File: Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows,

and Other Issues

Multiple Choice:

[QUESTION]
1. On January 1, 2013, 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 2013?
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.
Answer: D
Learning Objective: 06-02
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: E
Learning Objective: 06-02
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: B

1
Learning Objective: 06-05
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
4. Where do dividends paid to the non-controlling 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.
Answer: C
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: E
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: A
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking

2
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: D
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: C
Learning Objective: 06-05
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 06-01
On January 1, 2013, Riney Co. owned 80% of the common stock of Garvin Co. On that date,
Garvin's stockholders' equity accounts had the following balances:

Common stock ($5 par value) $ 250,000

Additional paid-in capital 110,000
Retained earnings 330,000
Total stockholders’ equity $ 690,000

The balance in Riney's Investment in Garvin Co. account was $552,000, and the non-controlling
interest was $138,000. On January 1, 2013, Garvin Co. sold 10,000 shares of previously unissued

3
common stock for $15 per share. Riney did not acquire any of these shares.

[QUESTION]
REFER TO: 06-01
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.
Answer: B
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $250,000 / $5 = 50,000 shares X .80 = 40,000 shares owned by parent
Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 X $15)
$150,000 = Total Equity after Stock Offering $840,000 X 40,000 Parent / 60,000 Total =
$560,000 Parent’s Investment Account

[QUESTION]
REFER TO: 06-01
10. What is the balance in Non-controlling 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.
Answer: C
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $250,000 / $5 = 50,000 shares X .80 = 40,000 shares owned by parent
Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 X $15)
$150,000 = Total Equity after Stock Offering $840,000 X 20,000/60,000 = $280,000 Non-
Controlling Interest

[QUESTION]
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 non-controlling interest in the subsidiary's income?
A) $234,000.
B) $273,000.
C) $302,000.

4
D) $312,000.
E) $284,000.
Answer: C
Learning Objective: 06-03
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $780,000 Net Income – Preferred Dividends (10,000 X $10) = $680,000 X .40 =
$272,000 Non-Controlling Interest
$100,000 Preferred Dividends X .30 = $30,000 Non-Controlling Interest
$272,000 from Income + $30,000 Preferred Dividends = $302,000 Non-Controlling Interest in
Income

REFERENCE: 06-02
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 2013.

[QUESTION]
REFER TO: 06-02
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.
Answer: E
Learning Objective: 06-05
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Parent Shares 40,000 / 64,000 Total shares (50,000 + 8,000 + 6,000) = 62.5%
$300,000 + $22,000 = $322,000 X 62.5% = $201,250

[QUESTION]
REFER TO: 06-02
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.

5
Answer: D
Learning Objective: 06-05
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Consolidated Earnings $201,250 / (50,000 X .80) 40,000 shares = $5.03
Diluted Earnings per Share

[QUESTION]
14. Campbell Inc. owned all of Gordon Corp. For 2013, 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, 2013, with a book value of
$297,000. The parent acquired the bonds on that date for $281,000. During 2013, Campbell
reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is
consolidated net income for 2013?
A) $406,000.
B) $374,000.
C) $378,000.
D) $410,000.
E) $394,000.
Answer: A
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Income of the Parent $280,000 + Income of the Sub $112,000 – Difference in
Interest on Intra-Entity Bonds ($31,000 - $29,000) $2,000 + Gain on Bonds Purchase
($297,000 - $281,000) $16,000 = $406,000 Consolidated Net Income

[QUESTION]
15. Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on
January 1, 2012, 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 2012 while Quasimota
reported interest expense of $29,000. Consolidated financial statements were prepared for 2013.
What adjustment would have been required for the retained earnings balance as of January 1,
2013?
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.
Answer: C
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic

6
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Bond Acquisition Price $288,000 – Bonds BV $265,000 = $23,000 R/E Reduction
Intra-Entity Interest $29,000 - $25,000 = $4,000 R/E Increase
$23,000 - $4,000 = $19,000 R/E Reduction

[QUESTION]
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, 2013, 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 non-controlling interest's share of the subsidiary's net income?
A) $42,000.
B) $37,800.
C) $39,600.
D) $40,070.
E) $44,080.
Answer: A
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Sub’s income $140,000 X .30 = $42,000 NCI’s Portion of Income

[QUESTION]
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 non-
controlling interest?
A) $8,500,000.
B) $7,000,000.
C) $6,200,000.
D) $2,400,000.
E) $6,929,400.
Answer: B
Learning Objective: 06-03
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

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

[QUESTION]
18. Cadion Co. owned a controlling interest in Knieval Inc. Cadion reported sales of $420,000
during 2013 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.
Answer: A
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Parent’s Sales $420,000 + Sub’s Sales $280,000 – Intra-Entity Sales $56,000 –
Change in A/R $42,000 ($154,000 - $112,000) = $602,000 Consolidated Cash Collected

[QUESTION]
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, 2013, 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.
Answer: D
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: BV $56 X 12,000 + $70 X 3,000 = $882,000 X .80 = $705,600 – Investment
Account Balance $834,000 = $128,400 Reduction in Investment Account

REFERENCE: 06-03
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, 2011, when Cocker

8
had the following stockholders' equity accounts.

