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File: Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows,
and Other Issues
Multiple Choice:
[QUESTION]
1. On January 1, 2018, Riley Corp. acquired some of the outstanding bonds of one of its
subsidiaries. The bonds had a carrying value of $421,620, and Riley paid $401,937 for them.
How should you account for the difference between the carrying value and the purchase price in
the consolidated financial statements for 2018?
A) The difference is added to the carrying value of the debt.
B) The difference is deducted from the carrying value of the debt.
C) The difference is treated as a loss from the extinguishment of the debt.
D) The difference is treated as a gain from the extinguishment of the debt.
E) The difference does not influence the consolidated financial statements.
Answer: D
Learning Objective: 06-03
Topic: Intra-entity debt―Gain or loss for consolidation
Difficulty: 1 Easy
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
[QUESTION]
2. Regency Corp. recently acquired $500,000 of the bonds of Safire Co., one of its subsidiaries,
paying more than the carrying value of the bonds. According to the most practical view of this
intra-entity transaction, to whom should the loss be attributed?
A) To Safire because the bonds were issued by Safire.
B) The loss should be allocated between Safire and Regency based on the purchase price and the
original face value of the debt.
C) The loss should be amortized over the life of the bonds and need not be attributed to either
party.
D) The loss should be deferred until it can be determined to whom the attribution can be made.
E) To Regency because Regency is the controlling party in the business combination.
Answer: E
Topic: Intra-entity debt transactions―General
Difficulty: 1 Easy
Blooms: Understand
[QUESTION]
3. Which one of the following characteristics of preferred stock would make the stock a dilutive
security for purposes of calculating earnings per share?
A) The preferred stock is callable.
B) The preferred stock is convertible.
C) The preferred stock is cumulative.
D) The preferred stock is noncumulative.
Copyright © 2018 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Page 6-1
E) The preferred stock is participating.
Answer: B
Topic: EPS―Consolidated diluted EPS
Topic: EPS―EPS of subsidiary by itself
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
4. Where do dividends paid to the noncontrolling interest of a subsidiary appear on a
consolidated statement of cash flows?
A) Cash flows from operating activities.
B) Cash flows from investing activities.
C) Cash flows from financing activities.
D) Supplemental schedule of noncash investing and financing activities.
E) They do not appear in the consolidated statement of cash flows.
Answer: C
Topic: Consolidated statement of cash flows
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
5. Where do dividends paid by a subsidiary to the parent company appear in a consolidated
statement of cash flows?
A) Cash flows from operating activities.
B) Cash flows from investing activities.
C) Cash flows from financing activities.
D) Supplemental schedule of noncash investing and financing activities.
E) They do not appear in the consolidated statement of cash flows.
Answer: E
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
6. Where do intra-entity transfers of inventory appear in a consolidated statement of cash flows?
A) They do not appear in the consolidated statement of cash flows.
B) Supplemental schedule of noncash investing and financing activities.
C) Cash flows from operating activities.
D) Cash flows from investing activities.
Page 6-2
E) Cash flows from financing activities.
Answer: A
Difficulty: 1 Easy
Blooms: Understand
[QUESTION]
7. How do intra-entity transfers of inventory affect the preparation of a consolidated statement of
cash flows?
A) They must be added in calculating cash flows from investing activities.
B) They must be deducted in calculating cash flows from investing activities.
C) They must be added in calculating cash flows from operating activities.
D) Because the consolidated balance sheet and income statement are used in preparing the
consolidated statement of cash flows, no special elimination is required.
E) They must be deducted in calculating cash flows from operating activities.
Answer: D
Difficulty: 1 Easy
Blooms: Understand
[QUESTION]
8. How would consolidated earnings per share be calculated if the subsidiary has no convertible
securities or warrants?
A) Parent's earnings per share plus subsidiary's earnings per share.
B) Parent's net income divided by parent's number of shares outstanding.
C) Consolidated net income divided by parent's number of shares outstanding.
D) Average of parent's earnings per share and subsidiary's earnings per share.
E) Consolidated income divided by total number of shares outstanding for the parent and
subsidiary.
Answer: C
Topic: EPS―Consolidated basic EPS
Difficulty: 1 Easy
Blooms: Remember
REFERENCE: 06-01
On January 1, 2018, Riney Co. owned 80% of the common stock of Garvin Co. On that date,
Garvin's stockholders' equity accounts had the following balances:

Page 6-3
Common stock ($5 par value) $ 250,000
Additional paid-in capital 110,000
Retained earnings 330,000
Total stockholders’ equity $ 690,000
The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling
interest was $138,000. On January 1, 2018, Garvin Co. sold 10,000 shares of previously unissued
common stock for $15 per share. Riney did not acquire any of these shares.
[QUESTION]
REFER TO: 06-01
9. What is the balance in Riney’s “Investment in Garvin Co. Account” following the sale of the
10,000 shares of common stock?
A) $552,000.
B) $560,000.
C) $460,000.
D) $404,000.
E) $672,000.
Answer: B
Topic: Subsidiary stock―New issue-Percentage change
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
Feedback: $250,000 / $5 = 50,000 shares × .80 = 40,000 shares owned by parent
Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15)
$150,000 = Total Equity after Stock Offering $840,000 × 40,000 Parent / 60,000 Total =
$560,000 Parent’s Investment Account
[QUESTION]
REFER TO: 06-01
10. What amount should be attributed to the Noncontrolling Interest in Garvin Co. following the
sale of the 10,000 shares of common stock?
A) $288,000.
B) $101,000.
C) $280,000.
D) $230,000.
E) $168,000.
Answer: C
Blooms: Apply
Feedback: $250,000 / $5 = 50,000 shares × .80 = 40,000 shares owned by parent
Page 6-4
Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15)
$150,000 = Total Equity after Stock Offering $840,000 × 20,000/60,000 = $280,000
Noncontrolling Interest
[QUESTION]
11. Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par, preferred stock and
60% of the outstanding common stock of Brett Co. Assuming there are no excess amortizations
or intra-entity transactions, and Brett reports net income of $780,000, what is the noncontrolling
interest in the subsidiary's income?
A) $234,000.
B) $273,000.
C) $302,000.
D) $312,000.
E) $284,000.
Answer: C
Topic: Subsidiary preferred stock
Difficulty: 3 Hard
Blooms: Apply
Feedback: $780,000 Net Income – Preferred Dividends (10,000 × $10) = $680,000 × .40 =
$272,000 Noncontrolling Interest
$100,000 Preferred Dividends × .30 = $30,000 Noncontrolling Interest
$272,000 from Income + $30,000 Preferred Dividends = $302,000 Noncontrolling Interest in
Income
REFERENCE: 06-02
Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par
value common stock and 2,000 shares of preferred stock outstanding. Each preferred share
received an annual per share dividend of $2 and is convertible into four shares of common stock.
Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each
of which is convertible into ten shares of common stock. Stoop's annual after-tax interest
expense for the bonds was $2,000. Knight did not own any of Stoop's bonds. There are no
excess amortizations or intra-entity transactions associated with this consolidation. Stoop reported
net income of $300,000 for 2018. Knight has 100,000 shares of common stock outstanding and
reported net income of $400,000 for 2018.
[QUESTION]
REFER TO: 06-02
12. What would Knight Co. report as consolidated basic earnings per share (rounded)?
A) $6.37
B) $6.40
C) $7.00
D) $5.68
E) $6.00
Answer: A
Topic: EPS―Subsidiary earnings for consolidated EPS
Difficulty: 3 Hard
Page 6-5
Blooms: Apply
Feedback: Sub net income (300,000) – preferred divs(4,000) = $296,000 x 80% = 236,800
included in consolidated EPS. Parent net income (400,000)+ portion of sub net income =
(400,000 + 236,800) / 100,000 shares = $6.37
[QUESTION]
REFER TO: 06-02
13. What would Knight Co. report as consolidated diluted earnings per share (rounded)?
A) $4.00.
B) $. 4.71
C) $8.71.
D) $5.89.
E) $6.37.
Answer: D
Topic: EPS―EPS of subsidiary by itself
Difficulty: 3 Hard
Blooms: Apply
Feedback: Sub Net income $300,000 + Interest saved $2,000 (no preferred divs)=
$322,000. New ownership percentage = 40,000 / (50,000 + if-converted preferred shares
8,000 + if-converted bonds 6,000 shares) = 62.5%. Consolidated DEPS = 400,000 +
(62.5% x 302,000) = 588,750/100,000 = $5.89 Knight Co.’s Consolidated Diluted
Earnings per Share
[QUESTION]
14. Campbell Inc. owned all of Gordon Corp. For 2018, Campbell reported net income (without
consideration of its investment in Gordon) of $280,000 while the subsidiary reported $112,000.
There are no excess amortizations associated with this consolidation. The subsidiary had bonds
payable outstanding on January 1, 2018, with a book value of $297,000. The parent acquired the
bonds on that date for $281,000. During 2018, Campbell reported interest income of $31,000
while Gordon reported interest expense of $29,000. What is consolidated net income for 2018?
A) $406,000.
B) $374,000.
C) $378,000.
D) $410,000.
E) $394,000.
Answer: A
Topic: Intra-entity debt―Effect on consolidated balances
Blooms: Apply

Page 6-6
Feedback: Income of the Parent $280,000 + Income of the Sub $112,000 – Difference in
Interest Income over Interest Expense on Intra-Entity Bonds ($31,000 - $29,000) $2,000
+ Gain on Bonds Purchase ($297,000 - $281,000) $16,000 = $406,000 Consolidated Net
Income
[QUESTION]
15. Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on
January 1, 2017, with a book value of $265,000. The parent acquired the bonds on that date for
$288,000. Subsequently, Vontkins reported interest income of $25,000 in 2017 while Quasimota
reported interest expense of $29,000. Consolidated financial statements were prepared for 2018.
What adjustment would be required for the retained earnings balance as of January 1, 2018?
A) Reduction of $27,000.
B) Reduction of $4,000.
C) Reduction of $19,000.
D) Reduction of $30,000.
E) Reduction of $20,000.
Answer: C
Blooms: Apply
Feedback: Bond Acquisition Price $288,000 – Bonds carrying amount $265,000 = $23,000 R/E
Reduction.
Intra-Entity Interest $29,000 - $25,000 = $4,000 R/E Increase
$23,000 - $4,000 = $19,000 R/E Reduction
[QUESTION]
16. Tray Co. reported current earnings of $560,000 while paying $56,000 in cash dividends.
Sparrish Co. earned $140,000 in net income and distributed $14,000 in dividends. Tray held a
70% interest in Sparrish for several years, an investment that it originally acquired by transferring
consideration equal to the book value of the underlying net assets. Tray used the initial value
method to account for these shares.
On January 1, 2018, Sparrish acquired in the open market $70,000 of Tray's 8% bonds. The
bonds had originally been issued several years ago at a price that would yield a 10% effective
interest rate. On the date of the bond purchase, the book value of the bonds payable was $67,600.
Sparrish paid $65,200 based on a 12% effective interest rate over the remaining life of the bonds.
What is the noncontrolling interest's share of the subsidiary's net income?
A) $42,000.
B) $37,800.
C) $39,600.
D) $40,070.
E) $44,080.
Answer: A
Blooms: Apply

Page 6-7
Feedback: Sub’s income $140,000 × .30 = $42,000 NCI’s Portion of Income (gain or loss
is assigned to the parent only)
[QUESTION]
17. A company had common stock with a total par value of $18,000,000 and fair value of
$62,000,000; and 7% preferred stock with a total par value of $6,000,000 and a fair value of
$8,000,000. The book value of the company was $85,000,000. Assuming ninety percent (90%)
of the company’s total equity is acquired, what amount must be attributed to the noncontrolling
interest?
A) $8,500,000.
B) $7,000,000.
C) $6,200,000.
D) $2,400,000.
E) $6,929,400.
Answer: B
Difficulty: 1 Easy
Blooms: Apply
Feedback: FV Common Stock $62,000,000 + FV Preferred Stock $8,000,000 =
$70,000,000 × .10 = $7,000,000 Noncontrolling Interest
[QUESTION]
18. Cadion Co. owned a controlling interest in Knieval Inc. Cadion reported sales of $420,000
during 2018 while Knieval reported $280,000. Inventory costing $28,000 was transferred from
Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent
was still in ending inventory at year's end. Total receivables on the consolidated balance sheet
were $112,000 at the first of the year and $154,000 at year-end. No intra-entity debt existed at
the beginning or ending of the year. Using the direct approach, what is the consolidated amount
of cash collected by the business from its customers?
A) $602,000.
B) $644,000.
C) $686,000.
D) $714,000.
E) $592,000.
Answer: A
Blooms: Apply

Page 6-8
Feedback: Parent’s Sales $420,000 + Sub’s Sales $280,000 – Intra-Entity Sales $56,000 –
increase in A/R $42,000 ($154,000 - $112,000) = $602,000 Consolidated Cash Collected
[QUESTION]
19. Parker owned all of Odom Inc. Although the Investment in Odom Inc. account had a balance
of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share.
On January 1, 2018, Odom issued 3,000 new shares to the public for $70 per share. How does
this transaction affect the Investment in Odom Inc. account?
A) It should be decreased by $210,000.
B) It should be increased by $210,000.
C) It should be increased by $168,000.
D) It should be decreased by $1,200.
E) It is not affected since the shares were sold to outside parties.
Answer: D
Blooms: Apply
Feedback:
Subsidiary’s unamortized fair value of prior to new share issue
(12,000 × $56) ....................................................... $834,000
Parent's ownership ................................................... 100%
Unamortized subsidiary fair value .......................... $834,000
Subsidiary unamortized fair value after issuing new

shares (above value plus 3,000 shares at $70 each) $1,044,000
Parent's ownership 12,000 ÷ 15,000 shares) ........... 80%
Unamortized subsidiary fair value after stock issue $835,200
Investment in Odom increases by $1,200 ($835,200 less $834,000).
REFERENCE: 06-03
These questions are based on the following information and should be viewed as independent
situations.
Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2016, when Cocker
had the following stockholders' equity accounts.
Common stock — 40,000 shares outstanding $140,000

Total stockholders’ equity $721,000
To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition
date fair value over book value being allocated to goodwill, which has been measured for

