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Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
6-1
Copyright © 2021 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
CHAPTER 6
VARIABLE INTEREST ENTITIES, INTRA-ENTITY DEBT,
CONSOLIDATED CASH FLOWS, AND OTHER ISSUES
Chapter Outline
I. Variable interest entities (VIEs)
A. VIEs typically take the form of a trust, partnership, joint venture, or corporation. In most
cases a sponsoring firm creates these entities to engage in a limited and well-defined set of
business activities. For example, a business may create a VIE to finance the acquisition of
a large asset. The VIE purchases the asset using debt and equity financing, and then leases
the asset back to the sponsoring firm. If their activities are strictly limited and the asset is
pledged as collateral, VIEs are often viewed by lenders as less risky than their sponsoring
firms. As a result, such arrangements can allow financing at lower interest rates than would
otherwise be available to the sponsor.
B. Control of VIEs, by design, sometimes does not rest with its equity holders. Instead, control
is exercised through contractual arrangements with the sponsoring firm who becomes the
"primary beneficiary" of the VIE. These contracts can take the form of leases, loans,
participation rights, guarantees, or other residual interests. Through contracting, the primary
beneficiary bears a majority of the risks and receives a majority of the rewards of the entity,
often without owning any voting shares.
C. An entity whose control rests with a primary beneficiary is addressed by FASB ASC subtopic
810-10 Variable Interest Entities. The following characteristics indicate a controlling financial
interest in a variable interest entity.
1. The power to direct the activities that most significantly impact the VIE’s economic
performance
2. The obligation to absorb losses of the VIE that could potentially be significant to the VIE
or the right to receive benefits from the VIE that could potentially be significant to the
VIE.
The primary beneficiary bears the risks and receives the rewards of a variable interest entity
and is considered to have a controlling financial interest.
D. If a reporting entity has a controlling financial interest in a variable interest entity, it should
include the assets, liabilities, and results of the activities of the variable interest entity its
consolidated financial statements.
E. In reporting periods subsequent to when a primary beneficiary gains control over a VIE,
consolidation procedures are similar to that for a voting interest entity. A notable exception
in consolidation procedures occurs in accounting for the allocation of consolidated net
income across the controlling and noncontrolling interests. Because variable, rather than
voting, interests determine profit allocation, the underlying agreements between the primary
beneficiary, the VIE, and other related parties must be carefully reviewed to determine net
income distribution.
II. Intra-entity debt transactions
A. No special difficulty is created when one member of a business combination loans money
to another. The resulting receivable/payable accounts as well as the interest income
expense balances are identical and can be directly offset in the consolidation process.

6-2
B. The acquisition of an affiliate's debt instrument from an outside party does require special
handling so that consolidated financial statements can be produced.
1. Because the acquisition price will usually differ from the carrying amount of the liability,
a gain or loss has been created by an effective retirement which is not recorded within
the individual records of either company.
2. Because of the amortization of any associated discounts and/or premiums, the interest
income reported by the buyer will not equal the interest expense of the debtor.
C. In the year of acquisition, the consolidation process eliminates intra-entity accounts (the
liability, the receivable, interest income, and interest expense) while the gain or loss (which
produced all of the discrepancies because of the initial difference) is recognized.
1. Although several alternatives exist, this textbook assigns all income effects resulting
from the retirement to the parent company, the party ultimately responsible for the
decision to reacquire the debt.
2. Any noncontrolling interest is, therefore, not affected by the adjustments utilized to
consolidate intra-entity debt.
D. After the year of effective retirement, all intra-entity accounts must be eliminated again in
each subsequent consolidation. However, when the parent uses the equity method, the
parent’s Investment in Subsidiary account is adjusted in consolidation rather than a gain or
loss account. If the parent employs an accounting method other than the equity method,
then the parent’s Retained Earnings are adjusted for the prior years’ income net effects of
the effective gain/loss on retirement.
1. The change in retained earnings is needed because a gain or loss was created in a prior
year by the effective retirement of the debt, but only interest income and interest expense
were recognized by the two parties.
2. The adjustment to retained earnings at any point in time is the original gain or loss
adjusted for the subsequent amortization of discounts or premiums.
III. Subsidiary preferred stock
A. Subsidiary preferred shares not owned by the parent are a part of noncontrolling interest.
B. The fair value of any subsidiary preferred shares not acquired by the parent is added to the
consideration transferred along with the fair value of the noncontrolling interest in common
shares to compute the acquisition-date fair value of the subsidiary.
IV. Consolidated statement of cash flows
A. Statement is produced from consolidated balance sheet and income statement and not from
the separate cash flow statements of the component companies.
B. Consolidated net income is the starting point for the cash flow from operating section—
including both the parent and noncontrolling interest share.
C. Intra-entity cash transfers are omitted from this statement because they do not occur with
an outside unrelated party.
D. Dividends paid by the subsidiary to the noncontrolling interest are reported as a financing
activity.
V. Consolidated earnings per share
A. This computation normally follows the pattern described in intermediate accounting
textbooks. For basic EPS, consolidated net income is divided by the weighted-average
number of parent shares outstanding. If convertibles (such as bonds or warrants) exist for