C o m m o n s to c k — 4 0 ,0 0 0 s h a r e s o u ts ta n d in g $ 1 4 0 ,0 0 0
A d d itio n a l p a id -in c a p ita l 1 0 5 ,0 0 0
R e ta in e d e a rn in g s 4 7 6 ,0 0 0
T o ta l s to c k h o ld e rs ’ e q u ity $ 7 2 1 ,0 0 0

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, 2014.
On January 1, 2014, 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.

[QUESTION]
REFER TO: 06-03
20. On January 1, 2014, 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.
Answer: C
Learning Objective: 06-06
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: No Adjustment is made to the APIC of the Parent as a Result of Sub’s Stock
Issue Since the same Level of Ownership Interest is Maintained

[QUESTION]
REFER TO: 06-03
21. On January 1, 2014, 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.
Answer: E
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply

9
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Net BV $1,113,000 + ($21 X 10,000) = $1,323,000 Net BV after Stock Issued
Parent Shared Held 32,000 / Total Shares Outstanding 50,000 = .64 X $1,323,000 = $846,720
Net BV $1,113,000 X .80 = $890,400 - $846,720 = $43,680 Reduction in Parents APIC

[QUESTION]
REFER TO: 06-03
22. On January 1, 2014, 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.
Answer: D
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $1,113,000 X .80 = $890,400 BV before Share Buy-Back
$1,113,000 – Buyback Value $272,000 (8,000 X $34) = $841,000 BV after Buy-Back
$890,400 (BV before Share Buy-Back) - $841,000 (BV after Buy-Back) = $49,400 Decrease in
Parent’s APIC

[QUESTION]
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.
Answer: E
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.

10
B) Subsequent interest revenue/expense must be removed although these balances fail to agree in
amount.
C) A gain or loss must be recognized by both parent and subsidiary companies.
D) Changes in the investment, debt, interest revenue, and interest expense accounts occur
constantly because of the amortization process.
E) The gain or loss on the retirement of the debt must be recognized by the business combination
in the year the debt is acquired, even though this balance does not appear on the financial records
of either company.
Answer: C
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: B
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: E
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
27. What would differ between a statement of cash flows for a consolidated company and an

11
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) Non-controlling 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.
Answer: C
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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 non-controlling 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.
Answer: D
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: A
Learning Objective: 06-05
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]

12
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.
Answer: D
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Analyze
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: D
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Analyze
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: A
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Analyze
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.

13
C) Additional paid-in capital on the parent's books will increase.
D) Additional paid-in capital on the parent's books will decrease.
E) No adjustment is necessary.
Answer: E
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On
January 1, 2013, 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 2013.
A) $1,000 gain.
B) $1,000 loss.
C) $2,000 loss.
D) $3,000 loss.
E) $3,000 gain.
Answer: D
Learning Objective: 06-02
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Bonds Purchase Price $11,000 – Bonds BV ($10,000 - $2,000) = $3,000 Loss
to Consolidation Income

[QUESTION]
35. Keenan Company has had bonds payable of $20,000 outstanding for several years. On
January 1, 2013, 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 2013.
A) $3,000 gain.
B) $3,000 loss.
C) $1,000 gain.
D) $1,000 loss.
E) $2,000 gain.
Answer: C
Learning Objective: 06-02
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking

14
AICPA FN: Measurement
Feedback: Bonds Purchase Price $19,000 – Bonds BV ($20,000 - $2,000) = $1,000 Gain
to Consolidation Income

REFERENCE: 06-04
On January 1, 2013, 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:

Common stock, $10 par value (50,000 shares outstanding) $500,000

Preferred stock, 6% cumulative, $100 par value,
3,000 shares outstanding 300,000
Additional paid in capital 200,000
Retained earnings 500,000
Total stockholders’ equity $1,500,000

[QUESTION]
REFER TO: 06-04
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.
Answer: C
Learning Objective: 06-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV of Consideration Recorded for Each Class of Stock in the Investment
Account

[QUESTION]
REFER TO: 06-04
37. Compute the goodwill recognized in consolidation.
A) $ 800,000.
B) $ 310,000.
C) $ 124,000.
D) $ 0.
E) $(196,000.)
Answer: B
Learning Objective: 06-03

15
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Consideration for Common & Preferred Stock ($1,200,000 + $124,000) +
Non-Controlling Interest Value ($300,000 + $186,000) = FV $1,810,000 – BV
$1,500,000 = $310,000 Goodwill

[QUESTION]
REFER TO: 06-04
38. Compute the non-controlling interest in Smith at date of acquisition.
A) $486,000.
B) $480,000.
C) $300,000.
D) $150,000.
E) $120,000.
Answer: A
Learning Objective: 06-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Common Stock Non-Controlling Interest at Acquisition = $1,200,000 / .80 =
$1,500,000 X .20 = $300,000
Preferred Stock Non-Controlling Interest at Acquisition = $124,000 / .40 = $310,000 X .60 =
$186,000
$300,000 + $186,000 = $486,000 Non-Controlling Interest at Acquisition Date

[QUESTION]
REFER TO: 06-04
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.
Answer: C
Learning Objective: 06-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: BV Recorded as Debit on Acquisition

[QUESTION]

16
REFER TO: 06-04
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 non-controlling interest in subsidiary income.
C) the non-controlling interest balance will be $27,200.
D) the preferred stock dividend will be ignored in non-controlling interest in subsidiary net
income because Nichols owns the non-controlling interest of preferred stock.
E) the non-controlling interest in subsidiary net income is $30,800.
Answer: C
Learning Objective: 06-03
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $100,000 – Preferred Dividends ($6 X 3,000) $18,000 = $82,000 X .20 = $16,400
Income to NCI
Preferred Dividends $18,000 X .60 = $10,800 to NCI
$16,400 Income + $10,800 Preferred Dividends = $27,200 Income to NCI

REFERENCE: 06-05
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.) Non-controlling 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.

