testbanksinstant.eutestbanksinstant.eu/samples/test bank for advanced... · web viewchase company...

Full file at http://testbanksinstant.eu/ Test-Bank-for-Advanced-accounting-12th-edition,-Hoyle

Chapter 07

Consolidated Financial Statements-Ownership Patterns and Income Taxes

Multiple Choice Questions

1. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle.

When Buckette prepared consolidated financial statements, it should include

A. Shuvelle but not Tayle.

B. Tayle but not Shuvelle.

C. either Shuvelle or Tayle.

D. Shuvelle and Tayle.

E. neither Shuvelle nor Tayle.

7-1Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.



What is this pattern of ownership called?

A. pyramid ownership.

B. a connecting affiliation.

C. mutual ownership.

D. an indirect affiliation.

E. an affiliated group.

3. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle

owned 35% of Tayle.

What percentage of Tayle's income is attributed to Buckette's ownership interest?

A. 100%.

B. 75%.

C. 61%.

D. 40%.

E. 74%.




4. D Corp. had investments, direct and indirect, in several subsidiaries:

• E Co. is a domestic firm in which D Corp. owned a 90% interest• F Co. is a domestic firm in which D Corp. owned 60% and E Co. owned 30%• G Co. is a domestic firm wholly owned by E Co.• H Co. is a foreign subsidiary in which D Corp. owned a 90% interest• I Co. is a domestic firm in which D Corp. owned 50% and G Co. owned 25%

Which of these subsidiaries may be included in a consolidated income tax return?

A. E, F, G, H, and I.

B. E, G, H, and I.

C. E and F.

D. E, F, G, and H.

E. E, F, and G.

5. Evanston Co. owned 60% of Montgomery Corp. Montgomery owned 75% of Noir Inc.,

and Noir owned 15% of Montgomery. This pattern of ownership would be called

A. mutual ownership.

B. direct control.

C. indirect control.

D. an affiliated group.

E. a connecting affiliation.




6. In a tax-free business combination,

A. the income tax basis for acquired assets and liabilities is adjusted to current fair value.

B. any goodwill created by the combination may be amortized in calculating taxable income.

C. the subsidiary's assets and liabilities are assigned an income tax basis of zero dollars, so that they will have no future income tax consequences.

D. any goodwill created by the combination must be deducted in total in calculating taxable income.

E. the subsidiary's cost basis for assets are retained for income tax calculations.

7. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of

Compass Co. West and East both used the initial value method to account for their investments. The following information was available from the financial statements and records of the three companies:

Operating income included unrealized intra-entity gains (which are related to inventory transfers) but did not include dividend income from investment in subsidiary.

The accrual-based income of East Co. is calculated to be

A. $385,700.

B. $581,000.

C. $557,000.

D. $551,000.

E. $707,000.




8. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass Co. West and East both used the initial value method to account for their investments. The following information was available from the financial statements and records of the three companies:


The accrual-based income of West Corp. is calculated to be

A. $734,000.

B. $1,261,000.

C. $1,123,900.

D. $1,140,700.

E. $1,149,700.






What amount should have been reported for consolidated net income?

A. $1,285,000.

B. $1,331,700.

C. $1,349,000.

D. $1,315,000.

E. $1,314,900.






For West Corp. and consolidated subsidiaries, what total amount would have been reported for the non-controlling interest's share of subsidiaries' net income?

A. $165,300.

B. $199,300.

C. $191,000.

D. $228,000.

E. $153,000.






What amount of dividends did West Corp. receive from Compass Co.?

A. $-0-

B. $25,200.

C. $36,000.

D. $42,000.

E. $90,000.




12. River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:

Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%.

What is the amount of taxable income reported on the consolidated income tax return?

A. $720,000.

B. $625,000.

C. $621,000.

D. $665,000.

E. $655,000.






What was the amount of income tax expense that should have been assigned to Boat using the percentage allocation method?

A. $31,500

B. $32,750

C. $36,000

D. $32,660

E. $30,390






What was the amount of income tax expense that should have been assigned to Boat using the separate return method?

A. $36,000

B. $31,500

C. $33,390

D. $32,750

E. $32,660






What was the non-controlling interest in Boat Inc.'s net income, assuming that the separate return method was used?

A. $16,800

B. $14,450

C. $14,700

D. $17,450

E. $13,800




16. Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported operating income of $266,000 for 2013 whereas Bell earned $98,000 during the same period. No investment income was included within either of these income totals. On a consolidated income statement, what is the non-controlling interest in Bell's net income?

A. $9,800.

B. $13,692.

C. $10,836.

D. $12,460.

E. $11,214.

17. Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding

common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported operating income of $266,000 for 2013 whereas Bell earned $98,000 during the same period. No investment income was included within either of these income totals. How would the 10% investment in Prescott owned by Bell be presented in the consolidated balance sheet?

A. The 10% investment would be eliminated and no amount would be shown in the consolidated balance sheet.

B. The 10% investment would be reclassified in Bell's balance sheet as Treasury Stock before the consolidation process begins.

C. The 10% investment would be eliminated and the same dollar amount would appear as treasury stock in the consolidated balance sheet.

D. The 10% investment would be included as part of Additional Paid-In Capital because it is less than 20% and therefore indicates no significant influence is present.

E. Prescott would treat the shares owned by Bell as if they had been repurchased on the open market, and a treasury stock account would be set up on Prescott's books recording the shares at their market value on the date of combination.




18. On January 1, 2013, a subsidiary bought 10% of the outstanding shares of its parent company. Although the total book value and fair value of the parent's net assets were $5.5 million, the consideration transferred for these shares was $590,000. During 2013, the parent reported operating income (no investment income was included) of $714,000 while paying dividends of $196,000. How were these shares reported at December 31, 2013?

A. The investment was recorded for $641,800 at the end of 2013 and then eliminated for consolidation purposes.

B. Consolidated stockholders' equity was reduced by $641,800.

C. The investment was recorded for $590,000 at the end of 2013 and then eliminated for consolidation purposes.

D. Consolidated stockholders' equity was reduced by $639,800.

E. Consolidated stockholders' equity was reduced by $590,000.

19. Jastoon Co. acquired all of Wedner Co. for $588,000 cash in a tax-free transaction. On

that date, the subsidiary had net assets with a $560,000 fair value but a $420,000 book value and income tax basis. The income tax rate was 30%. What amount of goodwill should have been recognized on the date of the acquisition?

A. $70,000.

B. $28,000.

C. $(14,000.)

D. $19,600.

E. $65,000.




20. Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Operating income totals for 2013 are shown below; these figures contained no investment income. Amortization expense was not required by any of these acquisitions. Included in Eckston's operating income was a $56,000 unrealized gain on intra-entity transfers to Maroon.

The accrual-based income of Eckston Inc. is calculated to be

A. $234,000.

B. $211,000.

C. $221,000.

D. $224,000.

E. $246,000.

21. Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Operating

income totals for 2013 are shown below; these figures contained no investment income. Amortization expense was not required by any of these acquisitions. Included in Eckston's operating income was a $56,000 unrealized gain on intra-entity transfers to Maroon.

The accrual-based income of Maroon Corp. is calculated to be

A. $481,600.

B. $472,700.

C. $488,900.

D. $502,300.

E. $358,800.





The accrual-based income of Beagle Co. is calculated to be

A. $706,670.

B. $755,980.

C. $805,280.

D. $838,150.

E. $815,770.

23. Hardford Corp. held 80% of Inglestone Inc. which, in turn, owned 80% of Jade Co.

Operating income figures (without investment income) as well as unrealized upstream gains included in the income for the current year follow:

The accrual-based income of Jade Co. is calculated to be

A. $193,000.

B. $189,000.

C. $196,000.

D. $201,000.

E. $144,000.




24. Hardford Corp. held 80% of Inglestone Inc. which, in turn, owned 80% of Jade Co. Operating income figures (without investment income) as well as unrealized upstream gains included in the income for the current year follow:

The non-controlling interest in the net income of Jade Co. is calculated to be

A. $36,900.

B. $33,600.

C. $42,400.

D. $32,300.

E. $39,200.

25. Hardford Corp. held 80% of Inglestone Inc. which, in turn, owned 80% of Jade Co.

Operating income figures (without investment income) as well as unrealized upstream gains included in the income for the current year follow:

The non-controlling interest in the net income of Inglestone Inc. is calculated to be

A. $106,950.

B. $102,640.

C. $114,530.

D. $106,960.

E. $103,680.




26. When indirect control is present, which of the following statements is true?

A. At least one company within the business combination holds a parent and a subsidiary relationship.

B. The parent company owns a percent of subsidiary and subsidiary owns a percent of the parent.

C. Consolidated financial statements are required for only one subsidiary.

D. Recognition of income for an indirectly owned subsidiary is ignored.

E. Only dividend income is recognized for an indirectly owned subsidiary.

27. Which of the following statements is false concerning a father-son-grandson

configuration?

A. This type of ownership pattern does not significantly alter the worksheet process.

B. Most worksheet entries are simply made twice.

C. The doubling of entries may seem overwhelming.

D. The individual consolidation procedures remain unaffected.

E. Consolidated financial statements are required for only the father and son companies.

28. Which of the following statements is true regarding mutual ownership between a

parent and its subsidiary?

A. The shares of the parent held by a subsidiary should be treated as outstanding stock on the consolidated balance sheet.

B. Only the subsidiary's shares held by the parent should be eliminated in consolidation.

C. The treasury stock approach is required to reflect parent shares held by the subsidiary.

D. The treasury stock approach is required to eliminate subsidiary shares held by the parent company.

E. The parent company does not need to file consolidated financial statements if there is mutual ownership.




29. Which of the following statements is true regarding a subsidiary's investment in the parent company's stock?

A. The treasury stock approach focuses on the parent's control over its subsidiary.

B. For consolidation, both the parent and subsidiary must eliminate all intra-entity investments.

C. In consolidation, the parent's retained earnings will not be reduced by the dividends it paid to the subsidiary.

D. This corporate combination is known as mutual ownership.

E. All of these are true statements.

30. Which of the following statements is true regarding the subsidiary's investment in its

parent's common stock?

A. All of the parent company's common stock is eliminated.

B. The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to treasury stock.

C. The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to retained earnings.

D. The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to additional paid-in capital.

E. The investment in parent company's common stock is not eliminated in consolidation.

31. Which of the following statements is true regarding the filing of income taxes for an

affiliated group?

