2. If combined financial statements are presented, then the combining is treated essentially in the same manner as a consolidation with:

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1 Understanding the Consolidation of Variable Interest Entity Rules - Final Exam 60 Questions 1. An example of where combined financial statements may be useful is: A. A group of unconsolidated entities Tax planning strategies When one entity wishes to augment its balance sheet D. Where there is a group of unrelated parties that wish to join forces 2. If combined financial statements are presented, then the combining is treated essentially in the same manner as a consolidation with: A. All intercompany transactions eliminated No intercompany transactions eliminated Selected intercompany transactions eliminated D. Only equity accounts consolidated with eliminations made Print Page 3. If a physician practice management entity (PPME) has a controlling financial in a physician practice, then how should the PPME account for the physician practice? A. Consolidate it Record it at equity method Record it at cost D. Make no entry 4. In accordance with ASC Subtopic , there is a presumption that a general partner a limited partnership regardless of the extent of the general partners' ownership interest in the limited partnership. A. Manages Controls Has significant influence in D. Materially participates in 5. A key aspect of a variable interest entity (VIE) is that it: A. Is not self-supportive Can finance its activities without additional financial support Is not required to be consolidated D. Controls a subsidiary 6. Common uses of off-balance sheet entities include all of the following except: 7. A. Leasing arrangements involving real estate and personal property Management services Distribution services D. Accounting services

2 Advantages of using a variable interest entity (VIE) include all of the following except: A. Lower-cost financing Tax advantages Removal of assets and liabilities D. Being able to consolidate financial statements 8. In FIN 46R, the term special-purpose entity (SPE) is superseded by the term: A. Qualified interest entity (QIE) Primary beneficiary (PB) Leasing interim entity (LIE) D. Variable interest entity (VIE) 9. An individual has a controlling financial interest in a variable interest entity (VIE). The individual is preparing personal financial statements. In this case, which of the following is correct: A. The consolidation rules of FIN 46R apply The consolidation rules apply to the individual but are not required to be presented on the personal financial statements The consolidation rules do not apply as FIN 46R applies to a legal entity and not an individual D. FIN46R is silent as to whether the rules apply to an individual 10. The definition of a not-for-profit organization that is not subject to the FIN46R rules includes all of the following characteristics except: Contributions of significant amounts of resources from resource providers who A. do not expect commensurate proportionate pecuniary return Operating purposes other than to provide goods or services for profit Absence of ownership interests like those of business reporting enterprises D. Files a Form 990 for Federal income tax purposes 11. Company X is the sponsor of a pension plan for its employees. Which of the following is the correct way in which X should account for the pension plan under FIN 46R? A. X should consolidate the pension plan as the plan is a variable interest entity X consolidates the plan only if X controls that plan X is not required to consolidate the plan under FIN 46R D. X and the plan should issue combined statements 12. The special exemptions in FIN 46R include all of the following except: A. Special exemption for non-substantive terms, transactions, and arrangements Special exemption for owners of more than 50% of the voting shares Special exemption for variable interest holders who have difficulty obtaining D. Special exemption for certain entities that are businesses 13. A business consists of all of the following elements, except: A. Inputs Processes applied to inputs Resulting outputs

