Chapter 7

Select all that apply What are some key attributes of the Big-Middle-Little example of a father-son-grandson affiliation?

Big owns 80% of Middle and Middle acquires 70% of Little. Big and Middle each apply the partial equity method to their subsidiaries. Intra-entity inventory transfers are upstream across affiliates.

Select all that apply What is the effect of Pop and Son's mutual ownership on the derivation of consolidated stockholders' equity?

Consolidation Entry TS is used to reclassify Son's investment in Pop as treasury stock. Son's investment in Pop is reclassified as treasury stock and reduces the balance of stockholders' equity in the consolidated balance sheet. Consolidation Entry TS brings Son's Investment in Pop balance to zero.

Select all that apply Jay Company owns 60% of Zee Company and 25% of Bee Company. If Zee Company purchases a 40% ownership share of Bee Company, then

Jay and Zee have a connecting affiliation with Bee. Despite owning only a 25% direct ownership of Bee, Jay will possess a controlling interest in Bee. Jay, Zee, and Bee comprise a consolidated reporting entity.

Select all that apply In general, what techniques are appropriate to allocate consolidated income tax expense across the parent and subsidiary companies?

Tax expense is attributed to each company based on its percentage of total taxable income. Tax expense is attributed to each company based on its percentage of total tax computed using separate tax returns.

Select all that apply What purpose is served by allocating consolidated income tax expense across members of a consolidated reporting entity?

The allocation is needed to properly determine net income attributable to the noncontrolling interest. The allocated amount is needed if a subsidiary is required to produce a separate income statement.

Select all that apply In father-son-grandson affiliations, what accompanying consolidation elements affect Consolidation Entry S for a particular subsidiary?

The existence of a noncontrolling interest in the subsidiary. Any asterisk G adjustments to remove intra-entity gains from the subsidiary's retained earnings. Any asterisk C adjustments to the subsidiary's retained earnings resulting from its control over another affiliate.

True or false: A connecting affiliation is formed when two or more companies within a consolidated reporting entity own an interest in one of the affiliated companies.

True

True or false: Compared to a parent with a single subsidiary, a consolidation worksheet for a father-son-grandson affiliation will combine the companies' assets and liabilities in a similar fashion.

True

True or false: Mutual ownership occurs when two companies within a consolidated reporting entity own an equity interest each other.

True

True or false: On a consolidated worksheet for a father-son-grandson configuration, each noncontrolling interest's share of consolidated net income is computed separately.

True

Temporary differences across financial accounting and tax reporting purpose can occur when

a difference in the tax and financial reporting basis for an asset or liability results in a deductible future amount.

When a parent company indirectly controls other companies through its direct control of a subsidiary company

all companies under control (direct or indirect) are included in the parent's consolidated financial statements.

If a parent owns at least 80% of all classes of a subsidiary stock, then dividends paid by the subsidiary to the parent

create no income tax liability.

Select all that apply Dividends paid by a subsidiary to its parent

create no temporary difference if a parent owns more than 80% of the subsidiary's ownership shares. are eliminated entirely in preparing consolidated financial statements. produce no income tax liability if the parent owns at least 80% of the subsidiary's ownership shares.

Select all that apply In consolidated financial statements, the ownership of a parent's equity shares by a subsidiary

does not result in any effects from dividend declarations on the equity shares owned by the subsidiary. is reclassified as treasury stock. is valued at its reacquisition price.

Select all that apply When consolidating a father-son-grandson affiliation, regardless of whether control is direct or indirect,

excess fair value amortizations for each affiliate must be determined. the consolidation process is essentially repeated for each separate affiliate. control acquisition-date fair values are used for each of the connecting affiliates.

A father-son-grandson affiliation describes a situation where the

father company is able to control the grandson company indirectly through its control of the son.

In consolidating the net incomes of a father-son-grandson affiliation, the process begins with the net income calculation of the

grandson.

In a father-son-grandson affiliation, when a subsidiary has control over one of the affiliated companies, the computation of the subsidiary's accrual-based income

includes its accrual-based equity income from the controlled affiliates.

