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

Question 1

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?

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.

Answer 1

E

Question 2

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%.

Answer 2

C

Question 3

On January 1, 2021, 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 $6.2 million, the consideration transferred for these shares was $700,000. During 2021, the parent reported separate net income of $816,000, before including investment income, while dividends declared were $207,000. How were these shares reported at December 31, 2021?

A) The investment was recorded for $760,900 at the end of 2021 and then eliminated for consolidation purposes.
B) Consolidated stockholders' equity was reduced by $760,900.
C) The investment was recorded for $700,000 at the end of 2021 and then eliminated for consolidation purposes.
D) Consolidated stockholders' equity was reduced by $802,300.
E) Consolidated stockholders' equity was reduced by $700,000.

Answer 3

E

Question 4

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?

A) $1,425,000.
B) $1,490,000.
C) $1,525,000.
D) $1,635,000.
E) $1,700,000.

Question 5

Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Separate company net incomes for 2021 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 gross profit on intra-entity transfers to Maroon. The accrual-based net income of Maroon Corp. is calculated to be

A) $481,600.
B) $472,700.
C) $488,900.
D) $502,300.
E) $358,800.

Question 6

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.

Question 7

Florrick Co. owns 85% of Bishop Inc. The two companies file a consolidated income tax return and Florrick uses the initial value method to account for the investment. The following information is available from the two companies' financial statements: The income tax rate was 40%.The amount of income tax expense that should be assigned to Bishop using the separate return method is approximately:

A) $12,500
B) $50,000
C) $20,000
D) $43,600
E) $62,500

Question 8

Florrick Co. owns 85% of Bishop Inc. The two companies file a consolidated income tax return and Florrick uses the initial value method to account for the investment. The following information is available from the two companies' financial statements: The income tax rate was 40%.What is the amount of income tax expense that should be assigned to Bishop using the percentage allocation method?

A) $41,420
B) $54,500
C) $32,700
D) $50,000
E) $23,750

Question 9

Florrick Co. owns 85% of Bishop Inc. The two companies file a consolidated income tax return and Florrick uses the initial value method to account for the investment. The following information is available from the two companies' financial statements: The income tax rate was 40%.What was the net income attributable to the noncontrolling interest, assuming that the separate return method was used to assign the income tax expense?

A) $12,625
B) $12,280
C) $31,250
D) $10,575
E) $6,750

Question 10

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.

Question 11

Florrick Co. owns 85% of Bishop Inc. The two companies file a consolidated income tax return and Florrick uses the initial value method to account for the investment. The following information is available from the two companies' financial statements: The income tax rate was 40%.What is the amount of taxable income reported on the consolidated income tax return?

A) $565,000.
B) $605,000.
C) $531,250.
D) $625,000.
E) $545,000.

Question 12

Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Separate company net incomes for 2021 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 gross profit on intra-entity transfers to Maroon. The accrual-based net income of Eckston Inc. is calculated to be

A) $234,000.
B) $211,000.
C) $221,000.
D) $224,000.
E) $246,000.

Question 13

Chapman Co. acquired all of Klein Co. for $613,000 cash in a tax-free transaction. On that date, the subsidiary had net assets with a $590,000 fair value but a $460,000 book value and income tax basis. The income tax rate was 35%. What amount of goodwill should have been recognized on the date of the acquisition?

A) $68,500.
B) $23,000.
C) $45,500.
D) $22,500.
E) $61,500.

Question 14

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.For Gardner Corp. and consolidated subsidiaries, what total amount would be reported for the net income attributable to the noncontrolling interest?

A) $141,700.
B) $152,200.
C) $120,700.
D) $202,050.
E) $212,550.

Question 15

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.On a consolidated income statement, what is the net income attributable to the noncontrolling interest?

A) $8,700.
B) $16,800.
C) $25,500.
D) $14,250.
E) $34,200.

Question 16

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 Lockhart Co. is calculated to be

A) $530,000.
B) $590,000.
C) $603,500.
D) $683,500.
E) $723,500.

Question 17

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

Question 18

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

A) $1,114,800.
B) $1,212,450.
C) $1,272,800.
D) $1,382,800.
E) $1,393,500.

Question 19

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 of dividends should Gardner Corp. recognize in its consolidated net income with respect to dividends received from Canning Co.?

A) $-0-
B) $25,200.
C) $36,000.
D) $42,000.
E) $90,000.