Chapter 06 – Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues – 14e
6-3
the parent shares, their weight must be included in computing diluted EPS but only if
earnings per share is reduced.
1. The subsidiary's diluted earnings per share are computed first to arrive at (1) an earnings
figure and (2) a shares figure.
2. The portion of the shares figure belonging to the parent is computed. That percentage
of the subsidiary's diluted earnings is then added to the parent's net income in order to
complete the earnings per share computation.
VI. Subsidiary stock transactions
A. If the subsidiary issues new shares of stock or reacquires its own shares as treasury stock,
a change is created in the book value underlying the parent's investment account. The
increase or decrease should be reflected by the parent as an adjustment to this balance.
B. The book value of the subsidiary that corresponds to the parent's ownership is measured
before and after the transaction with any alteration recorded directly to the investment
account. The parent's additional paid-in capital (or retained earnings) account is normally
adjusted although the recognition of a gain or loss is an alternate accounting treatment.
C. Treasury stock acquired by the subsidiary may also necessitate a similar adjustment to the
parent's investment account. In addition, any subsidiary treasury stock is eliminated within
the consolidation process.
Answer to Discussion Question: Who Lost this $300,000?
This case is designed to give life to a theoretical accounting issue: If a subsidiary's debt is retired,
should the resulting gain or loss be assigned to the parent or to the subsidiary? The case illustrates
that there is no clear-cut solution. This lack of an absolute answer makes financial accounting both
intriguing and frustrating.
The assignment decision is only necessary in the presence of a noncontrolling interest. Regardless
of the ownership level all intra-entity balances are eliminated on the worksheet with a gain or loss
recognized. Not until the consolidated net income is allocated across the controlling interest and
the noncontrolling interest does the assignment decision have an impact.
We assume that financial and operating decisions are made in the best interest of the business
entity as a whole. This debt would not have been retired unless corporate officials believed that
Penston/Swansan would benefit from the decision. Thus, an argument can be made against any
assignment to either separate party.
Students should choose and justify one method. Discussion often centers on the following:
▪ Parent company officials made the actual choice that created the book loss. Therefore,
assigning the $300,000 to the subsidiary directs the impact of their decision to the wrong party.
In effect, the subsidiary had nothing to do with this transaction (as indicated in the case) so that
its share of consolidated net income should not be affected by the $300,000 loss.
▪ The debt was that of the subsidiary. Because the subsidiary's debt is being retired, all of the
$300,000 should be attributed to that party. Financial records measure the results of
transactions and the retirement simply culminates an earlier transaction made by the subsidiary.
The parent is doing no more than acting as an agent for the subsidiary (as indicated in the case).
If the subsidiary had acquired its own debt, for example, no question as to the assignment would

6-4
have existed. Thus, changing that assignment simply because the parent agreed to be the
acquirer is not justified.
▪ Both parties were involved in the transaction so that some allocation of the loss is required. If,
at the time of repurchase, a discount existed within the subsidiary's accounts, this figure would
have been amortized to interest expense (if the debt had not been retired). Thus, the $300,000
loss was accepted now in place of the later amortization. This reasoning then assigns this
portion of the loss to the subsidiary. Because the parent agreed to pay more than face value,
that remaining portion is assigned to the buyer.
Answers to Questions
1. A variable interest entity (VIE) is a business structure that is designed to accomplish a specific
purpose. A VIE can take the form of a trust, partnership, joint venture, or corporation although
typically it has neither independent management nor employees. The entity is frequently
sponsored by another firm to achieve favorable financing rates.
2. Variable interests are contractual, ownership, or other pecuniary interests in an entity that
change with changes in the entity's net asset value. Variable interests will absorb portions of a
variable interest entity's losses or receive portions of the entity's expected residual returns.
Variable interests typically are accompanied by contractual arrangements that provide decision
making power to the owner of the variable interests. Examples of variable interests include debt
guarantees, lease residual value guarantees, participation rights, and other financial interests.
3. The following characteristics are indicative of an enterprise qualifying as a primary beneficiary
with a controlling financial interest in a VIE.
▪ The power, through voting rights or similar rights, to direct the activities of an entity that most
significantly impact the entity’s economic performance.
▪ The obligation to absorb losses of the VIE that could potentially be significant to the VIE or
the right to receive benefits from the VIE that could potentially be significant to the VIE.
4. Because the bonds were purchased from an outside party, the acquisition price is likely to differ
from the carrying amount of the debt in the subsidiary's records. This difference creates
accounting challenges in handling the intra-entity transaction. From a consolidated perspective,
the debt is retired; a gain or loss is reported with no further interest being recorded. In reality,
each company continues to maintain these bonds on their individual financial records. Also,
because discounts and/or premiums are likely to be present, these account balances as well as
the interest income/expense will change from period to period because of amortization. For
reporting purposes, all individual accounts must be eliminated with the gain or loss being
reported so that the events are shown from the vantage point of the consolidated entity.
5. If the bonds are acquired directly from the affiliate company, all reciprocal accounts will be equal
in amount. The debt and the receivable will be in agreement so that no gain or loss is created.
Interest income and interest expense should also reflect identical amounts. Therefore, the
consolidation process for this type of intra-entity debt requires no more than the offsetting of the
various reciprocal balances.
6. The gain or loss to be reported is the difference between the price paid and the carrying amount
of the debt on the date of acquisition. For consolidation purposes, this gain or loss should be
recognized immediately on the date of acquisition.

