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

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, 2013 follows: Which of the following statements is true?

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?

White Company owns 60% of Cody Company. Separate tax returns are required. For 2012, 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 2013.

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?

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

White Company owns 60% of Cody Company. Separate tax returns are required. For 2012, 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 2013.

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

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

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?

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

Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Operating income totals for 2013 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

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?

On January 1, 2012, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2012 or 2013. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2012 were as follows: Following are the 2013 financial statements for these three companies. Curle made numerous transfers of inventory to Lance since the takeover: $112,000 (2012) and $140,000 (2013). These transactions included the same markup applicable to Curle's outside sales. In each of these years, Lance carried 20% of this inventory into the succeeding year before disposing of it. An effective income tax rate of 45% was applicable to all companies. Required: Determine the non-controlling interest in Curle Co.'s net income for the year 2013.

On January 1, 2012, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2012 or 2013. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2012 were as follows: Following are the 2013 financial statements for these three companies. Curle made numerous transfers of inventory to Lance since the takeover: $112,000 (2012) and $140,000 (2013). These transactions included the same markup applicable to Curle's outside sales. In each of these years, Lance carried 20% of this inventory into the succeeding year before disposing of it. An effective income tax rate of 45% was applicable to all companies. Required: Determine the total amount of goodwill for the January 1, 2012 acquisition of Curle Co. and for the acquisition of Lance Co. on the same date.

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?

What are the benefits or advantages of filing a consolidated income tax return?

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, 2013 follows: What is the total non-controlling interest in the subsidiaries' income for 2013?

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?

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?

Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2013, Jull and Solaver reported operating income (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver paid dividends of $120,000 and $50,000, respectively. Required: Under the treasury stock approach, what is Jull's controlling interest in Solaver Co.'s net income?