Question 1

Business reasons, and not tax incentives, constitute the primary motivation for most corporations to form a conglomerate and file tax and financial accounting reports on a consolidated basis.

Accepted Answer

A) True 
 B)False

Question 2

For each of the indicated tax years. compute consolidated taxable income for the calendar year Whitman Group, which elected consolidated status immediately upon creation of the two member corporations in January year 1. All recognized income related to the data processing services of the firms. No intercompany transactions were completed during the indicated years. $$\begin{array} { | l | c | c | } 
\hline \text { Tax Year } & \text { Whitman Corporation } & \text { Draper Corporation } \
\hline \text { Year 1 } & \$ 250,000 & \$ 90,000 \
\hline \text { Year } 2 & 250,000 & ( 170,000 ) \
\hline \text { Year 3 } & 250,000 & ( 560,000 ) \
\hline \text { Year 4 } & 250,000 & 145,000 \
\hline
\end{array}$$

Accepted Answer

The answer of For each of the indicated tax years....

Question 3

Certain business entities are ineligible to join an affiliated group and file a consolidated Federal income tax return.
List three or more entities that cannot be part of a Federal consolidated tax return group.

Accepted Answer

The answer of Certain business entities are ineligible to join...

Question 4

When a subsidiary sells to the parent some business-use property that has appreciated from its $20,000 basis to a
$50,000 fair market value, the subsidiary immediately recognizes $30,000 ordinary income on the consolidated return.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following potentially is a disadvantage of electing to file a Federal consolidated corporate income tax return?

Accepted Answer

A)  The § 1231 loss of one member is not offset against the § 1231 gain of another member of the group. 
B)  Recognition of losses from certain intercompany transactions is deferred. 
C)  The tax basis of investments in the stock of subsidiaries is unaffected by members contributing to consolidated taxable income. 
D)  All of the above are disadvantages of a consolidation election.

Question 6

Giant Ltd. owns 100% of the stock of Middle Corporation. Bottom Corp is owned 60% by Giant and 40% by Middle.
Giant's Federal consolidated income tax return includes both Middle and Bottom.

Accepted Answer

A) True 
 B)False

Question 7

Match each of the following items with the appropriate description, indicating whether the item's treatment for financial accounting and Federal income tax purposes is the same or not.
-Parent owns 100% of a U.S. partnership and wants the entity to join the consolidated group.

Accepted Answer

A) Tax and book treatment is the same 
B) Tax and book treatment differ

Question 8

The Parent consolidated group reports the following results for the tax year. Determine each member's share of the consolidated tax liability, assuming that the members all have consented to use the relative tax liability tax-sharing method. Dollar amounts are listed in millions, and a 21% income tax rate applies to all of the entities. $$\begin{array} { | c | c | c | c | c | c | } 
\hline & \text { Parent } & \text { SubOne } & \text { SubTwo } & \text { SubThree } & \text { Consolidated } \
\hline \text { Ordinary income } & \$ 600 & \$ 200 & \$ 60 & ( \$ 30 ) & \$ 830 \
\hline
\end{array}$$

Accepted Answer

The answer of The Parent consolidated group reports the following...

Question 9

A parent-subsidiary controlled group exists where there is percent ownership of all of the affiliates within the group, and there is an identifiable corporation.

Accepted Answer

The answer of A parent-subsidiary controlled group exists where there...

Question 10

Calendar year Parent Corporation acquired all of the stock of SubCo on January 1, year 1, for $500,000. The subsidiary's operating gains and losses are shown below. In addition, a $50,000 dividend is paid early in year 2.
Complete the following chart, indicating the appropriate stock basis and excess loss account amounts. $$\begin{array} { l c c c } 
\text { Year } & \begin{array} { c } 
\text { Operating } \
\text { Gain/Loss }
\end{array} & \begin{array} { c } 
\text { Stock } \
\text { Basis }
\end{array} & \begin{array} { c } 
\text { Excess } \
\text { Loss } \
\text { Account }
\end{array} \
1 & ( \$ 100,000 ) & ? & ? \
2 & ( \$ 150,000 ) & ? & ? \
3 & \$ 300,000 & ? & ?
\end{array}$$

Accepted Answer

The answer of Calendar year Parent Corporation acquired all of...

Question 11

Match each of the following items with the appropriate description, indicating whether the item is computed on a group basis on a consolidated tax return.
-Charitable contributions.

Accepted Answer

A) Group item 
B) Not a group item

Question 12

In computing consolidated E & P, dividends paid to the parent by group members are subtracted.

