in consolidated financial statements. – true  When a parent applies the equity method and upstream intra-entity gross profits exist in the beginning inventory, the debit to the subsidiary's Retained Earnings account in Consolidated Entry S ______ Consolidation Entry *G. – will decrease by the debit to the subsidiary’s Retained Earnings account in  Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from downstream sales. Comparing Exhibits 5.7 and 5.4 shows ___ difference in consolidated totals resulting from the investment accounting (equity vs. initial value) method choice – no  When land is sold at a gain across members of a consolidated group, in years subsequent to the land sale, where does the gain reside? – in the seller’s retained earnings account and the buyer’s land account  When the parent applies the equity method and routinely receives upstream inventory transfers from a subsidiary, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to – the subsidiary’s retained earnings  Consolidation Entry TL removes the gain on sale from an intra-entity land sale because the land remains under the control of the consolidated entity. – true  How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in beginning inventories from upstream sales to an 80% owned affiliate? – 80% of the intra-entity gross profits in beginning inventory are recognized  Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from upstream sales. Comparing Exhibits 5.8 and 5.6, how are the final consolidated totals affected by the investment accounting method choice? – no effect  How does the direction of intra-entity land transfers (resulting in intra-entity gain on sale) affect the computation of the noncontrolling interest's share of consolidated net income? – upstream land transfers affect the computation  Compared to intra-entity gross profits in inventory, intra-entity gross profits from land transfers – can require consolidation entries to land indefinitely until the land is sold to outsiders; can require consolidation entries to RE indefinitely until the land is sold to outsiders  In the year of an intra-entity land transfer resulting in the recording of a gain, a consolidation entry is needed to – write-down the value of the land by the amount of the intra-entity gain; ensure the gain is not reported in the consolidated income statement  The accounting effects of intra-entity depreciable asset sales are removed in consolidation because no ___ of the asset occurred with an outside entity. – sale

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 In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry ED – removes the overstatement of expense resulting from depreciating the inflated transfer price of the transferred asset; reduced accumulated depreciation for the current year’s overstatement of depreciation expense  When a parent sells land to its subsidiary at a profit, what is the effect on the noncontrolling interest. – no effect  In period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following *TA adjustments remains constant over the remaining life of the asset? – the asset account  When intra-entity transfers of depreciable assets occur, what are the financial reporting objectives in preparing consolidated financial statements? – re-establish historical cost balances for the transferred assets; recognize appropriate income effects from the sale and use of intra- entity transferred assets; defer intra-entity gains from intra-entity depreciable asset sales  In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry TA – ensures the exclusion of the intra-entity gain in the consolidated income statement; restores the amount of accumulated depreciation removed when the sale was recorded on the selling entity’s books; restores the historical cost balance for the transferred asset  In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry *TA is modified when the parent applies the equity method and the transfer was downstream. The modification replaces the adjustment to the parent's retained earnings with an adjustment to the Investment in Subsidiary account because ______. – the debit to the Investment in Subsidiary account is needed to bring that account to zero in consolidation; the equity method has already reduced the parent’s retained earnings for the intra-equity gain  B Company sells land to its parent A Company and records a gain on the sale. In the year of the sale, what accounts must be adjusted in preparing a consolidation worksheet? – the gain on sale must be removed; the land must be written down to its original cost to the consolidated entity  In period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following individual affiliate accounts continue to be misstated from a consolidated perspective? – accumulated depreciation; retained earnings of the selling affiliate; depreciation expense  Consistent with the textbook treatment of intra-entity inventory profits, all income effects of intra-entity depreciable asset profits are assigned to the original ___ of the asset. – seller  In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry *TA is modified when