6-5
7. Because the bonds are still legally outstanding, they will continue to be found on both sets of
financial records. Thus, each account (Bonds Payable, Investment in Bonds, Interest Expense,
and Interest Income) must be eliminated within the consolidation process. Any gain or loss on
the effective retirement as well as later effects on interest caused by amortization are also
included to arrive at an adjustment to the beginning retained earnings (or the Investment
account if the equity method is used) of the parent company.
8. The original gain is never recognized within the financial records of either company. Thus, within
the consolidation process for the year of acquisition, the gain is directly recorded whereas (for
each subsequent year) it is entered as an adjustment to beginning retained earnings (or the
Investment account if the equity method is used). In addition, because the carrying amount of
the debt and the investment are not in agreement, the interest expense and interest income
balances being recorded by the two companies will differ each year because of the amortization
process. This amortization effectively reduces the difference between the individual retained
earnings balances and the total that is appropriate for the consolidated entity. Consequently, a
smaller change is needed each period to arrive at the balance to be reported. For this reason,
the annual adjustment to beginning retained earnings (or the Investment account if the equity
method is used) gradually decreases over the life of the bond.
9. No set rule exists for assigning the income effects from intra-entity debt transactions although
several different theories exist and include: (1) assignment of the entire amount to the debtor,
(2) assignment of the entire amount to the buyer, and (3) allocation of the gain or loss between
the two parties in some manner. This textbook attributes the entire income effect (the $45,000
gain in this case) to the parent company. Assignment to the parent is justified because that party
is ultimately responsible for the decision to retire the debt from the public market. The answer
to the discussion question included in this chapter analyzes this question in more detail.
10. Subsidiary outstanding preferred shares are part of the noncontrolling interest and are included
in the consolidated financial statements at acquisition-date fair value and subsequently adjusted
for their share of subsidiary income and dividends.
11. The consolidated cash flow statement is developed from consolidated balance sheet and
income statement figures. Thus, the cash flows generated by operating, investing, and financing
activities are identified only after the consolidation of these other statements.
12. The noncontrolling interest share of the subsidiary’s net income is a component of consolidated
net income. Consolidated net income then is adjusted for noncash and other items to arrive at
consolidated cash flows from operations. Any dividends paid by the subsidiary to these outside
owners are listed as a financing activity because an actual cash outflow occurs.
13. An alternative to the normal diluted earnings per share calculation is required whenever the
subsidiary has dilutive convertible securities such as bonds or warrants. In this case, the
potential impact of the conversion of subsidiary shares must be factored into the overall diluted
earnings per share computation.
14. Basic Earnings per Share. The existence of subsidiary convertible securities does not affect
basic EPS. The parent’s basic earnings per share is computed by dividing the parent’s share
of consolidated net income by the weighted average number of parent shares outstanding.