Question 20

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?

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

Question 21

On January 1, 2020, 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, 2021, 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: Compute the net income attributable to the noncontrolling interest for 2021.

A) $11,000.
B) $10,800.
C) $9,000.
D) $8,200.
E) $7,200.

Question 22

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.

Question 23

Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Separate company net incomes for 2021 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 gross profit on intra-entity transfers to Maroon. The accrual-based net income of Beagle Co. is calculated to be

A) $706,670.
B) $755,980.
C) $805,280.
D) $838,150.
E) $815,770.

Question 24

Hardford Corp. held 80% of Inglestone Inc., which, in turn, owned 80% of Jade Co. Excess amortization expense was not required by any of these acquisitions. Separate net income figures (without investment income) as well as upstream intra-entity gross profits (before deferral) included in the income for the current year follow: The accrual-based net income of Jade Co. is calculated to be

A) $193,000.
B) $189,000.
C) $196,000.
D) $201,000.
E) $144,000.

Question 25

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

A) At least one company within the consolidated entity 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.

Question 26

Hardford Corp. held 80% of Inglestone Inc., which, in turn, owned 80% of Jade Co. Excess amortization expense was not required by any of these acquisitions. Separate net income figures (without investment income) as well as upstream intra-entity gross profits (before deferral) included in the income for the current year follow: The net income attributable to the noncontrolling interest of Inglestone Inc. is calculated to be

A) $106,950.
B) $102,640.
C) $114,530.
D) $106,960.
E) $103,680.

Question 27

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.

Question 28

Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate company net incomes for 2021 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also defers a $20,000 intra-entity gain in its current income figures. Excess 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%.

Question 29

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.

Question 30

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.

Question 31

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

A) Gross profits from intra-entity transfers are not taxed until such amounts are recognized for financial statement reporting purposes.
B) Recognition of gross profits from intra-entity transfers is deferred for income tax recognition purposes.
C) The issuance of dividends between related entities 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) Gross profits on intra-entity transfers are taxed before they are recognized for financial statement reporting purposes in the year of the transfer, but any such losses are deferred.

Question 32

Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate company net incomes for 2021 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also defers a $20,000 intra-entity gain in its current income figures. Excess 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 net income for 2021.

A) $746,000.
B) $719,000.
C) $779,600.
D) $774,200.
E) $758,100.

Question 33

Hardford Corp. held 80% of Inglestone Inc., which, in turn, owned 80% of Jade Co. Excess amortization expense was not required by any of these acquisitions. Separate net income figures (without investment income) as well as upstream intra-entity gross profits (before deferral) included in the income for the current year follow: The net income attributable to the noncontrolling interest of Jade Co. is calculated to be

A) $36,900.
B) $33,600.
C) $42,400.
D) $32,300.
E) $39,200.

Question 34

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.

Question 35

On January 1, 2020, 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, 2021, 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: Compute Whitton's accrual-based consolidated net income for 2021.

A) $199,000.
B) $190,000.
C) $185,000.
D) $184,000.
E) $176,000.

Question 36

Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate company net incomes for 2021 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also defers a $20,000 intra-entity gain in its current income figures. Excess 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 net income attributable to the noncontrolling interest in Ross for 2021.

A) $92,000.
B) $77,400.
C) $75,000.
D) $64,500.
E) $69,000.

Question 37

Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate company net incomes for 2021 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also defers a $20,000 intra-entity gain in its current income figures. Excess 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 Lawrence's accrual-based net income for 2021.

A) $354,000.
B) $329,500.
C) $334,000.
D) $265,000.
E) $344,500.

Question 38

On January 1, 2020, 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, 2021, 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: Compute the amount allocated to trademarks recognized in the January 1, 2021 consolidated balance sheet.

A) $80,000.
B) $100,000.
C) $76,000.
D) $16,000.
E) $-0-

Question 39

Which of the following statements is false 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 defer gross profit on remaining inventory from intra-entity transfers.
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) Shares of the parent held by a subsidiary are treated as outstanding shares in consolidated financial statements.

Question 40

On January 1, 2020, 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, 2021, 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 2021?

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.

Question 41

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.

Question 42

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

A) The existence of deferred losses in ending inventory.
B) The ability to use net operating losses of one company to offset profits of another company.
C) The existence of intra-entity gross profit remaining in ending inventory.
D) Transfers of inventory at a transfer price above cost.
E) There is no difference between U.S. GAAP and tax accounting rules for dividends paid to a parent by an 85%-owned subsidiary.

