Questions to think about while reading this chapter:

• What is a variable interest entity and when must such an entity be consolidated? How are consolidated values determined for variable interest entities?



• When a company buys an affiliate’s debt instrument from an outside party, the reciprocal balances (investment and debt, interest revenue and expense, etc.) usually do not agree. How do intercompany debt and related interest affect the consolidation process in the year of acquisition as well as in succeeding periods?



• What impact does a subsidiary’s preferred stock have on the consolidation process?



• What effect does a business combination have on the consolidated statement of cash flows?



• How are basic and diluted earnings per share computed for business combinations?



• Why would a subsidiary buy or sell more shares of its own stock after coming under the control of a parent company? What effect do such transactions have on consolidated financial statements?