6-6
Diluted Earnings per Share. The subsidiary's diluted earnings per share is computed by
including both convertible items. The portion of the parent's controlled shares to the total shares
used in this calculation is then determined. Only this percentage (of the income figure used in
the subsidiary's computation) is added to the parent's income in arriving at the parent company’s
diluted earnings per share.
15. Several reasons could exist for a subsidiary to issue new shares of stock to outside parties.
First, additional financing is brought into the company by any such sale. Also, stock issuance
may be used to entice new individuals to join the organization. Additional management
personnel, as an example, might be attracted to the company in this manner. The company
could also be forced to sell shares because of government regulation. Many countries require
some degree of local ownership as a prerequisite for operating within that country.
16. Because the new stock was issued at a price above the subsidiary’s assigned consolidation
value, the overall valuation for Metcalf's stock has been increased. Consequently, the
Washburn's investment is increased to reflect this change. To measure the effect, the value of
Washburn's investment is calculated both before and after the new issue. Because the
increment is the result of a stock transaction, an increase is made to additional paid-in capital.
Although the subsidiary's shares (both new and old) are eliminated in the consolidation process,
the increase in the parent's APIC (or gain or loss) carries into the consolidated figures. Also, the
noncontrolling interest percentage of the subsidiary increases.
17. A stock dividend does not alter the assigned consolidated subsidiary value and, thus, creates
no effect on Washburn's investment account or on the consolidated figures. Hence, no entry is
recorded by the parent company in connection with the subsidiary's stock dividend.

6-7
Answers to Problems
1. C
2. B Vintage Company net income ...................................................... $100,000
Less: Prairie Company 15% ownership share ............................ (15,000)
Less: Prairie Company 40% participating rights ........................ (40,000)
Net income attributable to noncontrolling interest .................... $45,000
3. B
4. D
5. A
6. D
7. D Cash flow from operations:
Net income ................................................................. $45,000
Depreciation............................................................... 10,000
Trademark amortization............................................ 15,000
Increase in accounts receivable............................... (17,000)
Increase in inventory................................................. (40,000)
Increase in accounts payable................................... 12,000 (20,000)
Cash flow from operations ....................................... $25,000
8. C Cash flow from financing activities:
Dividends to parent’s interest .................................. ($12,000)
Dividends to noncontrolling interest (20%  $5,000) (1,000)
Reduction in long-term notes payable .................... (25,000)
Cash flow from financing activities ......................... ($38,000)
9. C
10.C Post-issue subsidiary valuation ($800,000 + $250,000) $1,050,000
Arcola’s new ownership percentage (40,000 ÷ 50,000) 80%
Arcola’s share of post-issue subsidiary valuation $ 840,000
Arcola’s pre-issue equity balance 800,000
Increase to Arcola’s investment account $ 40,000
11.C Dane’s income from own operations....................... $185,000
Carlton’s income ...................................................... 105,000
Eliminate intra-entity interest income...................... (19,000)
Eliminate intra-entity interest expense.................... 18,000
Recognize retirement gain on debt ($209,000 – $196,000) 13,000
Consolidated net income .................................... $302,000

6-8
12.B Mattoon’s share of consolidated net income.......... $465,000
Number of Mattoon common shares outstanding.. 100,000
Mattoon’s EPS = ($465,000 ÷ 100,000 shares)......... $4.65
13.B Aaron net income ..................................................... $430,000
Less intra-entity dividends (initial value method) .. (8,050) $421,950
Zeese reported net income ...................................... 164,000
Gain on extinguishment of debt ($60,200 – $56,000) 4,200
Eliminate interest expense on "retired" debt
($60,200 × 10%) .................................................... 6,020
Eliminate interest income on "retired" debt
($56,000 × 12%) .................................................... (6,720)
Consolidated net income ......................................... $589,450
14.B 30% of $147,000 subsidiary net income; the intra-entity debt effects are
attributed solely to the parent company. 30% x $147,000 = $44,100
15.A For 2021, the adjustment to beginning retained earnings should recognize
the gain on the retirement of the debt, the elimination of the 2020 interest
expense, and the elimination of the 2020 interest income.
Gain on Retirement of Bond:
Original carrying amount .................................................... $10,600,000
2017–2019 amortization ($600,000 ÷ 20 yrs. × 3 yrs.) ....... (90,000)
Carrying amount, January 1, 2021 ..................................... $10,510,000
Percentage of bonds retired ............................................... 40%
Carrying amount of retired bonds ...................................... $ 4,204,000
Cash received ($4,000,000 × 96.6%) ................................... 3,864,000
Gain on retirement of bonds ............................................... $ 340,000
Interest Expense on Intra-Entity Debt—2020
Cash interest expense (9% × $4,000,000) .......................... $360,000
Premium amortization ($30,000 per year total × 40%
retired portion of bonds) ............................................... (12,000)
Interest expense on intra-entity debt ................................. $348,000
Interest Income on Intra-Entity Debt—2020
Cash interest income (9% × $4,000,000) ............................ $360,000
Discount amortization (.034 × $4,000,000 ÷ 17 years) ....... 8,000
Interest income on intra-entity debt ................................... $368,000
Adjustment to 1/1/21 Retained Earnings
Recognition of 2020 gain on extinguishment of debt (above)..... $340,000
Elimination of 2020 intra-entity interest expense (above)............ 348,000
Elimination of 2020 intra-entity interest income (above) ............. (368,000)
Increase in retained earnings, 1/1/21 ....................................... $320,000