3 D. Conditional elements used to create cash flows 14. In defining a business, inputs include all of the following except: A. Revenues Long-lived assets (including intangibles) Intellectual property D. Access to materials and rights 15. The general rule of FIN46R is that a primary beneficiary consolidates a VIE if the primary beneficiary has which of the following: A. Control over the VIE's core business Controlling financial interest Ownership of more than 50% of the VIE's equity D. Power to control the VIE 16. In order for one entity to consolidate an off-balance sheet entity under FIN 46R, there are three requirements that must be satisfied. Those requirements include all of the following except: A. There must a variable interest entity (VIE) Entities and/or individuals must have variable interests in the VIE An entity or individual must be the primary beneficiary of the VIE D. An entity or individual must own at least 50% of the VIE's voting equity 17. In order for an off-balance sheet entity to be consolidated, it must be a: A. Non-VIE (NV) Variable interest entity (VIE) Primary beneficiary (PB) D. Special purpose entity (SPE) 18. An entity is considered a VIE if, by design, it has one or both of two conditions. One of those conditions is that the total equity investment at risk is not sufficient for it to finance its activities without doing what? A. Obtaining additional cash flow from an affiliate Increasing its revenue to fund financing shortfalls Obtaining additional subordinated financial support provided by any parties D. Receiving financing from an unrelated party 19. An entity is considered a VIE if, by design, it has one or both of two conditions. Condition 2 states that: As a group, the holders of equity investments at risk lack any one of three characteristics one of which is. A. Obligation to absorb the expected losses of the entity Right to receive the VIE's cash flows Ability to control the majority of the VIE's operations D. Power receive residual returns of the entity 20. held by the holders of an equity investment at risk do not prevent other parties from having power to direct activities of an entity. A. Kick-out and participating rights, but not protective rights

4 Kick-out rights and protective rights, but not participating rights Participating and protective rights, but not kick-out rights D. Kick-out, participating, and protective rights 21. There are three qualitative methods to demonstrate an entity's sufficiency of equity including all of following except: A. Primary beneficiary method Non-recourse financing method Similar entity method D. Other facts and circumstances method 22. The one quantitative method to demonstrate an entity's sufficiency of equity is: A. Non-recourse financing method Similar entity method Expected losses method D. Other facts and circumstances method 23. The term 'equity investment' is defined to include all equity interests that are required to be reported as equity: A. For income tax purposes In that entity's financial statements In that entity's trial balance D. Except for preferred stock 24. There is a presumption that an equity investment of of the entity's total assets is not considered sufficient for the entity to finance its activities without financial support. A. Less than 5 percent Less than 10 percent Less than 25 percent D. Less than 50 percent 25. Additional subordinated financial support is referred to as a (an) that will absorb some or all of an entity's expected losses, if they occur. A. Additional variable interest Additional equity investment that is not at risk Trade receivable or payable D. Form of a loan 26. Which of the following would be an example of an entity that is not a VIE? A. Entity has a non-recourse loan from a bank with no guarantees Entity has a recourse loan from a lender with an owner's guarantee Entity has a non-recourse loan from a bank with an intercompany loan from a related party D. Entity has a non-recourse loan with a completion guarantee 27. Company X computes expected losses of $(115,000). X's fair value of equity is $150,000. X's net income is $90,000. Which of the following is true based on the results of applying the expected losses method?

5 X is a VIE because its net income of $90,000 is less than the fair value of its A. equity of $150,000 X is a VIE because its expected losses of $(115,000) is less than its net income of $90,000 X is not a VIE because the fair value of its equity of $150,000 is greater than the expected losses of ($115,000) X is not a VIE because its net income of $130,000 is greater than its expected D. losses of $(115,000) 28. Company X is a VIE has the following variable interest holders Y is a guarantor of X s loan Z has a loan it made to X that is outstanding. C has a-market-value lease with X. Who should perform the test to determine whether X is a VIE? A. Y and Z Y, Z and C Z and C D. C only 29. The date of the initial test for determining whether an entity is a VIE is made: On the date at which the variable interest holder first becomes involved with A. the VIE On the date the VIE is established On the date the primary beneficiary is established D. Only when there is a triggering event 30. Which of the following is an example of an activity that significantly impacts an entity's economic performance? A. Overseeing manufacturing Collecting insurance claims Making payments on loans D. Administration of escrow accounts 31. A variable interest is defined as a contractual, ownership or other pecuniary interest in a VIE that changes with changes in the fair value of the VIE's, exclusive of variable interests. A. Tangible assets Intangible assets Net assets D. Investments in securities 32. Which of the following is an example of a variable interest? A. Guarantees Equity investment in a VIE that is not at risk Most assets D. Trade receivables and payables in the normal course of business 33. Which of the following is not a variable interest? A. Market lease with a residual value guarantee

