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

Dice Inc. owns 40% of the outstanding shares of Spalding Corp., an investment accounted for by the equity method. During 2011, 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 2011? (B.) If Dice expects to sell its interest in Spalding in the near future, how does that decision change the 2011 income tax expense journal entry?

Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Operating income totals for 2011 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 Beagle Co. is calculated to be

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

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

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?

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: Which of the following statements is true?

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 Sigma's income for 2011?

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

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 total amount of goodwill for the January 1, 2010 acquisition of Curle Co. and for the acquisition of Lance Co. on the same date.

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?

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

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 West Corp. is calculated to be

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 accrual-based income of Mace Co for the year 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 the income tax payable by White for 2011.

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?

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 separate return method?

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 Sigma's accrual-based income for 2011?

In a tax-free business combination,

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.

Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Operating income totals for 2011 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