Chapter 3

Question 1

Limitations of consolidated financial statements

Answer 1

1. masking of poor performance
2. Limited availability of resources
3. Unrepresentative combined financial ratios
4. a lack of uniformity
5. lack of detailed disclosures

Question 2

direct control

Answer 2

when one company owns a majority of the stock

Question 3

indirect control

Answer 3

when one companies common stock is owned by more than one company controlled by the same company

Question 4

effective control

Answer 4

idea of control that the FASB is attempting to put into practice

Question 5

noncontrolling or minority interest

Answer 5

the shareholders who are not considered the parent because they don’t own a majority of the shares and they don’t have control

Question 6

consolidated net income

Answer 6

equal to the parent’s income from its own operations, excluding any investment income from consolidated subsidiaries, plus the net income from each of the consolidated subsidiaries

Question 7

Noncontrolling retained earnings

Answer 7

accounted for in the equity section under noncontrolling interests

Question 8

JE for stock acquisition for 80% of a company

Answer 8

Investment in Special Foods
Cash
FV of Acquirer consideration is 240000 noncontrolling is 20% which is 60000

Question 9

Basic investment elimination entry in partially owned company

Answer 9

Common Stock 200000
R E 100000
Investment in Special Foods 240000
NCI in NA of Special Foods 60000
the NCI is booked as a credit on the acquired companies books

Question 10

NCI in NA of Acquired company

Answer 10

is recorded in the equity of the consolidated financial statement

Question 11

Partially owned Income on investment entry

Answer 11

inv

income from inv

Question 12

partially owned dividend

Answer 12

cash

investment in special foods

Question 13

partially owned elimination entry

Answer 13

C/S 
RE  
Inc Acquired C 
NCI in NI of Special Foods
   Dividends declared
   Investment in Special Foods
   NCI in NA of Special Foods
you have to eliminate all intercompany transactions

Question 14

depreciation elimination entry

Answer 14

you have to eliminate the subs depreciation

Question 15

depreciation and other values for elimination entries are calculated at the acquisition date

Answer 15

know it

Question 16

Variable Interest Entities

Answer 16

special purpose entity with guidelines, once they are established as this the specific assets and liabilities can be excluded from the balance sheet of the entity
definition: legal structure used fro business purposes, usually a corporation, trust, or partnership, that either does not have equity investors that have voting rights and share in all of the entity’s profits and losses or has equity investors that do not provide sufficient financial resources to support the entity’s activities

Question 17

combined financial statements

Answer 17

financial statements that include a group of related companies without including the parent company or other owner are

Question 18

special purpose entity

Answer 18

financing agent that usually doesn’t have any operations

Question 19

primary beneficiary

Answer 19

person who gets the benefit from the variable interest entity