the parent applies the equity method and the transfer was downstream. The modification replaces the adjustment to the parent's retained earnings with ______. – the investment in subsidiary account  Similar to gross profits from intra-entity inventory transfers, the income effect of Consolidation Entries is allocated to the noncontrolling interest for – upstream transfers Chapter 6  In response to the evolving nature of control relationships among firms, the FASB expanded its definition of control beyond the long-standing criterion of a majority voting interest to include which of the following? – control exercised through variable interests  What does SPE stand for in terms of the names for the separate business structures that firms establish to help finance their operations at favorable rates? – special-purpose entities  Variable interests entities are often established to provide – research and development arrangements; leasing arrangements; low-cost financing for asset purchases

 The primary beneficiary of a VIE – is deemed to have a controlling interest in the VIE; typically exercises control through authority granted from governance documents or other contractual arrangements; has the power to direct the VIE’s activities  Why do the risks and rewards from a VIE often get distributed to the primary beneficiary rather than equity investors? – contractual arrangements often specify that the VIE’s risks and rewards go to the primary beneficiary; VIE’s may separate ownership from the VIE’s economic benefits and risks to enable beneficial contracting (e.g. financing) for a primary beneficiary; equity investors frequently bear little economic risk in the VIE  ____ interest entities emerged over recent decades as a new type of business structure that provided effective control of one firm by another without overt ownership. – variable  Which of the following is not one of the names for the separate business structures that firms establish to help finance their operations at favorable rates? – special-purpose business units  What business types typically describe variable interest entities? – joint ventures across two or more other business entities; corporations; trusts  The primary beneficiary of a VIE – must include the VIE’s assets and liabilities in its consolidated balance sheet  If a VIE is unable to obtain needed creditor financing because the equity investments are too small, then non-equity investors may provide additional financial support and – obtain rights to the VIE’s profits; will likely limit the decision-making ability of the equity investors; provide a small guaranteed return to the equity holders in exchange for financial control over the VIE  If an affiliated entity is determined not to be a variable interest entity, then – the voting interest model is applied to determine whether an enterprise must consolidate the entity  Under what general conditions does an entity qualify as a variable interest entity? – there is insufficient equity at risk to enable the entity to finance its activities without additional support; the equity investors lack the ability to exercise financial control over the entity; equity investors’ returns are capped by contractual arrangements with variable interest holders  Control over a VIE's decision-making process is typically exercised through – power granted contractually to a primary beneficiary  A business enterprise is required to consolidate the assets, liabilities, and results of operations of a VIE in which it holds no equity interest if – it can exercise financial control over the VIE in its role as primary beneficiary  In evaluating an entity’s status as a VIE, if equity at risk is less than ___% of total assets, the risk is deemed insufficient and the entity is considered VIE. – 10  In general, an enterprise that has the power to direct the activities of a variable interest entity (VIE) and the obligation to absorb the losses of the VIE is the ___ ___ of the VIE – primary beneficiary  What characteristics of Power Finance Company suggest that it qualifies as a variable interest entity? – the equity investor bears little to no risk from ownership of the plant asset; the company was unable to obtain financing without additional financial support from Twin Peaks Electic; the equity investor’s ownership at risk is less than 10% of total assets  If Power Finance's electric plant is financially successful, the fact that Twin Peaks will receive the residual profits points to Twin Peaks as the ___ ___ of Power Finance. – primary beneficiary  In consolidating a business entity VIE, any excess of the VIE's total business fair value over the collective fair values of its net assets is recognized as – goodwill  In general, which of the following characteristics are needed to establish that an enterprise with an variable interest in a VIE has a controlling financial interest? – the enterprise has the power to direct the economically significant activities of the VIE; the enterprise is obligated to absorb significant losses of the VIE or is entitled to receive significant benefits from the VIE