Question 43

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 the income tax liability of White for 2021.

A) $93,600.
B) $91,350.
C) $94,500.
D) $90,900.
E) $90,000.

Question 44

Tower Company owns 85% of Hill Company. The two companies engaged in several intra-entity transactions. There were no excess fair-value amortization amounts to account for. Each company's income before income tax and dividend income for the current time period follow, as well as the effects of intra-entity gross profits on remaining inventory which are included in the separate net income amounts. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%. Compute accrual-based consolidated income before income tax.

A) $280,000.
B) $245,000.
C) $200,000.
D) $255,200.
E) $290,200.

Question 45

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.

A) $6,000.
B) $2,250.
C) $3,150.
D) $11,250.
E) $21,000.

Question 46

On January 1, 2021, a subsidiary buys 12% 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 separate company 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, 2021?

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

Question 47

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 the above.

Question 48

Which of the following is not a reason for a consolidated group to file separate income tax returns?

A) There are no intra-entity transfers.
B) There are no deferred intra-entity gross profits in ending inventory.
C) One of the companies is a foreign company.
D) Parent owns 68 percent of one company and 82 percent of another.
E) No temporary differences will exist with separate income tax returns.

Question 49

Tower Company owns 85% of Hill Company. The two companies engaged in several intra-entity transactions. There were no excess fair-value amortization amounts to account for. Each company's income before income tax and dividend income for the current time period follow, as well as the effects of intra-entity gross profits on remaining inventory which are included in the separate net income amounts. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%. Under the separate return method, income tax expense that will be assigned to Hill is closest to:

A) $24,000.
B) $22,857.
C) $24,874.
D) $21,874.
E) $21,000.

Question 50

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

A) One entity in the group can use another entity's net operating loss carryforward to its advantage.
B) The parent can use the net operating loss carryforward of another entity in the group.
C) A net operating loss carryforward if an entity will be unusable when consolidated tax returns are prepared.
D) A net operating loss carryforward 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 carryforward of one entity must be pro-rated to all other entities in the group.

Question 51

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 Cody's undistributed earnings for 2021.

A) $62,500.
B) $125,000.
C) $87,500.
D) $100,000.
E) $70,000.

Question 52

Strong Company has had poor operating results in recent years and has a $160,000 net operating loss carryforward. 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 acquisition?

A) $40,000.
B) $88,000.
C) $104,000.
D) $152,000.
E) $248,000.

Question 53

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 the income tax liability of Cody for 2021.

A) $33,000.
B) $34,500.
C) $37,500.
D) $30,000.
E) $22,500.

Question 54

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.

Question 55

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

A) Companies that are solely in subsidiary positions must have their accrual-based net 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 accrual-based net income is not important in the consolidation process.
D) The parent must have its accrual-based net income computed first in the consolidation process.
E) None of these answer choices are correct.

Question 56

On January 1, 2021, a subsidiary buys 8% 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, 2021?

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.

Question 57

Tower Company owns 85% of Hill Company. The two companies engaged in several intra-entity transactions. There were no excess fair-value amortization amounts to account for. Each company's income before income tax and dividend income for the current time period follow, as well as the effects of intra-entity gross profits on remaining inventory which are included in the separate net income amounts. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%. Using the percentage allocation method for assigning income tax expense, the income tax expense assigned to Hill is closest to:

A) $21,000.
B) $24,000.
C) $20,100.
D) $17,400.
E) $0.

Question 58

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.

Question 59

Woods Company has one depreciable asset valued at $800,000. Because of recent losses, the company has a net operating loss carryforward of $150,000. The tax rate is 30%. The company was acquired for $1,000,000. It is more likely than not that the tax benefit will be realized. Compute the goodwill recognized for consolidated financial statements.

A) $0.
B) $155,000.
C) $200,000.
D) $305,000.
E) $350,000.

Question 60

Tower Company owns 85% of Hill Company. The two companies engaged in several intra-entity transactions. There were no excess fair-value amortization amounts to account for. Each company's income before income tax and dividend income for the current time period follow, as well as the effects of intra-entity gross profits on remaining inventory which are included in the separate net income amounts. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%. What is the income 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.

Question 61

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?

A) $1,091,520.
B) $1,115,520.
C) $1,168,000.
D) $1,168,520.
E) $1,200,000.