[QUESTION]
REFER TO: 06-05
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.
Answer: D
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Land Sale of $5,000 Reduces Net Income as Operating Activity in Cash Flows

[QUESTION]
REFER TO: 06-05

17
42. Where does the non-controlling 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) Non-controlling interest in Stage's net income does not appear on a consolidated statement of
cash flows.
Answer: E
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: NCI’s Income is NOT Reported on Consolidated Cash Flows

[QUESTION]
REFER TO: 06-05
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.
Answer: E
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Parent’s Dividends $15,000 + NCI Dividends $2,000 = $17,000 Decrease in
Cash Flow for Financing

[QUESTION]
REFER TO: 06-05
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.
Answer: D
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply

18
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $6,000 Excess Amortization is not a Cash Item and therefore Added Back to
Net Income on the Cash Flow Statement

[QUESTION]
REFER TO: 06-05
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.
Answer: A
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: The $8,000 Receivables Decrease is Added to Net Income and Classified as an
Operating Item

[QUESTION]
REFER TO: 06-05
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.
Answer: B
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: The $7,000 Payables Decrease is Added to Net Income and Classified as an
Operating Item

REFERENCE: 06-06
Webb Company owns 90% of Jones Company. The original balances presented for Jones and
Webb as of January 1, 2013, are as follows:

19
 Jones Company:
Shares outstanding 100,000
Book value of Jones $1,200,000
Book value per share $12
Webb Company:
Shares owned of Jones 90,000
Book value of investment $1,080,000

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for
$10 per share.

[QUESTION]
REFER TO: 06-06
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.
Answer: B
Learning Objective: 06-06
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Starting BV $1,200,000 + Add’l Shares Sold $200,000 ($10 X 20,000) =
$1,400,000 Current BV

[QUESTION]
REFER TO: 06-06
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%.
Answer: A
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Shares Outstanding 100,000 X .90 = 90,000 Parent’s Shares
100,000 + 20,000 = 120,000 New Outstanding Shares
90,000 / 120,000 = 75% New Ownership Percentage

[QUESTION]

20
REFER TO: 06-06
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.
E) No adjustment is necessary.
Answer: D
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $1,400,000 X .75 = $1,050,000 - $1,080,000 = $30,000 Decrease in
Investment Account

REFERENCE: 06-07
Webb Company owns 90% of Jones Company. The original balances presented for Jones and
Webb as of January 1, 2013 are as follows:

Jones Company:
Shares outstanding 100,000
Book value of Jones $1,200,000
Book value per share $12
Webb Company:
Shares owned of Jones 90,000
Book value of investment $1,080,000

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.

[QUESTION]
REFER TO: 06-07
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.
Answer: A
Learning Objective: 06-06
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Starting BV $1,200,000 + Add’l Shares Sold $300,000 ($15 X 20,000) =
$1,500,000 Current BV

21
[QUESTION]
REFER TO: 06-07
51. After acquiring the additional shares, what adjustment is needed for Webb's investment in
Jones account?
A) $270,000 increase.
B) $270,000 decrease.
C) $ 27,000 increase.
D) $ 27,000 decrease.
E) No adjustment is necessary.
Answer: E
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Investment in Sub Does Not Change After Add’l Shares Purchased

REFERENCE: 06-08
Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and
Chase as of January 1, 2013, are as follows:

Chase Company:
Shares outstanding 50,000
Book value $400,000
Book value per share $8

Ryan Company:
Shares owned of Chase 40,000
Book value of investment in Chase $320,000

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.

[QUESTION]
REFER TO: 06-08
52. What is the new percent ownership Ryan owns in Chase?
A) 80.0%.
B) 87.5%.
C) 90.0%.
D) 75.0%.
E) 82.5%.
Answer: B
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Shares Outstanding 50,000 X .80 = 40,000 Parent’s Shares
50,000 + 30,000 = 80,000 New Outstanding Shares

22
40,000 + 30,000 = 70,000 Parent’s Shares after New Issue
70,000 / 80,000 = 87.5% New Ownership Percentage

[QUESTION]
REFER TO: 06-08
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.
Answer: D
Learning Objective: 06-06
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Starting BV $400,000 + Add’l Shares Sold $360,000 ($12 X 30,000) =
$760,000 Current BV

[QUESTION]
REFER TO: 06-08
54. After acquiring the additional shares, what adjustment is needed for Ryan's investment in
Chase account?
A) $70,000 increase.
B) $70,000 decrease.
C) $15,000 increase.
D) $15,000 decrease.
E) No adjustment is necessary.
Answer: D
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $760,000 X 87.5 = $665,000 – ($320,000 + $360,000) = $15,000 Decrease in
Investment Account

REFERENCE: 06-09
Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and
Chase as of January 1, 2013 are as follows:

23
 Chase Company:
Shares outstanding 50,000
Book value $400,000
Book value per share $8

Ryan Company:
Shares owned of Chase 40,000
Book value of investment in Chase $320,000

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share.

