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

Question 1

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?

A) $16,800
B) $14,450
C) $14,700
D) $17,450
E) $13,800

Answer 1

B

Question 2

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. 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.

Answer 2

C

Question 3

On January 1, 2011, 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 2011, 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, 2011?

A) The investment was recorded for $641,800 at the end of 2011 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 2011 and then eliminated for consolidation purposes.
D) Consolidated stockholders' equity was reduced by $639,800.
E) Consolidated stockholders' equity was reduced by $590,000.

Answer 3

E

Question 4

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 Maroon Corp. is calculated to be

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

Question 5

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. 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.

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

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.

Question 8

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 2011 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.

Question 9

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?

A) $36,000
B) $31,500
C) $33,390
D) $32,750
E) $32,660

Question 10

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 11

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

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

Question 12

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%.

Question 13

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?

A) $31,500
B) $32,750
C) $36,000
D) $32,660
E) $30,390

Question 14

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.

Question 15

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?

A) $165,300.
B) $199,300.
C) $191,000.
D) $228,000.
E) $153,000.

Question 16

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.

Question 17

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 18

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

A) $734,000.
B) $1,261,000.
C) $1,123,900.
D) $1,140,700.
E) $1,149,700.

Question 19

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.

Question 20

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 2011 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.

Question 21

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.

Question 22

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 23

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.

Question 24

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

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

Question 25

On January 1, 2010, 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, 2011, 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 non-controlling interest in net income for 2011.

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

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

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.

Question 30

On January 1, 2010, 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, 2011, 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 2011?

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 31

Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2011 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 Lawrence's accrual-based income for 2011.

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

Question 32

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 33

On January 1, 2010, 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, 2011, 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 2011.

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

Question 34

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 35

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 36

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 the above are true statements.

Question 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 2011 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 2011.

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

Question 38

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 39

On January 1, 2010, 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, 2011, 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, 2011 consolidated balance sheet.

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

Question 40

Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2011 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 2011.

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

Question 41

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.

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

Question 42

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 the above.

Question 43

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.

Question 44

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%. 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.

Question 45

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.

Question 46

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 White's deferred income taxes for 2011.

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

Question 47

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?

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 48

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.

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

Question 49

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 50

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%. 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.

Question 51

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 52

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 income tax expense for 2011.

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

Question 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.

Question 54

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%. 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.

Question 55

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 the above.

Question 56

On January 1, 2011, 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, 2011?

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 57

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.

Question 58

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 59

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.

Question 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 the above.

Question 61

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?

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

Question 62

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?

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

Question 63

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?

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

Question 64

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.

Question 65

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

Question 66

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.

Question 67

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.

Question 68

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?

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

Question 69

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) $7,500.
E) $1,000.

Question 70

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 the total non-controlling interest in the subsidiaries' income for 2011?

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

Question 71

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?

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 72

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) $232,500.
E) $240,000.

Question 73

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.

Question 74

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 the non-controlling interest in Gamma's income for 2011?

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

Question 75

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?

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 76

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 Pi's accrual-based income for 2011?

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

Question 77

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 Alpha's accrual-based income for 2011?

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

Question 78

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 Delta's accrual-based income for 2011?

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

Question 79

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 total non-controlling interest in the subsidiaries' income for 2011?

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

Question 80

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?

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