Question 62

Alpha Corporation owns 100% of Beta Company, and Beta owns 80% of Gamma, Inc., all of which are domestic corporations. There were no excess allocation values at the date of acquisition of the subsidiaries. Information for the three companies for the year ending December 31, 2021 follows: What is the net income attributable to the noncontrolling interest in Gamma for 2021?

A) $0.
B) $9,600.
C) $10,000.
D) $19,200.
E) $20,000.

Question 63

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 will be reported as the net income attributable to the noncontrolling interest of Stance?

A) $6,500.
B) $8,000.
C) $9,000.
D) $7,500.
E) $1,000.

Question 64

Alpha Corporation owns 100% of Beta Company, and Beta owns 80% of Gamma, Inc., all of which are domestic corporations. There were no excess allocation values at the date of acquisition of the subsidiaries. Information for the three companies for the year ending December 31, 2021 follows: What is Gamma's accrual-based net income for 2021?

A) $76,000.
B) $80,000.
C) $96,000.
D) $100,000.
E) $104,000.

Question 65

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 Pi's accrual-based net income for 2021?

A) $152,000.
B) $16,000.
C) $192,000.
D) $200,000.
E) $208,000.

Question 66

Alpha Corporation owns 100% of Beta Company, and Beta owns 80% of Gamma, Inc., all of which are domestic corporations. There were no excess allocation values at the date of acquisition of the subsidiaries. Information for the three companies for the year ending December 31, 2021 follows: What is Beta's accrual-based net income for 2021?

A) $200,000.
B) $276,800.
C) $280,000.
D) $296,000.
E) $300,000.

Question 67

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?

A) $232,500.
B) $225,000.
C) $224,500.
D) $226,000.
E) $233,500.

Question 68

Pear, Inc. owns 80% of Apple Corporation. During the current year, Apple reported operating income before tax of $400,000 and paid a dividend of $120,000. The income tax rate for each company is 40% 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.

Question 69

Alpha Corporation owns 100% of Beta Company, and Beta owns 80% of Gamma, Inc., all of which are domestic corporations. There were no excess allocation values at the date of acquisition of the subsidiaries. Information for the three companies for the year ending December 31, 2021 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.

Question 70

Dean, Inc. owns 90% 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% of this merchandise was still on hand. The tax rate is 30%.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.

Question 71

Alpha Corporation owns 100% of Beta Company, and Beta owns 80% of Gamma, Inc., all of which are domestic corporations. There were no excess allocation values at the date of acquisition of the subsidiaries. Information for the three companies for the year ending December 31, 2021 follows: What is Alpha's accrual-based net income for 2021?

A) $564,000.
B) $564,800.
C) $572,200.
D) $580,000.
E) $600,000.

Question 72

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?

A) $400,000.
B) $592,000.
C) $540,000.
D) $572,800.
E) $600,000.

Question 73

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 consolidated net income?

A) $229,500.
B) $237,000.
C) $245,000.
D) $232,500.
E) $240,000.

Question 74

Alpha Corporation owns 100% of Beta Company, and Beta owns 80% of Gamma, Inc., all of which are domestic corporations. There were no excess allocation values at the date of acquisition of the subsidiaries. Information for the three companies for the year ending December 31, 2021 follows: What is the total net income attributable to the noncontrolling interests for 2021?

A) $0.
B) $9,600.
C) $10,000.
D) $19,200.
E) $20,000.

Question 75

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 the net income attributable to the noncontrolling interest in Sigma for 2021?

A) $55,240.
B) $56,420.
C) $57,280.
D) $59,420.
E) $60,000.

Question 76

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: Which of the following statements is true?

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.

Question 77

Dean, Inc. owns 90% 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% of this merchandise was still on hand. The tax rate is 30%.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.

Question 78

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 the total net income attributable to the noncontrolling interest for 2021?

A) $55,240.
B) $66,020.
C) $67,280.
D) $76,280.
E) $76,480.

Question 79

Reggie, Inc. owns 70% of Nancy Corporation. During the current year, Nancy reported operating income before tax of $100,000 and paid a dividend of $30,000. The income tax rate for both companies is 30%. 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.

Question 80

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 the net income attributable to the noncontrolling interest in Pi for 2021?

A) $0.
B) $9,600.
C) $10,000.
D) $19,200.
E) $20,000.