ExpertHard1 markMultiple Choice
CPA · Question 31 · Area II: Technical Accounting
Company A holds a variable interest in Entity B. Company A has the power to direct the activities that most significantly impact Entity B's economic performance and the obligation to absorb losses that could be significant to Entity B. However, Company A owns only 10% of the voting stock. Under ASC 810, should Company A consolidate Entity B?
Company A holds a variable interest in Entity B. Company A has the power to direct the activities that most significantly impact Entity B's economic performance and the obligation to absorb losses that could be significant to Entity B. However, Company A owns only 10% of the voting stock. Under ASC 810, should Company A consolidate Entity B?
Answer options:
A.
Yes, because Company A is the primary beneficiary of the Variable Interest Entity (VIE).
B.
No, because Company A does not own more than 50% of the voting stock.
C.
No, unless Company A guarantees the debt of Entity B.
D.
Yes, but only using the equity method.
How to approach this question
VIE Model Steps: 1. Is it a VIE? 2. Who is Primary Beneficiary (Power + Economics)? If yes to both, Consolidate.
Full Answer
A.Yes, because Company A is the primary beneficiary of the Variable Interest Entity (VIE).✓ Correct
A
Company A meets the definition of the Primary Beneficiary: it has the power to direct significant activities AND the obligation to absorb losses/right to receive benefits. Therefore, it must consolidate the VIE regardless of voting ownership.
Common mistakes
Applying the Voting Interest Model (50% rule) to a VIE.
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