Question: 1 An enterprise that holds a variable interest in a

1. An enterprise that holds a variable interest in a variable interest entity (VIE) is required to consolidate the assets, liabilities, revenues, expenses, and noncontrolling interest of that entity if:
a. The VIE has issued no voting stock.
b. The variable interest held by the enterprise involves a lease.
c. The enterprise has a controlling financial interest in the VIE.
d. Other equity interests in the VIE have the obligation to absorb the expected losses of the VIE.

2. A subsidiary has a debt outstanding that was originally issued at a discount. At the beginning of the current year, the parent company acquired the debt at a slight premium from outside parties. Which of the following statements is true?
a. Whether the balances agree or not, both the subsequent interest income and interest expense should be reported in a consolidated income statement.
b. The interest income and interest expense will agree in amount and should be offset for consolidation purposes.
c. In computing any noncontrolling interest allocation, the interest income should be included but not the interest expense.
d. Although subsequent interest income and interest expense will not agree in amount, both balances should be eliminated for consolidation purposes.

3. The parent company acquires all of a subsidiary’s common stock but only 70 percent of its preferred shares. This preferred stock pays a 7 percent annual cumulative dividend. No dividends are in arrears at the current time. How is the noncontrolling interest’s share of the subsidiary’s income computed?
a. As 30 percent of the subsidiary’s preferred dividend.
b. No allocation is made because the dividends have been paid.
c. As 30 percent of the subsidiary’s income after all dividends have been subtracted.
d. Income is assigned to the preferred stock based on total par value and 30 percent of that amount is allocated to the noncontrolling interest.

4. Aceton Corporation owns 80 percent of the outstanding stock of Voctax, Inc. During the current year, Voctax made $140,000 in sales to Aceton. How does this transfer affect the consolidated statement of cash flows?
a. The transaction should be included if payment has been made.
b. Only 80 percent of the transfers should be included because the subsidiary made the sales.
c. Because the transfers were from a subsidiary organization, the cash flows are reported as investing activities.
d. Because of the intra-entity nature of the transfers, the amount is not reported in the consolidated cash flow statement.

5. Warrenton, Inc., owns 80 percent of Aminable Corporation. On a consolidated income statement, the Noncontrolling Interest in the Subsidiary’s Income is reported as $37,000. Aminable paid a total cash dividend of $100,000 for the year. How does this impact the consolidated statement of cash flows?
a. The dividends paid to the outside owners are reported as a financing activity, but the noncontrolling interest figure is not viewed as a cash flow.
b. The noncontrolling interest figure is reported as an investing activity, but the dividends amount paid to the outside owners is omitted entirely.
c. Neither figure is reported on the statement of cash flows.
d. Both dividends paid and the noncontrolling interest are viewed as financing activities.

6. Bensman Corporation is computing EPS. One of its subsidiaries has stock warrants outstanding. How do these convertible items affect Bensman’s EPS computation?
a. No effect is created because the stock warrants were for the subsidiary company’s shares.
b. The stock warrants are not included in the computation unless they are antidilutive.
c. The effect of the stock warrants must be computed in deriving the amount of subsidiary income to be included in making the diluted EPS calculation.
d. The stock warrants are included only in basic EPS but never in diluted EPS.

7. Using the same information presented below, what is the noncontrolling interest’s share of the subsidiary’s net income?
a. $27,000.
b. $28,290.
c. $28,620.
d. $30,000.
Ace Company reports current earnings of $400,000 while paying $40,000 in cash dividends. Byrd Company earns $100,000 in net income and distributes $10,000 in dividends. Ace has held a 70 percent interest in Byrd for several years, an investment with an acquisition-date fair value equal to the book value of its underlying net assets. Ace uses the initial value method to account for these shares.
On January 1 of the current year, Byrd acquired in the open market $50,000 of Ace’s 8 percent bonds. The bonds had originally been issued several years ago for 92, reflecting a 10 percent effective interest rate. On the date of purchase, the book value of the bonds payable was $48,300. Byrd paid $46,600 based on a 12 percent effective interest rate over the remaining life of the bonds.

Problems 8 are based on the following information.
Neill Company purchases 80 percent of the common stock of Stamford Company on January 1, 2010, when Stamford has the following stockholders’ equity accounts:
Common stock—40,000 shares outstanding . . . . . . . . . . . . . . . . . . $100,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Retained earnings, 1/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540,000
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $715,000
To acquire this interest in Stamford, Neill pays a total of $592,000. The acquisition-date fair value of the 20 percent noncontrolling interest was $148,000. Any excess fair value was allocated to goodwill, which has not experienced any impairment.
On January 1, 2011, Stamford reports retained earnings of $620,000. Neill has accrued the increase in Stamford’s retained earnings through application of the equity method.

8. On January 1, 2011, Stamford issues 10,000 additional shares of common stock for $25 per share. Neill acquires 8,000 of these shares. How will this transaction affect the parent company’s Additional Paid-In Capital account?
a. Has no effect on it.
b. Increases it by $20,500.
c. Increases it by $36,400.
d. Increases it by $82,300.

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