[QUESTION]
REFER TO: 06-09
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.
Answer: C
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Sub BV before Stock Repurchase $400,000 – Stock Repurchase $80,000
(8,000 X $10) = Sub BV after Stock Repurchase $320,000

[QUESTION]
REFER TO: 06-09
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%.
Answer: B
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Shares Outstanding 50,000 X .80 = 40,000 Parent’s Shares before Treasury Purchase
50,000 - 8,000 = 42,000 New Outstanding Shares after Treasury Purchase
40,000 / 42,000 = 95% New Ownership Percentage

[QUESTION]

24
REFER TO: 06-09
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.
B) $60,000 decrease.
C) $64,000 increase.
D) $64,000 decrease.
E) No adjustment is necessary.
Answer: A
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $400,000 X .80 = $320,000 – $304,000 ($320,000 X .95) = $16,000 Decrease
in Investment Account

[QUESTION]
58. A variable interest entity can take all of the following forms except a(n)
A) Trust.
B) Partnership.
C) Joint venture.
D) Corporation.
E) Estate.
Answer: E
Learning Objective: 06-01
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: B
Learning Objective: 06-01
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
60. Which of the following is not a potential loss or return of a variable interest entity?
A) Entitles holder to residual profits.

25
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.
Answer: C
Learning Objective: 06-01
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: D
Learning Objective: 06-01
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: E
Learning Objective: 06-01
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.

26
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.
Answer: E
Learning Objective: 06-01
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: B
Learning Objective: 06-01
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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 non-
controlling 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 non-controlling 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.
Answer: C
Learning Objective: 06-03
Difficulty: Medium
Bloom’s: Analyze
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]

27
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 non-
controlling 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 and their relative par values.
B) There is no allocation to the non-controlling interest because there are no dividends in arrears.
C) Income is assigned as 40 percent of the preferred stock dividends.
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.
Answer: D
Learning Objective: 06-03
Difficulty: Medium
Bloom’s: Analyze
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: E
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: E
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking

28
AICPA FN: Measurement

[QUESTION]
69. Pursley, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year
reports $50,000 Non-controlling Interest in Harry Corp.’s 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?

Answer: D
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
70. Goehring, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year
reports $40,000 Non-controlling Interest in Harry Corp.’s 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.
Answer: D
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 06-10
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:

2013 2012
Cash $ 8,000 $ 26,000
Accounts Receivable (net) 75,000 54,000
Inventory 100,000 89,000
Plant & Equipment (net) 156,000 170,000
Copyright 16,000 18,000

29
 $355,000 $357,000

Accounts payable $ 60,000 $ 51,000

Long-term Debt 0 35,000
Non-controlling interest 27,000 25,000
Common stock, $1 par 100,000 100,000
Retained earnings 168,000 146,000
$355,000 $357,000

Additional information for 2013:

 The combination occurred using the acquisition method.
Consolidated net income was $50,000. The non-controlling interest
share of consolidated net income of Arthur was $3,200.
 Arthur paid $4,000 in dividends.
 There were no disposals of plant & equipment or copyright this year.

[QUESTION]
REFER TO: 06-10
71. Net cash flow from operating activities was:
A) $43,000.
B) $44,800.
C) $46,200.
D) $50,000.
E) $25,000.
Answer: A
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $50,000 + Depreciation $14,000 ($170,000 - $156,000) + Amortization
$2,000 ($18,000 -$16,000) – A/R $21,000 ($75,000 - $54,000) – Inventory $11,000
($100,000 - $89,000) + A/P $9,000 ($60,000 - $51,000) = $43,000 Net Consolidated
Cash Flow from Operations

[QUESTION]
REFER TO: 06-10
72. Net cash flow from financing activities was:
A) $(28,000).
B) $(35,000).
C) $(13,000).
D) $(63,000).
E) $(61,000).
Answer: E
Learning Objective: 06-04
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic

30
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 06-11
The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are
presented below:

2013 2012
Cash $ 16,000 $ 52,000
Accounts Receivable (net) 150,000 108,000
Inventory 220,000 178,000
Plant & Equipment (net) 315,000 340,000
Copyright 32,000 36,000
$733,000 $714,000

Accounts payable $120,000 $102,000

Long-term Debt 0 70,000
Non-controlling interest 77,000 50,000
Common stock, $1 par 200,000 200,000
Retained earnings 336,000 292,000
$733,000 $714,000

Additional information for 2013:

 Butler & Cassie’s consolidated net income was $100,000.

 Cassie paid $10,000 in dividends.
 There were no disposals of plant & equipment or copyright this year.