 The fact that Twin Peaks (rather than the equity investor) has an obligation to absorb any losses of Power Finance points to a conclusion that Power Finance is a ___ ___ entity. – variable interest  Which of the following characteristics suggest that Twin Peaks is the primary beneficiary of Power Finance? – Twin Peaks is entitled to receive significant benefits from the Power Finance; Twin Peaks has the power to direct the economically significant activities of Power Finance; Twin Peaks is obligated to absorb significant losses of Power Finance  Consolidation is required when one company possesses a controlling financial interest over another company. When is a majority voting interest not effective in identifying a controlling financial interest in an affiliated entity? – when variable interests allow a primary beneficiary to exercise financial control over a variable interest entity  In an acquisition-date consolidation, a primary beneficiary will include valuations of its VIE’s assets, liabilities at ___ value. – fair  In periods subsequent to the obtaining of financial control, a primary beneficiary’s consolidation of its VIE follows the same general process as if the entity were consolidated based on ___ interests. – voting  For the January 1, 2024, consolidation of Payton and Vicente, the noncontrolling interest amount is reported at its January 1, 2024 ___ value. – fair  Consolidation Entry F eliminates fees or other sources of income and expense between a consolidated VIE and its primary beneficiary. The income effect in the consolidated financial statements of Consolidation Entry F is attributable to the: - primary beneficiary  For the December 31, 2024, consolidation of Payton and Vicente, the noncontrolling interest is allocated all Vicente's net income after excess acquisition-date fair value amortization ($20,000 - $12,500) because – the noncontrolling interest owns 100% of the voting shares of Vicente  In addition to consolidated statements that include balances from its VIEs, a primary beneficiary must also disclose – any restrictions on the VIE’s assets or settlement of its liabilities reported in the consolidated balance sheet; any changes in the risks that accompany the enterprise’s involvement with the VIE; the purpose and nature of the VIE’s activities  Despite a total lack of ownership shares, Payton nonetheless consolidates 100% of Vicente’s assets, liabilities and results of operation because Payton has a ___ financial interest in Vicente. – controlling  IFRS defines control comprehensively to include control achieved through voting interests, contractual power, decision-making rights, etc. – true  For the January 1, 2024, consolidation of Payton and Vicente, Consolidation Entry S allocates the entire amount of Vicente's owners' equity balances to the ___ interest. – noncontrolling  Why are consolidation procedures needed to adjust for the effect of intra-entity activities across the members of the consolidated group? – consolidated statements must reflect the financial position and results of operations from the viewpoint of the combined business entity  In the December 31, 2024, consolidation of Payton and Vicente, Consolidation Entry F serves to eliminate the intra-entity ___ ___ between the primary beneficiary and its variable interest entity. – management fees  For the December 31, 2024, consolidation of Payton and Vicente, the net income attributable to the noncontrolling interest is determined by the noncontrolling interest's percentage ownership in Vicente multiplied by – Vicente’s net income adjusted for excess acquisition-date fair value amortization expense  In addition to consolidated financial statements, additional disclosures should be made about an enterprise's involvement with a VIE concerning the significant judgments and assumptions made to determine whether the enterprise must consolidate the VIE. – true

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 US GAAP specifies separate models (voting vs. variable interests) in assessing financial control. IFRS employs a ___ consolidation model for assessing financial control across voting and variable interests. – single  Consolidated financial statements represent a business combination as a single economic entity. – true  When one affiliate within a consolidated group acquires the debt of another affiliate from a third party at a price less than the debt's carrying amount, the gain on reacquisition of the debt is recognized immediately by the consolidated entity. – true  Which of the following consolidation procedures are needed when one affiliate within a consolidated group acquires the debt of another affiliate from a third party? – intra-entity interest revenue and expense must be eliminated; intra-entity must be eliminated; intra-entity in debt securities must be eliminated  Which of the following arrangements are considered encompassed within the IASB's control definition? – Less than 50% voting interest where the remaining shares are diffusely held across many owners; majority voting rights over the decision-making of an entity held by an investor; the obtaining of decision-making rights over