Page 6-9
impairment annually and has not been determined to be impaired as of January 1, 2019.
Popper did not pay any premium when it acquired its original interest in Cocker. On January 1,
2019, Cocker reported a net book value of $1,113,000 before the following transactions were
conducted. Popper uses the equity method to account for its investment in Cocker, thereby
reflecting the change in book value of Cocker.
[QUESTION]
REFER TO: 06-03
20. On January 1, 2019, Cocker issued 10,000 additional shares of common stock for $35 per
share. Popper acquired 8,000 of these shares. How would this transaction affect the additional
paid-in capital of the parent company?
A) Increase it by $28,700.
B) Increase it by $16,800.
C) $0.
D) Increase it by $280,000.
E) Increase it by $593,600.
Answer: C
Topic: Subsidiary stock―New issue-No percentage change
Difficulty: 1 Easy
Blooms: Apply
Feedback: No Adjustment is made to the APIC of the Parent as a Result of Sub’s Stock
Issue because the same Level of Ownership Interest is Maintained
[QUESTION]
REFER TO: 06-03
21. On January 1, 2019, Cocker issued 10,000 additional shares of common stock for $21 per
share. Popper did not acquire any of this newly issued stock. How would this transaction affect
the additional paid-in capital of the parent company?
A) $0.
B) Decrease it by $23,240.
C) Decrease it by $68,250.
D) Decrease it by $45,060.
E) Decrease it by $64,720.
Answer: E
Blooms: Apply
Feedback:
Consideration transferred ........................................................ $682,000
Noncontrolling interest acquisition-date fair value ............... 170,500
Increase in Sub book value (1,113,000-721,000) ..................... 392,000
Stock issue proceeds ................................................................ 210,000

Page 6-10
Subsidiary valuation basis ............................................................. 1,454,000
New parent ownership (32,000 shs. ÷ 50,000 shs.) ..................... 64%
Parent’s post-stock issue ownership balance.............................. $930,880
Parent's investment account ($682,000 + [80% × 392,000]) ........ 995,600
Required adjustment —decrease ............................................ $(64,720)
[QUESTION]
REFER TO: 06-03
22. On January 1, 2019, Cocker reacquired 8,000 of the outstanding shares of its own common
stock for $34 per share. None of these shares belonged to Popper. How would this transaction
have affected the additional paid-in capital of the parent company?
A) $0.
B) Decrease it by $32,900.
C) Decrease it by $45,700.
D) Decrease it by $23,100.
E) Decrease it by $50,500.
Answer: D
Topic: Subsidiary stock―Treasury stock acquired
Blooms: Apply
Feedback:
Adjusted acquisition-date fair value ($852,500 + $392,000) .................. $1,244,500
Less Stock repurchase ................................................................... $ ( 272,000)
Adjusted fair value after stock repurchase ................................... $972,500
Fair value equivalency of parent's ownership ........................ $972,500
Required adjustment—decrease .............................................. $ (23,100)
[QUESTION]
23. If new bonds are issued from a parent to its subsidiary, which of the following statements is
false?
A) Any premium or discount on bonds payable is exactly offset by a premium or discount on
bond investment.
B) There will be $0 net gain or loss on the bond transaction.
C) Interest expense needs to be eliminated on the consolidated income statement.
D) Interest revenue needs to be eliminated on the consolidated income statement.
E) A net gain or loss on the bond transaction will be reported.
Answer: E
Blooms: Understand
Page 6-11
[QUESTION]
24. The accounting problems encountered in consolidated intra-entity debt transactions when the
debt is acquired by an affiliate from an outside party include all of the following except:
A) Both the investment and debt accounts have to be eliminated now and for each future
consolidated financial statement despite containing differing balances.
B) Subsequent interest revenue/expense must be removed although these balances fail to agree in
amount.
C) A gain or loss must be recognized by both parent and subsidiary companies.
D) Changes in the investment, debt, interest revenue, and interest expense accounts occur
constantly because of the amortization process.
E) The gain or loss on the retirement of the debt must be recognized by the business combination
in the year the debt is acquired, even though this balance does not appear on the financial records
of either company.
Answer: C
Blooms: Understand
[QUESTION]
25. Which of the following statements is true concerning the acquisition of existing debt of a
consolidated affiliate in the year of the debt acquisition?
A) Recognition of any gain or loss is deferred until the debt is extinguished for purposes of
reporting such debt on consolidated financial statements.
B) Any gain or loss is recognized in the year of acquisition on a consolidated income statement.
C) Interest revenue generated from the debt of an affiliate is recognized on a consolidated income
statement.
D) Interest expense recognized from carrying debt instruments is recognized on a consolidated
income statement.
E) Consolidated retained earnings is adjusted to take into account the difference between the
purchase price and carrying value of the debt.
Answer: B
Blooms: Remember
[QUESTION]
26. Which of the following statements is false regarding the assignment of a gain or loss when an
affiliate’s debt instrument is acquired on the open market?
A) Subsidiary net income is not affected by a gain on the debt transaction.
B) Subsidiary net income is not affected by a loss on the debt transaction.
C) Parent Company net income is not affected by a gain on the debt transaction.
Page 6-12
D) Parent Company net income is not affected by a loss on the debt transaction.
E) Consolidated net income is not affected by a gain or loss on the debt transaction.
Answer: E
Blooms: Remember
[QUESTION]
27. What would differ between a statement of cash flows for a consolidated company and an
unconsolidated company using the indirect method?
A) Parent's dividends would be subtracted as a financing activity.
B) Gain on sale of land would be deducted from net income.
C) Noncontrolling interest in net income of subsidiary would be added to net income.
D) Proceeds from the sale of long-term investments would be added to investing activities.
E) Loss on sale of equipment would be added to net income.
Answer: C
Difficulty: 1 Easy
Blooms: Understand
[QUESTION]
28. Which of the following statements is true for a consolidated statement of cash flows?
A) Parent's dividends and subsidiary's dividends are deducted as a financing activity.
B) Only parent's dividends are deducted as a financing activity.
C) Parent's dividends and its share of subsidiary's dividends are deducted as a financing activity.
D) All of parent's dividends and noncontrolling interest of subsidiary's dividends are deducted as
a financing activity.
E) Neither parent's nor subsidiary's dividends are deducted as a financing activity.
Answer: D
Blooms: Remember
[QUESTION]
29. In reporting consolidated earnings per share when there is a wholly owned subsidiary, which
of the following statements is true?
A) Parent company earnings per share equals consolidated earnings per share when the equity
method is used.
B) Parent company earnings per share is equal to consolidated earnings per share when the initial
Page 6-13
value method is used.
C) Parent company earnings per share is equal to consolidated earnings per share when the partial
equity method is used and acquisition-date fair value exceeds book value.
D) Parent company earnings per share is equal to consolidated earnings per share when the partial
equity method is used and acquisition-date fair value is less than book value.
E) Preferred dividends are not deducted from net income for consolidated earnings per share.
Answer: A
Topic: EPS―Consolidated basic EPS
Blooms: Remember
[QUESTION]
30. A subsidiary issues new shares of common stock at an amount below book value. Outsiders
buy all of these shares. Which of the following statements is true?
A) The parent's additional paid-in capital will be increased.
B) The parent's investment in subsidiary will be increased.
C) The parent's retained earnings will be increased.
D) The parent's additional paid-in capital will be decreased.
E) The parent's retained earnings will be decreased.
Answer: D
Blooms: Analyze
AACSB: Analytical Thinking
[QUESTION]
31. A subsidiary issues new shares of common stock. If the parent acquires all of these shares at
an amount greater than book value, which of the following statements is true?
A) The investment in subsidiary will decrease.
B) Additional paid-in capital will decrease.
C) Retained earnings will increase.
D) The investment in subsidiary will increase.
E) No adjustment will be necessary.
Answer: D
Blooms: Analyze
[QUESTION]
32. If a subsidiary re-acquires its outstanding shares from outside ownership for more than the
Page 6-14
noncontrolling interest valuation basis at the date of buying such treasury stock, which of the
following statements is true?
A) Additional paid-in capital on the parent company’s books will decrease.
B) Investment in subsidiary will increase.
C) Treasury stock on the parent's books will increase.
D) Treasury stock on the parent's books will decrease.
E) No adjustment is necessary.
Answer: A
Topic: Subsidiary stock―Treasury stock acquired
Difficulty: 3 Hard
Blooms: Analyze
[QUESTION]
33. If a subsidiary issues a stock dividend, which of the following statements is true?
A) Investment in subsidiary on the parent's books will increase.
B) Investment in subsidiary on the parent's books will decrease.
C) Additional paid-in capital on the parent's books will increase.
D) Additional paid-in capital on the parent's books will decrease.
Answer: E
Topic: Subsidiary stock―Stock dividend issued
Blooms: Analyze
[QUESTION]
34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On
January 1, 2018, when there was an unamortized discount of $2,000 and a remaining life of 5
years, its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market
for $11,000. The bonds pay 6% interest annually on December 31. The companies use the
straight-line method to amortize interest revenue and expense. Compute the consolidated gain or
loss on a consolidated income statement for 2018.
A) $1,000 gain.
B) $1,000 loss.
C) $2,000 loss.
D) $3,000 loss.
E) $3,000 gain.
Answer: D
Difficulty: 1 Easy
Blooms: Apply
Page 6-15
Feedback: Bonds Purchase Price $11,000 – Bonds carrying amount ($10,000 - $2,000) =
$3,000 Loss to Consolidation Income
[QUESTION]
35. Keenan Company has had bonds payable of $20,000 outstanding for several years. On
January 1, 2018, there was an unamortized premium of $2,000 with a remaining life of 10 years,
Keenan's parent, Ross, Inc., purchased the bonds in the open market for $19,000. Keenan is a
90% owned subsidiary of Ross. The bonds pay 8% interest annually on December 31. The
companies use the straight-line method to amortize interest revenue and expense. Compute the
consolidated gain or loss on a consolidated income statement for 2018.
A) $3,000 gain.
B) $3,000 loss.
C) $1,000 gain.
D) $1,000 loss.
E) $2,000 gain.
Answer: A
Difficulty: 1 Easy
Blooms: Apply
Feedback: Bonds Purchase Price $19,000 – Bonds carrying amount ($20,000 + $2,000) =
$3,000 Gain to Consolidation Income
REFERENCE: 06-04
On January 1, 2018, Nichols Company acquired 80% of Smith Company's common stock and
40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was
$1,200,000 for the common and $124,000 for the preferred. There was no premium in the value
of consideration transferred. Any excess acquisition-date fair value over book value is considered
goodwill. The capital structure of Smith immediately prior to the acquisition is:
Common stock, $10 par value (50,000 shares outstanding) $500,000

Preferred stock, 6% cumulative, $100 par value,
3,000 shares outstanding 300,000
Additional paid in capital 200,000
Total stockholders’ equity $1,500,000
[QUESTION]
REFER TO: 06-04
36. With respect to Nichols’ investment in Smith, determine the amount to be recorded and
identify which account should be adjusted to reflect such amount.
A) $1,324,000 for Investment in Smith.
B) $1,200,000 for Investment in Smith.
C) $1,200,000 for Investment in Smith’s Common Stock and $124,000 for Investment in Smith’s
Page 6-16
Preferred Stock.
D) $1,200,000 for Investment in Smith’s Common Stock and $120,000 for Investment in Smith’s
Preferred Stock.
E) $1,448,000 for Investment in Smith’s Common Stock.
Answer: C
Blooms: Apply
Feedback: FV of Consideration Recorded for Each Class of Stock in the Investment
Account
[QUESTION]
REFER TO: 06-04
37. Compute the goodwill recognized in consolidation.
A) $ 800,000.
B) $ 310,000.
C) $ 124,000.
D) $ 0.
E) $(196,000.)
Answer: B
Blooms: Apply
Feedback: 100% acquisition-date fair value: 100% Common Stock ($1,200,000 / .80 =
$1,500,000) + 100% Preferred Stock ($124,000 / .40 = $310,000): Total acquisition-date
fair value $1,500,000 + $310,000 = FV $1,810,000 – BV $1,500,000 = $310,000
Goodwill
[QUESTION]
REFER TO: 06-04
38. Compute the noncontrolling interest in Smith at date of acquisition.
A) $486,000.
B) $480,000.
C) $300,000.
D) $150,000.
E) $120,000.
Answer: A
Blooms: Apply