A. Domestic subsidiaries greater than 50% ownership must file a consolidated tax return.

B. Domestic subsidiaries greater than 60% ownership must file a consolidated tax return.

C. Domestic subsidiaries greater than 80% ownership must file a consolidated tax return.

D. Domestic subsidiaries greater than 80% ownership may file a consolidated tax return.

E. Foreign subsidiaries must file a consolidated tax return.




32. The benefits of filing a consolidated tax return include all of the following except

A. Intercompany profits are not taxed until realized.

B. Intercompany profits are deferred.

C. Intercompany dividends are not taxable.

D. Losses incurred by an affiliated company can be used to reduce taxable income earned by other members to that affiliated group.

E. Intercompany profits are taxed before realized, but intercompany losses are deferred.

33. Which of the following statements is true regarding goodwill?

A. For accounting purposes, goodwill may be amortized over a period not to exceed 40 years.

B. For accounting purposes, goodwill may be amortized over a period not to exceed 20 years.

C. For tax purposes, goodwill amortization cannot be deductible.

D. For tax purposes, goodwill amortization may be deductible over a 20-year period.

E. For tax purposes, goodwill amortization may be deductible over a 15-year period.




34. Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2013 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also retains a $20,000 unrealized gain in their current income figures. Annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross.

Compute Chase's attributed ownership in Ross.

A. 40.0%.

B. 64.0%.

C. 24.0%.

D. 32.0%.

E. 12.8%.

35. Chase Company owns 80% of Lawrence Company and 40% of Ross Company.

Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2013 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also retains a $20,000 unrealized gain in their current income figures. Annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross.

Compute the non-controlling interest in Ross' net income for 2013.

A. $92,000.

B. $77,400.

C. $75,000.

D. $64,500.

E. $69,000.





Compute Lawrence's accrual-based income for 2013.

A. $354,000.

B. $329,500.

C. $334,000.

D. $265,000.

E. $344,500.

37. Chase Company owns 80% of Lawrence Company and 40% of Ross Company.

Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2013 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also retains a $20,000 unrealized gain in their current income figures. Annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross.

Compute Chase's accrual-based income for 2013.

A. $746,000.

B. $719,000.

C. $779,600.

D. $774,200.

E. $758,100.




38. On January 1, 2012, Jones Company bought 15% of Whitton Company. Jones paid $150,000 for these shares, an amount that exactly equaled the proportionate book value of Whitton. On January 1, 2013, Whitton acquired 80% ownership of Jones. The following data are available concerning Whitton's acquisition of Jones:

Excess fair value over book value (assigned to trademarks) is amortized over 20 years. The initial value method is used by both companies.

The following information is available regarding Jones and Whitton:

What would be included in a consolidation worksheet entry for 2013?

A. Debit treasury stock, $135,000.

B. Credit treasury stock, $135,000.

C. Debit treasury stock, $150,000.

D. Credit treasury stock, $150,000.

E. Debit common stock, $150,000.







Compute the amount allocated to trademarks recognized in the January 1, 2013 consolidated balance sheet.

A. $80,000.

B. $100,000.

C. $76,000.

D. $16,000.

E. $-0-







Compute Whitton's accrual-based consolidated net income for 2013.

A. $199,000.

B. $190,000.

C. $185,000.

D. $184,000.

E. $176,000.







Compute the non-controlling interest in net income for 2013.

A. $11,000.

B. $10,800.

C. $9,000.

D. $8,200.

E. $7,200.




42. Tower Company owns 85% of Hill Company. The two companies engaged in several intra-entity transactions. Each company's operating and dividend income for the current time period follow, as well as the effects of unrealized gains. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%.

Compute accrual-based consolidated net income.

A. $280,000.

B. $245,000.

C. $200,000.

D. $255,200.

E. $290,200.





What is the tax liability for the current year if consolidated tax returns are prepared?

A. $55,560.

B. $70,350.

C. $60,000.

D. $73,500.

E. $84,000.





Using percentage allocation method, how much income tax expense is assigned to Hill?

A. $21,000.

B. $24,000.

C. $20,400.

D. $17,400.

E. $0.





Under the separate return method, how much income tax expense will be assigned to Hill?

A. $24,000.

B. $22,857.

C. $24,874.

D. $21,874.

E. $21,000.




46. White Company owns 60% of Cody Company. Separate tax returns are required. For 2012, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody paid a total of $25,000 in cash dividends; $15,000 (60%) to White and $10,000 to the non-controlling interest. White paid dividends of $180,000. The income tax rate for both companies is 30%.

Compute Cody's income tax expense for 2013.

A. $33,000.

B. $34,500.

C. $37,500.

D. $30,000.

E. $22,500.

47. White Company owns 60% of Cody Company. Separate tax returns are required. For

2012, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody paid a total of $25,000 in cash dividends; $15,000 (60%) to White and $10,000 to the non-controlling interest. White paid dividends of $180,000. The income tax rate for both companies is 30%.

Compute Cody's undistributed earnings for 2013.

A. $62,500.

B. $125,000.

C. $87,500.

D. $100,000.

E. $70,000.





Compute the income tax payable by White for 2013.

A. $93,600.

B. $91,350.

C. $94,500.

D. $90,900.

E. $90,000.

49. White Company owns 60% of Cody Company. Separate tax returns are required. For

2012, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody paid a total of $25,000 in cash dividends; $15,000 (60%) to White and $10,000 to the non-controlling interest. White paid dividends of $180,000. The income tax rate for both companies is 30%.

Compute White's deferred income taxes for 2013.

A. $6,000.

B. $2,250.

C. $3,150.

D. $11,250.

E. $21,000.




50. Woods Company has one depreciable asset valued at $800,000. Because of recent losses, the company has a net operating loss carry-forward of $150,000. The tax rate is 30%. The company was acquired for $1,000,000. It is likely the benefit will be realized. Compute the goodwill realized in consolidation.

A. $0.

B. $155,000.

C. $200,000.

D. $305,000.

E. $350,000.

51. Under current U.S. tax law for consolidated tax returns:

A. One entity in the group can use another entity's net operating loss carry-forward to its advantage.

B. The parent can use the net operating loss carry-forward of another entity in the group.

C. A net operating loss carry-forward if an entity will be unusable when consolidated tax returns are prepared.

D. A net operating loss carry-forward of an entity in the group can only be used by that entity.

E. Since the tax return is for all entities in one consolidated group, the net operating loss carry-forward of one entity must be pro-rated to all other entities in the group.




52. Strong Company has had poor operating results in recent years and has a $160,000 net operating loss carry-forward. Leader Corp. pays $700,000 to acquire Strong and is optimistic about its future profitability potential. The book value and fair value of Strong's identifiable net assets is $500,000 at date of acquisition. Strong's tax rate is 30% and Leader's tax rate is 40%. What is goodwill resulting from this business combination?

A. $40,000.

B. $88,000.

C. $104,000.

D. $152,000.

E. $248,000.

53. According to International Financial Reporting Standards: In the consolidation process

for subsidiaries that are indirectly controlled:

A. The entity least owned by the parent must be included in consolidation.

B. Only the entity most directly controlled by the parent must be consolidated.

C. Each controlled subsidiary may be individually consolidated.

D. The entity most directly owned by the parent must be consolidated first.

E. Indirectly controlled subsidiaries cannot be consolidated.




54. In a father-son-grandson combination, which of the following statements is true?

A. Companies that are solely in subsidiary positions must have their realized income computed first in the consolidation process.

B. Father-son-grandson configurations never require consolidation unless one company owns 100% of at least one other member of the combined group.

C. The order of the computation of realized income is not important in the consolidation process.

D. The parent must have its realized income computed first in the consolidation process.

E. None of these.

55. Which of the following statements is true concerning connecting affiliations and

mutual ownerships?

A. In a mutual ownership, at least two companies in the consolidated group own portions of a third company.

B. There are at least four companies in a connecting affiliation.

C. In a connecting affiliation, at least one subsidiary owns stock in the parent company.

D. In a mutual ownership, the subsidiary owns a portion of the parent's stock.

E. There are only two companies in a connecting affiliation.

56. Which of the following is true concerning the treasury stock approach in accounting

for a subsidiary's investment in parent company stock?

A. The original cost of the subsidiary's investment reduces long-term liabilities.

B. The cost of parent shares is treated as if the shares are no longer outstanding.

C. The subsidiary must apply the equity method in accounting for the investment if the treasury stock approach is used.

D. The treasury stock approach increases total stockholders' equity.

E. The cost of parent shares is treated as if the shares are no longer issued.




57. Which of the following is not an advantage of filing a consolidated income tax return?

A. The existence of unrealized losses in ending inventory.

B. The ability to use net operating losses of one company to offset profits of another company.

C. The deferral of unrealized gains.

D. Transfers of inventory at a transfer price above cost.

E. Intercompany dividends are not taxable.

58. On January 1, 2013, a subsidiary buys 8 percent of the outstanding voting stock of its

parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary), and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?

A. Included in current assets.

B. Included in noncurrent assets.

C. Consolidated stockholders' equity is reduced by $350,000.

D. Consolidated stockholders' equity is reduced by $300,000.

E. There is no effect on the consolidated balance sheet, because the effects have been eliminated.




59. On January 1, 2013, a subsidiary buys 12 percent of the outstanding voting stock of its parent corporation. The payment of $400,000 exceeded book value of the acquired shares by $80,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $1,000,000 (excluding investment income from the subsidiary), and paid $120,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?

A. Consolidated stockholders' equity is reduced by $400,000.

B. Consolidated stockholders' equity is reduced by $320,000.

C. Included in current assets.

D. Included in noncurrent assets.


60. Which of the following conditions will allow two companies to file a consolidated

income tax return?

A. One company owns less than 50 percent of the other company's voting stock but has the ability to significantly influence the other company.

B. One company holds 50 percent of the other company's voting stock.

C. One company holds 75 percent of the other company's voting stock.

D. One company holds 83 percent of the other company's voting stock.

E. None of these.




61. How is goodwill amortized?

A. It is not amortized for reporting purposes or for tax purposes.

B. It is not amortized for reporting purposes, but is amortized over a 5-year life for tax purposes.

C. It is not amortized for tax purposes, but is amortized over a 5-year life for reporting purposes.

D. It is not amortized for tax purposes, but is amortized over a 15-year life for reporting purposes.

E. It is not amortized for reporting purposes, but is amortized over a 15-year life for tax purposes.

62. Why might a consolidated group file separate income tax returns?

A. There are no intra-entity transfers.

B. There are no unrealized gains in ending inventory.

C. One company is a foreign company.

D. Parent owns 68 percent of one company and 82 percent of another.

E. All of these.




63. Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

Which of the following statements is true?