an investee that dominate voting rights  When one affiliate within a consolidated group acquires the debt of another affiliate from a third party, from a consolidated view this liability is effectively ___ as of the debt reacquisition date. – retired  One affiliate within a consolidated group acquires the outstanding bonds of another affiliate from a third party. The consolidated gain or loss on the effective retirement is computed by comparing the price paid for the bond purchase to the bond's – carrying amount  When a bond is issued at a discount, annual cash interest payments on the bond will – be less than the amount of recognized interest expense  When a bond is purchased at a premium, annual cash interest receipts from the bond will – be larger than the amount of interest revenue recognized  Which of the following consolidation procedures are needed when one affiliate within a consolidated group acquires the debt of another affiliate from a third party? – the ongoing amortization of intra-entity discounts and premiums must be taken into account in the consolidation process; the intra-entity interest payable and receivable must be eliminated  A gain or loss from reacquisition of the debt of one company by an affiliated firm – is typically recognized via a consolidated worksheet entry rather than an entry on the individual books of an affiliate  When one affiliate within a consolidated group acquires the outstanding bonds of another affiliate from a third party the resulting intra-entity debt – is eliminated as part of the consolidated process  When a bond is issued at a discount, the amount of the discount is amortized periodically. The discount amortization process increases interest expense and – increases the carrying amount of the bonds payable  Because a parent company likely controls intra-entity debt reacquisition activity, the textbook attributes the gain or loss from retirement on such intra-entity debt – solely to the parent company  When a bond is purchased at a premium, the amount of the premium is amortized periodically. The premium amortization process decreases interest income and – decreases the investment in bonds account  In years subsequent to the acquisition of debt of one affiliate by another affiliate, consolidated worksheet entries continue to be necessary because – the effective retirement of the debt has not been recognized on either of the affiliated company’s books

 Consolidation Entry B adjusts which of the following accounts generated by the affiliates preparing consolidated financial statements in the year of an intra-entity bond reacquisition? – bonds payable; gain (or loss) on retirement of bonds; investment in bonds  In allocating the income effect of a gain or loss from retirement of the debt of one affiliate that has been purchased by another affiliate, the entire income effect is allocated to the ___ interest. – parent’s  In years subsequent to the acquisition of bonds payable of one affiliate by another affiliate, consolidated worksheet entries reflect differing amounts depending on – the amortization of the original premium or discount on the books of the affiliated company that issued the bonds; the amortization of the premium or discount on the books of the affiliated company that purchased the bonds from an outside third party; the income effect remaining in retained earnings  In years subsequent to the acquisition of bonds payable of one affiliate by another affiliate, which of the following accounts are affected by continuing bonds payable (and investment in bonds) discount amortizations on the affiliated companies' books? – interest expense; interest income; discount on bonds payable  Compared to Consolidation Entry *B when the parent uses the initial value method, when the parent employs the equity method – the investment in subsidiary account is adjusted for previous year’s intra-entity debt income effects instead of the parent’s RE account  In years subsequent to the acquisition of bonds payable of one affiliate by another affiliate, when the parent uses either the initial value or partial equity method – the parent’s retained earnings are adjusted for previous years’ income effects from the effective retirement  Subsidiary preferred stock not owned by the parent is a component of the ___ interest. – noncontrolling  When the parent applies the equity method, it recognizes on its books any retirement ___ or ___ from the acquisition of an affiliate's outstanding debt from a third party. – gain; loss  When a parent acquires control over a subsidiary with preferred shares outstanding, the subsidiary preferred shares not acquired by the parent are initially valued at – fair value  The existence of subsidiary preferred stock has no impact on the valuation principles for an acquired subsidiary's assets and liabilities. – true  When a subsidiary has both common and preferred shares in its capital structure, consolidation is made simpler by combining Consolidation Entries S and A because no allocation of the subsidiary’s ___ ___ to preferred common shares is required. – retained earnings  Identify the major categories in a