Page 6-17
Feedback: Common Stock Noncontrolling Interest at Acquisition = $1,200,000 / .80 = $1,500,000
× .20 = $300,000
Preferred Stock Noncontrolling Interest at Acquisition = $124,000 / .40 = $310,000 × .60 =
$186,000
$300,000 + $186,000 = $486,000 Noncontrolling Interest at Acquisition Date
[QUESTION]
REFER TO: 06-04
39. The consolidation entry at date of acquisition will include (referring to Smith):
A) Debit Common stock $500,000 and debit Preferred stock $120,000.
B) Debit Common stock $400,000 and debit Additional paid-in capital $160,000.
C) Debit Common stock $500,000 and debit Preferred stock $300,000.
D) Debit Common stock $500,000, debit Preferred stock $120,000, and debit Additional paid-in
capital $200,000.
E) Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in
capital $200,000, and debit Retained earnings $500,000.
Answer: C
Blooms: Apply
Feedback: BV is Debited in Consolidation Entry for Acquisition-Date Preparation of
Consolidated Balance Sheet
[QUESTION]
REFER TO: 06-04
40. If Smith’s net income is $100,000 in the year following the acquisition,
A) The portion allocated to the common stock (residual amount) is $92,800.
B) $10,800 preferred stock dividend will be subtracted from net income attributed to common
stock in arriving at noncontrolling interest in consolidated income.
C) The noncontrolling interest in consolidated net income is $27,200.
D) The preferred stock dividend will be ignored in noncontrolling interest in consolidated net
income because Nichols owns the noncontrolling interest of preferred stock.
E) The noncontrolling interest in consolidated net income is $30,800.
Answer: C
Difficulty: 3 Hard
Blooms: Apply
Feedback: $100,000 – Preferred Dividends ($6 × 3,000) $18,000 = $82,000 × .20 = $16,400
Income to NCI
Preferred Dividends $18,000 × .60 = $10,800 to NCI
$16,400 Income + $10,800 Preferred Dividends = $27,200 Income to NCI
Page 6-18
REFERENCE: 06-05
The following information has been taken from the consolidation worksheet of Graham Company
and its 80% owned subsidiary, Stage Company.
(1.) Graham reports a loss on sale of land (to an outside party) of $5,000. The land cost Graham
$20,000.
(2.) Noncontrolling interest in Stage's net income was $30,000.
(3.) Graham paid dividends of $15,000.
(4.) Stage paid dividends of $10,000.
(5.) Excess acquisition-date fair value over book value amortization was $6,000.
(6.) Consolidated accounts receivable decreased by $8,000.
(7.) Consolidated accounts payable decreased by $7,000.
[QUESTION]
REFER TO: 06-05
41. How is the loss on sale of land reported on the consolidated statement of cash flows?
A) $20,000 added to net income as an operating activity.
B) $20,000 deducted from net income as an operating activity.
C) $15,000 deducted from net income as an operating activity.
D) $5,000 added to net income as an operating activity.
E) $5,000 deducted from net income as an operating activity.
Answer: D
Blooms: Analyze
Feedback: Land Sale of $5,000 Reduces Net Income as Operating Activity in Cash Flows
[QUESTION]
REFER TO: 06-05
42. Where does the noncontrolling interest in Stage's net income appear on a consolidated
A) $30,000 added to net income as an operating activity on the consolidated statement of cash
flows.
B) $30,000 deducted from net income as an operating activity on the consolidated statement of
cash flows.
C) $30,000 increase as an investing activity on the consolidated statement of cash flows.
D) $30,000 decrease as an investing activity on the consolidated statement of cash flows.
E) Noncontrolling interest in Stage's net income does not appear on a consolidated statement of
cash flows.
Answer: E
Blooms: Apply
Page 6-19
Feedback: NCI’s Income is NOT Reported on Consolidated Cash Flows
[QUESTION]
REFER TO: 06-05
43. How will dividends be reported in consolidated statement of cash flows?
A) $15,000 decrease as a financing activity.
B) $25,000 decrease as a financing activity.
C) $10,000 decrease as a financing activity.
D) $23,000 decrease as a financing activity.
E) $17,000 decrease as a financing activity.
Answer: E
Blooms: Analyze
Feedback: Parent’s Dividends $15,000 + NCI Dividends $2,000 = $17,000 Decrease in
Cash Flow for Financing
[QUESTION]
REFER TO: 06-05
44. How is the amount of excess acquisition-date fair value over book value recognized in a
consolidated statement of cash flows assuming the indirect method is used?
A) It is ignored.
B) $6,000 subtracted from net income.
C) $4,800 subtracted from net income.
D) $6,000 added to net income.
E) $4,800 added to net income.
Answer: D
Blooms: Analyze
Feedback: $6,000 Excess Amortization is not a Cash Item and therefore Added Back to
Net Income on the Cash Flow Statement
[QUESTION]
REFER TO: 06-05
45. Using the indirect method, where does the decrease in accounts receivable appear in a
A) $8,000 increase to net income as an operating activity.
B) $8,000 decrease to net income as an operating activity.
C) $6,400 increase to net income as an operating activity.
D) $6,400 decrease to net income as an operating activity.
E) $8,000 increase as an investing activity.

Page 6-20
Answer: A
Difficulty: 1 Easy
Blooms: Analyze
Feedback: The $8,000 Receivables Decrease is Added to Net Income and Classified as an
Operating Item
[QUESTION]
REFER TO: 06-05
46. Using the indirect method, where does the decrease in accounts payable appear in a
A) $7,000 increase to net income as an operating activity.
B) $7,000 decrease to net income as an operating activity.
C) $5,600 increase to net income as an operating activity.
D) $5,600 decrease to net income as an operating activity.
E) $7,000 increase as a financing activity.
Answer: B
Difficulty: 1 Easy
Blooms: Analyze
Feedback: The $7,000 Payables Decrease is Added to Net Income and Classified as an
Operating Item
REFERENCE: 06-06
Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones
was $1,000,000. There was no premium paid by Webb. Jones currently has 100,000 shares
outstanding and a book value of $1,200,000.
Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for
$10 per share.
[QUESTION]
REFER TO: 06-06
47. What is the adjusted book value of Jones after the sale of the shares?
A) $ 200,000.
B) $1,400,000.
C) $1,280,000.
D) $1,050,000.
E) $1,440,000.
Answer: B

Page 6-21
Difficulty: 1 Easy
Blooms: Apply
Feedback: Beginning carrying amount $1,200,000 + Add’l Shares Sold $200,000 ($10 ×
20,000) = $1,400,000 Current carrying amount
[QUESTION]
REFER TO: 06-06
48. What is the new percent ownership of Webb in Jones after the stock issuance?
A) 75%.
B) 90%.
C) 80%.
D) 64%.
E) 60%.
Answer: A
Blooms: Apply
Feedback: Shares Outstanding 100,000 × .90 = 90,000 Parent’s Shares
100,000 + 20,000 = 120,000 New Outstanding Shares
90,000 / 120,000 = 75% New Ownership Percentage
[QUESTION]
REFER TO: 06-06
49. What adjustment is needed for Webb's investment in Jones account?
A) $180,000 increase.
B) $180,000 decrease.
C) $ 45,000 decrease.
D) $ 45,000 increase.
Answer: D
Blooms: Apply
Feedback:
Adjusted acquisition-date sub. fair value

Page 6-22
Increase in Stamford book value .............................................. 200,000
New parent ownership (90,000 shs. ÷ 120,000 shs.) ................... 75%
Parent’s post-stock issue ownership balance.............................. $1,125,000
Parent's investment account ($990,000 + [90% × 200,000]) ........ 1,170,000
Required adjustment —increase ............................................. $45,000
REFERENCE: 06-07
Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones
was $1,000,000. There was no premium paid by Webb. Jones currently has 100,000 shares
outstanding and a book value of $1,200,000.
Assume Jones issues 20,000 new shares of its common stock for $15 per share.
[QUESTION]
REFER TO: 06-07
50. What is the adjusted book value of Jones after the stock issuance?
A) $1,500,000.
B) $1,200,000.
C) $1,350,000.
D) $1,080,000.
E) $1,335,000.
Answer: A
Difficulty: 1 Easy
Blooms: Apply
Feedback: Beginning BV $1,200,000 + Add’l Shares Sold $300,000 ($15 × 20,000) =
$1,500,000 Current BV
[QUESTION]
REFER TO: 06-07
51. After acquiring the additional shares, what adjustment is needed for Webb's investment in
Jones account?
C) $ 30,000 increase.
D) $ 30,000 decrease.
Answer: D
Topic: Subsidiary stock―New issue-No percentage change
Blooms: Apply
Page 6-23
Feedback:
New parent ownership (90,000 shs. ÷ 120,000 shs.) ................... 75%
Parent’s post-stock issue ownership balance.............................. $1,200,000
Parent's investment account ($990,000 + [90% × 200,000]) ........ 1,170,000
Required adjustment — increase ............................................ $30,000
REFERENCE: 06-08
Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was
$300,000. Ryan paid no premium. Chase has 50,000 shares outstanding and currently has a book
value of $400,000.
Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.
[QUESTION]
REFER TO: 06-08
52. What is the new percent ownership Ryan owns in Chase?
A) 80.0%.
B) 87.5%.
C) 90.0%.
D) 75.0%.
E) 82.5%.
Answer: B
Topic: Subsidiary Stock Transactions
Blooms: Apply
Feedback: Shares Outstanding 50,000 × .80 = 40,000 Parent’s Shares
50,000 + 30,000 = 80,000 New Outstanding Shares
40,000 + 30,000 = 70,000 Parent’s Shares after New Issue
70,000 / 80,000 = 87.5% New Ownership Percentage
[QUESTION]
REFER TO: 06-08
53. What is the adjusted book value of Chase Company after the issuance of the shares?
A) $608,000.
B) $720,000.
C) $680,000.
D) $760,000.
E) $400,000.
Answer: D
Page 6-24
Difficulty: 1 Easy
Blooms: Apply
Feedback: Beginning carrying amount $400,000 + Additional Shares Sold $360,000 ($12
× 30,000) = $760,000 Current carrying amount
[QUESTION]
REFER TO: 06-08
54. After acquiring the additional shares, what adjustment is needed for Ryan's investment in
Chase account?
C) $12,188 decrease.
D) $12,188 increase.
Answer: D
Blooms: Apply
Feedback:
Subsidiary valuation basis ............................................................. 797,500
New parent ownership (90,000 shs. ÷ 120,000 shs.) ................... 87.5%
Parent's investment account
($270,000 + [80% × 100,000]+360,000) .......................... 710,000
REFERENCE: 06-09
Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was
$300,000. Ryan paid no premium. Chase has 50,000 shares outstanding and currently has a book
value of $400,000.
Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share.
[QUESTION]
REFER TO: 06-09
55. What should the adjusted book value of Chase be after the treasury shares were purchased?
A) $400,000.
B) $480,000.
Page 6-25
C) $320,000.
D) $336,000.
E) $464,000.
Answer: C
Difficulty: 1 Easy
Blooms: Apply
Feedback: Sub carrying amount before Stock Repurchase $400,000 – Stock Repurchase
$80,000 (8,000 × $10) = Sub carrying amount after Stock Repurchase $320,000
[QUESTION]
REFER TO: 06-09
56. What is Ryan's percent ownership in Chase after the acquisition of the treasury shares
(rounded)?
A) 80%.
B) 95%.
C) 64%.
D) 76%.
E) 69%.
Answer: B
Blooms: Apply
Feedback: Shares Outstanding 50,000 × .80 = 40,000 Parent’s Shares before Treasury Purchase
50,000 - 8,000 = 42,000 New Outstanding Shares after Treasury Purchase
40,000 / 42,000 = 95% New Ownership Percentage
[QUESTION]
REFER TO: 06-09
57. When Ryan’s new percent ownership is rounded to a whole number, what adjustment is
needed for Ryan's investment in Chase account?
A) $16,000 decrease.
C) $46,000 increase.
D) $46,000 decrease.
Answer: A
Blooms: Apply
Page 6-26
Feedback: Investment balance = 270,000 + (80% x 100,000 increase in book value) =
350,000. Adjusted sub value = (400,000 – 80,000) = 320,000. 320,000 x new ownership
percentage 95% = 304,000. 350,000 – 304,000 = 46,000 decrease in investment account
[QUESTION]
58. A variable interest entity can take all of the following forms except a(n):
A) Trust.
B) Partnership.
C) Joint venture.
D) Corporation.
E) Estate.
Answer: E
Topic: VIE―Characteristics
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
59. All of the following are examples of variable interests except:
A) Guarantees of debt.
B) Stock options.
C) Lease residual value guarantees.
D) Participation rights.
E) Asset purchase options.
Answer: B
Blooms: Remember
[QUESTION]
60. Which of the following is not a potential loss or return of a variable interest entity?
A) Entitles holder to residual profits.
B) Entitles holder to benefit from increases in asset fair value.
C) Entitles holder to receive shares of common stock.
D) If the variable interest entity cannot repay liabilities, honoring a debt guarantee will produce a
loss.
E) If leased asset declines below the residual value, honoring the guarantee will produce a loss.
Answer: C
Blooms: Understand

Page 6-27
[QUESTION]
61. Which of the following characteristics is not indicative of an enterprise qualifying as a
primary beneficiary with a controlling financial interest in a variable interest entity?
A) The power to direct the most significant economic performance activities.
B) The power through voting or similar rights to direct activities, which significantly impact
economic performance.
C) The obligation to absorb potentially significant losses of the entity.
D) No ability to make decisions about the entity's activities.
E) The right to receive potentially significant benefits of the entity.
Answer: D
Topic: VIE―Primary beneficiary
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
62. Which of the following statements is false concerning variable interest entities (VIEs)?
A) Sometimes VIEs do not have independent management.
B) Most VIEs are established for valid business purposes.
C) VIEs may be formed as a source of low-cost financing.
D) VIEs have little need for voting stock.
E) A VIE cannot take the legal form of a partnership or corporation.
Answer: E
Blooms: Remember
[QUESTION]
63. Which of the following statements is true concerning variable interest entities (VIEs)?
(1.) The role of the VIE equity investors can be fairly minor.
(2.) A VIE may be created specifically to benefit the business enterprise that established it with
low-cost financing.
(3.) VIE governing agreements often limit activities and decision-making.
(4.) VIEs usually have a well-defined and limited business activity.
A) 2 and 4.
B) 2, 3, and 4.
C) 1, 2, and 4.
D) 1, 2, and 3.
E) 1, 2, 3, and 4.
Page 6-28
Answer: E
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
64. Which of the following is not a factor that indicates a business enterprise that establishes a
variable interest entity (VIE) should consolidate such VIE with its own financial statements?
A) The business enterprise establishing a VIE has the obligation to absorb potentially significant
losses of the VIE.
B) The business enterprise establishing a VIE receives risks and rewards of the VIE in proportion
to equity ownership.
C) The business enterprise establishing a VIE has the right to receive potentially significant
benefits of the VIE.
D) The business enterprise establishing a VIE has power through voting rights to direct the
entity's activities that significantly impact economic performance.
E) The business enterprise establishing a VIE is a primary beneficiary for the VIE.
Answer: B
Topic: VIE―When consolidation required
Blooms: Remember
[QUESTION]
65. A parent acquires all of a subsidiary’s common stock and 60 percent of its preferred stock.
The preferred stock has a cumulative dividend. No dividends are in arrears. How is the
noncontrolling interest in the subsidiary’s net income assigned?
A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value
of the preferred stock, based on an allocation between common stock and preferred stock.
B) There is no allocation to the noncontrolling interest because the parent owns 100% of the
common stock and net income belongs to the controlling interest.
C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
preferred stock dividends.
D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
subsidiary’s income before preferred stock dividends.
E) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
subsidiary’s income after subtracting preferred stock dividends.
Answer: C
Blooms: Analyze
Page 6-29
[QUESTION]
66. A parent acquires 70% of a subsidiary’s common stock and 60 percent of its preferred stock.
The preferred stock is noncumulative. The current year’s dividend was paid. How is the
noncontrolling interest in the subsidiary’s net income assigned?
A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value
of the preferred stock, based on an allocation between common stock and preferred stock and
their relative par values.
B) There is no allocation to the noncontrolling interest because there are no dividends in arrears.
C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
preferred stock dividends.
D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
preferred stock dividends plus 30% of the subsidiary’s income after subtracting all preferred
stock dividends.
E) The noncontrolling interest in consolidated net income is assigned as 30 percent of the
subsidiary’s income after subtracting 60% of preferred stock dividends.
Answer: D
Blooms: Analyze
[QUESTION]
67. Wolff Corporation owns 70 percent of the outstanding stock of Donald, Inc. During the
current year, Donald made $75,000 in sales to Wolff. How does this transfer affect the
A) Included as a decrease in the investing section.
B) Included as an increase in the operating section.
C) Included as a decrease in the operating section.
D) Included as an increase in the investing section.
E) Not reported in the consolidated statement of cash flows.
Answer: E
Difficulty: 1 Easy
Blooms: Analyze
[QUESTION]
68. MacDonald, Inc. owns 80 percent of the outstanding stock of Stahl Corporation. During the
current year, Stahl made $125,000 in sales to MacDonald. How does this transfer affect the
A) Include 80 percent as a decrease in the investing section.
B) Include 100 percent as a decrease in the investing section.
C) Include 80 percent as a decrease in the operating section.
Page 6-30
D) Include 100 percent as an increase in the operating section.
E) Not reported in the consolidated statement of cash flows.
Answer: E
Difficulty: 1 Easy
Blooms: Analyze
[QUESTION]
69. Pursley, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year
reports $50,000 Noncontrolling Interest in Harry Corp.’s Net Income. Harry paid dividends in
the amount of $80,000 for the year. What are the effects of these transactions in the consolidated
statement of cash flows for the year?
Answer: D
Blooms: Analyze
[QUESTION]
70. Goehring, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year
reports $40,000 Noncontrolling Interest in Harry Corp.’s Net Income. Harry paid dividends in
the amount of $100,000 for the year. What are the effects of these transactions in the
consolidated statement of cash flows for the year?
A) Increase in the financing section of $70,000, and decrease in the operating section of $30,000.
B) Increase in the operating section of $70,000, and decrease in the financing section of $30,000.
C) Increase in the operating section of $70,000.
D) Decrease in the financing section of $30,000.
E) No effects.
Answer: D
Blooms: Analyze