A. Alpha and Beta must file a consolidated income tax return, but must exclude Gamma from the consolidated return.

B. Alpha, Beta, and Gamma must file a consolidated income tax return.

C. Alpha, Beta, and Gamma must file separate income tax returns because the ownership of Beta is less than 100%.

D. Alpha, Beta, and Gamma will probably not file a consolidated income tax return.

E. Alpha, Beta, and Gamma may file separate income tax returns or a consolidated income tax return.

64. Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of

Gamma, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is Gamma's accrual-based income for 2013?

A. $76,000.

B. $80,000.

C. $96,000.

D. $100,000.

E. $104,000.





What is Beta's accrual-based income for 2013?

A. $200,000.

B. $276,800.

C. $280,000.

D. $296,000.

E. $300,000.



What is Alpha's accrual-based income for 2013?

A. $564,000.

B. $564,800.

C. $572,200.

D. $580,000.

E. $600,000.





What is the non-controlling interest in Gamma's income for 2013?

A. $0.

B. $9,600.

C. $10,000.

D. $19,200.

E. $20,000.



What is the total non-controlling interest in the subsidiaries' income for 2013?

A. $0.

B. $9,600.

C. $10,000.

D. $19,200.

E. $20,000.




69. Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:


A. Delta and Sigma must file a consolidated income tax return, but must exclude Pi from the consolidated return.

B. Delta, Sigma, and Pi must file a consolidated income tax return.

C. Delta, Sigma, and Pi must file separate income tax returns because the ownership of Sigma and Pi is less than 100%.

D. Delta, Sigma, and Pi will probably not file a consolidated income tax return.

E. Delta, Sigma, and Pi may file separate income tax returns or a consolidated income tax return.

70. Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of

Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is Pi's accrual-based income for 2013?

A. $152,000.

B. $16,000.

C. $192,000.

D. $200,000.

E. $208,000.





What is Sigma's accrual-based income for 2013?

A. $400,000.

B. $592,000.

C. $540,000.

D. $572,800.

E. $600,000.



What is Delta's accrual-based income for 2013?

A. $1,091,520.

B. $1,115,520.

C. $1,168,000.

D. $1,168,520.

E. $1,200,000.





What is the non-controlling interest in Pi's income for 2013?

A. $0.

B. $9,600.

C. $10,000.

D. $19,200.

E. $20,000.



What is the non-controlling interest in Sigma's income for 2013?

A. $55,240.

B. $56,420.

C. $57,280.

D. $59,420.

E. $60,000.






A. $55,240.

B. $66,020.

C. $67,280.

D. $76,280.

E. $76,480.

76. Paris, Inc. owns 80 percent of the voting stock of Stance, Inc. The excess total fair

value over book value was $75,000. Stance holds 10 percent of the voting stock of Paris. The payment for that investment was in excess of book value and fair value by $15,000. Any excess fair value is assigned to trademarks to be amortized over a 10-year period. During the current year, Paris reported operating income of $200,000 and dividend income from Stance of $20,000. At the same time, Stance reported operating income of $40,000 and dividend income from Paris of $5,000.

What will be reported as the non-controlling interest in Stance's net income?

A. $6,500.

B. $8,000.

C. $9,000.

D. $7,700.

E. $1,000.




77. Paris, Inc. owns 80 percent of the voting stock of Stance, Inc. The excess total fair value over book value was $75,000. Stance holds 10 percent of the voting stock of Paris. The payment for that investment was in excess of book value and fair value by $15,000. Any excess fair value is assigned to trademarks to be amortized over a 10-year period. During the current year, Paris reported operating income of $200,000 and dividend income from Stance of $20,000. At the same time, Stance reported operating income of $40,000 and dividend income from Paris of $5,000.

What is consolidated net income?

A. $229,500.

B. $237,000.

C. $245,000.

D. $223,300.

E. $240,000.

78. Paris, Inc. owns 80 percent of the voting stock of Stance, Inc. The excess total fair

value over book value was $75,000. Stance holds 10 percent of the voting stock of Paris. The payment for that investment was in excess of book value and fair value by $15,000. Any excess fair value is assigned to trademarks to be amortized over a 10-year period. During the current year, Paris reported operating income of $200,000 and dividend income from Stance of $20,000. At the same time, Stance reported operating income of $40,000 and dividend income from Paris of $5,000.

What is Paris' share of consolidated net income?

A. $232,500.

B. $215,600.

C. $224,500.

D. $226,000.

E. $233,500.




79. Reggie, Inc. owns 70 percent of Nancy Corporation. During the current year, Nancy reported earnings before tax of $100,000 and paid a dividend of $30,000. The income tax rate for both companies is 30 percent. What deferred income tax liability arising in the current year must be recognized in the consolidated balance sheet?

A. $1,680.

B. $2,400.

C. $1,470.

D. $9,800.

E. $2,940.

80. Pear, Inc. owns 80 percent of Apple Corporation. During the current year, Apple

reported earnings before tax of $400,000 and paid a dividend of $120,000. The income tax rate for each company is 40 percent and separate tax returns are prepared. What deferred income tax liability arising this year must be recognized in the consolidated balance sheet?

A. $0.

B. $7,680.

C. $17,920.

D. $38,400.

E. $51,200.




81. Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent.

Assuming that separate income tax returns are being filed, what deferred income tax asset is created?

A. $0.

B. $1,100.

C. $1,800.

D. $6,000.

E. $9,000.

82. Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold

merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent.

Assuming that a consolidated income tax return is being filed, what deferred income tax asset is created?

A. $0.

B. $900.

C. $1,100.

D. $1,800.

E. $2,700.




83. Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent.


A. $0.

B. $360.

C. $450.

D. $2,250.

E. $3,600.

84. Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold

merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent.


A. $0.

B. $360.

C. $450.

D. $2,250.

E. $3,600.




85. Horse Corporation acquires all of Pony, Inc. for $300,000 cash. On that date, Pony has net assets with fair value of $250,000 but a book value and tax basis of $200,000. The tax rate is 40 percent. Prior to this date, neither Horse nor Pony has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $0.

B. $50,000.

C. $70,000.

D. $100,000.

E. $150,000.

86. Dog Corporation acquires all of Cat, Inc. for $400,000 cash. On that date, Cat has net

assets with fair value of $350,000 but a book value and tax basis of $325,000. The tax rate is 30 percent. Prior to this date, neither Dog nor Cat has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $0.

B. $50,000.

C. $65,000.

D. $66,400.

E. $57,500.




87. Britain Corporation acquires all of English, Inc. for $800,000 cash. On that date, English has net assets with fair value of $750,000 but a book value and tax basis of $500,000. The tax rate is 35 percent. Prior to this date, neither Britain nor English has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $47,542.

B. $117,850.

C. $125,000.

D. $137,500.

E. $250,000.

Essay Questions

88. What configuration of corporate ownership is described as a father-son-grandson relationship?




89. What ownership structure is referred to as a connecting affiliation? Describe briefly or illustrate with a diagram.

90. What ownership pattern is referred to as mutual ownership? Describe briefly or

illustrate with a diagram.

91. What are the essential criteria for including a subsidiary within an affiliated group?




92. X Co. owned 80% of Y Corp., and Y Corp. owned 15% of X Co. Under the treasury stock approach, how would the dividends paid by X Co. to Y Corp. be handled on a consolidation worksheet?

93. What term is used to describe a parent and subsidiaries that are eligible to file a

consolidated income tax return?

94. What method is used in consolidation to account for a subsidiary's ownership of

shares of its parent corporation?




95. What are the benefits or advantages of filing a consolidated income tax return?

96. How is the amortization of goodwill treated for income tax purposes? How does the

amortization of goodwill affect deferred income taxes?

97. C Co. currently owns 80% of D Co. and several other subsidiaries. C Co. is interested

in gaining control of H Co. Why might C Co. allow D Co. to acquire H Co., rather than purchasing H Co. directly?




98. Gamma Co. owns 80% of Delta Corp., and Delta Corp. owns 15% of Gamma Co. The two companies use the treasury stock approach to account for mutual ownership. How should Delta Corp.'s ownership interest in Gamma Co. be accounted for in the consolidation?

99. Explain how the treasury stock approach treats shares of the parent's common stock

that are owned by the subsidiary and the rationale behind the approach.

100.

T Corp. owns several subsidiaries that are eligible for inclusion on a consolidated income tax return, but T Corp. decided that each company in the group will file a separate return. Under what conditions would there be minimal advantage in filing a consolidated income tax return?




101.

Under what conditions must a deferred income tax asset be recorded?

Short Answer Questions

102.

B Co. owned 70% of the voting common stock of C Corp.; C Corp. owned 20% of B Co. For 2013, B Co. and C Corp. reported net income (not including the investment) of $600,000 and $300,000, respectively. B Co. and C Corp. paid dividends of $80,000 and $60,000, respectively.

Required:

Prepare a schedule showing B Co.'s share of consolidated net income for 2013 using the treasury stock approach.




103.

Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2013, Jull and Solaver reported operating income (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver paid dividends of $120,000 and $50,000, respectively.

Required:

Under the treasury stock approach, what is the non-controlling interest in Solaver Co.'s net income?

104.

Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2013, Jull and Solaver reported operating income (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver paid dividends of $120,000 and $50,000, respectively.

Required:

Under the treasury stock approach, what is Jull's controlling interest in Solaver Co.'s net income?




105.

Kurton Inc. owned 90% of Luvyn Corp.'s voting common stock. The consideration paid exceeded book value by $110,000. Of this amount, one half is attributable to a patent and is to be amortized over 5 years. Luvyn held 20% of Kurton's voting common stock which cost $28,000 more than fair value.During the current year, Kurton reported operating income of $224,000 and dividend income from Luvyn of $37,800. At the same time, Luvyn reported operating income of $70,000 and dividend income from Kurton of $19,600.

Required:

Using the treasury stock approach, prepare a schedule to show what is reported as the non-controlling interest in Luvyn Corp.'s net income.

106.


Required:

Prepare a schedule to show consolidated net income.




107.


Required:

Prepare a schedule to show Kurton's share of controlling interest in Luvyn's net income.

108.

Wilkins Inc. owned 60% of Motumbo Co. During the current year, Motumbo reported net income of $280,000 but paid a total cash dividend of only $56,000.

Required:

Assuming an income tax rate of 30%, what amount of Deferred Income Tax Liability arising this year must be recognized in the consolidated balance sheet?




