Multiple Choice Questions
1. A parent company buys bonds on the open market that had been previously issued by its subsidiary. The price paid by the parent is less than the book value of the bonds on the subsidiary’s records. How should the parent report the difference between the price paid and the book value of the bonds on its consolidated financial statements?
a. As a loss on retirement of the bonds.
b. As a gain on retirement of the bonds.
c. As an increase to interest expense over the remaining life of the bonds.
d. Because the bonds now represent intra-entity debt, the difference is not reported.

2. Bensman Corporation is computing EPS. One of its subsidiaries has stock warrants outstanding. How do these convertible items affect Bensman’s EPS computation?
a. No effect is created because the stock warrants were for the subsidiary company’s shares.
b. The stock warrants are not included in the computation unless they are antidilutive.
c. The effect of the stock warrants must be computed in deriving the amount of subsidiary income to be included in making the diluted EPS calculation.
d. The stock warrants are included only in basic EPS but never in diluted EPS.

3. Arcola, Inc., acquires all 40,000 shares of Tuscola Company for $725,000. A year later, when Arcola’s equity adjusted balance in its investment in Tuscola equals $800,000, Tuscola issues an additional 10,000 shares to outside investors for $25 per share. Which of the following best describes the effect of Tuscola’s stock issue on Arcola’s investment account?
a. No effect because the shares were all sold to outside parties.
b. The investment account is reduced because Arcola now owns a smaller percentage of Tuscola.
c. The investment account is increased because Arcola’s share of Tuscola’s value has increased.
d. No effect because Arcola maintains control over Tuscola despite the new stock issue.

4. Dane, Inc., owns Carlton Corporation. For the current year, Dane reports net income (without consideration of its investment in Carlton) of $185,000 and the subsidiary reports $105,000. The parent had a bond payable outstanding on January 1, with a book value of $209,000. The subsidiary acquired the bond on that date for $196,000. During the current year, Dane reported interest expense of $18,000 while Carlton reported interest income of $19,000, both related to the intra-entity bond payable. What is consolidated net income?
a. $289,000 .
b. $291,000.
c. $302,000.
d. $304,000.

5. Redfield Company reports current earnings of $420,000 while declaring $52,000 in cash dividends. Snedeker Company earns $147,000 in net income and declares $13,000 in dividends. Redfield has held a 70 percent interest in Snedeker for several years, an investment with an acquisition-date excess fair over book value attributable solely to goodwill. Redfield uses the initial value method to account for these shares. On January 1 of the current year, Snedeker acquired in the open market $51,600 of Red-field’s 8 percent bonds. The bonds had originally been issued several years ago at 92, reflecting a 10 percent effective interest rate. On the date of purchase, the book value of the bonds payable was $50,400. Snedeker paid $49,200 based on a 12 percent effective interest rate over the remaining life of the bonds.
What is the noncontrolling interest’s share of consolidated net income?
a. $40,200.
b. $44,100.
c. $40,560.
d. $44,460.