Page 6-31
REFERENCE: 06-10
Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated
balance sheets of Anderson, Inc. and Arthur Corp. are presented below:
2018 2017
Cash $ 8,000 $ 26,000
Accounts Receivable (net) 75,000 54,000
Inventory 100,000 89,000
Plant & Equipment (net) 156,000 170,000
Copyright 16,000 18,000
$355,000 $357,000
Accounts payable $ 60,000 $ 51,000

Long-term Debt 0 35,000
Noncontrolling interest 27,000 25,000
Common stock, $1 par 100,000 100,000
Retained earnings 168,000 146,000
$355,000 $357,000
Additional information for 2018:

• The combination occurred using the acquisition method.
Consolidated net income was $50,000. The noncontrolling interest
share of consolidated net income of Arthur was $3,200.
• Arthur paid $4,000 in dividends.
• There were no purchases or disposals of plant & equipment or
copyright this year.
[QUESTION]
REFER TO: 06-10
71. Net cash flow from operating activities was:
A) $43,000.
B) $44,800.
C) $46,200.
D) $50,000.
E) $25,000.
Answer: A
Blooms: Apply
Feedback: $50,000 + Depreciation $14,000 ($170,000 - $156,000) + Amortization
$2,000 ($18,000 -$16,000) – A/R $21,000 ($75,000 - $54,000) – Inventory $11,000
($100,000 - $89,000) + A/P $9,000 ($60,000 - $51,000) = $43,000 Net Consolidated
Cash Flow from Operations

Page 6-32
[QUESTION]
REFER TO: 06-10
72. Net cash flow from financing activities was:
A) $(28,000).
B) $(35,000).
C) $(13,000).
D) $(63,000).
E) $(61,000).
Answer: E
Difficulty: 3 Hard
Blooms: Apply
Feedback: Parent dividend paid $24,800 (income attributed to controlling interest $46,800 less
increase in Retained Earnings $22,000) + Subsidiary dividends paid to NCI ($1,200) + repayment
of debt ($35,000)
REFERENCE: 06-11
The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., which
Butler has owned for several years are presented below:
2018 2017
Cash $ 16,000 $ 52,000
Accounts Receivable (net) 150,000 108,000
Inventory 220,000 178,000
Plant & Equipment (net) 315,000 340,000
Copyright 32,000 36,000
$733,000 $714,000
Accounts payable $120,000 $102,000

Long-term Debt 0 70,000
Noncontrolling interest 77,000 50,000
Common stock, $1 par 200,000 200,000
Retained earnings 336,000 292,000
$733,000 $714,000
Additional information for 2018:
• Butler & Cassie’s consolidated net income was $100,000.

• Cassie paid $10,000 in dividends.
• There were no purchases or disposals of plant & equipment or
copyright this year.
[QUESTION]
REFER TO: 06-11
73. Net cash flow from operating activities was:

Page 6-33
A) $92,000.
B) $27,000.
C) $63,000.
D) $29,000.
E) $34,000.
Answer: C
Blooms: Apply
Feedback: $100,000 + Depreciation $25,000 ($340,000 – $315,000) + Amortization
$4,000 ($36,000 – $32,000) – A/R $42,000 ($150,000 – $108,000) – Inventory $42,000
($220,000 – $178,000) + A/P $18,000 ($120,000 – $102,000) = $63,000 Net
Consolidated Cash Flow from Operations
[QUESTION]
REFER TO: 06-11
74. Net cash flow from financing activities was:
A) $(129,000).
B) $ (96,000).
C) $(300,000).
D) $ (80,000).
E) $(126,000).
Answer: A
Difficulty: 3 Hard
Blooms: Apply
Feedback: Parent dividend paid $56,000 (income to controlling interest $100,000 less increase in
Retained Earnings $44,000) + NCI in subsidiary dividend ($3,000) + repayment of debt
($70,000) = ($129,000)
[QUESTION]
75. How do outstanding subsidiary stock warrants affect the calculation of consolidated earnings
per share?
A) They will be included in both basic and diluted earnings per share if they are dilutive.
B) They will only be included in diluted earnings per share if they are dilutive.
C) They will only be included in basic earnings per share if they are dilutive.
D) Only the warrants owned by the parent company affect consolidated earnings per share.
E) Because the warrants are for subsidiary shares, there will be no effect on consolidated earnings
per share.
Answer: B

Page 6-34
Topic: EPS―Consolidated diluted EPS
Blooms: Remember
[QUESTION]
76. A parent company owns a controlling interest in a subsidiary and on the last day of the year,
the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds
control over the subsidiary. The adjusted subsidiary value at the date of the new stock issuance
was $27 per share. Which of the following statements is true?
A) Since the sale was made at the end of the year, the parent’s investment account is not affected.
B) Since the shares were sold for more than the adjusted subsidiary value per share, the parent’s
investment account must be increased.
C) Since the shares were sold for more than the adjusted subsidiary value per share, the parent’s
investment account must be decreased.
D) Since the shares were sold for more than the adjusted subsidiary value per share, but the
parent did not buy any of the shares, the parent’s investment account is not affected.
E) None of these answer choices are correct.
Answer: B
Blooms: Analyze
[QUESTION]
77. A parent company owns a controlling interest in a subsidiary whose stock has a valuation
basis of $27 per share. On the last day of the year, the subsidiary issues new shares entirely to
outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the
following statements is true?
B) Since the shares were sold for less than the adjusted subsidiary value per share, the parent’s
investment account must be increased.
C) Since the shares were sold for less than the adjusted subsidiary value per share, the parent’s
investment account must be decreased.
D) Since the shares were sold for less than the adjusted subsidiary value per share, but the parent
did not buy any of the shares, the parent’s investment account is not affected.
Answer: C
Blooms: Analyze
Page 6-35
[QUESTION]
78. A parent company owns a 70 percent interest in a subsidiary whose stock has a valuation
basis of $27 per share. On the last day of the year, the subsidiary issues new shares for $27 per
share, and the parent buys its 70 percent interest in the new shares. Which of the following
statements is true?
B) Since the shares were sold for the same per share amount as the the adjusted subsidiary value
per share, the parent’s investment account must be increased.
C) Since the shares were sold for the same per share amount as the the adjusted subsidiary value
per share, the parent’s investment account must be decreased.
D) Since the shares were sold for the same per share amount as the the adjusted subsidiary value
per share, and the parent bought 70 percent of the shares, the parent’s investment account is not
affected except for the total acquisition amount for the new shares.
Answer: D
Blooms: Analyze
[QUESTION]
79. Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2018 (without
consideration of its investment in Madrid, Inc.) of $1,500,000. For the same year, Madrid reports
net income of $705,000. Carlson had bonds payable outstanding on January 1, 2018 with a
carrying value of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2018
for $1,090,000. For the year 2018, Carlson reported interest expense on the bonds in the amount
of $96,000, while Madrid reported interest income of $94,000 for the same bonds. Assuming
there are no excess amortizations or other intra-entity transactions, what is Carlson’s share of
consolidated net income?
A) $2,064,000.
B) $2,066,000.
C) $2,176,000.
D) $2,207,000.
E) $2,317,000.
Answer: C
Difficulty: 3 Hard
Blooms: Apply
Feedback: Parent’s Income $1,500,000 + Loss on Bond Sale $110,000 – Bond Interest
$94,000 + Bond Income $96,000 + Sub’s Income to Parent $564,000 ($705,000 × .80) =
$2,176,000 Consolidated Income

Page 6-36
REFERENCE: 06-12
On January 1, 2018, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc.
This price was based on paying $750,000 for 30 percent of Involved’s preferred stock, and
$1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition,
Involved’s stockholders’ equity accounts were as follows:
[QUESTION]
REFER TO: 06-12
80. What is the total acquisition-date fair value of Involved?
A) $2,600,000
B) $4,812,500
C) $3,062,500
D) $2,312,500
E) $3,250,000
Answer: B
Blooms: Apply
Preferred Stock Noncontrolling Interest at Acquisition = $750,000 / .30 = $2,500,000
$2,312,500 + $2,500,000 = $4,812,500 FV of Sub at Acquisition
$1,850,000 + $462,500 + $750,000 + $1,750,000 = $4,812,500
[QUESTION]
REFER TO: 06-12
81. Assuming Involved’s accounts are correctly valued within the company’s financial
statements, what amount of goodwill should be recognized for the Investment in Involved?
A) $(100,000.)
B) $ 0.
C) $ 200,000.
D) $ 812,500.
E) $2,112,500.
Answer: D
Blooms: Apply

Page 6-37
× .20 = $462,500
Preferred Stock Noncontrolling Interest at Acquisition = $750,000 / .30 = $2,500,000 × .70 =
$1,750,000
(CS Parent $1,850,000) + (CS NCI $462,500) + (PS Parent $750,000) + (PS NCI $1,750,000) =
$4,812,500 FV of Sub at Acquisition
FV $4,812,500 – carrying amount $4,000,000 = $812,500 Goodwill
[QUESTION]
82. Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2018
while Kaspar reports $250,000. Kaspar transferred inventory during 2018 to Johnson at a price of
$50,000. On December 31, 2018, 30% of the transferred goods are still held in Johnson’s
inventory. Consolidated accounts receivable on January 1, 2018 was $120,000, and on December
31, 2018 is $130,000. Johnson uses the direct approach in preparing the statement of cash flows.
How much is cash collected from customers in the consolidated statement of cash flows?
A) $590,000.
B) $610,000.
C) $625,000.
D) $635,000.
E) $650,000.
Answer: A
Blooms: Apply
Feedback: Parent $400,000 + Sub $250,000 – Intra-Entity $50,000 – Increase in A/R
$10,000 ($120,000 - $130,000) = $590,000
[QUESTION]
83. Which of the following variable interests entitles a holder to residual profits, losses, and
dividends?
A) Participation rights
B) Lease residual value guarantees
C) Common stock
D) Asset purchase options
E) Subordinated debt instruments
Answer: C
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
84. Which of the following statements regarding consolidation of a VIE with its primary
beneficiary is true?
Page 6-38
A) The consolidation of a VIE with its primary beneficiary requires the business enterprise to
follow a separate process than the one required for consolidations based on voting interests.
B) All intra-entity transactions between the primary beneficiary and the VIE are included in the
consolidation.
C) Only intra-entity transactions between the primary beneficiary and the VIE resulting from
intra-entity transfers are eliminated in the consolidation.
D) VIEs with controlling interests must include one hundred percent of the primary beneficiary’s
net income in a consolidation.
E) The allocation of the VIE’s net income is based on an analysis of the underlying contractual
arrangements between the primary beneficiary and other holders of variable interests.
Answer: E
Topic: VIE―Process of consolidation
Difficulty: 1 Easy
Blooms: Remember
[REFERENCE 06-13]
On January 1, 2018, A. Hamilton, Inc. (“AHI”) provides a loan for $3,000,000 to Reynolds
Manufacturing Corp. (“RMC”). The terms of the loan require payment of the loan no later than
January 1, 2023. RMC was in terrible financial condition and would cease operations absent
securing a loan. Prior to requesting a loan from AHI, RMC exhausted all other possible avenues
for funding. The terms of the loan agreement include provisions that require RMC to provide AHI
with the following from January 1, 2018 through January 1, 2023: (i) 6 percent annual interest on
the principal amount of the loan, which reflects a market rate of interest; (ii) 100 percent
participation rights to RMC’s profits less $17,000 in a guaranteed annual dividend to RMC’s
common shareholders; and (iii) complete decision-making authority over RMC’s operations and
financing decisions..
At the end of the term of the loan, AHI is given the right to acquire RMC or, in its discretion,
extend the term of the original loan an additional 5 years. At the date the loan was extended to
RMC, RMC’s common stock had an estimated fair value of $136,000 and a book value of
$40,000. The $96,000 difference was attributed to an asset with a 3-year useful life remaining
(“Asset”). At January 1, 2018, the balance sheets for AHI and RMC are as follows:

Page 6-39
[QUESTION]
REFER TO: 06-13
85. With respect to the acquisition-date consolidation worksheet, which of the following is
accurate?
A) The value of the noncontrolling interest is $40,000.
B) The total of all adjustments and eliminations equal $3,136,000.
C) The consolidated total long-term debt equals $3,688,000.
D) The total consolidated assets equal $9,794,000.
E) The total liabilities and equity on a consolidated basis equals $5,614,000.
Answer: B
Blooms: Apply
[QUESTION]
REFER TO: 06-13
86. In preparing the consolidation worksheet as of December 31, 2018 for AHI and RMC, which
of the following worksheet entry descriptions reflects what AHI should do to consolidate the
financial statements?
A) Consolidation Entry A is recorded to allocate the excess fair value to the noncontrolling
interest and record a credit to the Asset in connection with a fair valuation on the date AHI
obtains control of RMC as follows:
Noncontrolling interest $96,000
Asset $96,000
Page 6-40
B) Consolidation Entry P is recorded to eliminate the long-term receivable and debt representing
AHI’s initial investment in RMC as follows:
Loan receivable from RMC $3,000,000
Long-term debt $3,000,000
C) Consolidation Entry S is recorded to eliminate the interest payment on the loan from RMC to
AHI as follows:
Interest expense $180,000
Interest income $180,000
D) Consolidation Entry E is recorded to amortize the excess fair value allocation to the Asset over
its remaining useful life as follows:
Other operating expenses $32,000
Asset $32,000
E) Consolidation Entry P is recorded to eliminate the beginning stockholders’ equity of the VIE
and recognize the 100% equity ownership of the noncontrolling interest as follows:
Retained earnings – RMC 1/1/18 $ 6,000
Common stock – RMC $34,000
Retained Earnings-AHI $40,000
Answer: D
Blooms: Analyze
Essay:
[QUESTION]
87. Parent Corporation loaned money to its subsidiary with a five-year note at the market interest
rate. How would the note be accounted for in the consolidation process?
Answer: The note would be eliminated in the consolidation process with an entry debiting Notes
Payable and crediting Notes Receivable.
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
88. What are the primary sources of information that are used for preparation of a consolidated
Answer: The main source of information would be the consolidated income statement and the
consolidated balance sheet.
Page 6-41
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
89. Parent Corporation acquired some of its subsidiary's bonds on the open bond market. The
remaining life of the bonds was eight years, and Parent expected to hold the bonds for the full
eight years. How would the acquisition of the bonds affect the consolidation process?
Answer: In the consolidation process, the bonds would be treated as if they had been retired. A
gain or loss would be recognized in the period in which they were acquired. Intra-entity interest
revenue and expense would be eliminated.
Difficulty: 1 Easy
Blooms: Remember
AACSB: Communication
[QUESTION]
90. Parent Corporation acquired some of its subsidiary's bonds on the open bond market, paying
a price $40,000 higher than the bonds' carrying value. How should the difference between the
purchase price and the carrying value be accounted for?
Answer: The $40,000 difference between the acquisition price and the carrying value would be
recognized as a loss on retirement of bonds.
Difficulty: 1 Easy
Blooms: Understand
[QUESTION]
91. How are intra-entity inventory transfers treated on the consolidation worksheet and how are
they reflected in a consolidated statement of cash flows?
Answer: Intra-entity inventory transfers are eliminated on the consolidation worksheet and,
therefore, do not appear in the consolidated statement of cash flows.
Blooms: Remember
Page 6-42
[QUESTION]
92. Danbers Co. owned seventy-five percent of the common stock of Renz Corp. How does the
issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process?
Answer: A stock dividend would not influence Danbers' ownership percentage and would not
alter the consolidation process.
Topic: Subsidiary stock―Stock dividend issued
Blooms: Understand
[QUESTION]
93. During 2018, Parent Corporation purchased at carrying value some of the outstanding bonds
of its subsidiary. How would this acquisition have been reflected in the consolidated statement of
cash flows?
Answer: The cash paid for the bonds on the open market would be shown under cash flows from
financing activities. If the bonds were acquired directly from the subsidiary, the cash received
and the cash paid has no effect on the consolidated entity. Therefore, in a direct intra-entity
transaction, there is no effect in the consolidated statement of cash flows.
Blooms: Remember
[QUESTION]
94. On January 1, 2018, Parent Corporation acquired a controlling interest in the voting common
stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro's outstanding
preferred stock. In preparing consolidated financial statements, how should the acquisition of the
preferred stock be accounted for?
Answer: The investment in preferred stock account and Foxboro’s preferred stock balance should
be eliminated in consolidation so that only the parent’s equity remains. No gain or loss should be
recognized.
Difficulty: 1 Easy
Blooms: Remember
Page 6-43
[QUESTION]
95. When a company has preferred stock in its capital structure, what amount should be used to
calculate noncontrolling interest in the preferred stock of the subsidiary when the company is
acquired as a subsidiary of another company?
Answer: The noncontrolling interest should be reflected at its acquisition-date fair value.
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
96. Parent Corporation acquired some of its subsidiary's outstanding bonds. Why might Parent
purchase the bonds, rather than the subsidiary buying its own bonds?
Answer: The purchase might have been made by Parent Corporation because it had more
available cash than the subsidiary and there was a desire to bring the bonds in from the market.
Also, in some cases, the contract signed when the bonds were issued might prevent the subsidiary
from purchasing its own bonds or it might require the payment of a price that would be higher
than the market value of the bonds.
Blooms: Understand
[QUESTION]
97. Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open
market. What items related to these bonds will have to be accounted for in the consolidation
process?
Answer: For each period that the parent owns the bonds, the bonds must be eliminated on the
consolidation worksheet. Eliminating the bonds on the consolidation worksheet requires the
elimination of: (i) the parent's investment account; (ii) the portion of the bonds payable that the
parent acquired; (iii) interest expense of the issuer; and (iv) interest income of the investor. In the
year in which the parent acquired the bonds, a gain or loss must have been recognized. Over the
life of the bonds, retained earnings must be debited or credited for the amount of the gain or loss,
as adjusted by the previous years’ difference between interest expense and interest income.
Difficulty: 3 Hard
Blooms: Remember
Page 6-44
[QUESTION]
98. Parent Corporation recently acquired some of its subsidiary's outstanding bonds at an amount
which required the recognition of a loss. In what ways could the loss be allocated? Which
allocation would you recommend? Why?
Answer: The loss could be assigned to the subsidiary since it originally issued the bonds. The
loss could be assigned to the parent since the parent acquired the bonds. A method could be
applied to divide the loss between the parent and subsidiary. Finally, the loss could be assigned
to the parent because the parent controls the combined entity. The loss should probably be
assigned to the parent, without regard to who issued and who purchased the bonds, since the
parent is responsible for decision-making for the combined entity.
Difficulty: 3 Hard
Blooms: Understand
[QUESTION]
99. How does the existence of a noncontrolling interest affect the preparation of a consolidated
Answer: The noncontrolling interest's share of the subsidiary's income would not appear in the
consolidated statement of cash flows. Dividends paid to the noncontrolling interest represent
cash outflows for the combined entity to outside parties, and should be shown as cash flows from
financing activities.
Blooms: Remember
Problems:
[QUESTION]
100. On January 1, 2018, Bast Co. had a net book value of $2,100,000 as follows:
Preferred stock, 2,000 shares $70 par value,

cumulative, nonparticipating, nonvoting $ 140,000
Common stock, 22,400 shares $50 par value 1,120,000
Page 6-45
Total shareholders’ equity $2,100,000
Fisher Co. acquired all of the outstanding preferred shares for $148,000 and 60% of the common
stock for $1,281,000. Fisher believed that one of Bast's buildings, with a twelve-year life, was
undervalued on the company's financial records by $70,000.
Required:
What is the amount of goodwill to be recognized from this purchase?
Answer:
Consideration transferred for 60% interest in common stock $1,281,000

Consideration transferred for100% interest in preferred stock 148,000
Noncontrolling interest in common stock (40%):
[$1,281,000/.60] - $1,281,000 854,000
Total fair value $2,283,000
Book value 2,100,000
Excess acquisition-date fair value over book value 183,000
Assigned to building 70,000
Goodwill $ 113,000

Blooms: Apply
REFERENCE: 06-13
Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest
was acquired several years ago on the date that the subsidiary was formed. Consequently, no
goodwill or other allocation was recorded in connection with the acquisition price.
On January 1, 2017, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds
pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1,
2019, for 95% of the face value. Both companies utilized the straight-line method of
amortization.
[QUESTION]
REFER TO: 06-13
101. What balances would need to be considered in order to prepare the consolidation entry in
connection with these intra-entity bonds at December 31, 2019, the end of the first year of the
intra-entity investment? Prepare schedules to show numerical answers for balances that would be
needed for the entry.
Answer:
Carrying amount of bonds payable, January 1, 2019
Book value, January 1, 2017 ($1,400,000 × 1.08) original issue $1,512,000

Amortization- 2017-2018 [($112,000 premium ÷ 10 years) × 2 years] (22,400)

Page 6-46
Book value of bonds payable, January 1, 2019 $1,489,600
Carrying amount of 40% of bonds payable (intra-entity portion),

January 1, 2019 $ 595,840
Gain on retirement of bonds, January 1, 2019:
Purchase price ($560,000 face value × 95%) of investment $(532,000)

Book value of liability (calculated above) 595,840
Gain on retirement of bonds $ 63,840
Carrying amount of bonds payable, December 31, 2019
Carrying amount, January 1, 2019 (calculated above) $1,489,600

Amortization – 2019 ( 11,200)
Carrying amount of bonds payable, December 31, 2019 $1,478,400
Cash payment ($560,000 face value × 10%) $56,000

Amortization of premium for 2019 ($11,200 × 40%) (4,480)
Intra-entity interest expense $51,520
Carrying amount of 40% of bonds payable (intra-entity portion)

December 31, 2019 ($595,840-4,480 premium amortization) $591,360
Carrying amount of investment, December 31, 2019
Carrying amount of investment, January 1, 2019 (purchase price) $532,000

Amortization – 2019 ($28,000 discount ÷ 8 years remaining) 3,500
Carrying amount of bonds payable, December 31, 2019 $535,500
Cash receipt ($560,000 face value × 10%) $56,000

Amortization of discount for 2019 3,500
Intra-entity interest revenue $59,500

Difficulty: 3 Hard
Blooms: Apply
[QUESTION]
REFER TO: 06-13
102. What consolidation entry would be recorded in connection with these intra-entity bonds on
December 31, 2019?
Answer:
Bonds Payable 560,000

Premium on Bonds Payable 31,360
Interest Income 59,500
Page 6-47
Investment in Bonds 535,500
Interest Expense 51,520
Gain on retirement 63,840
Blooms: Apply
[QUESTION]
REFER TO: 06-13
December 31, 2020?
Answer:
Bonds Payable $560,000

Retained Earnings, 1/1/20 (Fargus Corp.) 55,860
Difficulty: 3 Hard
Blooms: Apply
[QUESTION]
REFER TO: 06-13
December 31, 2021?
Answer:
Bonds Payable $560,000

Retained Earnings, 1/1/21 (Fargus Corp.) 47,880
Difficulty: 3 Hard
Blooms: Apply
[QUESTION]
Page 6-48
105. Skipen Corp. had the following stockholders' equity accounts:
Preferred stock (8% cumulative dividend) $ 700,000

Common stock 1,050,000
Retained earnings 1,330,000
Total $ 3,500,000
The preferred stock was participating and is therefore considered to be equity. Vestin Corp.
acquired 90% of this common stock for $2,250,000 and 70% of the preferred stock for
$1,120,000. All of the subsidiary's assets and liabilities were determined to have fair values equal
to their carrying amounts except for land, which is undervalued by $130,000.
Required:
What amount was attributed to goodwill on the date of acquisition?
Answer:
Consideration transferred for 70% interest in preferred stock 1,120,000
Noncontrolling interest in common stock (10%):
[$2,250,000/.90] - $2,250,000 250,000
Noncontrolling interest in preferred stock (30%):
[$1,120,000/.7] - $1,120,000 480,000
Total fair value of Skipen - date of acquisition $4,100,000
Carrying amount 3,500,000
Excess acquisition-date fair value over book value 600,000
Assigned to land 130,000
Goodwill $ 470,000

Blooms: Apply
REFERENCE: 06-14
Thomas Inc. had the following stockholders' equity accounts as of January 1, 2018:
Preferred stock — $90 par value, nonvoting and nonparticipating;

9% cumulative dividend $ 2,700,000
Common stock — $25 par value 5,600,000
Retained earnings 14,000,000
Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2018, for
$20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of
$3,060,000. A database valued at $656,000 was recognized and amortized over five years.
During 2018, Thomas reported earning $630,000 in net income and paid $504,000 in total cash
dividends. Kuried used the equity method to account for this investment.
Page 6-49
[QUESTION]
REFER TO: 06-14
106. What is the amount of goodwill resulting from this acquisition?
Answer:
Noncontrolling interest in preferred stock (100%): 3,060,000
Total fair value of Thomas 1/1/18 $23,716,000
Carrying amount 22,300,000
Excess acquisition-date fair value over book value 1,416,000
Assigned to database 656,000
Goodwill $ 760,000

Blooms: Apply
[QUESTION]
REFER TO: 06-14
107. What was the noncontrolling interest's share of consolidated net income for the year 2018?
Answer:
Preferred stock — Thomas Inc. $ 2,700,000
Preferred dividend rate x 9%
Noncontrolling interest’s share of subsidiary’s income $ 243,000
All residual net income is attributed to the controlling interest of Kuried as sole owner of
common stock of Thomas.
Difficulty: 1 Easy
Blooms: Apply
[QUESTION]
REFER TO: 06-14
108. What is the controlling interest share of Thomas’ net income for the year ended December
31, 2018?
Answer:
Database $ 656,000
Amortization period in years ÷ 5
Annual amortization of database $ 131,200
Thomas net income (book) $ 630,000

Page 6-50
Amortization of database (131,200)
498,800
Preferred stock dividend (9% × $2,700,000) (243,000)
Net income residual to common stockholders $ 255,800
(100% to Kuried as controlling interest)
Blooms: Apply
[QUESTION]
REFER TO: 06-14
109. What was Kuried’s balance in the Investment in Thomas Inc. account as of December 31,
2018?
Answer:
Database $ 656,000
Amortization period in years ÷ 5
Annual amortization of database $ 131,200
Investment in Thomas Inc., 12/31/18

Acquisition consideration, 1/1/13 $20,656,000
Equity accrual ($630,000 - $243,000) 387,000
Dividends collected ($504,000 - $243,000) (261,000)
Database amortization (from above) (131,200)
Investment in Thomas Inc., 12/31/18 $20,650,800
Blooms: Apply
[QUESTION]
REFER TO: 06-14
110. Prepare all consolidation entries for 2018.
Answer:
Consolidation Entries
Consolidation Entries S and A (combined)
Common Stock (Thomas Inc.) 5,600,000

Preferred Stock (Thomas Inc.) 2,700,000
Retained Earnings, 1/1/18 (Thomas Inc.) 14,000,000
Database 656,000
Goodwill 760,000
Page 6-51
Investment in Thomas Inc. 20,656,000
Noncontrolling Interest in Thomas Inc. 3,060,000
Consolidated Entry I
Equity Income of Subsidiary 387,000

Investment in Thomas Inc. 387,000
Consolidation Entry D
Investment in Thomas Inc. 261,000

Dividends Paid 261,000
Consolidation Entry E
Amortization Expense 131,200

Database 131,200

Blooms: Apply
[QUESTION]
111. Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2016, for
$644,000 in cash. Of this consideration transferred, $42,000 was attributed to equipment with a
ten-year remaining useful life. Goodwill of $56,000 had also been identified. Jet applied the
partial equity method so that income would be accrued each period based solely on the earnings
reported by the subsidiary.
On January 1, 2019, Jet reported $280,000 in bonds outstanding with a book value of $263,200.
Nittle purchased half of these bonds on the open market for $135,800.
During 2019, Jet began to sell merchandise to Nittle. During that year, inventory costing
$112,000 was transferred at a price of $140,000. All but $14,000 (at Jet’s selling price) of these
goods were resold to outside parties by year's end. Nittle still owed $50,400 for inventory
shipped from Jet during December.
The following financial figures were for the two companies for the year ended December 31,
2019.
Jet Corp. Nittle Inc.

