Question 1

Earnings of overseas branches are taxed in the United States when the earnings are remitted.

Accepted Answer

The answer of Earnings of overseas branches are taxed in...

Question 2

In selecting the form of organization for a new operation to be established, an expanding company would consider income tax considerations for domestic expansion to be far more important than for foreign expansion.

Accepted Answer

Income tax considerations are crucial for both domestic and foreign expansions, as they can significantly impact the overall profitability and operational efficiency of the new operation in each jurisdiction.

Question 3

To prevent loss of patent protection, a domestic company expanding overseas would use the subsidiary form of organization rather than the branch form of organization.

Accepted Answer

Patent protection is not directly related to the choice between a subsidiary or a branch form of organization. Patent protection is secured through legal processes in each country and is independent of the company's organizational structure.

Question 4

The idea of consolidated statements is to disregard the separate legal entity status of each company.

Accepted Answer

Consolidated statements combine the financial statements of multiple companies into a single set of statements, as if they were a single entity. This is done to provide a more complete and accurate picture of the financial position and performance of the group as a whole.

Question 5

The aggregated format of presenting consolidated statements is a "layered" format.

Accepted Answer

The aggregated format of presenting consolidated statements combines the parent company's and its subsidiaries' items line by line without showing internal balances, transactions, or profit and loss among them, but it does not use a "layered" format.

Question 6

The disaggregated format of presenting consolidated statements is required if the subsidiary is in an unrelated line of business from the parent and its other subsidiaries.

Accepted Answer

Consolidated financial statements are designed to present the financial position and results of operations of a parent and its subsidiaries as if they were a single economic entity, regardless of the line of business of the subsidiaries. The requirement for disaggregation typically relates to segment reporting within the notes to the financial statements, rather than affecting the consolidation process itself.

Question 7

In the aggregated format of presenting consolidated statements, the subsidiary's assets and liabilities cannot be identified.

Accepted Answer

In the aggregated format of presenting consolidated statements, the assets and liabilities of the subsidiary are combined with those of the parent company, making it impossible to identify the subsidiary's specific assets and liabilities.

Question 8

A general ledger is maintained for the consolidated reporting entity.

Accepted Answer

The answer of A general ledger is maintained for the...

Question 9

Consolidation entries are never posted to a general ledger.

Accepted Answer

Consolidation entries are adjustments made in the process of preparing consolidated financial statements for a group of companies. They are not posted to the general ledger of any individual company but are used to adjust and eliminate intercompany transactions and balances to present the financial position and results of the group as a single economic entity.

Question 10

Reciprocal account balances are created as a result of the consolidation process.

Accepted Answer

The answer of Reciprocal account balances are created as a...

Question 11

Intercompany accounts and reciprocal accounts are interchangeable terms.

Accepted Answer

Intercompany accounts and reciprocal accounts are both used to record transactions between two related companies. Intercompany accounts are used to record the receivables and payables between the two companies, while reciprocal accounts are used to record the assets and liabilities that are owed to or by the two companies.

Question 12

In general, foreign consolidation rules for the major trading partners of the United States are more lenient than U.S. consolidation rules.

Accepted Answer

Foreign consolidation rules for the major trading partners of the United States are generally more lenient than U.S. consolidation rules. This means that foreign companies are allowed to consolidate their subsidiaries more easily than U.S. companies.

Question 13

The presumption that consolidated statements are more meaningful than separate statements and are necessary for a fair presentation can be overcome by an assertion to the contrary by management in the notes to the financial statements.

Accepted Answer

The presumption that consolidated financial statements are more meaningful and necessary for a fair presentation cannot be overcome simply by management's assertion in the notes to the financial statements. Generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS) require consolidation when certain criteria are met, regardless of management's assertions.

Question 14

Under current GAAP, a banking subsidiary of a parent company that is a manufacturing company need not be consolidated.

Accepted Answer

Under current GAAP (Generally Accepted Accounting Principles), all majority-owned subsidiaries, including banking subsidiaries of a parent company that is a manufacturing company, must be consolidated in the financial statements of the parent company. This is to ensure that the financial statements present a complete and accurate picture of the financial position and performance of the entire group of companies.

Question 15

It is appropriate to consolidate foreign subsidiaries.

Accepted Answer

Consolidating foreign subsidiaries is appropriate and often required for financial reporting purposes to present a comprehensive view of a parent company's financial health and operations.

Question 16

A foreign subsidiary that is prohibited from paying dividends because of currency exchange restrictions imposed by the foreign government of the country in which it is located may still be consolidated.

Accepted Answer

A foreign subsidiary can be consolidated with its parent company's financial statements regardless of dividend payment restrictions, as consolidation is based on control rather than the ability to receive dividends.

Question 17

A subsidiary that has just filed for bankruptcy reorganization usually would not be consolidated.

Accepted Answer

When a subsidiary files for bankruptcy reorganization, it often loses the financial control and governance necessary for consolidation, leading to its exclusion from the consolidated financial statements of the parent company.

Question 18

A parent need not consolidate a created subsidiary that the parent is in the process of trying to sell.

Accepted Answer

Under most accounting standards, including International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), a parent company must consolidate all subsidiaries, including those it intends to sell, unless specific criteria are met that would classify the subsidiary as held for sale from its acquisition date.

Question 19

It is inappropriate to consolidate a subsidiary that has not yet become profitable.

Accepted Answer

Consolidation is based on control, not profitability. If a parent company has control over a subsidiary (typically through owning more than 50% of the subsidiary's voting stock), it must consolidate the subsidiary's financial statements with its own, regardless of the subsidiary's profitability.

Question 20

It is inappropriate to consolidate a subsidiary that is prohibited by law from making loans to its parent.

Accepted Answer

Consolidation of a subsidiary in financial statements is based on control, not on the ability to make loans to its parent. If the parent company has control over the subsidiary, it is appropriate to consolidate, regardless of legal restrictions on inter-company loans.

Quiz 1: Wholly Owned Subsidiaries: at Date of Creation