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

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

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.

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, 2011 follows: What is Gamma's accrual-based income for 2011?

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

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, 2011 follows: What is Beta's accrual-based income for 2011?

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

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

On January 1, 2011, 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, 2011?

White Company owns 60% of Cody Company. Separate tax returns are required. For 2010, 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 2011.

On January 1, 2010, 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 2010 or 2011. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2010 were as follows: Following are the 2011 financial statements for these three companies. Curle made numerous transfers of inventory to Lance since the takeover: $112,000 (2010) and $140,000 (2011). 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 non-controlling interest in Curle Co.'s net income for the year 2011.

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

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

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, 2011 follows: Which of the following statements is true?

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

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

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?

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

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

B Co. owned 70% of the voting common stock of C Corp.; C Corp. owned 20% of B Co. For 2011, 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 2011 using the treasury stock approach.

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, 2011 follows: What is the non-controlling interest in Pi's income for 2011?