Revenues $(894,600) $(652,400)
Cost of goods sold 483,000 277,200
Expenses 187,600 225,400
Interest expense-bonds 33,600 0
Interest income-bond investment 0 (15,400)
Equity in income of Nittle Inc. (165,200) 0
Net income $(355,600) $ (165,200)

Page 6-52
Retained earnings, January 1, 2019 $(483,000) $(505,400)
Net income (above) (355,600) (165,200)
Dividends paid 217,000 85,400
Retained earnings, December 31, 2019 $(621,600) $(585,200)
Cash and receivables $186,200 $109,200

Inventory 239,400 121,800
Investment in Nittle Inc. 851,200 0
Investment in Jet Corp. bonds 0 137,200
Land, buildings, and equipment (net) 348,600 757,400
Total assets $ 1,625,400 $1,125,600
Accounts payable $(315,000) $(232,400)

Bonds payable (280,000) (140,000)
Discount on bonds payable 11,200 0
Common stock (420,000) (168,000)
Retained earnings, December 31, 2019 (above) (621,600) (585,200)
Total liabilities and stockholders’ equity $(1,625,400) $(1,125,600)
Required:
Prepare a consolidation worksheet for the year ended December 31, 2019.
Answer:
CONSOLIDATION WORKSHEET
For the Year Ended 12/31/2019
Jet Nittle Consolidated Entries Consolidated

Account Corp Inc. DR CR Balance
Revenues ( 894,600) ( 652,400) (TI) 140,000 (1,407,000)
Cost of Goods Sold 483,000 277,200 (G) 2,800 (TI) 140,000 623,000
Expenses 187,600 225,400 (E) 4,200 417,200
Interest Expense – Bonds 33,600 (B) 16,800 16,800
Interest Income – Bond Investment ( 15,400) (B) 15,400
Loss on extinguishment of debt (B) 4,200 4,200
Equity in Nittle Income ( 165,200) (I) 165,200
Net Income ( 355,600) ( 165,200) ( 345,800)
R/E, 1/1/19, Jet Corp. ( 483,000) (*C) 12,600 ( 470,400)
R/E, 1/1/19, Nittle Inc. ( 505,400) (S) 505,400
Net Income ( 355,600) ( 165,200) ( 345,800)
Dividends Paid 217,000 85,400 (D) 85,400 217,000
R/E, 12/31/19 ( 621,600) ( 585,200) ( 599,200)
Cash & Receivables 186,200 109,200 (P) 50,400 245,000
Inventory 239,400 121,800 (G) 2,800 358,400
Investment in Nittle 851,200 (D) 85,400 (*C) 12,600
(S) 673,400
(A) 85,400
(I) 165,200
Investment in Jet Corp. Bonds 137,200 (B) 137,200
Land, Buildings, & Equipment (net) 348,600 757,400 (A) 29,400 (E) 4,200 1,131,200
Goodwill (A) 56,000 56,000
Total Assets 1,625,400 1,125,600 1,790,600

Page 6-53
Accounts Payable ( 315,000) ( 232,400) (P) 50,400 ( 497,000)
Bonds Payable ( 280,000) ( 140,000) (B) 140,000 ( 280,000)
Discount on Bonds Payable 11,200 (B) 5,600 5,600
Common Stock ( 420,000) ( 168,000) (S) 168,000 ( 420,000)
R/E, 12/31/19 ( 621,600) ( 585,200) ( 599,200)
Total Liabilities & Stockholders’ (1,625,400) (1,125,600) 1,379,000 1,379,000 (1,790,600)
Equity
Blooms: Apply
[QUESTION]
112. Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's
convertible bonds. The following consolidated financial statements were for 2017 and 2018.

Page 6-54
2017 2018
Revenues $ 1,064,000 $ 1,232,000
Cost of goods sold ( 714,000) ( 756,000)
Depreciation and amortization ( 126,000) ( 140,000)
Gain on sale of building –0– 28,000
Interest expense ( 42,000) ( 42,000)
Noncontrolling interest $ 12,600 $ 15,400
Net income to controlling interest $ 169,400 $ 306,600
Retained earnings, January 1 $ 420,000 $ 519,400

Net income (from above) 169,400 306,600
Dividends paid ( 70,000) ( 140,000)
Retained earnings, December 31 $ 519,400 $ 686,000
Cash $ 112,000 $ 196,000

Accounts receivable 210,000 196,000
Inventory 280,000 476,000
Buildings and equipment (net) 896,000 966,000
Database 210,000 203,000
Total assets $ 1,708,000 $ 2,037,000
Accounts payable $ (196,000) $ (140,000)

Bonds payable (560,000) (720,000)
Noncontrolling interest in Brewer Inc. ( 44,800) ( 57,400)
Common stock (140,000) (168,000)
Additional paid-in capital (247,800) (265,600)
Retained earnings, December 31 (from above) (519,400) (686,000)
Total liabilities and stockholders’ equity $ (1,708,000) $ (2,037,000)
Additional Information:
1. Bonds were issued during 2018 by the parent for cash.
2. Amortization of a database acquired in the original combination amounted to $7,000 per
year.
3. A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash
on May 11, 2018.
4. Equipment was purchased by the subsidiary on July 23, 2018, using cash.
5. Late in November 2018, the parent issued common stock for cash.
6. During 2018, the subsidiary paid dividends of $14,000.
Required:
Prepare a consolidated statement of cash flows for this business combination for the year ending
December 31, 2018. Either the direct method or the indirect method may be used.
Answer:

Page 6-55
ALLEN CO. AND BREWER INC.
Statement of Cash Flows – Direct Method
For the Year Ending December 31, 2018
Cash flows from operating activities

Cash received from customers $1,246,000
Cash payments
To suppliers $1,008,000
For interest expense 42,000 (1,050,000)
Net cash provided by operating activities $ 196,000
Cash flows from investing activities

Proceeds from sale of building $ 70,000
Purchase of equipment (245,000)
Net cash used by investing activities (175,000)
Cash flows from financing activities

Payment of cash dividends $ (142,800)
Issuance of bonds 160,000
Issuance of common stock 45,800
Net cash provided by financing activities $ 63,000
Net increase in cash $ 84,000
Cash, January 1, 2018 112,000
Cash, December 31, 2018 $ 196,000
The above statement uses the direct method for calculating cash flows from operating activities.
The following presentation would be included for the direct method as a reconciliation of net
income to net cash from operations, as well as being the presentation of cash flow from operating
activities for the indirect method:
ALLEN CO. AND BREWER INC.

Statement of Cash Flows – Indirect Method
For the Year Ending December 31, 2018
Cash flows from operating activities

Consolidated net income $ 322,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense $ 133,000
Amortization of database 7,000
Gain on sale of building (28,000)
Decrease in accounts receivable 14,000
Increase in inventory (196,000)
Decrease in accounts payable (56,000) $(126,000)
Net cash provided by operating activities $ 196,000

Page 6-56
Difficulty: 3 Hard
Blooms: Apply
REFERENCE: 06-15
Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share when
Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30
per share. At the present time, Glotfelty reports the following stockholders’ equity:
Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None
of this stock is purchased by Panton.
[QUESTION]
REFER TO: 06-15
113. Describe how this transaction would affect Panton’s books.
Answer:
The investment account and APIC will be increased by $63,000 as shown below:

Increase in Sub book value (600,000-450,000) ........................ 150,000
Blooms: Analyze
[QUESTION]
REFER TO: 06-15
114. Prepare Panton’s journal entry to recognize the impact of this transaction.

Page 6-57
Answer:
Investment in Glotfelty 63,000
Additional Paid in Capital 63,000

Difficulty: 1 Easy
Blooms: Apply
REFERENCE: 06-16
Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years agofor $30 per share when
Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30
per share. At the present time, Glotfelty reports the following stockholders’ equity:
Glotfelty issues 5,000 shares of previously unissued stock to the public for $22 per share. None
of this stock is purchased by Panton.
[QUESTION]
REFER TO: 06-16
115. Describe how this transaction would affect Panton’s books.
Answer:
The investment account and APIC would be decreased by $1,800, as shown below:

Subsidiary valuation basis ............................................................. 935,000
Required adjustment —decrease ............................................ $1,800
Blooms: Apply

Page 6-58
[QUESTION]
REFER TO: 06-16
116. Prepare Panton’s journal entry to recognize the impact of this transaction.
Answer:
Additional paid in capital 1,800
Investment in Glotfelty 1,800

Difficulty: 1 Easy
Blooms: Apply
[QUESTION]
117. Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share
when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded
at $30 per share. At the present time, Glotfelty reports the following stockholders’ equity:
Glotfelty issues 5,000 shares of previously unissued stock to Panton for $35 per share.
Required: Describe how this transaction would affect Panton’s books.
Answer:
The investment account and APIC will be increased by $70,000, as shown below:

Parent's investment account
($540,000 + [90% × 150,000]+175,000) .......................... 850,000

Blooms: Analyze

Page 6-59

Page 6-60
Another random document with
no related content on Scribd:
up unto heaven and our heart is sore." "Amon is the god of the rich and
Aton the god of the poor," the king preached. "Woe unto you, you sleek and
rich who acquire house after house and field after field, so that there is no
room on the earth left for others! Your hands are full of blood. Wash,
cleanse yourselves, learn to do good. Save the oppressed, defend the
orphan, protect the widow. Provide bread for the hungry, water for the
thirsty, clothes for the naked, shelter for the homeless, smiles for the
weeping. Undo the bondsmen's yoke and set the slaves free: then shall your
light shine in darkness and your night shall be as midday!"
"Ankh-em-maat, You-Who-live-in-Truth," the king's disciples said to

him, "you will make the poor equal with the rich, will efface the boundaries
between fields as the river flood effaces them. You are a multitude of Niles,
flooding the earth with the waters of inexhaustible love!"
The king had invented a dangerous game of throwing gold to the

beggars like fire into straw. For many years Mahu, the chief of the guards,
had saved the situation: collecting trustworthy people from among the
palace servants he dressed them up as beggars and promised the well-
behaved a fair share of the spoils and the unruly—the lash; and all had gone
well. The king was short-sighted; from the High Place where he sat while
throwing the gold money rings into the crowd, he could not recognize the
faces below.
But someone informed against Mahu. The king was very angry and
nearly dismissed him from his post; and next time Mahu had to admit real,
not dressed up beggars. Then there was trouble: no sooner did the rain of
gold begin to fall than people grew savage, a free fight began and a whole
detachment of armed soldiers had difficulty in quieting the crowd. There
were three killed and many wounded. The king fell ill with grief, gold
rained no more, but food was still given away and petitions received.
The Beggars Court was a large quadrangle paved with slabs of alabaster
and surrounded by two storeys of pillared arcades. At one end of it was the
High Place—the king's tabernacle. A wide, gradually ascending staircase of
alabaster led to it. The goddess, Nekhbet, the Falcon Sun-mother, with a
white head and a red, scaly body, was soaring above the tabernacle holding
a golden ring—the royal globe, in its claws. "As the mother comforts her
children so will I comfort you," the king, son of the Sun, said to the
sorrowful children of the earth.
"Down! down! down! the king comes! The god comes!" the runners
cried and the whole crowd in the court prostrated themselves, crying out:
"Rejoice, Akhnaton, Joy of the Sun!"
Besides beggars and petitioners there were, in the crowd, many sick,
blind, halt and lame, because people believed that everyone who touched
the king's clothes or upon whom his shadow fell was healed.
"Defend us, save us, have mercy, O Lord!" they called to him, like the
souls in hell to the god who came down to them.
The king ascended the steps to the tabernacle and sat on his throne. Dio
stood behind him with the fan.
The guards admitted the petitioners through a narrow passage between

two low walls of stone along the foot of the stairs. Two Nubian soldiers
with naked swords guarded the door in the middle of the wall adjoining the
staircase. Approaching this door every petitioner prostrated himself, sniffed
the ground, placed a wooden or a clay tablet with his petition on the bottom
step of the stairs, where there was a heap of them already, and passed on.
Everyone was admitted into the Court, but a special permit was required
for entering the passage leading to the king's tabernacle. Mahu, the chief of
the guards, watched over everything.
Suddenly there was a disturbance. A petitioner tried to get through the