statement of cash flows. – cash flows from financing activities; cash flows from operating activities; cash flows from investing activities  How does the statement of cash flows report the net cash outflow that occurs when a parent company acquires a business for cash? – as an investing activity  A parent acquires a subsidiary through purchasing both common and preferred subsidiary shares. In determining the consideration transferred for the subsidiary, the parent includes – the price paid for both the common and preferred shares  In a period when a mid-term business combination occurs, only post-acquisition excess fair-value amortizations are added back to ___ ___ in computing cash flows from operating activities using the indirect method. – net income  Subsidiary dividends paid to its parent company – do not appear on the consolidated statement of cash flows  The effects of intra-entity inventory transfers do not appear on the consolidated statement of cash flows because such transfers do not affect the amount of ___ held by the consolidated entity. – cash

 When a subsidiary has both common and preferred shares in its capital structure, consolidation entries – bring the subsidiary’s common stock account balance to zero; bring the subsidiary’s preferred stock account balance to zero; eliminate the parent’s investment in subsidiary preferred stock account balance  Clark Company acquires Transport Company in exchange for a cash payment to the former owners of Transport. Included in the assets received by Clark is Transport Company's cash balance. The current year consolidated statement of cash flows would report – the net cash paid for the acquisition (cash paid less cash received) as an investing activity  In computing cash flows from operating activities (indirect method), normally the increase in account receivable is deducted from net income. In a period accompanied by a business combination, however, any change in accounts receivable must be adjusted for – the acquisition- date balance of the subsidiary’s accounts receivable  In computing consolidated operating cash flows (indirect method) after a current mid-year business combination, the acquisition-date subsidiary balance of accounts receivable – increases the parent’s beginning balance of accounts receivable  Subsidiary dividends paid appear as a financing outflow on the consolidated statement of cash outflows – only when paid to the noncontrolling interest  Because the impact of intra-entity transfers is removed in consolidation, no additional adjustments for intra-entity transfers are needed in preparing a consolidated statement of cash flows. – true  Alpha Company acquires 90% of Zeta Company in exchange for a cash payment to former owners of Zeta. Included in the assets received by Alpha is Zeta's Company's cash balance. The current year consolidated statement of cash flows would report – the net cash paid for the acquisition (cash paid less cash received) as an investing activity  The starting figure for preparing the operating section (indirect method) of a consolidated statement of cash flows is consolidated __ ___. – net income  In computing consolidated operating cash flows (indirect method) after a current mid-year business combination, the acquisition-date subsidiary balance of accounts payable – increases the parent’s beginning balance of accounts payable  Assuming neither the parent nor its 90% owned subsidiary have dilutive securities or preferred shares, what EPS calculations are required for consolidated financial statements? – Basic EPS = Parent’s share of consolidated net income divided by the parent’s weighted average shares outstanding  If a less-than-100% owned subsidiary has dilutive securities in its capital structure, the parent's share of subsidiary earnings used in deriving diluted EPS – may change when assuming the conversion of the dilutive securities  The investing section of a consolidated statement of cash flows is unaffected by the existence of a ___ interest. – noncontrolling  Assuming no carryover balances from operating accounts acquired in a previous year business combination, no special adjustments are required to prepare a consolidated statement of cash flows in periods subsequent to a business combination. – true  In computing consolidated EPS, the numerator contains earnings – attributable only to the controlling interest  If the consolidated entity has dilutive securities in its capital structure, then in addition to basic EPS the consolidated financial statements must also disclose ___ EPS. – diluted  The potential dilutive effect of a less-than-100% owned subsidiary's stock options – can affect the parent’s share of the consolidated net income; will not affect the parent’s computation of basic EPS

