Question 1

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

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Question 2

Assuming that a consolidated income tax return is being filed, what deferred income tax asset is created?

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Question 3

Explain how the treasury stock approach treats shares of the parent's common stock that are owned by the subsidiary and the rationale behind the approach.

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Question 4

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?

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Question 5

B Co.owned 70% of the voting common stock of C Corp.; C Corp.owned 20% of B Co.There were no excess-value allocations at the dates the investments were acquired.For 2018, B Co.and C Corp.reported net income (not including the investment) of $600,000 and $300,000, respectively.B Co.and C Corp.declared dividends of $80,000 and $60,000, respectively.
Required:
Prepare a schedule showing net income attributable to B Co.'s controlling interest for 2018 using the treasury stock approach.

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Question 6

What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a diagram.

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Question 7

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

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Question 8

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

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Question 9

Britain Corporation acquires all of English, Inc.for $800,000 cash.On that date, English has net assets with fair value of $750,000 but a book value and tax basis of $500,000.The tax rate is 35 percent.Prior to this date, neither Britain nor English has reported any deferred income tax assets or liabilities.What amount of goodwill should be recognized on the date of the acquisition?

Accepted Answer

The goodwill is calculated as the difference between the consideration transferred ($800,000) and the net assets acquired at fair value ($750,000), adjusted for the tax effect. The tax effect is calculated as the difference between the tax basis of the net assets acquired ($500,000) and their fair value ($750,000), multiplied by the tax rate (35%).

Goodwill = Consideration - Net assets acquired at fair value + Tax effect 
Goodwill = $800,000 - $750,000 + ($750,000 - $500,000) x 35% 
Goodwill = $137,500

Question 10

What term is used to describe a parent and subsidiaries that are eligible to file a consolidated income tax return?

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Question 11

Assuming that separate income tax returns are being filed, what deferred income tax asset is created?

Accepted Answer

Assuming separate income tax returns are being filed, only Bob can claim the $1,800 loss on his tax return. This loss will create a deferred tax asset for Bob, which he can use to offset future taxable income. The deferred tax asset will be equal to the loss ($1,800) multiplied by the tax rate (25%) which gives us $450. Therefore, the correct answer is C.

Question 12

C Co.currently owns 80% of D Co.and several other subsidiaries.C Co.is interested in gaining control of H Co.Why might C Co.allow D Co.to acquire H Co., rather than purchasing H Co.directly?

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Question 13

X Co.owned 80% of Y Corp., and Y Corp.owned 15% of X Co.Under the treasury stock approach, how would the dividends paid by X Co.to Y Corp.be handled on a consolidation worksheet?

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Question 14

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

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Question 15

Horse Corporation acquires all of Pony, Inc.for $300,000 cash.On that date, Pony has net assets with fair value of $250,000 but a book value and tax basis of $200,000.The tax rate is 40 percent.Prior to this date, neither Horse nor Pony has reported any deferred income tax assets or liabilities.What amount of goodwill should be recognized on the date of the acquisition?

Accepted Answer

We have to calculate the goodwill by subtracting the fair value of Pony's net assets from the purchase price.
Purchase price = $300,000
Fair value of Pony's net assets = $250,000
Goodwill = Purchase price - Fair value of net assets = $50,000
However, we also have to consider the tax implications. Since Pony's net assets have a tax basis of $200,000 but a fair value of $250,000, there is a potential for future taxable income when these assets are sold or otherwise disposed of in the future.
Therefore, we need to calculate the deferred tax liability resulting from the difference between the fair value and tax basis of the net assets. This is done with the following calculation:
Deferred tax liability = (Fair value - Tax basis) x Tax rate = ($250,000 - $200,000) x 40% = $20,000
The deferred tax liability reduces the amount of goodwill that can be recognized, since it represents a future tax cost to Horse Corporation. Therefore, the amount of goodwill to be recognized is:
Goodwill = Purchase price - Fair value of net assets - Deferred tax liability = $300,000 - $250,000 - $20,000 = $30,000.
However, this calculation assumes that Pony's net assets consist only of depreciable assets with differing tax bases and fair values. If any of the net assets are not depreciable, or have other tax considerations (such as tax credits), the calculation of the deferred tax liability would need to be adjusted accordingly.

Question 16

Gamma Co.owns 80% of Delta Corp., and Delta Corp.owns 15% of Gamma Co.The two companies use the treasury stock approach to account for mutual ownership.How should Delta Corp.'s ownership interest in Gamma Co.be accounted for in the consolidation?

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Question 17

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?

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Question 18

How is the amortization of goodwill treated for income tax purposes? How does the amortization of goodwill affect deferred income taxes?

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Question 19

What method is used in consolidation to account for a subsidiary's ownership of shares of its parent corporation?

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Question 20

What ownership structure is referred to as a connecting affiliation? Describe briefly or illustrate with a diagram.

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