little door. The soldiers crossed their swords in front of him but he went
straight ahead, stretching his arm towards the king and screaming as though
he were being cut to pieces:
"Defend, save, have mercy, Joy of the Sun!"
Not daring to kill a man before the king, the soldiers lifted their swords
and the man, flattening himself on the ground and wriggling like an eel,
crept between them and began crawling up the stairs. Mahu rushed at him
and seized him by the collar, but the man wriggled out and went on
screaming and crawling towards the king.
Mahu made a sign to the lancers of the bodyguard who stood two in a
row, along the stairs. They closed their ranks and lowered their spears. But
the man crawled on.
At the same moment a frenzied scream was heard:
"Let him through! Let him through!"
The squealing, breathless scream like that of a woman in hysterics or of

a child in a fit was so strange that Dio did not recognize the king's voice.
With a distorted face he jumped up and stamped with both feet, as the little
girls had done when they played blind man's buff to the sound of the
threshing song. And the ringing cry went on:
"Let him through! Let him through!"
Mahu made another sign to the lancers and they lifted their spears,
making way. The man crawled between them and advanced almost as far as
the top landing where the king's tabernacle stood. He raised his head and
Dio recognised the long red curls, the red goat's beard, the prominent ears,
hooked nose, thick lips and burning eyes of Issachar, son of Hamuel.
The king was quiet now and, bending forward, looked straight into
Issachar's eyes intently and, as it were, greedily, just as Issachar looked at
him.
"Your servant has a secret message for you, sire!" Issachar whispered.
"Speak, I listen."
"No, for you, for you alone."
"Leave us alone," the king said to the dignitaries who stood on the
landing.
All withdrew except Dio who hid behind the corner of the tabernacle.
Some three or four steps separated Issachar from the king. "I know who
you are! I know!" he said, crawling up and looking straight into the king's
eyes, with the same intent, eager look. "Sun's joy, Sun's Only Son,
Akhnaton Uaenra, Son of the living God!"
Suddenly he jumped up and drew a knife from his belt. But before he
had time to raise it Dio darted forward and seized him by the hand. He
pushed her so that she fell on her knees but jumped up again, not letting go
of his hand, and screening the king with her body. An unendurably burning
chill pierced her shoulder. She heard shouts, saw people running and fell on
the ground with the last thought: 'he will kill him!'
IX
aradise gardens of Maru-Aton—the Precincts of the Sun

—were situated south of the city, where the rocks of the
hilly desert were close to the river.
The sweet breath of the north wind could be felt even

on the hottest days under the shade of the evergreen
palms and cedars laden with the fragrance of incense. Each tree was planted
in a hole dug in the sand, filled with the Nile black earth and surrounded by
a ridge of bricks to prevent water running away.
Everywhere there were flower-beds, ponds, islands, bridges, arbours,

chapels, summer houses of light transparent lattice-work magnificently
painted and gilded like jewel boxes.
The king often came here to rest from the noise of the city in the
stillness of paradise.
Dio spent three months here recovering from her wound. Issachar hit
her with the knife just above her left breast. It was a dangerous wound: had
the knife gone in deeper it would have touched the heart. During the first
few days she suffered from fever and delirium.
She fancied she was lying on the funeral pyre as then, in the island of
Crete after killing the god Bull; the sacrificial knife pierced her heart; the
flames burnt her but through their heat she felt a heavenly freshness: Merira
was the flame and Tammuzadad—the freshness.
Or she saw a fiery red goat grazing on the green meadows of paradise;
the grass turned coal-black at his touch and red sparks flitted about it; and
again—Tamu was the green grass and Merira—the sparks.
Or it was a rich old Sidonian merchant unfolding before her among the
booths of the Knossos harbour magnificent stuff, red shot with green;
winking slyly he praised his goods: "a true robe of Baal! A mine of silver
per cubit is my last price." And, once more, the red shade was Merira, the
green—Tammuzadad.
Or, the real Merira was taking her into the holy of holies of Aton's
temple, as he really had done, three days before Issachar's attack on the
king; she did not want to go in, knowing that no one but the king and the
high priest were supposed to do so, but Merira reassured her, saying, "Yes,
with me you may!" And, taking her by the hand, he led her in. In the dim
light of sanctuary lamps the bas-relief of the Sphinx seemed a pale
phantom: a lion's body and legs, human arms and head and an inexpressibly
strange, fine, birdlike face—old, ancient, eternal. "If a man had suffered for
a thousand years in hell and then came to earth again, he would have a face
like that," Merira whispered in her ear. "Who is he?" she tried to recognize
him and could not; and then, suddenly, she knew him and woke up with a
cry of unearthly horror: 'Akhnaton'!
The king's physician, Pentu, treated her so cleverly that she was soon
better. But the unwearying care of the queen did her more good perhaps
than any medicine. The queen nursed Dio as though she had been her own
daughter; she never left her, spent sleepless nights beside her though she
herself was far from well: she had a cough and every evening there was an
ominous red flush in her cheeks.
Each time that Dio saw the wan, beautiful face bending over her, the
face of one who had also received a mortal wound, she felt like bursting
into tears.
She learned from the queen what happened in the Beggars Court after
Issachar had struck her and she fell down senseless.
"God has saved the king by a miracle!" everyone said. The assassin had
raised his knife to strike him when some dreadful vision appeared before
him; the knife dropped out of his hand and he fell at the king's feet. The
king, thinking that Dio was killed, bent over her and embraced her with a
cry so terrible that only then they understood how much he loved her. He
would not leave her, but at last Pentu, the physician, assured him that Dio
was alive and he got up, covered with her blood.
"You are now related by blood both to him and to me," the queen said,
smiling through tears.
Some of the bodyguards rushed at Issachar, intending to kill him on the

spot, but the others saved him at the orders of Mahu and Ramose; only
these two had kept their presence of mind amidst the general confusion and
remembered that, before putting the criminal to death, they ought to find
out from him whether he had any accomplices. Issachar was taken to the
prison and cross-examined, but he said very little; he did not give anyone
away and only confessed that when he raised the knife to strike the king he
had a vision. He would not say what the vision was and only muttered to
himself something in the Jewish language about their King-Messiah and
repeated senseless words "they shall look on Him whom they pierced." But
he would not explain who was pierced and then grew silent altogether.
Torture was forbidden by royal decree in the holy province of Aton, yet
considering the importance of the occasion they had recourse to it all the
same. But neither antelope lashes nor hippopotamus scourges could untie
Issachar's tongue. Mahu and Ramose had to give him up at last.
On that same night he was taken ill with something like brain fever—or
pretended to be. Fearing that the criminal might die before the execution
Ramose hastened to ask the king for a death penalty had been abolished in
Aton's province. And when Ramose suggested that the criminal should be
moved to some other province and executed there, the king smiled and said,
shrugging his shoulders: "there is no deceiving God, my friend! This man
wanted to kill me here—and here he must be judged."—"Not judged, but
pardoned," Ramose understood and was indignant; he decided to put
Issachar to death secretly by the hands of the gaolers. But he did not
succeed in this either: the old gaolers were replaced by the new who had
received strict orders to preserve the prisoner's life.
Issachar soon recovered from his real, or pretended, illness. The king
who had had an epileptic fit after Issachar's attack on him and was still far
from well, visited the prisoner and had a long peaceful talk almost alone
with him: the guards stood at a distance; and a few days later it appeared
that the prisoner had escaped.
The three elder princesses, Maki, Rita and Ankhi, helped the queen to
nurse Dio; it was from them she heard of the city rumour about the king
having himself helped Issachar to escape; it was said that the man had not
gone far but was hiding somewhere in the town waiting, perhaps, for a new
opportunity to take the king's life.
"The king has now shamed the faces of all his faithful servants because
he loves those who hate him and hates those who love him!" Ramose cried
when he heard of Issachar's escape, and he recalled the words of old
Amenhotep the Wise, the tutor and namesake of the king's father: "if you
want to please the gods, sire, and to cleanse Egypt from corruption, drive
away all the Jews!"
"The darling Hippopotamus is right," Ankhi concluded—she called

Ramose 'hippopotamus' because of his being so stout—and suddenly she
clenched her fists and stamped almost crying with anger. "Shame, shame
upon all of us that the vile Jew has been spared!"
Dio made no answer, but the thought flashed through her mind "we are
related by blood now, but blood, both his own and other people's is like
water to him!" And though she immediately felt ashamed of this thought a
trace of it remained in her mind.
The king often came to Maru-Aton, but the queen seldom allowed him
to see Dio, especially during the first, difficult days: she knew he was not
clever with the sick. His conversations with Dio were strangely trivial.
"Why is it I keep talking of trifles?" he wondered one day, left alone

with her. "Is it that I am growing stupid? You know, Dio, sometimes I am
awfully stupid, ridiculously so. It must be because of my illness...."
He paused and then added, with the childishly timid, apologetic smile
that always wrung her heart: "The worst of it is that I sometimes make the
most sacred things foolish and ridiculous: like a thief stealing and
desecrating that which is holy...."
"Why do you talk like this?" Dio cried, indignantly.
"There, forgive me, I won't.... What is it I was going to say? Oh, yes,
about Issachar. It wasn't out of foolishness I pardoned him. He is a very
good man...."
The queen came in and the conversation dropped. Dio was glad: her
heart was throbbing as though Issachar's knife had once more been thrust
into the wound.
By the month of Paonzu, March-April, she was almost well though still
weak.
The first time she went into the garden she was surprised to see that the
hot summer came straight after the winter: there was no trace of spring.
Strange longing came upon her during those hot days of delusive
southern spring. "He who drinks water out of the Nile forgets his native
land," the Egyptians said. She fancied she, too, had forgotten it. What was
this longing then? "It's nothing," she tried to comfort herself, "it's simply
foolishness, the result of illness, as with the king. It will pass off." But it did
not.
In the gardens of Maru-Aton by the big pond opposite the women's

quarters where Dio lived, a rare tree, hardly ever seen in Egypt, was planted
—a silver birch, graceful and slender, like a girl of thirteen. It had been
brought as a present to Princess Makitatona from Thracia, the land of
Midnight. The princess was very fond of it; she looked after it herself,
watered it and kept the ground around it well dug, covering it with fresh
Nile black earth.
Dio, too, grew fond of the birch tree. Every day she watched its buds
swell and sticky, greenish yellow leaves, crumpled like the face of a new-
born baby, open out; she kissed them and, sniffing them with her eyes
closed, fancied that every moment she would hear the call of the cuckoo
and smell the melting snow and lilies of the valley as in her native woods at
home on Mount Ida—smell the real spring of her own native land.
When flocks of cranes flew northwards, with their melancholy call, she
stretched out her arms to them: would that she, too, were flying with them!
Looking at the ever blue, lifeless sky she longed for the living clouds she
knew so well. Putting her ear to a shell, she eagerly listened to its roar, that
was like the roar of sea waves; she dreamt of the sea in her sleep and wept.
One day she sniffed a new sponge Zenra had just bought and almost cried in
reality.
She had a Cretan amethyst, a present from her mother, with a fine
design upon it: bare willows in a flooded meadow all bent to one side by the
wind, a tumble-down old fence with poles sticking out, the ripple of autumn
rain on the water: everything dull and wretched and yet she would have
given her very soul to see it all again. But she knew she would never see it,
she would never go home—she would not want to herself. Was this,
perhaps, why she longed for it so? Thus the radiant shades in paradise may
be longing for this gloomy earth.
One early morning she sat by Maki's birch tree, listening to the wailing
of the shepherd's pipe in the hills above Maru-Aton. She knew both the
song and the singer: the song was about the dead god Tammuz and the
singer was Engur, son of Nurdahan, a Babylonian shepherd, an old servant
of Tammuzadad, brought by her to Egypt from the island of Crete.
The sounds of the pipe fell sadly and monotonously, sound after sound
like tear after tear.
"The wail is raised for Tammuz far away,
The mother-goat and the kid are slain,
The mother-sheep and the lamb are slain,
The wail is raised for the beloved Son."
Dio listened and it seemed to her that in this song the whole creation
was weeping for the Son who is to come, but still tarries "how long, how
long, O Lord?"
Nothing stirred and complete stillness reigned everywhere; only the air,
in spite of the early hour, was simmering with heat over the sandy paths of
the garden and flowing in streams like molten glass.
Suddenly a fan-like leaf at the top of a palm moved as though coming to

life, then another and a third. There was a gust of wind, hot as from an
oven; the sand on the paths rose up like smoke; the light grew dim; the sky
turned dark and yellowish in an extraordinary, incredible way: it might be
the end of the world; the whole garden rustled and groaned in the sudden
whirlwind. It was dark as night.
Dio ran home. The wind almost knocked her off her feet, burned her
face, blinded her with sand. Her breath failed her, her temples throbbed, her
legs gave way under her. It was not twenty paces to the house but she felt
she would fall exhausted before she got there.
"Make haste, make haste, dear!" Zenra shouted to her from the steps;
seizing Dio by the hand she dragged her into the entry, and with difficulty
shutting the door in the tearing wind, bolted it fast.
"What is it, nurse?" Dio asked.
"Sheheb, a plague of Set," the old woman answered in a whisper,

putting the palms of both hands to her forehead as in prayer.
Sheheb, the south-east wind, blows from the Arabian desert. Fiery
clouds of sand, thrown up by the whirlwind, fall slanting upon the ground
with the noise of hail. The sun turns crimson, then dark like an ember. At
midday lamps have to be lit. Neither men nor animals can breathe in the
black stuffy darkness; plants perish. The whirlwind never lasts more than an
hour; if it lasted longer everything would be burned up as with fire.
In the fiery darkness of the Sheheb Dio lay on her couch like one dead.
The wind howled outside and the whole house shook as though it would
fall. Someone seemed to be knocking and throwing handfuls of sand at the
closed shutters, the flame of the lamp flickered in the wind that penetrated
through the walls.
The door opened suddenly and someone came in.
"Zenra, is it you?" Dio called.
There was no answer. Somebody approached the couch. Dio recognized