109.

On January 1, 2012, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2012 or 2013. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2012 were as follows:

Following are the 2013 financial statements for these three companies. Curle made numerous transfers of inventory to Lance since the takeover: $112,000 (2012) and $140,000 (2013). These transactions included the same markup applicable to Curle's outside sales. In each of these years, Lance carried 20% of this inventory into the succeeding year before disposing of it.An effective income tax rate of 45% was applicable to all companies.

Required:

Determine the total amount of goodwill for the January 1, 2012 acquisition of Curle Co. and for the acquisition of Lance Co. on the same date.




110.



Required:

Determine the non-controlling interest in Curle Co.'s net income for the year 2013.




111.



Required:

Determine the non-controlling interest in Lace Co.'s net income for the year 2013.




112.



Required:

Determine the accrual-based income of Mace Co. for the year 2013.




113.

On January 1, 2013, Youder Inc. bought 120,000 shares of Nopple Co. for $384,000, giving Youder 30% ownership and the ability to apply significant influence to the operating and financing decisions of Nopple. Youder anticipated holding this investment for an indefinite time. In making this acquisition, Youder paid an amount equal to the book value for these shares. The fair value of each asset and liability was the same as its book value. Dividends and income for Nopple for 2013 were as follows:

Required:

Assume a 40% income tax rate. Prepare all necessary journal entries for Youder for 2013 beginning at acquisition and ending at tax accrual.




114.

Dice Inc. owns 40% of the outstanding shares of Spalding Corp., an investment accounted for by the equity method. During 2013, Dice earned operating income (not including income from its investment in Spalding) of $370,000. For this same period, Spalding reported net income of $160,000 and paid cash dividends of $60,000. Dice has an effective income tax rate of 35% and anticipates holding its investment in Spalding for an indefinite period.

Required:

(A.) What income tax expense journal entry would Dice Inc. record at the end of 2013?(B.) If Dice expects to sell its interest in Spalding in the near future, how does that decision change the 2013 income tax expense journal entry?

115.

Dotes, Inc. owns 40% of Abner Co. Dotes accounts for its investment using the equity method. Abner follows a policy of paying dividends equal to 30% of its income each year. During the current year, Abner reported net income of $216,000. Dotes has an effective income tax rate of 32%.

Required:

What journal entry would Dotes record at the end of the current year for income taxes relating to the investment in Abner? Assume the investment is to be held for an indefinite time and that all amounts are to be rounded to the nearest dollar.




116.

Patton's operating income excludes income from the investment in Stevens, but includes $150,000 of unrealized gains on intra-entity transfers of inventory. Patton uses the initial value method to account for the investment in Stevens.

Assume Patton owns 90 percent of the voting stock of Stevens and files a consolidated income tax return. What amount of income taxes would be paid?

117.


Assume Patton owns 90 percent of the voting stock of Stevens and they each file separate income tax returns. What amount of total income tax would be paid?




118.


How much will the consolidated group save if it decides to file a consolidated income tax return?




119.

For each of the following situations, select the best answer concerning accounting for income taxes in combinations:

(A) May file a consolidated income tax return.(B) May not a file consolidated income tax return.(C) Must file a consolidated income tax return.

_____1. Parent company owns 85% of the voting stock of the subsidiary, and there are significant intercompany transactions._____2. Subsidiary is a foreign corporation._____3. Parent company owns 90% of the voting stock of the subsidiary, but there are no intercompany inventory transactions._____4. Parent company owns 75% of the voting stock of the subsidiary but there are no intercompany inventory transactions._____5. Parent company owns 90% of the voting stock of the subsidiary, and there are intercompany inventory transactions with transferred goods in ending inventory._____6. Parent company owns 75% of the voting stock of the subsidiary and there are intercompany inventory transactions with transferred goods in ending inventory.




Chapter 07 Consolidated Financial Statements-Ownership Patterns and Income Taxes Answer Key

Multiple Choice Questions


When Buckette prepared consolidated financial statements, it should include

A. Shuvelle but not Tayle.

B. Tayle but not Shuvelle.

C. either Shuvelle or Tayle.

D. Shuvelle and Tayle.

E. neither Shuvelle nor Tayle.

AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Measurement

Accessibility: Keyboard NavigationBlooms: AnalyzeDifficulty: 1 Easy

Learning Objective: 07-02 Demonstrate the consolidation process when a corporate ownership structure is characterized by a connecting affiliation.

Topic: Indirect Subsidiary Control - Connecting Affiliation





What is this pattern of ownership called?

A. pyramid ownership.

B. a connecting affiliation.

C. mutual ownership.

D. an indirect affiliation.

E. an affiliated group.

AACSB: Reflective thinkingAICPA BB: Critical Thinking

AICPA FN: MeasurementAccessibility: Keyboard Navigation

Blooms: UnderstandDifficulty: 1 Easy




What percentage of Tayle's income is attributed to Buckette's ownership interest?

A. 100%.

B. 75%.

C. 61%.

D. 40%.

E. 74%.

40% + 21% [60% × 35%] = 61%

AACSB: Analytic

AICPA BB: Critical Thinking





Blooms: AnalyzeDifficulty: 2 Medium



4. D Corp. had investments, direct and indirect, in several subsidiaries:

• E Co. is a domestic firm in which D Corp. owned a 90% interest• F Co. is a domestic firm in which D Corp. owned 60% and E Co. owned 30%• G Co. is a domestic firm wholly owned by E Co.• H Co. is a foreign subsidiary in which D Corp. owned a 90% interest• I Co. is a domestic firm in which D Corp. owned 50% and G Co. owned 25%

Which of these subsidiaries may be included in a consolidated income tax return?

A. E, F, G, H, and I.

B. E, G, H, and I.

C. E and F.

D. E, F, G, and H.

E. E, F, and G.

AACSB: Analytic


Accessibility: Keyboard NavigationBlooms: Analyze

Difficulty: 2 MediumLearning Objective: 07-04 List the criteria for being a member of an affiliated group for income tax filling

purposes.Topic: Affiliated Groups




5. Evanston Co. owned 60% of Montgomery Corp. Montgomery owned 75% of Noir Inc., and Noir owned 15% of Montgomery. This pattern of ownership would be called

A. mutual ownership.

B. direct control.

C. indirect control.

D. an affiliated group.

E. a connecting affiliation.




Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

Topic: Mutual Ownership

6. In a tax-free business combination,

A. the income tax basis for acquired assets and liabilities is adjusted to current fair value.

B. any goodwill created by the combination may be amortized in calculating taxable income.

C. the subsidiary's assets and liabilities are assigned an income tax basis of zero dollars, so that they will have no future income tax consequences.

D. any goodwill created by the combination must be deducted in total in calculating taxable income.

E. the subsidiary's cost basis for assets are retained for income tax calculations.



Blooms: RememberDifficulty: 2 Medium

Learning Objective: 07-07 Determine the deferred tax consequences for temporary differences generated when a business combination is created.

Topic: Temporary Differences Generated by Business Combinations






The accrual-based income of East Co. is calculated to be

A. $385,700.

B. $581,000.

C. $557,000.

D. $551,000.

E. $707,000.

East Income $600,000[Compass Income ($120,000) - Excess Amort ($20,000) - Unrealized I/E Gains ($15,000)] × 60% = East's Share of Compass Income ($51,000)Excess Amort of West ($30,000) - Unrealized I/E Gains ($70,000) = $100,000$600,000 + $51,000 - $100,000 = $551,000

AACSB: Analytic


Blooms: ApplyDifficulty: 2 Medium

Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfather-father-son ownership configuration.

Topic: Indirect Subsidiary Control






The accrual-based income of West Corp. is calculated to be

A. $734,000.

B. $1,261,000.

C. $1,123,900.

D. $1,140,700.

E. $1,149,700.

West's Income ($860,000) + West's Income from East ($551,000 × .70 = $385,700 - Deferral of I/E Gains ($96,000) = $1,149,700

AACSB: Analytic










What amount should have been reported for consolidated net income?

A. $1,285,000.

B. $1,331,700.

C. $1,349,000.

D. $1,315,000.

E. $1,314,900.

Combined Operating Inc ($860,000 + $600,000 + $120,000) $1,580,000 - Combined Excess Amort ($30,000 + $20,000) $50,000 - Combined I/E Gains ($96,000 + $70,000 + $15,000) $181,000 = Consolidated Income ($1,349,000)

AACSB: Analytic










For West Corp. and consolidated subsidiaries, what total amount would have been reported for the non-controlling interest's share of subsidiaries' net income?

A. $165,300.

B. $199,300.

C. $191,000.

D. $228,000.

E. $153,000.

Consolidated Income ($1,349,000) - Controlling Interest Inc ($1,149,700) = Non-Controlling Interest Inc ($199,300)

AACSB: Analytic










What amount of dividends did West Corp. receive from Compass Co.?

A. $-0-

B. $25,200.

C. $36,000.

D. $42,000.

E. $90,000.

[$0] - No Direct Dividends Paid to West

AACSB: Analytic










What is the amount of taxable income reported on the consolidated income tax return?

A. $720,000.

B. $625,000.

C. $621,000.

D. $665,000.

E. $655,000.

Combined Income ($600,000 + $120,000) $720,000 - Combined I/E Gains (50,000 + $15,000) = Taxable Income ($655,000)

AACSB: Analytic



Learning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on information presented in a consolidated set of financial statements.

Topic: Deferred Income Taxes






What was the amount of income tax expense that should have been assigned to Boat using the percentage allocation method?

A. $31,500

B. $32,750

C. $36,000

D. $32,660

E. $30,390

Consolidated Income Tax $655,000 × .30 = $196,500Parent's Portion of the Consolidated Income $600,000 - $50,000 = $550,000/Consolidated Income $655,000 = 84%Sub's Portion of the Consolidated Income $655,000 - $550,000 = $105,000/Consolidated Income $655,000 = 16%Consolidated Income Tax $196,500 × .16 = $31,500

AACSB: Analytic










What was the amount of income tax expense that should have been assigned to Boat using the separate return method?

A. $36,000

B. $31,500

C. $33,390

D. $32,750

E. $32,660

Parent Operating Income $600,000 × .30 = $180,000Sub Operating Income $120,000 × .30 = $36,000Total from Separate Returns = $216,000Sub's Income $36,000/Total from Separate Returns $216,000 = 16.67%Consolidated Income Tax $196,500 × .167 = $32,750

AACSB: Analytic










What was the non-controlling interest in Boat Inc.'s net income, assuming that the separate return method was used?