[QUESTION]
REFER TO: 06-11
73. Net cash flow from operating activities was:
A) $92,000.
B) $27,000.
C) $63,000.
D) $29,000.
E) $34,000.
Answer: C
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $100,000 + Depreciation $25,000 ($340,000 - $315,000) + Amortization
$4,000 ($36,000 -$32,000) – A/R $42,000 ($150,000 - $108,000) – Inventory $42,000
($220,000 - $178,000) + A/P $18,000 ($120,000 - $102,000) = $63,000 Net Consolidated
Cash Flow from Operations

[QUESTION]

31
REFER TO: 06-11
74. Net cash flow from financing activities was:
A) $(129,000).
B) $ (96,000).
C) $(300,000).
D) $ (80,000).
E) $(126,000).
Answer: A
Learning Objective: 06-04
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: B
Learning Objective: 06-05
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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.
Answer: B
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking

32
AICPA FN: Measurement

[QUESTION]
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?
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 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 parent’s investment account is not affected.
E) None of the above.
Answer: C
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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?
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 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.
E) None of the above.
Answer: D
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
79. Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2013 (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, 2013 with a
carrying value of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2013
for $1,090,000. For the year 2013, 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

33
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.
Answer: C
Learning Objective: 06-02
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Parent’s Income $1,500,000 + Loss on Bond Sale $110,000 – Bond Interest
$94,000 + Bond Income $96,000 + Sub’s Income to Parent $564,000 ($705,000 X .80) =
$2,176,000 Consolidated Income

[QUESTION]
80. Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On
January 2, 2011, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing
January 2, 2031 at a premium of $400,000. On January 1, 2013, 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 2014 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.
Answer: C
Learning Objective: 06-02
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
81. Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company.
On January 2, 2011, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing
January 2, 2031 at a premium of $500,000. On January 1, 2013, 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 2014 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.
Answer: A

34
Learning Objective: 06-02
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 06-12
On January 1, 2013, 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:

[QUESTION]
REFER TO: 06-12
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
Answer: B
Learning Objective: 06-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Common Stock Non-Controlling Interest at Acquisition = $1,850,000 / .80 =
$2,312,500
Preferred Stock Non-Controlling Interest at Acquisition = $750,000 / .30 = $2,500,000
$2,312,500 + $2,500,000 = $4,812,500 FV of Sub at Acquisition
$1,850,000 + $462,500 + $750,000 + $1,750,000 = $4,812,500

[QUESTION]
REFER TO: 06-12
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.
Answer: D

35
Learning Objective: 06-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Common Stock Non-Controlling Interest at Acquisition = $1,850,000 / .80 =
$2,312,500 X .20 = $462,500
Preferred Stock Non-Controlling Interest at Acquisition = $750,000 / .30 = $2,500,000 X .70 =
$1,750,000
(CS Parent $1,850,000) + (CS NCI $462,500) + (PS Parent $750,000) + (PS NCI $1,750,000) =
$4,812,500 FV of Sub at Acquisition
FV $4,812,500 – BV $4,000,000 = $812,500 Goodwill

[QUESTION]
84. Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2013
while Kaspar reports $250,000. Kaspar transferred inventory during 2013 to Johnson at a price of
$50,000. On December 31, 2013, 30% of the transferred goods are still in Johnson’s inventory.
Consolidated accounts receivable on January 1, 2013 was $120,000, and on December 31, 2013 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.
Answer: A
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Parent $400,000 + Sub $250,000 – Intra-Entity $50,000 – A/R Change
$10,000 ($120,000 - $130,000) = $590,000

Essay:

[QUESTION]
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?
Answer: The note would be eliminated in the consolidation process with an entry debiting Notes
Payable and crediting Notes Receivable.
Learning Objective: 06-02
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]

36
86. What documents or other sources of information would be used to prepare a consolidated
statement of cash flows?
Answer: The main source of information would be the consolidated income statement and the
consolidated balance sheet.
Learning Objective: 06-04
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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?
Answer: 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.
Learning Objective: 06-02
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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?
Answer: 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.
Learning Objective: 06-02
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
89. How are intra-entity inventory transfers treated on the consolidation worksheet and how are
they reflected in a consolidated statement of cash flows?
Answer: Intra-entity inventory transfers are eliminated on the consolidation worksheet and
therefore do not appear in the consolidated statement of cash flows.
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

37
[QUESTION]
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?
Answer: A stock dividend would not influence Danbers' ownership percentage and would not
alter the consolidation process.
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
91. During 2013, 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?
Answer: 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.
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
92. On January 1, 2013, 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?
Answer: 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.
Learning Objective: 06-03
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
93. When a company has preferred stock in its capital structure, what amount should be used to
calculate non-controlling interest in the preferred stock of the subsidiary when the company is
acquired as a subsidiary of another company?
Answer: The non-controlling interest should be reflected at its acquisition-date fair value.
Learning Objective: 06-03
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking

38
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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?
Answer: 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.
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Analyze
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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?
Answer: For each period that the parent owns the bonds, the bonds must be eliminated on the
consolidation worksheet. Eliminating the bonds (1) requires the elimination of the parent's
investment account; (2) the portion of the bonds payable that the parent acquired; (3) interest
expense of the issuer; and (4) 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 of the gain or loss, as adjusted by the
previous years’ difference between interest expense and interest income.
Learning Objective: 06-02
Difficulty: Hard
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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?
Answer: 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.
Learning Objective: 06-02
Difficulty: Hard
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking

39
AICPA FN: Measurement

[QUESTION]
97. How does the existence of a non-controlling interest affect the preparation of a consolidated
statement of cash flows?
Answer: The non-controlling interest's share of the subsidiary's income would not appear in the
consolidated statement of cash flows. Dividends paid to the non-controlling interest represent
cash outflows for the combined entity to outside parties, and should be shown as cash flows from
financing activities.
Learning Objective: 06-04
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