6-9
16.D Consideration transferred for preferred stock ............................. $ 424,000
Consideration transferred for common stock .............................. 3,960,000
Noncontrolling interest fair value for preferred ........................... 1,696,000
Noncontrolling interest fair value for common ............................ 440,000
Acquisition-date fair value ............................................................. 6,520,000
Acquisition-date identified net asset fair value ........................... (6,000,000)
Goodwill .......................................................................................... $ 520,000
17.B Consideration transferred for preferred stock ............................. $214,000
Consideration transferred for common stock .............................. 1,253,280
Noncontrolling interest fair value for common stock .................. 835,520
Acquisition-date fair value ............................................................. $2,302,800
Acquisition-date book value .......................................................... (2,174,000)
Excess fair over book value ........................................................... $ 128,800
to building .................................................................................. 63,600
to goodwill .................................................................................. $ 65,200
18.B Parent’s reported sales ............................................ $480,000
Subsidiary's reported sales ..................................... 264,000
Less: intra-entity transfers ...................................... (57,600)
Sales to outsiders ............................................... $686,400
Less: increase in receivables................................... (37,300)
Cash generated by sales .................................... $649,100
19.B Subsidiary’s unamortized fair value prior to new share issue
(12,000 × $49) ....................................................... $588,000
Parent's ownership ................................................... 100%
Unamortized subsidiary fair value ......................... $588,000
Subsidiary unamortized fair value after issuing new
shares (above value plus 3,000 shares at $50 each) $738,000
Parent's ownership 12,000 ÷ 15,000 shares) .......... 80%
Unamortized subsidiary fair value after stock issue $590,400
Investment in Veritable increases by $2,400 ($590,400 less $588,000).
20.A Because the parent acquired 80 percent of the new shares, its proportional
ownership remains the same. Because the amount the parent pays will
necessarily equal 80 percent of the increase in the subsidiary's book value,
no separate adjustment by the parent is required.

6-10
21.C Adjusted acquisition-date sub. fair value at 1/1/21
Consideration transferred ........................................................ $592,000
Noncontrolling interest acquisition-date fair value ................ 148,000
Increase in Stamford book value .............................................. 80,000
Stock issue proceeds ................................................................ 150,000
Subsidiary valuation basis 1/1/21 .................................................. 970,000
New parent ownership (32,000 shs. ÷ 50,000 shs.) ...................... 64%
Parent’s post-stock issue ownership balance.............................. $620,800
Parent's investment account ($592,000 + [80% × 80,000]) .......... 656,000
Required adjustment —decrease ............................................ $(35,200)
22.D Adjusted acquisition-date fair value ($820,000 – $192,000) ........ $628,000
New parent ownership (32,000 shs. ÷ 32,000 shs.) ...................... 100%
Fair value equivalency of parent's ownership ........................ $628,000
Parent's investment account ($592,000 + [80% × 80,000]) .......... 656,000
Required adjustment—decrease .............................................. $ (28,000)
23. (10 minutes) (Qualifications of a VIE and consolidation requirements)
Apparel Media is a variable interest entity (VIE). The equity holders (the two
outside investors) lack
▪ The power, through voting rights or similar rights, to direct the activities
of a legal entity that most significantly impact the entity’s economic
performance.
▪ The obligation to absorb the expected losses of the VIE.
▪ The right to receive the expected residual returns of the legal entity.
Consolidation of a VIE is required if a firm has a variable interest that gives the
firm a controlling financial interest in the VIE evidenced by
▪ The power to direct the activities of a VIE that most significantly impact
the VIE’s economic performance
▪ The obligation to absorb losses of the VIE that could potentially be
significant to the VIE or the right to receive benefits from the VIE that
could potentially be significant to the VIE.
Because (1) Paige has the right to receive the 95% of the revenues generated by
the VIE, and (2) Paige’s losses are not limited by contract, Paige should
consolidate Apparel Media.
24. (30 minutes) (VIE Qualifications for Consolidation)
a. The purpose of consolidated financial statements is to present the financial
position and results of operations of a group of businesses as if they were a
single entity. They are designed to provide information useful for making
business and economic decisions—especially assessing amounts, timing,