6 Senior debt including bank loans Derivatives D. Casual purchases and sales at market value 34. Which of the following types of leases would be a variable interest in a VIE? A. Lease with a renewal option at a variable market rate Lease with an option to acquire at a fixed price Lease at market value Lease based on leased assets that are less than 50% of the fair value of the D. VIE's total assets 35. In looking at the typical degree of variability of variable interests, the likelihood of unrestricted equity ownership holder being the primary beneficiary of a VIE is: A. Highest Lowest Moderate D. At the same level as a bank loan 36. FIN 46R states that an entity with a variable interest in specified assets of a VIE shall treat a portion of the entity as a if 1) the specified assets are essentially the only source of payment for specified liabilities or other interests, and, 2) the entity has been determined to be a VIE after eliminating the specified assets. A. Separate VIE Non-VIE Blended VIE entity D. Primary beneficiary 37. The third and final requirement to consolidation of a VIE is to do what? A. Determine whether the entity is a VIE Identify variable interest holders Identify the primary beneficiary of the VIE D. Identify all related parties 38. If two unrelated parties have shared power, then how should the parties select a primary beneficiary to consolidate a VIE? A. Power cannot be shared if the entities are unrelated parties Both parties are considered primary beneficiaries and both consolidate the VIE No party is the primary beneficiary and the VIE is not consolidated D. The parties use the 'most closely associated rule' to break the tie 39. A reporting enterprise determines whether it is the primary beneficiary of the VIE at the time when the. A. Enterprise obtains a variable interest in the VIE VIE is initially established The VIE satisfies the expected losses method D. VIE obtains its financing 40. Companies Y, Z and K are unrelated variable interest holders of Company X, a VIE. Facts follow:

7 Y satisfies the power criterion. Z has the obligation to absorb 90 percent of X s losses. K has the right to receive 85% of X s benefits from X. Which of the three variable interest holders is the primary beneficiary that consolidates X? A. Y is the primary beneficiary because it satisfies the power criterion Z is the primary beneficiary because it has the obligation to absorb 90 percent of X's losses K is the primary beneficiary because K has the right to receive 85% of X's benefits from X D. None of the three variable interest holders is the primary beneficiary 41. In order for an enterprise to be a primary beneficiary of a VIE, it must have either an obligation to absorb losses or right to receive benefits from the VIE that. A. Are the majority of those related to the VIE Could potentially be significant to the VIE Are material to the VIE D. Are more than 50 percent of the total for the VIE 42. Company X is a new entity capitalized as follows: X purchases real estate for $2,000,000. X is tested and X is not a VIE. Bank debt: $500,000 Unsecured loan- Company Y: 300,000 Equity- 100% held by Company Z: 1,200,000 Total: $2,000,000 Who is likely to be the primary beneficiary (PB) that consolidates X under FIN 46R? A. The bank is the PB that consolidates X Company Y, as the unsecured lender is the PB that consolidates X Company Z, as the 100% equity holder is the PB that consolidates X D. No entity consolidates X under FIN 46R because X is not a VIE 43. Same facts as Question 42 above, except that X is tested and X is a VIE. Who is likely to be the primary beneficiary that consolidates X? A. The bank is the PB that consolidates X Company Y, as the unsecured lender is the PB that consolidates X Company Z, as the 100% equity holder is the PB that consolidates X D. No entity consolidates X 44. In determining whether a reporting enterprise (or individual) is the primary beneficiary of a VIE, an enterprise (or individual) with a variable interest must treat variable interests held by which of the following as being its own? 45. A. Related parties, defacto agents and principals Employees Distributors, customers and vendors D. Contractors