Problems:

[QUESTION]
98. On January 1, 2013, Bast Co. had a net book value of $2,100,000 as follows:

Preferred stock, 2,000 shares $70 par value,

cumulative, nonparticipating, nonvoting $ 140,000
Common stock, 22,400 shares $50 par value 1,120,000
Retained earnings 840,000
Total shareholders’ equity $2,100,000

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?
Answer:

Consideration transferred for 60% interest in common stock $1,281,000

Consideration transferred for100% interest in preferred stock 148,000
Non-controlling interest in common stock (40%):
[$1,281,000/.60] - $1,281,000 854,000
Total fair value $2,283,000
Book value 2,100,000
Excess acquisition-date fair value over book value 183,000
Assigned to building 70,000
Goodwill $ 113,000

Learning Objective: 06-03

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic

40
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 06-13
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, 2012, 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,
2014, for 95% of the face value. Both companies utilized the straight-line method of
amortization.

[QUESTION]
REFER TO: 06-13
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, 2014, 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.
Answer:
Book value of bonds payable, January 1, 2014

Book value, January 1, 2012 ($1,400,000 x 1.08) original issue $1,512,000

Amortization- 2012-2013 [($112,000 premium ÷ 10 years) x 2 years] (22,400)
Book value of bonds payable, January 1, 2014 $1,489,600

Book value of 40% of bonds payable (intra-entity portion),

January 1, 2014 $ 595,840

Gain on retirement of bonds, January 1, 2014:

Purchase price ($560,000 face value x 95%) of investment $(532,000)

Book value of liability (calculated above) 595,840
Gain on retirement of bonds $ 63,840

Book value of bonds payable, December 31, 2014

Book value, January 1, 2014 (calculated above) $1,489,600

Amortization – 2014 ( 11,200)
Book value of bonds payable, December 31, 2014 $1,478,400

Cash payment ($560,000 face value x 10%) $56,000

Amortization of premium for 2014 ($11,200 x 40%) (4,480)
Intra-entity interest expense $51,520

Book value of 40% of bonds payable (intra-entity portion)

December 31, 2014 ($595,840-4,480 premium amortization) $591,360

Book value of investment, December 31, 2014

Book value of investment, January 1, 2014 (purchase price) $532,000

Amortization – 2014 ($28,000 discount ÷ 8 years remaining) 3,500

41
Book value of bonds payable, December 31, 2014 $535,500

Cash receipt ($560,000 face value x 10%) $56,000

Amortization of discount for 2014 3,500
Intra-entity interest revenue $59,500

Learning Objective: 06-02

Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 06-13
100. What consolidation entry would be recorded in connection with these intra-entity bonds on
December 31, 2014?
Answer:

Bonds Payable 560,000

Premium on Bonds Payable 31,360
Interest Income 59,500
Investment in Bonds 535,500
Interest Expense 51,520
Gain on retirement 63,840
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA FN: Measurement

[QUESTION]
REFER TO: 06-13
101. What consolidation entry would be recorded in connection with these intra-entity bonds on
December 31, 2015?
Answer:

Bonds Payable $560,000

Premium on Bonds Payable 26,880
Interest Income 59,500
Investment in Bonds 539,000
Interest Expense 51,520
Retained Earnings, 1/1/15 (Fargus Corp.) 55,860
Learning Objective: 06-02
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]

42
REFER TO: 06-13
102. What consolidation entry would be recorded in connection with these intra-entity bonds on
December 31, 2016?
Answer:

Bonds Payable $560,000

Premium on Bonds Payable 22,400
Interest Income 59,500
Investment in Bonds 542,500
Interest Expense 51,520
Retained Earnings, 1/1/16 (Fargus Corp.) 47,880
Learning Objective: 06-02
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

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

Preferred stock (8% cumulative dividend) $ 700,000

Common stock 1,050,000
Additional paid-in capital 420,000
Retained earnings 1,330,000
Total $ 3,500,000

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?
Answer:
Consideration transferred for 90% interest in common stock $2,250,000
Consideration transferred for 70% interest in preferred stock 1,120,000
Non-controlling interest in common stock (10%):
[$2,250,000/.90] - $2,250,000 250,000
Non-controlling interest in preferred stock (30%):
[$1,120,000/.7] - $1,120,000 480,000
Total fair value of Skipen - date of acquisition $4,100,000
Book value 3,500,000
Excess acquisition-date fair value over book value 600,000
Assigned to land 130,000
Goodwill $ 470,000

Learning Objective: 06-03

Difficulty: Medium
Bloom’s: Apply

43
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 06-14
Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

P re fe rre d s to c k — $ 9 0 p a r v a lu e , n o n v o tin g a n d n o n p a rtic ip a tin g ;

9 % c u m u la tiv e d iv id e n d $ 2 ,7 0 0 ,0 0 0
C o m m o n s to c k — $ 2 5 p a r v a lu e 5 ,6 0 0 ,0 0 0
R e ta in e d e a rn in g s 1 4 ,0 0 0 ,0 0 0

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, 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 2013, 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.

