Question 1

Income is assigned to noncumulative,nonparticipating preferred stock only if dividends are declared and paid.

Accepted Answer

The answer of Income is assigned to noncumulative,nonparticipating preferred stock...

Question 2

The GAAP requires that corporations report both basic and diluted earnings per share.

Accepted Answer

This statement is true. The Generally Accepted Accounting Principles (GAAP) require that corporations report both basic and diluted earnings per share. Basic earnings per share are calculated by dividing the net income by the total number of outstanding common shares, while diluted earnings per share account for the potential dilution of earnings if certain securities, such as stock options or convertible bonds, were to be exercised or converted into common stock. This information is important for investors to assess a company's financial performance and potential future earnings.

Question 3

The parent company's retained earnings are reduced when additional paid-in capital is insufficient to absorb an excess of purchase price over book value of the subsidiary's preferred stock.

Accepted Answer

When a company acquires a subsidiary, it may pay a price that is higher than the book value of the acquired company's preferred stock. If the excess cannot be absorbed by additional paid-in capital, it must be deducted from the parent company's retained earnings. This reduces the amount of earnings available for distribution to shareholders. Therefore, the statement is true.

Question 4

The constructive retirement of subsidiary preferred stock through the purchase by the parent is reported as an actual retirement in the consolidated statements.

Accepted Answer

When a parent company purchases subsidiary preferred stock and retires it, this is considered a reduction in the total number of outstanding preferred shares. As a result, the consolidated statements will reflect the retirement of the stock as an actual event.

Question 5

The calculation of parent EPS and consolidated basic EPS are identical.

Accepted Answer

The calculation of parent EPS and consolidated basic EPS is identical because they both use the same basic formula which is (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding. The only difference is that parent EPS only takes into account the parent company's financial results, while consolidated basic EPS includes the results of all subsidiaries and affiliates.

Question 6

A disadvantage of filing a consolidated return is intercompany dividends are included in taxable income.

Accepted Answer

Intercompany dividends are generally eliminated in the consolidation process, meaning they are not included in the taxable income of the consolidated group. This avoids double taxation of the same income within the group.

Question 7

A parent's net income and the controlling share of the consolidated net income are equal under the equity method.

Accepted Answer

Under the equity method, the parent company's net income is increased by its share of the subsidiary's net income, which is equal to the controlling share of the consolidated net income.

Question 8

The consolidated entity must file a consolidated income tax return.

Accepted Answer

A consolidated entity may choose to file a consolidated income tax return, but it is not mandatory. The decision depends on the tax regulations of the jurisdiction and the specific circumstances of the entity.

Question 9

The investment in preferred stock of a subsidiary by the parent is accounted for under the equity method.

Accepted Answer

Investment in preferred stock of a subsidiary is typically accounted for under the cost method or fair value method, not the equity method, because preferred stock does not usually confer significant influence over the subsidiary.

Question 10

From the viewpoint of a consolidated entity,the parent's purchase of the outstanding subsidiary preferred stock results in the retirement of the stock purchased.

Accepted Answer

When a parent company purchases the outstanding preferred stock of its subsidiary, it results in the retirement of that stock. This is because the subsidiary is now wholly owned by the parent and there is no longer a need for the stock to be outstanding.

Quiz 10: Subsidiary Preferred Stock, consolidated Earnings Per Share, and Consolidated Income Taxation