A. $16,800

B. $14,450

C. $14,700

D. $17,450

E. $13,800

Sub's Reported Income ($120,000) - Unrealized I/E Gains ($15,000) - Assigned Income tax Expense ($32,750) = Sub's Realized Income ($72,250) × Non-Controlling Share 20% = $14,450

AACSB: Analytic


Blooms: ApplyDifficulty: 3 Hard






16. Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported operating income of $266,000 for 2013 whereas Bell earned $98,000 during the same period. No investment income was included within either of these income totals. On a consolidated income statement, what is the non-controlling interest in Bell's net income?

A. $9,800.

B. $13,692.

C. $10,836.

D. $12,460.

E. $11,214.

Sub's Income ($98,000) × Non-Controlling Interest (10%) = $9,800

AACSB: Analytic


Accessibility: Keyboard NavigationBlooms: Apply

Difficulty: 1 EasyLearning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a

grandfather-father-son ownership configuration.Topic: Indirect Subsidiary Control




17. Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported operating income of $266,000 for 2013 whereas Bell earned $98,000 during the same period. No investment income was included within either of these income totals. How would the 10% investment in Prescott owned by Bell be presented in the consolidated balance sheet?

A. The 10% investment would be eliminated and no amount would be shown in the consolidated balance sheet.

B. The 10% investment would be reclassified in Bell's balance sheet as Treasury Stock before the consolidation process begins.

C. The 10% investment would be eliminated and the same dollar amount would appear as treasury stock in the consolidated balance sheet.

D. The 10% investment would be included as part of Additional Paid-In Capital because it is less than 20% and therefore indicates no significant influence is present.

E. Prescott would treat the shares owned by Bell as if they had been repurchased on the open market, and a treasury stock account would be set up on Prescott's books recording the shares at their market value on the date of combination.









18. On January 1, 2013, a subsidiary bought 10% of the outstanding shares of its parent company. Although the total book value and fair value of the parent's net assets were $5.5 million, the consideration transferred for these shares was $590,000. During 2013, the parent reported operating income (no investment income was included) of $714,000 while paying dividends of $196,000. How were these shares reported at December 31, 2013?

A. The investment was recorded for $641,800 at the end of 2013 and then eliminated for consolidation purposes.

B. Consolidated stockholders' equity was reduced by $641,800.

C. The investment was recorded for $590,000 at the end of 2013 and then eliminated for consolidation purposes.

D. Consolidated stockholders' equity was reduced by $639,800.

E. Consolidated stockholders' equity was reduced by $590,000.

AACSB: Analytic


Accessibility: Keyboard NavigationBlooms: Analyze

Difficulty: 2 MediumLearning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is

characterized by mutual ownership.Topic: Mutual Ownership




19. Jastoon Co. acquired all of Wedner Co. for $588,000 cash in a tax-free transaction. On that date, the subsidiary had net assets with a $560,000 fair value but a $420,000 book value and income tax basis. The income tax rate was 30%. What amount of goodwill should have been recognized on the date of the acquisition?

A. $70,000.

B. $28,000.

C. $(14,000.)

D. $19,600.

E. $65,000.

FV ($560,000) - Tax Basis ($420,000) = Temp Difference ($140,000) × .30 = Deferred Tax Liability ($42,000) + [Cash Paid ($588,000) - FV Assets ($560,000)] $28,000 = Goodwill ($70,000)

AACSB: Analytic



Difficulty: 2 MediumLearning Objective: 07-07 Determine the deferred tax consequences for temporary differences generated when

a business combination is created.Topic: Temporary Differences Generated by Business Combinations





The accrual-based income of Eckston Inc. is calculated to be

A. $234,000.

B. $211,000.

C. $221,000.

D. $224,000.

E. $246,000.

Operating Inc ($280,000) - Unrealized I/E Trans ($56,000) = Accrual Income ($224,000)

AACSB: Analytic









The accrual-based income of Maroon Corp. is calculated to be

A. $481,600.

B. $472,700.

C. $488,900.

D. $502,300.

E. $358,800.

Operating Inc ($280,000) + Parent's Portion of Sub's Accrual Income ($224,000 × .90) $201,600 = Accrual Income $481,600

AACSB: Analytic









The accrual-based income of Beagle Co. is calculated to be

A. $706,670.

B. $755,980.

C. $805,280.

D. $838,150.

E. $815,770.

Operating Income ($420,000) + Parent's Portion of Sub's Accrual Income ($481,600 × .80) $385,280 = Accrual Income $805,280

AACSB: Analytic









The accrual-based income of Jade Co. is calculated to be

A. $193,000.

B. $189,000.

C. $196,000.

D. $201,000.

E. $144,000.

Operating Inc ($280,000) - Unrealized I/E Trans ($84,000) = Accrual Income ($196,000)

AACSB: Analytic









The non-controlling interest in the net income of Jade Co. is calculated to be

A. $36,900.

B. $33,600.

C. $42,400.

D. $32,300.

E. $39,200.

Operating Inc ($280,000) - Unrealized I/E Trans ($84,000) = Accrual Income ($196,000) × 20% = Non-Controlling Interest Income ($39,200)

AACSB: Analytic









The non-controlling interest in the net income of Inglestone Inc. is calculated to be

A. $106,950.

B. $102,640.

C. $114,530.

D. $106,960.

E. $103,680.

Parent's Operating Inc. ($420,000) - Unrealized I/E Trans ($42,000) = Parent's Accrual Income ($378,000) + Parent's Portion of Sub's Accrual Income ($196,000 × .80) = $534,800 × .20 = Non-Controlling Interest Income Portion ($106,960)

AACSB: Analytic








26. When indirect control is present, which of the following statements is true?

A. At least one company within the business combination holds a parent and a subsidiary relationship.

B. The parent company owns a percent of subsidiary and subsidiary owns a percent of the parent.

C. Consolidated financial statements are required for only one subsidiary.

D. Recognition of income for an indirectly owned subsidiary is ignored.

E. Only dividend income is recognized for an indirectly owned subsidiary.






27. Which of the following statements is false concerning a father-son-grandson configuration?

A. This type of ownership pattern does not significantly alter the worksheet process.

B. Most worksheet entries are simply made twice.

C. The doubling of entries may seem overwhelming.

D. The individual consolidation procedures remain unaffected.

E. Consolidated financial statements are required for only the father and son companies.









28. Which of the following statements is true regarding mutual ownership between a parent and its subsidiary?

A. The shares of the parent held by a subsidiary should be treated as outstanding stock on the consolidated balance sheet.

B. Only the subsidiary's shares held by the parent should be eliminated in consolidation.

C. The treasury stock approach is required to reflect parent shares held by the subsidiary.

D. The treasury stock approach is required to eliminate subsidiary shares held by the parent company.

E. The parent company does not need to file consolidated financial statements if there is mutual ownership.






29. Which of the following statements is true regarding a subsidiary's investment in the parent company's stock?

A. The treasury stock approach focuses on the parent's control over its subsidiary.

B. For consolidation, both the parent and subsidiary must eliminate all intra-entity investments.

C. In consolidation, the parent's retained earnings will not be reduced by the dividends it paid to the subsidiary.

D. This corporate combination is known as mutual ownership.

E. All of these are true statements.









30. Which of the following statements is true regarding the subsidiary's investment in its parent's common stock?

A. All of the parent company's common stock is eliminated.

B. The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to treasury stock.

C. The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to retained earnings.

D. The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to additional paid-in capital.

E. The investment in parent company's common stock is not eliminated in consolidation.

AACSB: Analytic


Accessibility: Keyboard NavigationBlooms: AnalyzeDifficulty: 1 Easy



31. Which of the following statements is true regarding the filing of income taxes for an affiliated group?

A. Domestic subsidiaries greater than 50% ownership must file a consolidated tax return.

B. Domestic subsidiaries greater than 60% ownership must file a consolidated tax return.

C. Domestic subsidiaries greater than 80% ownership must file a consolidated tax return.

D. Domestic subsidiaries greater than 80% ownership may file a consolidated tax return.

E. Foreign subsidiaries must file a consolidated tax return.




Learning Objective: 07-04 List the criteria for being a member of an affiliated group for income tax filling purposes.

Topic: Affiliated Groups




32. The benefits of filing a consolidated tax return include all of the following except

A. Intercompany profits are not taxed until realized.

B. Intercompany profits are deferred.

C. Intercompany dividends are not taxable.

D. Losses incurred by an affiliated company can be used to reduce taxable income earned by other members to that affiliated group.

E. Intercompany profits are taxed before realized, but intercompany losses are deferred.






33. Which of the following statements is true regarding goodwill?

A. For accounting purposes, goodwill may be amortized over a period not to exceed 40 years.

B. For accounting purposes, goodwill may be amortized over a period not to exceed 20 years.

C. For tax purposes, goodwill amortization cannot be deductible.

D. For tax purposes, goodwill amortization may be deductible over a 20-year period.

E. For tax purposes, goodwill amortization may be deductible over a 15-year period.



Blooms: RememberDifficulty: 1 Easy







Compute Chase's attributed ownership in Ross.

A. 40.0%.

B. 64.0%.

C. 24.0%.

D. 32.0%.

E. 12.8%.

40% + 24% [80% × 30%] = 64%

AACSB: Analytic




characterized by a connecting affiliation.Topic: Indirect Subsidiary Control - Connecting Affiliation





Compute the non-controlling interest in Ross' net income for 2013.

A. $92,000.

B. $77,400.

C. $75,000.

D. $64,500.

E. $69,000.

$250,000 - $20,000 - $15,000 = $215,000 × .30 = $64,500

AACSB: Analytic









Compute Lawrence's accrual-based income for 2013.

A. $354,000.

B. $329,500.

C. $334,000.

D. $265,000.

E. $344,500.

Parent's Accrual Income ($300,000 - $20,000 - $15,000) = $265,000 + Sub's Accrual Income ($215,000 × .30) $64,500 = $329,500

AACSB: Analytic









Compute Chase's accrual-based income for 2013.

A. $746,000.

B. $719,000.

C. $779,600.

D. $774,200.

E. $758,100.

Parent's Accrual Income ($450,000 - $20,000) = $430,000 + First Sub's Accrual Income ($329,500 × .80) $263,600 + Second Sub's Accrual Income ($215,000 × .40) $86,000 = $779,600

AACSB: Analytic











What would be included in a consolidation worksheet entry for 2013?

