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

REFERENCE: Ref.07_17 On January 1,2009,Maurice Co.acquired 75% of Lawrence Co.'s outstanding common stock.On the same date,Lawrence acquired an 80% interest in Curleton Co.Both of these investments were accounted using the initial value method.No dividends were distributed by either Lawrence or Curleton during 2009 or 2010.Maurice paid cash dividends each year equal to 40% of operating income.Reported operating income totals for 2009 were as follows: Following are the 2010 financial statements for these three companies.Curleton made numerous transfers of inventory to Lawrence since the takeover: $112,000 (2009)and $140,000 (2010).These transactions included the same markup applicable to Curleton's outside sales.In each of these years,Lawrence 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. I can't edit picture.Need to change the three years in the schedules - each from 2007 to 2010 The years should be 2010 instead of 2007 in this table -Required: Determine the noncontrolling interest in Lawrence Co.'s net income.

REFERENCE: Ref.07_02 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 intercompany 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

REFERENCE: Ref.07_06 Chase Company owns 80% of Lawrence Company and 40% of Ross Company.Lawrence Company also owns 30% of Ross Company.Separate operating incomes for 2009 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 2009.

REFERENCE: Ref.07_08 Tower Company owns 85% of Hill Company.The two companies engaged in several intercompany 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?

REFERENCE: Ref.07_10 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 31,2009 follows: -What is Gamma's accrual-based income for 2009?

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

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.

Which of the following statements is true concerning connecting affiliations and mutual ownerships?

REFERENCE: Ref.07_13 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?

REFERENCE: Ref.07_11 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 31,2009 follows: -What is Pi's accrual-based income for 2009?

Dog Corporation acquires all of Cat,Inc.for $400,000 cash.On that date,Cat has net assets with fair value of $350,000 but a book value and tax basis of $325,000.The tax rate is 30 percent.Prior to this date,neither Dog nor Cat has reported any deferred income tax assets or liabilities.What amount of goodwill should be recognized on the date of the acquisition?

T Corp.owns several subsidiaries that are eligible for inclusion on a consolidated income tax return,but T Corp.decided that each company in the group will file a separate return.Under what conditions would there be minimal advantage in filing a consolidated income tax return?

On January 1,2009,Youder Inc.bought 120,000 shares of Nopple Co.for $384,000,giving Youder 30% ownership and the ability to apply significant influence to the operating and financing decisions of Nopple.Youder anticipated holding this investment for an indefinite time.In making this acquisition,Youder paid an amount equal to the book value for these shares.The fair value of each asset and liability was the same as its book value.Dividends and income for Nopple for 2009 were as follows: Dividends: $.40 per share Income: $400,000.00 Required: Assume a 40% income tax rate.Prepare all necessary journal entries for Youder for 2009 beginning at acquisition and ending at tax accrual.

What are the essential criteria for including a subsidiary within an affiliated group?

REFERENCE: Ref.07_08 Tower Company owns 85% of Hill Company.The two companies engaged in several intercompany 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%. -How much income will be reported on the consolidated income statement before deducting noncontrolling interest?

REFERENCE: Ref.07_11 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 31,2009 follows: -Which of the following statements is true?

REFERENCE: Ref.07_11 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 31,2009 follows: -What is the total noncontrolling interest in the subsidiaries' income for 2009?

Dice Inc.owns 40% of the outstanding shares of Spalding Corp. ,an investment accounted for by the equity method.During 2009,Dice earned operating income (not any income accrued from its investment in Spalding)of $370,000.For this same period,Spalding reported earnings 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 2009? (B. )If Dice expects to sell its interest in Spalding in the near future,how does that decision change the 2009 income tax expense journal entry?

What configuration of corporate ownership is described as a father-son-grandson relationship?

Which of the following statements is true regarding mutual ownership between a parent and its subsidiary?