6-11
and uncertainty of prospective cash flows. Consolidated statements also
provide more complete information about the resources, obligations, risks,
and opportunities of an enterprise than separate statements.
b. An entity qualifies as a VIE and is subject to consolidation if either of the
following conditions exist.
1. The total equity at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties.
2. The equity investors in the VIE lack any one of the following three
characteristics of a controlling financial interest.
• The power, through voting rights or similar rights, to direct the
activities of a legal entity that most significantly impact the entity’s
economic performance.
• The obligation to absorb the expected losses of the VIE.
• The right to receive the expected residual returns of the legal entity.
Consolidation of a variable interest entity is required if a firm has a variable
interest that gives the firm
▪ The power, through voting rights or similar rights, to direct the activities
of an entity that most significantly impact the entity’s economic
performance.
▪ The obligation to absorb a majority of the entity's expected losses if they
occur and/or the right to receive a majority of the entity's expected
residual returns if they occur
c. Risks of the construction project that has TecPC has effectively shifted to
the owners of the VIE:
At the end of the 1st five-year lease term, if the parent opts to sell the facility,
and the proceeds are insufficient to repay the VIE investors, TecPC may be
required to pay up to 85% of the project's cost--a potential 15% risk.
Risks that remain with TecPC
▪ Guarantees of return to VIE investors at market rate, if facility does not
perform as expected TecPC is still obligated to pay market rates.
▪ If lease is not renewed, TecPC must either purchase the facility or sell it
on behalf of the VIE with a guarantee of Investors' (debt and equity)
balances representing a risk of decline in market value of asset
▪ Debt guarantees

6-12
24. (continued)
d. TecPC possesses the following characteristics of a primary beneficiary:
▪ Direct decision-making ability (end of five-year lease term).
▪ The obligation to absorb the expected losses of the VIE.
▪ The right to receive the expected residual returns of the legal entity.
25. (15 minutes) (Consolidation of variable interest entity.)
a. Implied valuation and excess allocation for Valery:
Noncontrolling interest fair value $60,000
Consideration transferred by Petra 20,000
Total Valery fair value 80,000
Fair value of Valery’s net identifiable assets 105,000
Excess net asset value fair value (bargain purchase) $25,000
Petra recognizes the $25,000 excess net asset fair value as a bargain purchase and
records all of Valery’s assets and liabilities at their individual fair values.
Cash $ 20,000
Marketing software 165,000
Computer equipment 40,000
Long-term debt (120,000)
Noncontrolling interest (60,000)
Gain on bargain purchase (25,000)
b. Implied valuation and excess allocation for Valery
Noncontrolling interest fair value $60,000
Consideration transferred by Petra 20,000
Total Valery fair value 80,000
Fair value of Valery’s net identifiable assets 55,000
Goodwill $25,000
When the fair value of a VIE (that is a business) is greater than assessed
asset values, all identifiable assets and liabilities are reported at fair values
(unless a previously held interest) and the difference is treated as goodwill.
Cash $ 20,000
Marketing software 115,000
Computer equipment 40,000
Goodwill (excess business fair value) 25,000
Long-term debt (120,000)
Noncontrolling interest (60,000)

6-13
26. (40 minutes) (Acquisition-date consolidation worksheet for a parent and a
variable interest entity)
Access Net
Consolidation Entries
Consolidated
IT Connect NCI Balances
Cash 61,000 41,000 102,000
Investment in NetConnect 1,000,000 S 65,600
A 934,400
Capitalized software 981,000 156,000 1,137,000
Computer equipment 1,066,000 56,000 1,122,000
Communications
equipment 916,000 336,000 1,252,000
Research and
development asset A1,960,000 1,960,000
Patent 191,000 191,000
Goodwill A 376,000 376,000
Total assets 4,024,000 780,000 6,140,000
Long-term debt (941,000) (616,000) (1,557,000)
Common stock-Access IT (2,660,000) (2,660,000)
Common stock-
NetConnect (41,000) S 41,000
Retained earnings (423,000) (123,000) S 123,000 (423,000)
Noncontrolling interest S 98,400
A 1,401,600 (1,500,000) (1,500,000)
Total liabilities and equity (4,024,000) (780,000) 2,500,000 2,500,000 (6,140,000)
Consideration transferred $1,000,000
Noncontrolling interest fair value 1,500,000
Acquisition-date fair value $2,500,000
Book value (164,000)
Excess fair over book value $2,336,000
Research and development asset 1,960,000
Goodwill $ 376,000