A. Debit treasury stock, $135,000.

B. Credit treasury stock, $135,000.

C. Debit treasury stock, $150,000.

D. Credit treasury stock, $150,000.

E. Debit common stock, $150,000.

Purchase Price $800,000/.80 = $1,000,000 FV Jones × .15 = $150,000 Debit to Treasury Stock Account

AACSB: Analytic


Blooms: AnalyzeDifficulty: 2 Medium









Compute the amount allocated to trademarks recognized in the January 1, 2013 consolidated balance sheet.

A. $80,000.

B. $100,000.

C. $76,000.

D. $16,000.

E. $-0-

Purchase Price $800,000/.80 = $1,000,000 FV Jones - BV $900,000 = $100,000 Excess FV of Trademark

AACSB: Analytic











Compute Whitton's accrual-based consolidated net income for 2013.

A. $199,000.

B. $190,000.

C. $185,000.

D. $184,000.

E. $176,000.

Parent's Accrual Income ($140,000 + $14,000 - $9,000) = $145,000 + Parent's Portion of Sub's Accrual Income ($50,000 × .80) $40,000 = $185,000

AACSB: Analytic











Compute the non-controlling interest in net income for 2013.

A. $11,000.

B. $10,800.

C. $9,000.

D. $8,200.

E. $7,200.

AACSB: Analytic









Compute accrual-based consolidated net income.

A. $280,000.

B. $245,000.

C. $200,000.

D. $255,200.

E. $290,200.

Combined Operating Inc ($200,000 + $80,000) $280,000 - Combined I/E Gains ($25,000 + $10,000) $35,000 = Consolidated Income ($245,000)

AACSB: Analytic


Blooms: ApplyDifficulty: 1 Easy







What is the tax liability for the current year if consolidated tax returns are prepared?

A. $55,560.

B. $70,350.

C. $60,000.

D. $73,500.

E. $84,000.

Combined Income ($200,000 + $80,000) $280,000 - Combined I/E Gains (25,000 + $10,000) = Taxable Income ($245,000) × .30 = Tax Liability ($73,500)

AACSB: Analytic









Using percentage allocation method, how much income tax expense is assigned to Hill?

A. $21,000.

B. $24,000.

C. $20,400.

D. $17,400.

E. $0.

Consolidated Income Tax = $73,500Parent's Portion of the Consolidated Income $200,000 - $25,000 = $175,000/Consolidated Income $245,000 = 71.5%Sub's Portion of the Consolidated Income $80,000 - $10,000 = $70,000/Consolidated Income $245,000 = 28.5%Consolidated Income Tax $73,500 × .285 = $21,000

AACSB: Analytic









Under the separate return method, how much income tax expense will be assigned to Hill?

A. $24,000.

B. $22,857.

C. $24,874.

D. $21,874.

E. $21,000.

Parent Operating Income $200,000 × .30 = $60,000Sub Operating Income $80,000 × .30 = $24,000Total from Separate Returns = $84,000Sub's Income $24,000/Total from Separate Returns $84,000 = 28.5%Consolidated Income Tax $73,500 × .285 = $21,000

AACSB: Analytic









Compute Cody's income tax expense for 2013.

A. $33,000.

B. $34,500.

C. $37,500.

D. $30,000.

E. $22,500.

Sub's Operating Income $125,000 × .30 = $37,500 Sub's Tax Liability

AACSB: Analytic



Difficulty: 1 EasyLearning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate

tax returns are filed by any of the affiliates of a business combination.Topic: Filing of Separate Tax Returns





Compute Cody's undistributed earnings for 2013.

A. $62,500.

B. $125,000.

C. $87,500.

D. $100,000.

E. $70,000.

Sub's Operating Income $125,000 - Tax Liability $37,500 - Dividend Payments $25,000 = Undistributed Earnings $62,500

AACSB: Analytic



Difficulty: 2 MediumLearning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate






Compute the income tax payable by White for 2013.

A. $93,600.

B. $91,350.

C. $94,500.

D. $90,900.

E. $90,000.

AACSB: Analytic









Compute White's deferred income taxes for 2013.

A. $6,000.

B. $2,250.

C. $3,150.

D. $11,250.

E. $21,000.

AACSB: Analytic



Difficulty: 3 HardLearning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate





50. Woods Company has one depreciable asset valued at $800,000. Because of recent losses, the company has a net operating loss carry-forward of $150,000. The tax rate is 30%. The company was acquired for $1,000,000. It is likely the benefit will be realized. Compute the goodwill realized in consolidation.

A. $0.

B. $155,000.

C. $200,000.

D. $305,000.

E. $350,000.

Consideration $1,000,000 - FV of Assets $800,000 = $200,000 Excess - FV Carry-Forward ($150,000 × .30) $45,000 = Unattributed Excess to Goodwill ($155,000)

AACSB: Analytic



Difficulty: 2 MediumLearning Objective: 07-08 Explain the impact that a net operating loss of an acquired affiliate has on

consolidated figures.Topic: Business Combinations and Operating Loss Carryforwards

51. Under current U.S. tax law for consolidated tax returns:

A. One entity in the group can use another entity's net operating loss carry-forward to its advantage.

B. The parent can use the net operating loss carry-forward of another entity in the group.

C. A net operating loss carry-forward if an entity will be unusable when consolidated tax returns are prepared.

D. A net operating loss carry-forward of an entity in the group can only be used by that entity.

E. Since the tax return is for all entities in one consolidated group, the net operating loss carry-forward of one entity must be pro-rated to all other entities in the group.







Learning Objective: 07-08 Explain the impact that a net operating loss of an acquired affiliate has on consolidated figures.

Topic: Business Combinations and Operating Loss Carryforwards

52. Strong Company has had poor operating results in recent years and has a $160,000 net operating loss carry-forward. Leader Corp. pays $700,000 to acquire Strong and is optimistic about its future profitability potential. The book value and fair value of Strong's identifiable net assets is $500,000 at date of acquisition. Strong's tax rate is 30% and Leader's tax rate is 40%. What is goodwill resulting from this business combination?

A. $40,000.

B. $88,000.

C. $104,000.

D. $152,000.

E. $248,000.

Consideration $700,000 - FV of Assets $500,000 = $200,000 Excess - FV Carry-Forward ($160,000 × .30) $48,000 = Unattributed Excess to Goodwill ($152,000)

AACSB: Analytic



Difficulty: 2 MediumLearning Objective: 07-08 Explain the impact that a net operating loss of an acquired affiliate has on

consolidated figures.Topic: Business Combinations and Operating Loss Carryforwards




53. According to International Financial Reporting Standards: In the consolidation process for subsidiaries that are indirectly controlled:

A. The entity least owned by the parent must be included in consolidation.

B. Only the entity most directly controlled by the parent must be consolidated.

C. Each controlled subsidiary may be individually consolidated.

D. The entity most directly owned by the parent must be consolidated first.

E. Indirectly controlled subsidiaries cannot be consolidated.






54. In a father-son-grandson combination, which of the following statements is true?

A. Companies that are solely in subsidiary positions must have their realized income computed first in the consolidation process.

B. Father-son-grandson configurations never require consolidation unless one company owns 100% of at least one other member of the combined group.

C. The order of the computation of realized income is not important in the consolidation process.

D. The parent must have its realized income computed first in the consolidation process.

E. None of these.









55. Which of the following statements is true concerning connecting affiliations and mutual ownerships?

A. In a mutual ownership, at least two companies in the consolidated group own portions of a third company.

B. There are at least four companies in a connecting affiliation.

C. In a connecting affiliation, at least one subsidiary owns stock in the parent company.

D. In a mutual ownership, the subsidiary owns a portion of the parent's stock.

E. There are only two companies in a connecting affiliation.






Topic: Indirect Subsidiary Control - Connecting AffiliationTopic: Mutual Ownership

56. Which of the following is true concerning the treasury stock approach in accounting for a subsidiary's investment in parent company stock?

A. The original cost of the subsidiary's investment reduces long-term liabilities.

B. The cost of parent shares is treated as if the shares are no longer outstanding.

C. The subsidiary must apply the equity method in accounting for the investment if the treasury stock approach is used.

D. The treasury stock approach increases total stockholders' equity.

E. The cost of parent shares is treated as if the shares are no longer issued.









57. Which of the following is not an advantage of filing a consolidated income tax return?

A. The existence of unrealized losses in ending inventory.

B. The ability to use net operating losses of one company to offset profits of another company.

C. The deferral of unrealized gains.

D. Transfers of inventory at a transfer price above cost.

E. Intercompany dividends are not taxable.



Blooms: UnderstandDifficulty: 2 Medium



58. On January 1, 2013, a subsidiary buys 8 percent of the outstanding voting stock of its parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary), and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?

A. Included in current assets.

B. Included in noncurrent assets.

C. Consolidated stockholders' equity is reduced by $350,000.

D. Consolidated stockholders' equity is reduced by $300,000.


AACSB: Analytic






Difficulty: 1 EasyLearning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is


59. On January 1, 2013, a subsidiary buys 12 percent of the outstanding voting stock of its parent corporation. The payment of $400,000 exceeded book value of the acquired shares by $80,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $1,000,000 (excluding investment income from the subsidiary), and paid $120,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?

A. Consolidated stockholders' equity is reduced by $400,000.

B. Consolidated stockholders' equity is reduced by $320,000.

C. Included in current assets.

D. Included in noncurrent assets.


Full Payment of $400,000 is Debited to Treasury Stock

AACSB: Analytic








60. Which of the following conditions will allow two companies to file a consolidated income tax return?

A. One company owns less than 50 percent of the other company's voting stock but has the ability to significantly influence the other company.

B. One company holds 50 percent of the other company's voting stock.

C. One company holds 75 percent of the other company's voting stock.

D. One company holds 83 percent of the other company's voting stock.

E. None of these.






61. How is goodwill amortized?

A. It is not amortized for reporting purposes or for tax purposes.

B. It is not amortized for reporting purposes, but is amortized over a 5-year life for tax purposes.

C. It is not amortized for tax purposes, but is amortized over a 5-year life for reporting purposes.

D. It is not amortized for tax purposes, but is amortized over a 15-year life for reporting purposes.

E. It is not amortized for reporting purposes, but is amortized over a 15-year life for tax purposes.









62. Why might a consolidated group file separate income tax returns?

A. There are no intra-entity transfers.

B. There are no unrealized gains in ending inventory.

C. One company is a foreign company.

D. Parent owns 68 percent of one company and 82 percent of another.

E. All of these.





Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

Topic: Affiliated GroupsTopic: Filing of Separate Tax Returns






A. Alpha and Beta must file a consolidated income tax return, but must exclude Gamma from the consolidated return.

B. Alpha, Beta, and Gamma must file a consolidated income tax return.

C. Alpha, Beta, and Gamma must file separate income tax returns because the ownership of Beta is less than 100%.

D. Alpha, Beta, and Gamma will probably not file a consolidated income tax return.

E. Alpha, Beta, and Gamma may file separate income tax returns or a consolidated income tax return.

AACSB: Analytic


Blooms: AnalyzeDifficulty: 1 Easy







What is Gamma's accrual-based income for 2013?