[QUESTION]
REFER TO: 06-14
104. What is the amount of goodwill resulting from this acquisition?
Answer:
Consideration transferred for 100% interest in common stock $20,656,000
Non-controlling interest in preferred stock (100%): 3,060,000
Total fair value of Thomas 1/1/13 $23,716,000
Book value 22,300,000
Excess acquisition-date fair value over book value 1,416,000
Assigned to database 656,000
Goodwill $ 760,000

Learning Objective: 06-03

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 06-14
105. What was the non-controlling interest's share of consolidated net income for the year 2013?
Answer:
P re fe rre d s to c k — T h o m a s In c . $ 2 ,7 0 0 ,0 0 0
P re fe rre d d iv id e n d ra te x 9%
N o n c o n tr o llin g in te r e s t’s s h a r e o f s u b s id ia r y ’s in c o m e $ 2 4 3 ,0 0 0

All residual net income is attributed to the controlling interest of Kuried as sole owner of
common stock of Thomas.
Learning Objective: 06-03

44
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 06-14
106. What is the controlling interest share of Thomas’ net income for the year ended December
31, 2013?
Answer:
Database $ 656,000
Amortization period in years ÷ 5
Annual amortization of database $ 131,200

Thomas net income (book) $ 630,000

Amortization of database (131,200)
498,800
Preferred stock dividend (9% x $2,700,000) (243,000)
Net income residual to common stockholders $ 255,800
(100% to Kuried as controlling interest)
Learning Objective: 06-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 06-14
107. What was Kuried’s balance in the Investment in Thomas Inc. account as of December 31,
2013?
Answer:

Database $ 656,000
Amortization period in years ÷ 5
Annual amortization of database $ 131,200

Investment in Thomas Inc., 12/31/13

Acquisition consideration, 1/1/13 $20,656,000
Equity accrual ($630,000 - $243,000) 387,000
Dividends collected ($504,000 - $243,000) (261,000)
Database amortization (from above) (131,200)
Investment in Thomas Inc., 12/31/13 $20,650,800
Learning Objective: 06-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

45
[QUESTION]
REFER TO: 06-14
108. Prepare all consolidation entries for 2013.
Answer:

Consolidation Entries

Consolidation Entries S and A (combined)

Common Stock (Thomas Inc.) 5,600,000

Preferred Stock (Thomas Inc.) 2,700,000
Retained Earnings, 1/1/13 (Thomas Inc.) 14,000,000
Database 656,000
Goodwill 760,000
Investment in Thomas Inc. 20,656,000
Non-controlling Interest in Thomas Inc. 3,060,000

Consolidated Entry I

Equity Income of Subsidiary 387,000

Investment in Thomas Inc. 387,000

Consolidation Entry D

Investment in Thomas Inc. 261,000

Dividends Paid 261,000

Consolidation Entry E

Amortization Expense 131,200

Database 131,200

Learning Objective: 06-03

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
109. Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2011, 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, 2014, 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 2014, 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

46
shipped from Jet during December.
The following financial figures were for the two companies for the year ended December 31,
2014.

Jet Corp. Nittle Inc.

Revenues $(894,600) $(652,400)
Cost of goods sold 483,000 277,200
Expenses 187,600 225,400
Interest expense-bonds 33,600 0
Interest income-bond investment 0 (15,400)
Equity in income of Nittle Inc. (165,200) 0
Net income $(355,600) $ (165,200)

Retained earnings, January 1, 2014 $(483,000) $(505,400)

Net income (above) (355,600) (165,200)
Dividends paid 217,000 85,400
Retained earnings, December 31, 2014 $(621,600) $(585,200)

Cash and receivables $186,200 $109,200

Inventory 239,400 121,800
Investment in Nittle Inc. 851,200 0
Investment in Jet Corp. bonds 0 137,200
Land, buildings, and equipment (net) 348,600 757,400
Total assets $ 1,625,400 $1,125,600

Accounts payable $(315,000) $(232,400)

Bonds payable (280,000) (140,000)
Discount on bonds payable 11,200 0
Common stock (420,000) (168,000)
Retained earnings, December 31,2014 (above) (621,600) (585,200)
Total liabilities and stockholders’ equity $(1,625,400) $(1,125,600)

Required:
Prepare a consolidation worksheet for the year ended December 31, 2014.
Answer:
CONSOLIDATION WORKSHEET
For the Year Ended 12/31/2014

Jet Nittle Consolidated Entries Consolidated

Account Corp Inc. DR CR Balance
Revenues ( 894,600) ( 652,400) (TI) 140,000 (1,407,000)
Cost of Goods Sold 483,000 277,200 (G) 2,800 (TI) 140,000 623,000
Expenses 187,600 225,400 (E) 4,200 417,200
Interest Expense – Bonds 33,600 (B) 16,800 16,800
Interest Income – Bond Investment ( 15,400) (B) 15,400
Loss on extinguishment of debt (B) 4,200 4,200
Equity in Nittle Income ( 165,200) (I) 165,200
Net Income ( 355,600) ( 165,200) ( 345,800 )
R/E, 1/1/14, Jet Corp. ( 483,000) (*C) 12,600 ( 470,400)