Accepted Answer

A) True 
 B)False

Question 13

Cooper Corporation joined the Duck consolidated Federal income tax return group when Cooper held a $1 million NOL carryforward. In its first year as a part of the Duck group, Cooper generated a $150,000 taxable loss. For that year, Duck cannot deduct any of Cooper's NOL in computing consolidated taxable income.

Accepted Answer

A) True 
 B)False

Question 14

ParentCo and SubCo report the following items of income and deduction for the current year.  Compute ParentCo and SubCo's taxable income or loss computed on a separate basis.

Accepted Answer

The answer of ParentCo and SubCo report the following items...

Question 15

Match each of the following terms with the appropriate description in the context of a consolidated Federal income tax return.
-Offsetting gains against other members' losses.

Accepted Answer

A) Advantage of consolidating 
B) Disadvantage of consolidating 
C) Neither an advantage nor a disadvantage

Question 16

Which of the following potentially is a disadvantage of electing to file a Federal corporate income tax consolidated return?

Accepted Answer

A)  Increased deduction amounts when computations are made on a group basis. 
B)  Deferral of gains realized in transactions between group members. 
C)  Increased basis in the stock of a subsidiary that generates annual taxable income. 
D)  Additional administrative costs in complying with the election.

Question 17

Parent Corporation's current-year taxable income included $100,000 net profit from operations and a $30,000 net long-term capital gain. Parent also made a $22,000 contribution to State University. SubCo produced $85,000 of income from operations and incurred a $25,000 net short-term capital loss.
Use the computational worksheet of Exhibit 8.3 to derive the group members' separate taxable incomes and the group's consolidated taxable income.
 $\quad$

Accepted Answer

The answer of Parent Corporation's current-year taxable income included $100,000...

Question 18

A tax-exempt charitable trust created by a U.S. C corporation can join in a Federal consolidated return.

Accepted Answer

A) True 
 B)False

Question 19

When negative adjustments are made to the stock basis of the subsidiary that exceed the basis as of the beginning of the tax year, an) account is created rather than giving the parent a negative tax basis in the stock.

Accepted Answer

The answer of When negative adjustments are made to the...

Question 20

The calendar year Sterling Group files its Federal corporate income tax return on a consolidated basis. The group's
Form 1120 is due on April 15, or October 15 if an extended due date is approved by the IRS.

Accepted Answer

A) True 
 B)False

Exam 8: Consolidated Tax Returns

Business reasons, and not tax incentives, constitute the primary motivation for most corporations to form a conglomerate and file tax and financial accounting reports on a consolidated basis.

Certain business entities are ineligible to join an affiliated group and file a consolidated Federal income tax return. List three or more entities that cannot be part of a Federal consolidated tax return group.

When a subsidiary sells to the parent some business-use property that has appreciated from its $20,000 basis to a $50,000 fair market value, the subsidiary immediately recognizes $30,000 ordinary income on the consolidated return.

Which of the following potentially is a disadvantage of electing to file a Federal consolidated corporate income tax return?

Giant Ltd. owns 100% of the stock of Middle Corporation. Bottom Corp is owned 60% by Giant and 40% by Middle. Giant's Federal consolidated income tax return includes both Middle and Bottom.

Match each of the following items with the appropriate description, indicating whether the item's treatment for financial accounting and Federal income tax purposes is the same or not. -Parent owns 100% of a U.S. partnership and wants the entity to join the consolidated group.

A parent-subsidiary controlled group exists where there is percent ownership of all of the affiliates within the group, and there is an identifiable corporation.

Match each of the following items with the appropriate description, indicating whether the item is computed on a group basis on a consolidated tax return. -Charitable contributions.

In computing consolidated E & P, dividends paid to the parent by group members are subtracted.

ParentCo and SubCo report the following items of income and deduction for the current year. Compute ParentCo and SubCo's taxable income or loss computed on a separate basis.

Match each of the following terms with the appropriate description in the context of a consolidated Federal income tax return. -Offsetting gains against other members' losses.

Which of the following potentially is a disadvantage of electing to file a Federal corporate income tax consolidated return?

A tax-exempt charitable trust created by a U.S. C corporation can join in a Federal consolidated return.

When negative adjustments are made to the stock basis of the subsidiary that exceed the basis as of the beginning of the tax year, an) account is created rather than giving the parent a negative tax basis in the stock.

The calendar year Sterling Group files its Federal corporate income tax return on a consolidated basis. The group's Form 1120 is due on April 15, or October 15 if an extended due date is approved by the IRS.