A. $76,000.

B. $80,000.

C. $96,000.

D. $100,000.

E. $104,000.

Operating Income ($100,000) - Unrealized I/E Gains ($4,000) = Sub's Accrual Income ($96,000)

AACSB: Analytic









What is Beta's accrual-based income for 2013?

A. $200,000.

B. $276,800.

C. $280,000.

D. $296,000.

E. $300,000.

Operating Income ($200,000) + Second Sub's Accrual Income ($96,000 × .80) = First Sub's Accrual Income ($276,800)

AACSB: Analytic









What is Alpha's accrual-based income for 2013?

A. $564,000.

B. $564,800.

C. $572,200.

D. $580,000.

E. $600,000.

Parent's Operating Income ($300,000) - Unrealized I/E Gains ($12,000) + First Sub's Accrual Income ($276,800) = Parent's Accrual Income ($564,800)

AACSB: Analytic









What is the non-controlling interest in Gamma's income for 2013?

A. $0.

B. $9,600.

C. $10,000.

D. $19,200.

E. $20,000.

Operating Income ($100,000) - Unrealized I/E Gains ($4,000) = Sub's Accrual Income ($96,000 × .20) $19,200

AACSB: Analytic










A. $0.

B. $9,600.

C. $10,000.

D. $19,200.

E. $20,000.

Since the First Sub is Wholly-Owned the only Non-Controlling Interest is in the Second Sub therefore, Operating Income ($100,000) - Unrealized I/E Gains ($4,000) = Sub's Accrual Income ($96,000 × .20) $19,200

AACSB: Analytic










A. Delta and Sigma must file a consolidated income tax return, but must exclude Pi from the consolidated return.

B. Delta, Sigma, and Pi must file a consolidated income tax return.

C. Delta, Sigma, and Pi must file separate income tax returns because the ownership of Sigma and Pi is less than 100%.

D. Delta, Sigma, and Pi will probably not file a consolidated income tax return.

E. Delta, Sigma, and Pi may file separate income tax returns or a consolidated income tax return.

AACSB: Analytic


Blooms: AnalyzeDifficulty: 1 Easy







What is Pi's accrual-based income for 2013?

A. $152,000.

B. $16,000.

C. $192,000.

D. $200,000.

E. $208,000.

Operating Income ($200,000) - Unrealized I/E Gains ($8,000) = Sub's Accrual Income ($192,000)

AACSB: Analytic









What is Sigma's accrual-based income for 2013?

A. $400,000.

B. $592,000.

C. $540,000.

D. $572,800.

E. $600,000.

Operating Income ($400,000) + Second Sub's Accrual Income ($192,000 × .90) = First Sub's Accrual Income ($572,800)

AACSB: Analytic









What is Delta's accrual-based income for 2013?

A. $1,091,520.

B. $1,115,520.

C. $1,168,000.

D. $1,168,520.

E. $1,200,000.

Parent's Operating Income ($600,000) - Unrealized I/E Gains ($24,000) + First Sub's Accrual Income ($572,800 × .90) $515,520 = Parent's Accrual Income ($1,091,520)

AACSB: Analytic









What is the non-controlling interest in Pi's income for 2013?

A. $0.

B. $9,600.

C. $10,000.

D. $19,200.

E. $20,000.

Operating Income ($200,000) - Unrealized I/E Gains ($8,000) = Non-Controlling Interest in Sub's Accrual Income ($192,000 × .10) $19,200

AACSB: Analytic









What is the non-controlling interest in Sigma's income for 2013?

A. $55,240.

B. $56,420.

C. $57,280.

D. $59,420.

E. $60,000.

Operating Income ($400,000) + Second Sub's Accrual Income ($192,000 × .90) = Non-Controlling Interest in First Sub's Accrual Income ($572,800 × .10) $57,280

AACSB: Analytic










A. $55,240.

B. $66,020.

C. $67,280.

D. $76,280.

E. $76,480.

Operating Income ($200,000) - Unrealized I/E Gains ($8,000) = Non-Controlling Interest in Second Sub's Accrual Income ($192,000 × .10) $19,200Operating Income ($400,000) + Second Sub's Accrual Income ($192,000 × .90) = Non-Controlling Interest in First Sub's Accrual Income ($572,800 × .10) $57,280Non-Controlling Interest in First Sub's Accrual Income $57,280 + Non-Controlling Interest in Second Sub's Accrual Income $19,200 = $76,480

AACSB: Analytic









What will be reported as the non-controlling interest in Stance's net income?

A. $6,500.

B. $8,000.

C. $9,000.

D. $7,700.

E. $1,000.

Operating Income ($40,000) - Amortization ($1,500) = Sub's Accrual Income ($38,500 × .20) $7,700

AACSB: Analytic









What is consolidated net income?

A. $229,500.

B. $237,000.

C. $245,000.

D. $223,300.

E. $240,000.

Parent's Operating Income ($200,000) - Amortization ($7,500) + Sub's Accrual Income ($38,500 × .80) $30,800 = Consolidated Income ($223,300)

AACSB: Analytic









What is Paris' share of consolidated net income?

A. $232,500.

B. $215,600.

C. $224,500.

D. $226,000.

E. $233,500.

AACSB: Analytic








79. Reggie, Inc. owns 70 percent of Nancy Corporation. During the current year, Nancy reported earnings before tax of $100,000 and paid a dividend of $30,000. The income tax rate for both companies is 30 percent. What deferred income tax liability arising in the current year must be recognized in the consolidated balance sheet?

A. $1,680.

B. $2,400.

C. $1,470.

D. $9,800.

E. $2,940.

AACSB: Analytic





80. Pear, Inc. owns 80 percent of Apple Corporation. During the current year, Apple reported earnings before tax of $400,000 and paid a dividend of $120,000. The income tax rate for each company is 40 percent and separate tax returns are prepared. What deferred income tax liability arising this year must be recognized in the consolidated balance sheet?

A. $0.

B. $7,680.

C. $17,920.

D. $38,400.

E. $51,200.

AACSB: Analytic


Accessibility: Keyboard Navigation






Topic: Filing of Separate Tax Returns



A. $0.

B. $1,100.

C. $1,800.

D. $6,000.

E. $9,000.

AACSB: Analytic










A. $0.

B. $900.

C. $1,100.

D. $1,800.

E. $2,700.

AACSB: Analytic



Difficulty: 1 EasyLearning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on

information presented in a consolidated set of financial statements.Topic: Deferred Income Taxes



A. $0.

B. $360.

C. $450.

D. $2,250.

E. $3,600.

AACSB: Analytic










A. $0.

B. $360.

C. $450.

D. $2,250.

E. $3,600.

AACSB: Analytic



Difficulty: 1 EasyLearning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on

information presented in a consolidated set of financial statements.Topic: Deferred Income Taxes




85. Horse Corporation acquires all of Pony, Inc. for $300,000 cash. On that date, Pony has net assets with fair value of $250,000 but a book value and tax basis of $200,000. The tax rate is 40 percent. Prior to this date, neither Horse nor Pony has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $0.

B. $50,000.

C. $70,000.

D. $100,000.

E. $150,000.

AACSB: Analytic





86. Dog Corporation acquires all of Cat, Inc. for $400,000 cash. On that date, Cat has net assets with fair value of $350,000 but a book value and tax basis of $325,000. The tax rate is 30 percent. Prior to this date, neither Dog nor Cat has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $0.

B. $50,000.

C. $65,000.

D. $66,400.

E. $57,500.

AACSB: Analytic


Accessibility: Keyboard Navigation





Learning Objective: 07-07 Determine the deferred tax consequences for temporary differences generated when a business combination is created.

Topic: Temporary Differences Generated by Business Combinations

87. Britain Corporation acquires all of English, Inc. for $800,000 cash. On that date, English has net assets with fair value of $750,000 but a book value and tax basis of $500,000. The tax rate is 35 percent. Prior to this date, neither Britain nor English has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $47,542.

B. $117,850.

C. $125,000.

D. $137,500.

E. $250,000.

AACSB: Analytic





Essay Questions

88. What configuration of corporate ownership is described as a father-son-grandson relationship?

A father-son-grandson relationship exists when one corporation owns a controlling interest in another which, in turn, owns a controlling interest in a third corporation.





AICPA FN: MeasurementBlooms: Remember

Difficulty: 1 EasyLearning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a


89. What ownership structure is referred to as a connecting affiliation? Describe briefly or illustrate with a diagram.

A connecting affiliation exists when a parent owns an interest in each of two companies, and one of the two companies owns an interest in the other.





90. What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a diagram.

Mutual ownership exists when a subsidiary owns common stock of its parent corporation or when two subsidiaries own shares of each other's common stock.








91. What are the essential criteria for including a subsidiary within an affiliated group?

A subsidiary may be included in an affiliated group if both of the following conditions are met:

A. The subsidiary is a domestic corporation.B. The parent has at least eighty percent control of the subsidiary, directly or indirectly.


AICPA FN: MeasurementBlooms: RememberDifficulty: 2 Medium



92. X Co. owned 80% of Y Corp., and Y Corp. owned 15% of X Co. Under the treasury stock approach, how would the dividends paid by X Co. to Y Corp. be handled on a consolidation worksheet?

The dividends must be eliminated as intra-entity dividends.


AICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 Medium



93. What term is used to describe a parent and subsidiaries that are eligible to file a consolidated income tax return?

The term affiliated group would be used in this situation.



Difficulty: 1 Easy






94. What method is used in consolidation to account for a subsidiary's ownership of shares of its parent corporation?

The method is the treasury stock approach.





95. What are the benefits or advantages of filing a consolidated income tax return?

When a consolidated income tax return is filed, intercompany profits are not taxed until realized, either by use or by sale to an outsider. On separate returns, intercompany profits are taxed in the period the sale is made within the combined entity. Therefore, filing a consolidated return can delay payment of income taxes. A second advantage is that, on a consolidated return, losses incurred by one company within the affiliated group can offset taxable income earned by other members, reducing the total income tax liability of the combined entity.








