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    Consolidated Financials, Intercompany, Variable Interest Entities

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    Subject: Consolidated Financial Statements - Intercompany Asset Transactions

    1. What is the impact on consolidated financial statements of upstream and downstream transfers?

    a. No difference exists in consolidated financial statements between upstream and downstream
    transfers.
    b. Downstream transfers affect the computation of the noncontrolling interest's share of the subsidiary's
    income but upstream transfers do not.
    c. Upstream transfers affect the computation of the noncontrolling interest's share of the subsidiary's
    income but downstream transfers do not.
    d. Downstream transfers can be ignored since they are made by the parent company.

    28. Asphalt acquired 70 percent of Broadway on June 11, 1993. Based on the purchase price, an intangible
    of $300,000 was recognized and is being amortized at the rate of $10,000 per year. The 2004
    financial statements are as follows:

    Asphalt sells inventory costing $72,000 to Broadway during 2003 for $120,000. At year's end, 30
    percent is left. Asphalt sells inventory costing $200,000 to Broadway during 2004 for $250,000. At
    year's end, 20 percent is left. Under these circumstances, determine the consolidated balances for the
    following accounts:

    Sales
    Cost of Goods Sold
    Operating Expenses
    Dividend Income
    Noncontrolling Interest in Consolidated Income
    Inventory
    Noncontrolling Interest in Subsidiary, 12/31/04

    29. Compute the balances in problem 28 again, assuming that the intercompany transfers were all made
    from Broadway to Asphalt.

    Subject: Variable Interest Entities, Intercompany Debt, Consolidated Cash Flows, and Other Issues

    22. On January 1, 2004, Russell issues 10,000 additional shares of common stock for $15 per share.
    Chapman does not acquire any of this newly issued stock. How would this transaction affect the Additional
    Paid-In Capital account of the parent company?

    a. Has no effect on it.
    b. Increases it by $16,600.
    c. Decreases it by $31,200.
    d. Decreases it by $48,750.

    32. The following information has been taken from the consolidation worksheet of Peak and its 90
    percent-owned subsidiary, Valley:

    ? Peak reports a $12,000 gain on the sale of a building. The building had a book value of
    $32,000 but was sold for $44,000 cash.
    ? The noncontrolling interest in Valley's income is reported as $23,000.
    ? Intercompany inventory transfers of $129,000 occurred during the current period.
    ? A $30,000 dividend was paid by Valley during the year with $27,000 of this amount going to
    Peak.
    ? Amortization of an intangible asset recognized by Peak's purchase was $16,000 for the current
    period.
    ? Consolidated accounts payable decreased by $11,000 during the year.

    Indicate how each of these events is reflected on a consolidated statement of cash flows.

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    Solution Summary

    Subject: Consolidated Financial Statements - Intercompany Asset Transactions

    1. What is the impact on consolidated financial statements of upstream and downstream transfers?

    a. No difference exists in consolidated financial statements between upstream and downstream
    transfers.
    b. Downstream transfers affect the computation of the noncontrolling interest's share of the subsidiary's
    income but upstream transfers do not.
    c. Upstream transfers affect the computation of the noncontrolling interest's share of the subsidiary's
    income but downstream transfers do not.
    d. Downstream transfers can be ignored since they are made by the parent company.

    28. Asphalt acquired 70 percent of Broadway on June 11, 1993. Based on the purchase price, an intangible
    of $300,000 was recognized and is being amortized at the rate of $10,000 per year. The 2004
    financial statements are as follows:

    Asphalt sells inventory costing $72,000 to Broadway during 2003 for $120,000. At year's end, 30
    percent is left. Asphalt sells inventory costing $200,000 to Broadway during 2004 for $250,000. At
    year's end, 20 percent is left. Under these circumstances, determine the consolidated balances for the
    following accounts:

    Sales
    Cost of Goods Sold
    Operating Expenses
    Dividend Income
    Noncontrolling Interest in Consolidated Income
    Inventory
    Noncontrolling Interest in Subsidiary, 12/31/04

    29. Compute the balances in problem 28 again, assuming that the intercompany transfers were all made
    from Broadway to Asphalt.

    Subject: Variable Interest Entities, Intercompany Debt, Consolidated Cash Flows, and Other Issues

    22. On January 1, 2004, Russell issues 10,000 additional shares of common stock for $15 per share.
    Chapman does not acquire any of this newly issued stock. How would this transaction affect the Additional
    Paid-In Capital account of the parent company?

    a. Has no effect on it.
    b. Increases it by $16,600.
    c. Decreases it by $31,200.
    d. Decreases it by $48,750.

    32. The following information has been taken from the consolidation worksheet of Peak and its 90
    percent-owned subsidiary, Valley:

    ? Peak reports a $12,000 gain on the sale of a building. The building had a book value of
    $32,000 but was sold for $44,000 cash.
    ? The noncontrolling interest in Valley's income is reported as $23,000.
    ? Intercompany inventory transfers of $129,000 occurred during the current period.
    ? A $30,000 dividend was paid by Valley during the year with $27,000 of this amount going to
    Peak.
    ? Amortization of an intangible asset recognized by Peak's purchase was $16,000 for the current
    period.
    ? Consolidated accounts payable decreased by $11,000 during the year.

    Indicate how each of these events is reflected on a consolidated statement of cash flows.

    $2.19

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