47
R/E, 1/1/14, Nittle Inc. ( 505,400) (S) 505,400
Net Income ( 355,600) ( 165,200) ( 345,800)
Dividends Paid 217,000 85,400 (D) 85,400 217,000
R/E, 12/31/14 ( 621,600) ( 585,200) ( 599,200)
Cash & Receivables 186,200 109,200 (P) 50,400 245,000
Inventory 239,400 121,800 (G) 2,800 358,400
Investment in Nittle 851,200 (D) 85,400 (*C) 12,600
(S) 673,400
(A) 85,400
(I) 165,200
Investment in Jet Corp. Bonds 137,200 (B) 137,200
Land, Buildings, & Equipment (net) 348,600 757,400 (A) 29,400 (E) 4,200 1,131,200
Goodwill (A) 56,000 56,000
Total Assets 1,625,400 1,125,600 1,790,600

Accounts Payable ( 315,000) ( 232,400) (P) 50,400 ( 497,000)

Bonds Payable ( 280,000) ( 140,000) (B) 140,000 ( 280,000)
Discount on Bonds Payable 11,200 (B) 5,600 5,600
Common Stock ( 420,000) ( 168,000) (S) 168,000 ( 420,000)
R/E, 12/31/14 ( 621,600) ( 585,200) ( 599,200)
Total Liabilities & Stockholders’ (1,625,400) (1,125,600) 1,379,000 1,379,000 (1,790,600)
Equity
Learning Objective: 06-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
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 2012 and 2013.

48
 2012 2013
Revenues $ 1,064,000 $ 1,232,000
Cost of goods sold ( 714,000) ( 756,000)
Depreciation and amortization ( 126,000) ( 140,000)
Gain on sale of building –0– 28,000
Interest expense ( 42,000) ( 42,000)
Non-controlling interest $ 12,600 $ 15,400
Net income to controlling interest $ 169,400 $ 306,600

Retained earnings, January 1 $ 420,000 $ 519,400

Net income (from above) 169,400 306,600
Dividends paid ( 70,000) ( 140,000)
Retained earnings, December 31 $ 519,400 $ 686,000

Cash $ 112,000 $ 196,000

Accounts receivable 210,000 196,000
Inventory 280,000 476,000
Buildings and equipment (net) 896,000 966,000
Database 210,000 203,000
Total assets $ 1,708,000 $ 2,037,000

Accounts payable $ (196,000) $ (140,000)

Bonds payable (560,000) (720,000)
Non-controlling interest in Brewer Inc. ( 44,800) ( 57,400)
Common stock (140,000) (168,000)
Additional paid-in capital (247,800) (265,600)
Retained earnings, December 31 (from above) (519,400) (686,000)
Total liabilities and stockholders’ equity $ (1,708,000) $ (2,037,000)

Additional Information:
1.Bonds were issued during 2013 by the parent for cash.
2.Amortization of a database acquired in the original combination amounted to $7,000 per
year.
3.A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash
on May 11, 2013.
4.Equipment was purchased by the subsidiary on July 23, 2013, using cash.
5.Late in November 2013, the parent issued common stock for cash.
6.During 2013, 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, 2013. Either the direct method or the indirect method may be used.
Answer:

49
 ALLEN CO. AND BREWER INC.
Statement of Cash Flows – Direct Method
For the Year Ending December 31, 2013

Cash flows from operating activities

Cash received from customers $1,246,000
Cash payments
To suppliers $1,008,000
For interest expense 42,000 (1,050,000)
Net cash provided by operating activities $ 196,000

Cash flows from investing activities

Proceeds from sale of building $ 70,000
Purchase of equipment (245,000)
Net cash used by investing activities (175,000)

Cash flows from financing activities

Payment of cash dividends $ (142,800)
Issuance of bonds 160,000
Issuance of common stock 45,800
Net cash provided by financing activities $ 63,000
Net increase in cash $ 84,000
Cash, January 1, 2013 112,000
Cash, December 31, 2013 $ 196,000

The above statement uses the direct method for calculating cash flows from operating activities.
The following presentation would be included for the direct method as a reconciliation of net
income to net cash from operations, as well as being the presentation of cash flow from operating
activities for the indirect method:

ALLEN CO. AND BREWER INC.

Statement of Cash Flows – Indirect Method
For the Year Ending December 31, 2013

Cash flows from operating activities

Consolidated net income $ 322,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense $ 133,000
Amortization of database 7,000
Gain on sale of building (28,000)
Decrease in accounts receivable 14,000
Increase in inventory (196,000)
Decrease in accounts payable (56,000) $(126,000)
Net cash provided by operating activities $ 196,000
Learning Objective: 06-04

50
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 06-15
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.

[QUESTION]
REFER TO: 06-15
111. Describe how this transaction would affect Panton’s books.
Answer: 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.
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 06-15
112. Prepare Panton’s journal entry to recognize the impact of this transaction.
Answer:

Learning Objective: 06-06

Difficulty: Easy
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 06-16

51
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 $27 per share. None
of this stock is purchased by Panton.

[QUESTION]
REFER TO: 06-16
113. Describe how this transaction would affect Panton’s books.
Answer: 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.
Learning Objective: 06-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 06-16
114. Prepare Panton’s journal entry to recognize the impact of this transaction.
Answer:

Learning Objective: 06-06

Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
115. Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present
time, Glotfelty is reporting the following stockholders’ equity:

52
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.
Answer: 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)

Learning Objective: 06-06

Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

53