Advanced Financial Accounting - Exam 1 Questions & Answers

Indirect Control - ANSWERSOccurs when a company's common stock is owned by one or more other companies that are all under common control Direct Control - ANSWERSOccurs when one company owns a majority of another company's common stock Ability to Exercise Control - ANSWERSA parent company cannot exercise control when the subsidiary was in legal reorganization, bankruptcy, or if control rests with a court-appointed trustee Effective Control - ANSWERSOccurs when there is an ability to direct the policies of another entity even though majority ownership is lacking Three Eliminating Entries - ANSWERSIntercompany stockholdings, Intercompany receivables and payables, and Intercompany sales Intercompany Stockholdings - ANSWERSBecause the parent company owns the subsidiary's stock, the common stock and retained earnings is eliminated during the preparation of the Consolidated Financial Statements Intercompany Sales - ANSWERSThe ending inventory from intercompany sales must be restated to it's original cost, the profit recognized on intercompany sales and the amount included in retained earnings must be removed Difference Between FV and BV - ANSWERSThe fair value reflects the current value of the acquired assets. First we allocate it to the differential, then to Goodwill Noncontrolling Interest - ANSWERSThe shareholders of the subsidiary other than the parent Presentation of Noncontrolling Interest - ANSWERSConsolidated Net Income Less Consolidated Net Income from noncontrolling interest =Consolidated Net Income attributable to the controlling interest Special Purpose Entities - ANSWERSAre corporations, trusts, or partnerships created for a single specified purpose. They have no substantive operations and are used only for financing purposes. Variable Interest Entity - ANSWERSIs a legal structure used for business purposes, usually a corporation, trust, or partnership that either (1) does not have equity investors that have voting rights and share in all the entity's profits and losses (2) has equity investors that do not provide sufficient financial resources to support the entity's activities. Specific agreements may limit the extent to which the equity investors share the entity's profits or losses and the agreements may limit the control the equity investors have over the entity's activities. Primary Beneficiary - ANSWERSAn enterprise that will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual return, or both. The primary beneficiary must consolidate the VIE Proprietary Theory - ANSWERSViews the firm as an extension of the owners. The firms' assets, liabilities, revenues, and expenses are viewed as those of the owners Pro Rata Consolidation - ANSWERSIn which the parent company consolidates only its proportionate share of a less-than-wholly owned subsidiary's assets, liabilities, revenues, and expenses Parent Company Theory - ANSWERSRecognizes the parent has the ability to effectively control all of the assets and liabilities of a majority-owned subsidiary, not just a proportionate share, even though he parent does not actually own the subsidiary's assets or have obligations for the liabilities. Includes all in the F/S Entity Theory - ANSWERSFocuses on the firm as a separate economic entity rather than on the ownership rights of the shareholders. All of the assets, liabilities, revenues, and expenses of a less-than-wholly owned subsidiary are included in the consolidated F/S Acquisition Entry - ANSWERSDr- Investment in Sub Cr- Cash Dividend Entry - ANSWERSDr- Cash Cr- Investment in Sub Income Allocation Entry - ANSWERSDr- Investment in Subsidiary Cr- Income from Subsidiary Differential Amortization - ANSWERSDr- Income from Subsidiary Cr- Investment in Subsidiary When a company needs to amortize a portion of the differential allocated to the depreciable or amortizable assets Any differential that goes into GW and must book the entry Consolidation - ANSWERSIs just a reporting requirement, not an accounting method. Required when 50% of the C/S is owned by another corporation Usefulness of Consolidation - ANSWERSProvides primary stakeholders with a more complete picture of the operations and it is valuable for LT internal planning