8 The list of related parties covered under the related party rule includes all of the following except: A. Parent company and its subsidiaries An entity and its principal owners, management, or members of their immediate families Affiliates of the enterprise D. Distributors of an entity's products 46. Under the tie breaker rule, the related party that is designated the primary beneficiary is the one that is. A. In the same industry as the VIE Absorbs the majority of the VIE's expected losses Most closely associated with the VIE D. Has the most power to direct the VIE's activities 47. John is a 100 percent shareholder of X (a lessor VIE) and Y (a lessee). Y leases X's property. The lease is at market value, and there is no residual value guarantee, no option to purchase the leased property, and no lease renewal option. Neither John nor Y has guaranteed X's bank loan. How should this transaction be accounted for under the FIN46R rules? A. The lease is not a variable interest and Y should not consolidate X John is the primary beneficiary and should consolidate X The lease is not a variable interest; Y has an implicit variable interest in X and should consolidate X D. The lease is a variable interest and Y should consolidate X 48. If the primary beneficiary and VIE are not under common control, then the primary beneficiary of a VIE shall initially measure the assets, liabilities, and noncontrolling interests of a newly consolidated VIE at: A. Fair value Carrying value Replacement value D. Liquidation value 49. If the primary beneficiary and the VIE are under common control (e.g., same majority shareholder or owners), then the primary beneficiary must initially consolidate the VIE's assets, liabilities and noncontrolling interests at their in the financial statements of the entity that controls the VIE- assuming that entity's financial statements were prepared on a GAAP basis. A. Fair value Carrying value Replacement value D. Liquidation value 50. In a consolidation of a VIE, the VIE's stockholder's equity should be presented as a: A. Part of the consolidated equity Noncontrolling interest in the stockholders' equity section of the consolidated balance sheet Deferred credit in the liability section

9 D. Separate unconsolidated component inside stockholders equity 51. How should a deconsolidation be accounted for under FIN 46R? A gain or loss should be recognized in the net income attributable to the A. primary beneficiary Any gain or loss is recorded as an adjustment to retained earnings of the primary beneficiary No gain or loss is recognized on the transaction D. A consolidated deferred credit should be established and amortized 52. How often should a variable interest holder reconsider whether it is the primary beneficiary of a VIE? A. Annually When there is a triggering event Continuously D. Each time financial statements are issued 53. The updated reconsideration of whether an entity is a primary beneficiary should be done, using the: A. Fair value of the VIE at the date of the reconsideration Carrying value of the VIE at the date of the reconsideration Fair value of the VIE using the look back date D. Carrying value of the VIE using the look back date 54. GAAP generally provides that a primary beneficiary may consolidate a VIE that has a fiscal year end that is not more than from the fiscal year end of the primary beneficiary. A. Three months Four months Six months D. Nine months 55. An entity that holds a variable interest in a VIE, but is not the primary beneficiary, must disclose all of the following except: A. A tabular comparison of the carrying amounts of assets and liabilities Information about any liquidity arrangements The reporting enterprise's maximum exposure to loss as a result of its involvement with the VIE D. The entity's total initial investment in the VIE 56. Which of the following should be presented separately on the face of the primary beneficiary's balance sheet? 57. A. All of the assets of a consolidated VIE Liabilities of a consolidated VIE for which creditors have recourse to the general credit of the primary beneficiary Assets that can be used only to settle obligations of the VIE All assets and liabilities of the VIE, presented separately within each subcategory D.

10 How should an entity with a variable interest in another entity that is created after the effective date of FASB No. 167 apply the provisions of FIN 46R? A. The transition rules for other variable interests should be applied FIN 46R should be applied immediately and the transition rules do not apply FIN 46R should be applied retroactively D. FIN 46R should be delayed 58. If a variable interest holder does not use the look-back method, then the primary beneficiary should use Option 2 under which the initial test of the VIE is done, as of which date: A. Date on which parties first became involved Implementation date Reconsideration date D. Date that one of the triggering events first applies 59. The consolidation rules under FIN 46R apply to financial statements issued by a primary beneficiary. The rules to financial statements issued only for the VIE. A. May apply Do not apply Always apply D. Rarely 60. The author offers several ways by which to avoid the consolidation rules under FIN 46R. They include all of the following except: A. Convert to income tax basis (OCBOA) financial statements Issue separate financial statements with a GAAP departure Sever all ties with both the VIE and the primary beneficiary D. Restructure affiliations prior to the effective date of FIN 46R