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 When a subsidiary company has outstanding bonds payable that are convertible to common shares, it must assume conversion in computing diluted EPS. Assuming the convertible bonds are dilutive, what are the effects of the conversion on the subsidiary's diluted EPS ratio? – the numerator will increase by the after-tax income saved from assumed conversion; the denominator will increase by the number of common shares issued in the assumed conversion  In computing consolidated EPS, net income shall exclude the income attributable to the ___ interest in the subsidiary. – noncontrolling  Why did Parka's common stock ownership of Snow decrease from 84% to 64% for computation of consolidated diluted EPS? – the assumed conversion of the convertible bonds increased the number of common shares assumed outstanding; the assumed conversion of the preferred shares increased the number of common shares assumed outstanding  When a subsidiary company issues additional shares of common stock that are not purchased by the parent, - the parent’s investment in Subsidiary account may need to be adjusted; the parent’s percentage ownership in the subsidiary will change  Why does Giant increase its Investment in Small account after Small's new stock issue? – because Giant’s 60% share of Small’s post-stock issue value is greater than its 75% pre-stock issue value; because the $10 price per share exceeds the $8.50 time-adjusted acquisition-date per share value of Small and Giant  In computing consolidated diluted EPS, the presence of subsidiary dilutive securities will potentially affect – the amount of consolidated net income attributable to the common shares; the parent’s percentage ownership to apply to the earnings attributable to common shares; the numerator of the diluted EPS ratio  When a subsidiary issues shares of common stock subsequent to its acquisition, the parent will accordingly adjust its Investment in Subsidiary account and – its Additional-Paid in Capital account  Why did the amount of Parka's earnings for diluted EPS increase to $92,500 from the $59,200 amount attributable to basic EPS? – the assumed conversion of the convertible bonds increased the earnings available to the common shares assumed outstanding; the assumed conversion of the preferred shares increased the earnings available to the common shares assumed outstanding  When a subsidiary company issues additional shares of its own common stock to outside third parties, the parent will need to decrease its investment account if the per share price received for the additional shares issued is ___ than the time-adjusted per share acquisition-date subsidiary fair value. – less  In the Giant-Small example, what is the acquisition-date fair value of Small Company? – 640000  When a subsidiary issues shares of common stock subsequent to its acquisition, the parent recognizes no gain or loss on the transaction because – the additional investments is from owners and is thus an equity transaction  In the Giant-Small example, what is the January 1, 2024, equity method balance for Giant's investment in Small before the 20,000 new share issue by Small? – 510000  Why did Antioch decrease its Investment in Westminster Company balance as a result of Westminster's post-acquisition stock issue? – because the 14.4 price per share is less than the 16.4 time-adjusted acquisition-date per share value of Winchester; because Antioch’s 72% share of Westminster’s post-stock issue value is smaller than its 90% pre-stock issue value  A subsidiary issues new ownership shares that results in the maintenance of the previous relative ownership percentages of the parent and noncontrolling interests. What is the effect on the parent's investment account? – an increase in the investment account

 Subsequent to acquisition, when a subsidiary acquires its own outstanding noncontrolling interest shares, credit to the parent's additional paid-in capital is needed whenever the cash paid to reacquire the noncontrolling shares is – less than the consolidation value of the noncontrolling interest  When a subsidiary declares and issues a stock dividend, what is the accounting effect on the parent's financial records? – no effect  A subsidiary issues new ownership shares to outside parties at a price other than its book value per share. Although the parent acquires none of the newly issued shares, it continues to maintain control over the subsidiary. What is the effect on the parent's financial records? – additional paid-in capital is adjusted; the investment account should be adjusted  A subsidiary issues new ownership shares that results in the maintenance of the previous relative ownership percentages of the parent and noncontrolling interests. What is the effect on the parent's Additional Paid-In Capital account? – no effect  When a subsidiary reacquires some of its own shares, how are the treasury shares accounted for on the consolidated worksheet? – the balance in the subsidiary’s Treasury stock account is brought to zero in consolidation  Subsidiary stock dividends capitalize a portion of a company’s ___ ___ but do not affect the parent’s investment account. – retained earnings  When the parent acquires none of a post-acquisition subsidiary stock issue but maintains a controlling interest, the change in the carrying amount of the parent's investment account is recorded as – additional paid-in capital

Chapter 5, 6

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