96. How is the amortization of goodwill treated for income tax purposes? How does the amortization of goodwill affect deferred income taxes?

In a business combination, goodwill is tested annually for impairment for financial statement purposes. The Internal Revenue Code allows the deduction of goodwill and other purchased intangibles over a 15-year period. Because the taxable income and financial income differ, the presence of goodwill causes a temporary difference that necessitates the recognition of deferred income taxes.





97. C Co. currently owns 80% of D Co. and several other subsidiaries. C Co. is interested in gaining control of H Co. Why might C Co. allow D Co. to acquire H Co., rather than purchasing H Co. directly?

Indirect control (such as a father-son-grandson structure, as proposed by C Co.) may be used to group subsidiaries by product line, geographic location, or other criteria. The use of indirect control may establish clearer and shorter lines of communication for day-to-day operations and improve responsibility reporting.


AICPA FN: MeasurementBlooms: Analyze

Difficulty: 2 MediumLearning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a





98. Gamma Co. owns 80% of Delta Corp., and Delta Corp. owns 15% of Gamma Co. The two companies use the treasury stock approach to account for mutual ownership. How should Delta Corp.'s ownership interest in Gamma Co. be accounted for in the consolidation?

Under the treasury stock approach, the parent's common stock owned by a subsidiary is treated in consolidated financial statements as being no longer outstanding. The consolidation process will eliminate the Investment in Gamma cost of shares and replace it as Treasury Stock of Gamma, the parent. The dividends received by Delta will be eliminated; thereby increasing Gamma's retained earnings as if these dividends had not been paid.





99. Explain how the treasury stock approach treats shares of the parent's common stock that are owned by the subsidiary and the rationale behind the approach.

According to the treasury stock approach, acquisition of some of the parent's common stock by the subsidiary is no different than acquisition by the parent itself. Since treasury stock would be recorded if the parent bought some of its own stock, treasury stock should be recognized during the consolidation process when mutual ownership exists. The treasury stock approach focuses on the parent's control over the subsidiary and views the parent and subsidiary as a single economic entity. The main advantage of the treasury stock approach is its simplicity.








100. T Corp. owns several subsidiaries that are eligible for inclusion on a consolidated income tax return, but T Corp. decided that each company in the group will file a separate return. Under what conditions would there be minimal advantage in filing a consolidated income tax return?

There might be few disadvantages in filing separate income tax returns if there are few intercompany transactions, and if the companies which make up the combined entity are generally profitable. When there are frequent intercompany transactions, filing a consolidated income tax return postpones taxation on intercompany gains until they are realized by use or sale to an outsider. Thus, the consolidated return postpones the taxation of some income. When one of the companies records a loss, a consolidated return allows the loss to be offset against other companies' profits, reducing the total income tax obligation for the combined entity. The filing of separate returns allows the companies more flexibility in their choice of accounting methods and tax year.





101. Under what conditions must a deferred income tax asset be recorded?

A deferred income tax asset is recorded when there is a temporary difference between financial accounting and income tax accounting rules, and income is taxed before it is recognized for financial accounting (or an expense is recognized for financial accounting before it can be deducted on the income tax return).








Short Answer Questions

102. B Co. owned 70% of the voting common stock of C Corp.; C Corp. owned 20% of B Co. For 2013, B Co. and C Corp. reported net income (not including the investment) of $600,000 and $300,000, respectively. B Co. and C Corp. paid dividends of $80,000 and $60,000, respectively.

Required:

Prepare a schedule showing B Co.'s share of consolidated net income for 2013 using the treasury stock approach.

AACSB: Analytic








103. Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2013, Jull and Solaver reported operating income (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver paid dividends of $120,000 and $50,000, respectively.

Required:

Under the treasury stock approach, what is the non-controlling interest in Solaver Co.'s net income?

AACSB: Analytic








104. Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2013, Jull and Solaver reported operating income (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver paid dividends of $120,000 and $50,000, respectively.

Required:

Under the treasury stock approach, what is Jull's controlling interest in Solaver Co.'s net income?

AACSB: Analytic








105. Kurton Inc. owned 90% of Luvyn Corp.'s voting common stock. The consideration paid exceeded book value by $110,000. Of this amount, one half is attributable to a patent and is to be amortized over 5 years. Luvyn held 20% of Kurton's voting common stock which cost $28,000 more than fair value.During the current year, Kurton reported operating income of $224,000 and dividend income from Luvyn of $37,800. At the same time, Luvyn reported operating income of $70,000 and dividend income from Kurton of $19,600.

Required:

Using the treasury stock approach, prepare a schedule to show what is reported as the non-controlling interest in Luvyn Corp.'s net income.

AACSB: Analytic









Required:

Prepare a schedule to show consolidated net income.

AACSB: Analytic









Required:

Prepare a schedule to show Kurton's share of controlling interest in Luvyn's net income.

AACSB: Analytic








108. Wilkins Inc. owned 60% of Motumbo Co. During the current year, Motumbo reported net income of $280,000 but paid a total cash dividend of only $56,000.

Required:

Assuming an income tax rate of 30%, what amount of Deferred Income Tax Liability arising this year must be recognized in the consolidated balance sheet?

AACSB: Analytic








109. On January 1, 2012, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2012 or 2013. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2012 were as follows:


Required:

Determine the total amount of goodwill for the January 1, 2012 acquisition of Curle Co. and for the acquisition of Lance Co. on the same date.




AACSB: Analytic










Required:

Determine the non-controlling interest in Curle Co.'s net income for the year 2013.




AACSB: Analytic










Required:

Determine the non-controlling interest in Lace Co.'s net income for the year 2013.




AACSB: Analytic










Required:

Determine the accrual-based income of Mace Co. for the year 2013.




AACSB: Analytic








113. On January 1, 2013, Youder Inc. bought 120,000 shares of Nopple Co. for $384,000, giving Youder 30% ownership and the ability to apply significant influence to the operating and financing decisions of Nopple. Youder anticipated holding this investment for an indefinite time. In making this acquisition, Youder paid an amount equal to the book value for these shares. The fair value of each asset and liability was the same as its book value. Dividends and income for Nopple for 2013 were as follows:

Required:

Assume a 40% income tax rate. Prepare all necessary journal entries for Youder for 2013 beginning at acquisition and ending at tax accrual.

Entry One-To record the acquisition of Nopple common stock:

Entry Two-To record income for the year: 30% of $400,000, reported balance:

Entry Three-To record the collection of dividends from Nopple Co.: 120,000 shares × $.40 per share:

Entry Four - To record income tax for the year:

Current income taxes must be paid by Youder on the twenty percent of dividends ($9,600 = 20% of $48,000) that is taxable now. This current liability is $3,840 ($9,600 at the 40% rate). Furthermore, a deferred income tax liability also exists. On Youder's accounting records, the Equity Income - Investment in Nopple Co. account balance exceeds its income tax basis by $72,000 which is the undistributed earnings: ($120,000 - $48,000). Since this difference will be erased by the payment of future dividends, the eighty percent dividends received deduction is applicable ($57,600 = 80% of 72,000). Thus, future taxable income will be increased by $14,400 ($72,000 - $57,600). Based on an income tax rate of




forty percent, the deferred income tax liability is $5,760.

AACSB: Analytic








114. Dice Inc. owns 40% of the outstanding shares of Spalding Corp., an investment accounted for by the equity method. During 2013, Dice earned operating income (not including income from its investment in Spalding) of $370,000. For this same period, Spalding reported net income of $160,000 and paid cash dividends of $60,000. Dice has an effective income tax rate of 35% and anticipates holding its investment in Spalding for an indefinite period.

Required:

(A.) What income tax expense journal entry would Dice Inc. record at the end of 2013?(B.) If Dice expects to sell its interest in Spalding in the near future, how does that decision change the 2013 income tax expense journal entry?

(A.)

Recording of year-end income tax




(B.) If Dice expects to sell this investment, the undistributed earnings will be realized through an increase in sales price rather than through dividend payments. Thus, no future dividends received deduction is available if the investment is to be sold; the deferred income tax effect must be calculated without the potential eighty percent reduction:

AACSB: Analytic








115. Dotes, Inc. owns 40% of Abner Co. Dotes accounts for its investment using the equity method. Abner follows a policy of paying dividends equal to 30% of its income each year. During the current year, Abner reported net income of $216,000. Dotes has an effective income tax rate of 32%.

Required:

What journal entry would Dotes record at the end of the current year for income taxes relating to the investment in Abner? Assume the investment is to be held for an indefinite time and that all amounts are to be rounded to the nearest dollar.

Journal Entry

AACSB: Analytic








116.


Assume Patton owns 90 percent of the voting stock of Stevens and files a consolidated income tax return. What amount of income taxes would be paid?

Intercompany income and dividends are not relevant because a consolidated return is filed.

AACSB: Analytic








117.


Assume Patton owns 90 percent of the voting stock of Stevens and they each file separate income tax returns. What amount of total income tax would be paid?

Total taxes to be paid are $720,000. Stevens would have to pay $120,000 (30% of its $400,000 operating income.) Patton would pay $600,000 or 30% of its $2,000,000 operating income. The unrealized gain is not deferred because separate returns are being filed. Intercompany dividends are not taxable because the parties still qualify as an affiliated group even though separate returns are being filed.

AACSB: Analytic








118.


How much will the consolidated group save if it decides to file a consolidated income tax return?

(Also computed as $150,000 intercompany gains × 30% tax rate)

AACSB: Analytic





Topic: Deferred Income TaxesTopic: Filing of Separate Tax Returns




119. For each of the following situations, select the best answer concerning accounting for income taxes in combinations:

(A) May file a consolidated income tax return.(B) May not a file consolidated income tax return.(C) Must file a consolidated income tax return.

_____1. Parent company owns 85% of the voting stock of the subsidiary, and there are significant intercompany transactions._____2. Subsidiary is a foreign corporation._____3. Parent company owns 90% of the voting stock of the subsidiary, but there are no intercompany inventory transactions._____4. Parent company owns 75% of the voting stock of the subsidiary but there are no intercompany inventory transactions._____5. Parent company owns 90% of the voting stock of the subsidiary, and there are intercompany inventory transactions with transferred goods in ending inventory._____6. Parent company owns 75% of the voting stock of the subsidiary and there are intercompany inventory transactions with transferred goods in ending inventory.

(1) A; (2) B; (3) A; (4) B; (5) A; (6) B







testbanksinstant.eutestbanksinstant.eu/samples/test bank for advanced... · web viewchase company...

Documents