chapter 6 consolidation of variable interest entities and other intercompany investm 4314348

chapter 6 consolidation of variable interest entities and other intercompany investm 4314348

Chapter 6:Consolidation of Variable Interest Entities and Other Intercompany Investments

Multiple Choice

Topic: Special Purpose Entities

LO: 1

1.Which of the following are typical characteristics of special purpose entities?

a.It is legally distinct from the sponsoring company and may be bankruptcy remote.

b. It is only allowed to engage in a highly restricted set of activities.

c.When used in a securitization, cash flows from the assets held by the SPE are used by the SPE to repay the securities holders.

d.All of the above

e. None of the above

Topic: Acquisition of debt between Parent and Subsidiary

LO: 3

2.On January 1, 2014, a Parent company has a debt outstanding that was originally issued at a discount and was purchased, on issuance, by an unaffiliated party.  On July 1, 2014, a Subsidiary of the Parent purchased the debt from the unaffiliated party.  The debt was purchased by the Subsidiary at a slight premium.  The Parent is a calendar year company.  Which one of the following statements is true?

a.The consolidated balance sheet at December 31, 2014 will report none of the debt, and the consolidated income statement for the year ended December 31, 2014 will not report any interest expense from the debt.

b.The consolidated balance sheet at December 31, 2014 will report none of the debt, and the consolidated income statement for the year ended December 31, 2014 will report a gain or loss from the constructive retirement of the debt and will report some interest expense from the debt.

c.The consolidated balance sheet at December 31, 2014 will report none of the debt, and the consolidated income statement for the year ended December 31, 2014 will report a gain or loss from the constructive retirement of the debt and will not report any interest expense from the debt.

d.The consolidated balance sheet at December 31, 2014 will report the debt, and the consolidated income statement for the year ended December 31, 2014 will report a gain or loss from the constructive retirement of the debt and will not report any interest expense from the debt.

Topic: Preferred Stock

LO: 4

3.A Parent company owns a 70% controlling interest in the voting common stock of its Subsidiary.  The Subsidiary also has outstanding 20,000 shares of 5% cumulative preferred stock outstanding with par value equal to $10,000,000.  If the parent company owns none of the preferred stock, how should the preferred stock be accounted for in the consolidated financial statements?

a.All of the preferred stock equity account is assigned to the noncontrolling interests.

b.Thirty percent of the preferred stock equity account is assigned to the noncontrolling interests.

c.Seventy percent of the preferred stock equity account is assigned to the noncontrolling interest.

d.Seventy percent of the preferred stock equity account is eliminated against Investment in Subsidiary account on the Parent’s balance sheet.

 

Topic: Variable Interest Entity

LO: 2

4.Which of the following is not a variable interest?

  1. Equipment lease
  2. Technology license
  3. Management contract
  4. U.S. treasury bond

Topic: Special Purpose Entity

LO: 1

5.Which of the following would characterize a special purpose entity as bankruptcy remote?

a.If the sponsoring company goes bankrupt, the assets of the SPE are available to the sponsoring company’s creditors.

b.If the sponsoring company goes bankrupt, the assets of the SPE are protected from the creditors of the sponsoring company.

c.If both the sponsoring company and SPE go bankrupt, the assets of the SPE can only be accessed by owners of the SPE.

d.None of the above.

e.Only b and c.

Topic: Preferred Stock

LO: 4

6.A Parent company owns a 70% controlling interest in the voting common stock of its Subsidiary.  The Subsidiary also has outstanding 20,000 shares of 5% cumulative preferred stock outstanding with par value equal to $10,000,000.  If the parent company owns 100% of the preferred stock, how should the preferred stock be accounted for in the consolidated financial statements?

a.All of the preferred stock equity account is assigned to the noncontrolling interests.

b.Thirty percent of the preferred stock equity account is assigned to the noncontrolling interests.

c.One hundred percent of the preferred stock equity account is eliminated against Investment in Subsidiary account on the Parent’s balance sheet.

d.Seventy percent of the preferred stock equity account is eliminated against Investment in Subsidiary account on the Parent’s balance sheet.

 

Topic: Acquisition of Debt Between Parent and Subsidiary

LO: 3

7.A Parent Company owns 100% of its Subsidiary.  During 2014, the Parent company reports net income (by itself, without any investment income from its Subsidiary) of $1,000,000 and the subsidiary reports net income of $400,000.  The Parent had a bond payable outstanding on July 1, 2012, with a carry value equal to $840,000.  The Subsidiary acquired the bond on July 1, 2012 for $790,000.  During 2013, the Parent reported interest expense (related to the bond) of $70,000 while the Subsidiary reported interest income (related to the bond) of $64,000.  What is consolidated net income for the year ended December 31, 2013?

a.$1,400,000

b.$1,406,000

c.$1,450,000

d.$1,456,000

Topic: Variable Interest Entity

LO: 2

8.There are several steps in determining whether a special purpose entity is a VIE.  Which of the following is not a step in determining whether a special purpose entity is a VIE?

a.Determine whether the cash flows of the SPE are used to repay the securities holders.

b.Determine whether the company is the primary beneficiary of the VIE.

c.Determine whether the business-related scope exception applies.

d.Determine whether the total equity investment at risk is not sufficient to permit the legal entity to finance its activitieswithout additional subordinated financial support.

e.None of the above.

 

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