Question 1

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.

Accepted Answer

The answer of Explain how the treasury stock approach treats...

Question 2

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

Accepted Answer

The answer of What term is used to describe a...

Question 3

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

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired. In this case, Horse Corporation paid $300,000 for Pony, Inc., while the fair value of Pony's net assets was $250,000. Therefore, the amount of goodwill is $50,000.

However, we also need to consider the tax implications. Since the fair value of Pony's net assets exceeded their tax basis, there will be a taxable temporary difference. This means that Horse will be able to deduct a portion of the purchase price for tax purposes, resulting in a deferred tax liability. The deferred tax liability can be calculated as follows:

Fair value of net assets - tax basis of net assets = $250,000 - $200,000 = $50,000

Deferred tax liability = $50,000 × 40% = $20,000

The amount of goodwill recognized for accounting purposes is reduced by the amount of the deferred tax liability, resulting in a net goodwill of $70,000 ($50,000 - $20,000). Therefore, the correct answer is C.

Question 4

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

Accepted Answer

The answer of What are the benefits or advantages of...

Question 5

B Co.owned 70% of the voting common stock of C Corp. ;C Corp.owned 20% of B Co.For 2009,B Co.and C Corp.reported net income (not including the investment)of $600,000 and $300,000,respectively.B Co.and C Corp.paid dividends of $80,000 and $60,000,respectively.
Required:
Prepare a schedule showing B Co.'s share of consolidated net income for 2009 using the treasury stock approach.

Accepted Answer

The answer of B Co.owned 70% of the voting common...

Question 6

REFERENCE: Ref.07_15
Jull Corp.owned 80% of Solaver Co.Solaver paid $250,000 for 10% of Jull's common stock.In 2009,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 the noncontrolling interest in Solaver Co.'s net income?

Accepted Answer

The answer of REFERENCE: Ref.07_15
Jull Corp.owned 80% of Solaver Co.Solaver...

Question 7

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

Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired. Here, the purchase price is $800,000 and the fair value of net assets acquired is $750,000. Therefore, goodwill is $50,000 ($800,000 - $750,000).

However, a deferred tax liability must be recognized for the difference between the fair value and tax basis of English's net assets. This difference is $250,000 ($750,000 - $500,000), and the tax rate is 35%. Therefore, the deferred tax liability is $87,500 ($250,000 x 35%).

The goodwill must be adjusted for the deferred tax liability, so the net goodwill is $137,500 ($50,000 - $87,500). Therefore, the correct answer is option D.

Question 8

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?

Accepted Answer

The answer of T Corp.owns several subsidiaries that are eligible...

Question 9

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

Accepted Answer

The answer of What method is used in consolidation to...

Question 10

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

Accepted Answer

The answer of Under what conditions must a deferred income...

Question 11

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

Accepted Answer

The answer of What ownership structure is referred to as...

Question 12

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

Accepted Answer

The answer of What ownership pattern is referred to as...

Question 13

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

Accepted Answer

The answer of How is the amortization of goodwill treated...

Question 14

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?

Accepted Answer

The answer of Gamma Co.owns 80% of Delta Corp. ,and...

Question 15

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

Accepted Answer

The answer of What configuration of corporate ownership is described...

Question 16

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?

Accepted Answer

The answer of Dog Corporation acquires all of Cat,Inc.for $400,000...

Question 17

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

Accepted Answer

The answer of What are the essential criteria for including...

Question 18

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

Accepted Answer

The answer of X Co.owned 80% of Y Corp. ,and...

Question 19

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?

Accepted Answer

The answer of C Co.currently owns 80% of D Co.and...

Question 20

REFERENCE: Ref.07_14
Tate,Inc.owns 80 percent of Jeffrey,Inc.During the current year,Jeffrey sold merchandise costing $60,000 to Tate for $75,000.At the end of the year,10 percent of this merchandise was still being held.The tax rate is 30 percent.
-Assuming that a consolidated income tax return is being filed,what deferred income tax asset is created?

Accepted Answer

The answer of REFERENCE: Ref.07_14
Tate,Inc.owns 80 percent of Jeffrey,Inc.During the...

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