Exam 7: Consolidated Financial Statements - Ownership Patterns and Income Taxes

In a tax-free business combination,

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?

Riley Corp. owned 90% of Brady Inc., while Brady owned 10% of the outstanding common shares of Riley. No goodwill or other allocations were recognized in connection with either of these acquisitions. Riley reported net income of $255,000 for 2021 whereas Brady recognized $87,000 during the same period. No investment income was included within either of these income totals.How would the 10% investment in Riley owned by Brady be presented in the consolidated balance sheet?

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%. 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?

On January 1, 2021, Harley Company bought 15% of Buttercup Company. Harley paid $200,000 for these shares, an amount that exactly equaled the proportionate book value of Buttercup. On January 1, 2022, Buttercup acquired 80% ownership of Harley. The following data are available concerning Buttercup's acquisition of Harley:Consideration transferred for 80% interest, January 1, 2022: $1,000,000Harley's reported book value, January 1, 2022: 1,200,000Excess 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 Harley and Buttercup: Compute the amount allocated to trademarks recognized in the January 1, 2022 consolidated balance sheet.

D Corp. had investments, direct and indirect, in several subsidiaries:E Co. is a domestic firm in which D Corp. owned a 90% interestF 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% interestI 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?

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

Delta Corporation owns 90% of Sigma Company, and Sigma owns 90% of Pi, Inc., all of which are domestic corporations. There are no excess amortizations associated with any of the acquisitions. Information for the three companies for the year ending December 31, 2021 follows: What is Delta's accrual-based net income for 2021?

Gardner Corp. owns 80% of the voting common stock of Lockhart Co. Lockhart owns 70% of Canning Co. Gardner and Lockhart both use the initial value method to account for their investments. The following information is available from the financial statements and records of the three companies: Separate company net income includes intra-entity gains before the consolidating deferral but does not include dividend income from investment in subsidiary.What amount should be reported for consolidated net income?

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%. 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?

How does the treatment of intra-entity gains differ when an affiliated group files a consolidated tax return compared to filing separate tax returns?

Gardner Corp. owns 80% of the voting common stock of Lockhart Co. Lockhart owns 70% of Canning Co. Gardner and Lockhart both use the initial value method to account for their investments. The following information is available from the financial statements and records of the three companies: Separate company net income includes intra-entity gains before the consolidating deferral but does not include dividend income from investment in subsidiary.The accrual-based net income of Gardner Corp. is calculated to be

White Company owns 60% of Cody Company. Separate tax returns are required. For 2020, 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 declared total dividends of $25,000; $15,000 (60%) to White and $10,000 to the noncontrolling interest. White declared dividends of $180,000. The income tax rate for both companies is 30%.Compute White's deferred income taxes for 2021.

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?

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

Paris, Inc. owns 80% of the voting stock of Stance, Inc. The excess total fair value over book value was $75,000. Any excess fair value is assigned to a franchise contract to be amortized over a 10-year period. Stance holds 10% of the voting stock of Paris and paid an amount that equaled 10% of the book value of Paris at the time the investment was acquired. During the current year, Paris reported its own net income of $200,000 before investment income from Stance. Paris had dividend income from Stance of $20,000. At the same time, Stance reported its own net income of $40,000 before investment income. Stance's dividend income from Paris was $5,000.What is net income attributable to the controlling interest of Paris?

Delta Corporation owns 90% of Sigma Company, and Sigma owns 90% of Pi, Inc., all of which are domestic corporations. There are no excess amortizations associated with any of the acquisitions. Information for the three companies for the year ending December 31, 2021 follows: What is Sigma's accrual-based income for 2021?

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

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

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?