6-14
27. (35 minutes) (Consolidation of a primary beneficiary and variable interest entity one
year after control is obtained)
Pikes and Venti Companies
Consolidation Worksheet
Year Ended December 31, 2021
Pikes Venti Consolidation Entries NCI Consolidated
Revenues (792,000) (216,000) (1,008,000)
Management fee (54,000) -0- (F) 54,000 -0-
Cost of good sold 621,000 89,000 710,000
Other operating expenses 76,000 64,000 (F) 54,000 86,000
Interest income (21,000) -0- (IE) 21,000 -0-
Interest expense -0- 39,000 (IE) 21,000 18,000
Net Income (170,000) (24,000)
Consolidated net income (194,000)
to noncontrolling interest (24,000) 24,000
to Pikes (170,000)
Retained earnings 1/1 (1,380,000) (40,000) (S) 40,000 (1,380,000)
Net income (170,000) (24,000) (170,000)
Dividends declared 75,000 -0- 75,000
Retained earnings 12/31 (1,475,000) (64,000) (1,475,000)
Current assets 360,000 73,000 433,000
Loan receivable from Venti 300,000 -0- (P) 300,000 -0-
Equipment (net) 895,000 527,000 1,422,000
Trademark -0- 125,000 (A) 20,000 145,000
Total assets 1,555,000 725,000 2,000,000
Current liabilities (30,000) (92,000) (122,000)
Loan payable to Pikes -0- (300,000) (P) 300,000 -0-
Other long-term debt -0- (254,000) (254,000)
Common stock (50,000) (15,000) (S) 15,000 (50,000)
(S) 55,000
Noncontrolling interest -0- -0- (A) 20,000 (75,000) (99,000)
Retained earnings 12/31 (1,475,000) (64,000) (1,475,000)
Total liabilities and equity (1,555,000) (725,000) 450,000 450,000 (2,000,000)
Fair value of Venti on January 1, 2021 (date Pikes obtains control)................ $75,000
Venti book value—January 1, 2021 ($15,000 common stock + $40,000 RE) ..... 55,000
Excess fair over book value ............................................................................ 20,000
To trademark (indefinite life)......................................................................... 20,000
-0-

6-15
28. (25 Minutes) (Consolidation entry for three consecutive years to report effects
of intra-entity bond acquisition. Straight-line method used. Parent uses equity
method)
a. Carrying Amount of Bonds Payable, January 1, 2019
Carrying amount, January 1, 2017 ........................................ $1,050,000
Amortization—2017–2018 ($5,000 per year
[$50,000 premium ÷ 10 years] for two years) .................. 10,000
Carrying amount of bonds payable, January 1, 2019 .......... $1,040,000
Carrying amount of 40% of bonds payable
(intra-entity portion), January 1, 2019 ............................. $416,000
Gain on Retirement of Bonds, January 1, 2019
Purchase price ($400,000 × 96%) .......................................... $384,000
Carrying amount of liability (computed above) ................... 416,000
Gain on retirement of bonds ................................................. $ 32,000
Carrying Amount of Bonds Payable, December 31, 2019
Carrying amount, January 1, 2019 (computed above) ........ $1,040,000
Amortization for 2019.............................................................. 5,000
Carrying amount of bonds payable, December 31, 2019..... $1,035,000
Carrying amount 40% bonds payable (intra-entity portion),
December 31, 2019 ............................................................ $414,000
Carrying Amount of Investment in Bonds, December 31, 2019
Investment carrying amount, Jan. 1, 2019 (purchase price) $384,000
Amortization for 2019 ($16,000 discount ÷ 8-yr. rem. life) .. 2,000
Carrying amount of investment, December 31, 2019 .......... $386,000
Intra-entity Interest Balances for 2019
Interest expense:
Cash payment ($400,000 × 9%) ........................................ $36,000
Amortization of premium for 2019 ($5,000 per year
× 40% intra-entity portion) .......................................... 2,000
Intra-entity interest expense ............................................ $34,000
Interest income:
Cash collection ($400,000 × 9%) ...................................... $36,000
Amortization of discount for 2019 (above) ..................... 2,000
Intra-entity interest income .............................................. $38,000