Tammuzadad and was not frightened or surprised, she seemed to have
expected him. He bent over her and smiled; no, it was not Tamu, but
Merira. She looked closely and % again it was Tamu and then Merira again;
first it was one then another; they interchanged and merged into one another
like the two colours of a shot material. He bent down still lower, looked into
her eyes as though asking a question. She knew that if she answered 'no'
with her eyes only he would go away; but she closed her eyes without
speaking. He lay down beside her and embraced her. She lay like one dead.
When he had gone away she thought "I will go and hang myself." But
she went on lying quite still. She may have dropped asleep and by the time
she woke up the Sheheb was over, the sky was clear and the flame of the
lamp looked pale. Zenra came in and Dio understood that it had been
delirium.
After the Sheheb the weather freshened. The sweet breath of the north
wind could be felt in the shade of the evergreen palms and cedars fragrant
like a censer of incense. Only at times a smell of carrion came from the
direction of Sheol and then Dio thought of her Sheheb nightmare. It was the
last attack of her illness. The wound healed so completely that the only
trace left of it was a pale pink scar on the dark skin, and Dio was quite well.
The king had once given her a beautiful scroll of papyrus, yellowish like
old ivory, smoothed to perfection with wild boar's tooth, fine, strong,
imperishable.
Papyrus was expensive and only used for the most important records;
everything else was written on clay or wooden tablets, flat white stones or
fragments of broken earthenware.
Dio had been wondering for some time what would be good enough to
write on this scroll; at last she thought of something.
All the king's teaching was given by word of mouth; he never wrote
down anything himself and did not allow others to do so. "To write," he
used to say, "is to kill the word."
"It will all be lost, it will vanish like a footprint on the sand," Dio often
thought sorrowfully, and at last she decided: "I will write down on the
papyrus the king's teaching; I will not disobey him: no one living now shall
see the scroll; but when I have finished writing I will bury it in the ground;
perhaps in ages to come men will discover it and read it."
She carried out her plan.
In secret from all she worked night after night, sitting on the floor in
front of a low desk with a sloping board for the papyrus, tracing upon it,
with the sharpened end of a reed, close columns of hieroglyphics,
abbreviated into shorthand, and covering each column with cedar varnish
which made the writing indelible.
Words of wisdom of King Akhnaton Uaenra Neferheperura—Sun's
joy, Sun's beautiful essence, Sun's only Son—heard and written down by
Dio, daughter of Aridoel, a Cretan, priestess of the Great Mother.
The King says:
"Aton, the face of god, the disc of the sun, is the visible image of the
invisible God. To reveal to men the hidden one is everything.
"My grandfather, Prince Tutmose, was hunting once in the desert of

the Pyramids; he was tired, lay down and dropped asleep at the foot of
the great Sphinx which, in those days, was buried in the sands. The
Sphinx appeared to him in a dream and said "I am your father, Aton; I
will make you king if you dig me out of the sands." The prince did so,
and I am doing so, too: I dig the living God out of the dead sands—dead
hearts."
The King says:
"There are three substances in God: Zatut—Rays, Neferu—Beauty,

—Merita—Love; the Disc of the Sun, Light and Warmth; Father, Son,
Mother."
"The symbol of Aton, the disc of the sun with three rays like hands,
stretched downwards is clear to all men—to the wise and to the
children."
"The remedy from death is not ointments for the dead, balsam, salt,
resin or saltpetre, but mercy and love. Have mercy upon one another, O
people, have mercy upon one another and you shall never see death!"
The King said to the malefactor who attempted his life, Issachar the
Israelite: "your God sacrifices all to Himself and mine sacrifices Himself
for all."
The King says:
"The way they break granite in the quarries of Egypt is this: they
make a hole in the stone, drive a wooden wedge into it, moisten it with
water and the wood, as it swells out, breaks the stone. I, too, am such a
wedge."
"The Egyptians have an image of Osiris-Set, god-devil, with two

heads on one body, as it were, twins grown together. I want to cut them
in two."
"The deadness of Egypt is the perfect equilibrium of the scales. I
want to disturb it."
"How little I have done! I have lifted the coffin-lid over Egypt and I
know, when I am gone, the lid will be shut down again. But the signal
has been given to future ages!"
"When I was about eight I saw one day the soldiers piling up before
the King, my father, the cut-off hands of enemies killed in battle, and I
fainted with the smell of corruption. When I think of war I always recall
this smell."
"On the wall of the Charuk palace, near Thebes, where I spent my
childhood, there was a mural painting of a naval battle between the
Cretans and the Egyptians; the enemies' ships were going down, the men
drowning and the Egyptians were stretching out to them poles, sticks,
oars, saving their enemies. I remember someone laughed looking at the
painting: 'One wouldn't find such fools anywhere except in Egypt!' I did
not know what to answer and perhaps I do not know now, but I am glad
to be living in the land of such fools!"
"The greatest of the kings of Egypt, Amenemhet, had it written on

his tomb:
In my reign men lived in peace and mercy

Arrows and swords lay idle in my reign."
"The god rejoices when he goes into battle and sees blood" is said in
the inscription of King Tutmose the Third, the Conqueror, to the god
Amon. Amon is the god of war, Aton the god of peace. One must choose
between them. I have chosen."
"There will be war so long as there are many peoples and many gods;
but when there is one God and one mankind, there will be peace."
"We Egyptians despise the Jews, but maybe they know more about
the Son than we do: we say about Him 'He was' and they say He is to
come.'"
The king said to me alone and told me not to repeat it to anyone:

"I am the joy of the Sun, Akhnaton? No, not joy as yet, but sorrow;
not the light, but the shadow of the sun that is to rise—the Son!"
Dio wrote down many other words of the king in her scroll and she
finished with the hymn to Aton:
The Song of King Akhnaton Uaenra Neferheperura to Aton, the

living and only God.
If my scroll is ever found by you, men of the ages to come, pray for
me in gratitude for having preserved this song for you, the sweetest of all
the songs of the Lord, that at the everlasting supper I may eat bread with
my beloved King Akhnaton, the messenger of the rising sun—the Son.
Glorious is thy rising in the east

Lord and giver of life, Aton!
When thou risest in the sky
Thou fillest the earth with thy beauty.
Thy rays embrace all created things,
Thou hast carried them all away captive.
Thou bindest them by thy love.
Thou art far but thy rays are on earth,
Thou art on high, thy footprints are the day.
When thou settest in the west
Men lie in the darkness like the dead.
Their heads are wrapped up, their nostrils stopped
Stolen are all their things that are under their heads
While they know it not.
Lions come forth from their dens,
Serpents creep from out their holes:
The Creator has gone to rest and the world is dumb.
Thou risest and bright is the earth

Thou sendest forth thy rays and the darkness flees.
Men rise, bathe their limbs, take their clothing,
Their arms are uplifted in prayer.
And in all the world they do their work.

All cattle graze in pastures green,
All plants are growing in the fields,
The birds are flying over their nests,
And lift their wings like hands in prayer.
Lambs leap and dance upon their feet,
All winged things fly gaily round.
They all live in thy life, O Lord!
The boats sail up and down the river,

Every highway is open because thou hast dawned.
The fish in the river leap up before thee
And thy rays are in the midst of the great sea.
Thou createst the man-child in woman,

And makest the seed in man,
Givest life to the child in its mother's womb,
Soothing it that it may not weep
Ere its own mother can soothe it.
When the chicken cries in the egg-shell,

Thou givest it breath to preserve it alive
And the strength to break the shell.
It comes forth from the egg and staggers,
But with its voice it calls to thee.
How manifold are thy works, O Lord!
They are hidden from us, Thou only God whose power no
other possesses!
Thou didst create the earth according to thy desire,
While thou wast alone in eternity,
Thou didst create man and the beasts of the field,
All the creatures that are upon the earth,
And fly with their wings on high.
Thou didst create Syria, Nubia and Egypt,
Setting every man in his place.
Giving him all that he needs,
His measure of food and his measure of days.
Their tongues are diverse in speech,
Their forms are diverse and their skins,
For Thou, divider, hast divided the peoples.
Thou makest the Nile in the nether world

To fill with goods thy people here;
Thou hast set a Nile up in the sky,
That its waters may fall down in floods,
Giving drink to wild beasts on the hills,
And refreshing the fields and the meadows.
How excellent are thy works, O Lord!
The Nile in heaven is for the strangers,
And the Nile from the nether world is for Egypt.
Thou feedest each plant as thine own child,

Thou makest the seasons for all thy creatures:
The winter to bring them coolness
And the summer to bring them heat.
Thou didst create the distant heavens

In order to behold all that Thou didst make.
Thou comest, thou goest, thou comest back
And Greatest out of thyself, the Only One,
Thousands upon thousands of forms:
Cities, towns and villages
On highways and on rivers.
All eyes see thy eternal sun.
When thou hast risen they live, when thou settest they die,
When thou didst establish the earth
Thou didst reveal thy will to me,
Thy Son, Akhnaton, who lives for ever and proceeds from thee,
And to thy beloved daughter,
Nefertiti, the delight of the Sun's delights.
Who flourishes for ever and ever.
Thou, Father, art in my heart
And there's no other that knows thee,
Only I know thee, thy son,
Akhnaton Uaenra,
Joy of the Sun, Sun's only son!"
When she had finished writing, Dio put the scroll inside an earthenware
vessel, sealed it with a leaden seal with the sun disc of Aton and, as soon as
it was dark, took a spade and went to Maki's birch tree by the big pond in
the garden.
The fiery whirlwind of Sheheb had withered the tree, the blackened
leaves were rolled up into little tubes, but the roots were alive. Maki dug it
out to move it to a new hole with fresh earth in it, but she probably had not
had time to finish her work before night: the tree lay near the hole.
Dio dug the hole deeper, put the earthenware pot into it, covered it with
earth and levelled it.
A white rose was blooming close by in a flowerbed by the pond. In the

stillness of the April night glowworms flitted about like sparks. One of
them burrowed its way into the rose, and the flower seemed to have a heart
of fire.
Dio went up to it, kissed it and thought:
"If some day men read my writing, they will connect Akhnaton with
Dio. I shall be in him as this flame is in the flower."
X
he whip cracked, the horses dashed forward, the feathers
on their manes swayed, snowflakes of foam dropped off
their bridles, and the chariot flew like a whirlwind. The air
whistled in the ears; the lion's tail fixed to the king's belt at
the back and the crimson ribbons of his robe fluttered in
the wind. The king was driving; Dio stood behind him.
They passed the palm groves and the fields of ripe, yellow corn, taller
than the height of man; the Nile glittered for the last time in the distance
and the menacing silence of the endless desert, now dark brown, now
sparkling like glass, enveloped them.
As she looked through her lashes at the shining snake-like sandy roads,
flattened by heavy traffic, Dio recalled the thin layer of ice over the thawing
snow sparkling in the sun on Mount Dicte. The dazzling air was
shimmering with the heat. A vulture hung motionless in the dark blue sky.
At times the shadow of a passing cloud ran over the ground and, still
quicker, an antelope galloped past; suddenly it would stop and, stretching
out its neck, sniff the air and then run on, light as the wind.
The sun was setting when the wayfarers saw on a high rock of the
Arabian hills a boundary-stone of the province of Aton.
The images of King Akhnaton and Queen Nefertiti, cut out in the rock
at a height where only the wind, the sun and the eagles could reach them,
were half-covered, as though buried alive, by the waves of drifting sands.
The only way to reach the bas-reliefs was to descend by a rope down a
perpendicular rock; and evidently this was what some enemy of Aton's faith
had done, for the images were broken and defiled.
The king stepped out of the chariot. The long black shadow cast by his
figure upon the white sand seemed to stretch to the ends of the earth.
There was a clatter of hoofs. The high-priest, Merira, and the chief of
the guards, Mahu, drove up.
"If I could only find the scoundrels, I would kill them on the spot!"
Mahu cried indignantly, when he saw the desecrated images.
"Come, come, my friend," said the king, with a smile. "The sands will
bury them anyway—there will be nothing left."
Mahu went to make arrangements for the night: the king wished to sleep
in the desert.
Close by there was a mountain gorge, dark and narrow like a coffin,
where tombs had been cut in the rock for the princesses. Hard by an old fig-
tree made an unfading patch of green against the dead sand, and a
sweetbrier flowered, fragrant with the scent of honey and roses: the secret
water of an underground spring kept them fresh.
The king, accompanied by Dio and Merira, went down into the gorge to
see the tombs.
When they had finished they walked up the slope of the hill by a narrow
jackals' path, talking.
"Is the decree concerning the gods ready, Merira?" the king asked.
Dio understood that he meant the decree prohibiting the worship of all
the old gods.
"It is ready," Merira answered, "but do think before you proclaim it,
sire."
"Think of what?"
"Of not losing your kingdom."
The king looked at him intently, without speaking, and then asked
again:
"And what ought I to do, my friend, not to lose my kingdom?"
"I have told you many times, Uaenra: be merciful to yourself and
others."
"To myself and others? Can one do both?"

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Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

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Copyright © 2018 McGraw-Hill Education. All rights reserved.

Subsidiary unamortized fair value after issuing new

Investment in Odom increases by $1,200 ($835,200 less $834,000).

Common stock — 40,000 shares outstanding $140,000

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Common stock, $10 par value (50,000 shares outstanding) $500,000

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Accounts payable $ 60,000 $ 51,000

Additional information for 2018:

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Accounts payable $120,000 $102,000

Additional information for 2018:

• Butler & Cassie’s consolidated net income was $100,000.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Preferred stock, 2,000 shares $70 par value,

Consideration transferred for 60% interest in common stock $1,281,000

Learning Objective: 06-04

Book value, January 1, 2017 ($1,400,000 × 1.08) original issue $1,512,000

Copyright © 2018 McGraw-Hill Education. All rights reserved.

Carrying amount of 40% of bonds payable (intra-entity portion),

Gain on retirement of bonds, January 1, 2019:

Purchase price ($560,000 face value × 95%) of investment $(532,000)

Carrying amount of bonds payable, December 31, 2019

Carrying amount, January 1, 2019 (calculated above) $1,489,600

Cash payment ($560,000 face value × 10%) $56,000

Carrying amount of 40% of bonds payable (intra-entity portion)

Carrying amount of investment, December 31, 2019

Carrying amount of investment, January 1, 2019 (purchase price) $532,000

Cash receipt ($560,000 face value × 10%) $56,000

Learning Objective: 06-03

Bonds Payable 560,000

Bonds Payable $560,000

Bonds Payable $560,000

Preferred stock (8% cumulative dividend) $ 700,000

Learning Objective: 06-04