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Light wines and beer will return—there is little doubt of that; but
many people hold that we should adopt the Swedish and Canadian
methods of Government Control. We have seen that, with the
federal authorities managing the liquor traffic, a decent business is
done, bootlegging is practically stopped, and revenue pours into the
governmental coffers. Contentment takes the place of discontent,
and those who drink pay the price—which they are more than willing
to do. It is so obvious that this is the right method to pursue that it
seems strange there should be any argument, that there should be
any line-up of opposition.
Yet the Prohibitionists, in the light of their failure in the United
States, continue to make prophecies of a “bone dry” world in the
years to be. With amazing clairvoyance a member of the World’s
Women’s Christian Temperance Union has predicted that in 1924.
Uruguay will go dry, and likewise Argentine; Austria and Denmark in
1925; Chili in 1927; Great Britain in 1928; Germany in 1929; France
in 1933; Japan in 1936; Italy in 1938; Spain and China in 1939; and
Cuba in 1940.
Foreigners have frequently been heard to say that they cannot
understand why Americans have not protested with a louder voice
against the legislation which concerns Prohibition. They forget—or
they do not realize—that the United States is a vast melting-pot, and
that there are, alas! too few Americans left to make much of an
impression. The links that draw together the individual nations of
European countries are lacking in our own land. We have absorbed
every race on earth; and these aliens do not know how to band
together. They are not really part of us, and they are naturally
confused at our methods of government. Many of them are
strangers in a strange land, and perhaps they do not feel justified in
protesting, even though they are citizens now, saying to themselves
that if the Americans tolerate such rigid reforms, who are they to
utter words of rebellion?
Is it not self-evident that Prohibition has miserably failed when
the President finds it necessary to call a solemn conclave of

Governors to see what can be done, after three years, to force the
people to obey the law in the various States? The Federal
authorities, by that gesture, admit their inability to cope with the
situation, which has now become intolerable. Scandal after scandal
is being unearthed in sanctimonious Washington, the seat of the
Government, and the home of Prohibition. It is being revealed that
many Congressmen and Senators preach one thing and practise
another. Is it not high time that their dishonesty is shown up? They
should be made as ridiculous as possible. They should be made to
see that they are the worst Americans in existence, pretending to be
virtuous, invoking the law for their constituents, and bootlegging in
secret. For at least the rest of the people who conscientiously break
the law, are not on record as approving it.
No one is sacrosanct on this flaming issue. Government buildings
are said to contain plenty of liquid refreshment for the parched
throats of these eloquent advocates of a “dry” country. So long and
loudly have they proclaimed their insincere doctrine that at the end
of a forensic day they doubtless require a long, cool drink. Let them
be seen in all their inglorious hypocrisy. Let the whole land laugh at
them; for it is only through laughter that they can be reached and
hurt. A law that is winked at by those who framed it is not worth the
cost required to set it up in type.
But of course nothing will be done. No names will be named.
The same hypocrisy will be practised here. When someone higher up
is to be uncovered, the loudly proclaimed “investigation” will come to
a sudden end. There are too many criminals in exalted places. We
are the laughing-stock of the world as it is; but if the whole truth
were known!...
Economically, the people will have to have it driven home to
them that Prohibition is a mistake. We are forever talking about the
tariff; yet the most that our tariff can bring in is about $350,000,000
a year gross. The year 1914 was the banner year in the United
States in producing beer. There were 66,000,000 barrels sold. If we
had not had Prohibition thrust upon us, the normal growth would

have been a production of about 100,000,000 barrels. The
Government always collected revenue at the source—there was no
bookkeeping, merely a stamping, a labeling of each barrel, and that
was all there was to it. Think of the tax upon this one product alone
which we are losing!
In 1918 Canada imposed a tax of 15c on a gallon of beer. In
1922 it was 42½c a gallon. There are thirty gallons in a barrel,
which means $13.60 a barrel now, or more than two and a half
times as much as before. Multiply 100,000,000 barrels by $13.60,
and you arrive at $1,360,000,000 revenue collected at the source,
with no obstructions. This is four times as much as our tariff bill
would give to the country. Moreover, if beer were restored,
innumerable collateral businesses would be given new life. The
bottling industry, corking, glassware—all these would be
resuscitated, everyone would be happy, and personal taxes would be
immeasurably lessened. As things now are, we are burdened with
surtaxes, etc., which impoverish all kinds of industries and make for
intense ill-feeling.
Crying out for no change in our laws, it is the Prohibitionists
themselves who have altered our statutes. Can they not be changed
again?
It may be that the Eighteenth Amendment will never be
annulled. There are those, however, who are hopeful even of that.
But Congress is privileged to define what constitutes an intoxicating
beverage; and the Volstead Act is not static. The people will elect
men to represent them at Washington who will liberally interpret the
Eighteenth Amendment. Therein lies the remedy for much of our
discontent.
Prohibition rose, like a great wave; it is falling back now. The
tide comes in, but it goes out again. And one can begin to hear the
surge of a mighty people. They will speak at the polls, in every
election; for Prohibition, until it is modified, will never be taken out
of national politics.

A sane compromise would clear up the situation almost
overnight. And when the people speak, the Government must heed
their voice.

Transcriber’s Notes
Simple typographical errors were corrected.
Punctuation, hyphenation, and spelling were made
consistent when a predominant preference was found in
the original book; otherwise they were not changed.

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Fundamentals of Advanced Accounting 8th Edition Hoyle Solutions Manual

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