Select all that apply Taxable income as computed in a consolidated tax return excludes

intra-entity gains and losses. intra-entity dividends.

Select all that apply Potential advantages to preparing a consolidated vs. separate company tax returns for members of an affiliated group include situations where

losses incurred by one affiliated company can be offset against taxable profits of other affiliated group members. taxes on intra-entity profits can be deferred until the underlying asset leaves the affiliated group.

If a parent acquires a subsidiary with an unused net operating loss (NOL) carryforward for tax purposes, then the consolidated entity can recognize a positive net value for the NOL

only if it anticipates future subsidiary taxable income.

Select all that apply When the partial equity method is applied throughout a father-son-grandson affiliation, *C (conversion) worksheet entries are needed for each owner affiliate to

recognize previous periods' excess fair value cumulative amortization expenses. ensure the parent's beginning retained earnings reflect the accrual basis. serve as part of the consolidation worksheet process to bring the Investment in Subsidiary account balance to zero.

Select all that apply Under the partial equity method, a parent company

reduces it Investment in Subsidiary account balance for its share of subsidiary dividends declared. accrues its share of the subsidiary's reported income.

A parent owns 70% of its subsidiary. During the current year the subsidiary reports before tax net income of $50,000 including $10,000 of intra-entity ending inventory gross profits. If the subsidiary's tax rate is 21%, what is the subsidiary's amount of current income tax payable?

$10,500

A parent owns 70% of its subsidiary. During the current year the subsidiary reports before tax net income of $50,000 including $10,000 of intra-entity ending inventory gross profits. If the subsidiary's tax rate is 21%, what amount should the consolidated entity recognize as a deferred tax asset?

$2,100

For a parent company and its subsidiary to qualify for filing a single consolidated federal income tax return, the parent must own at least (1)% of the subsidiary's voting and nonvoting stock.

1. 80

Separate federal income tax returns are mandatory for domestic subsidiaries if the parent does not own at least (1)% of the subsidiary's equity shares.

1. 80

When temporary differences exist between an asset's book value and its tax basis, financial reporting often requires recognition of a (1) tax asset or liability.

1. deferred

Select all that apply Acme Company owns a 60% equity interest in Zircon Company. Zircon, in turn, owns a 25% equity interest in Acme Company. This ownership configuration means

Acme and Zircon comprise a consolidated reporting entity. Acme has a controlling financial interest in Zircon. Acme and Zircon are mutual owners.

Select all that apply When the partial equity method is applied throughout a father-son-grandson affiliation, the *C (conversion) worksheet entry for the parent's retained earnings

serves as part of the consolidation worksheet process to bring the Investment in Subsidiary account balance to zero. includes an adjustment for previous periods' intra-entity inventory profits recorded by its subsidiary. includes the parent's share of its subsidiary's *C worksheet entry.

Under U. S. GAAP, the selling firm in an intra-entity asset transfer defers both intra-entity profits and the related tax effects until the asset is sold to a third party or consumed by the consolidated entity. In comparison, IFRS requires that

taxes paid on intra-entity profits be recognized as incurred.

A parent and its 80% owned subsidiary report combined net incomes of $125,000. Included in this income is $25,000 of intra-entity gains and a $5,000 amount attributable to the noncontrolling interest. Excluded from the combined $125,000 income is a $10,000 dividend paid by the subsidiary. If the federal tax rate is 21% and a consolidated return is filed, what is the current federal income tax liability?

$21,000

A parent owns 60% of its subsidiary. During the current year the subsidiary reports net income of $70,000 and pays a $10,000 dividend. If the parent's tax rate is 21%, what is the amount of current income tax payable related to the parent's investment in its subsidiary?

$441

A parent owns 60% of its subsidiary. During the current year the subsidiary reports net income of $70,000 and pays a $10,000 dividend. If the parent's tax rate is 21%, what is the amount of deferred income tax payable related to the parent's investment in its subsidiary?

$2,646

Regardless of the position of a subsidiary within a father-son-grandson affiliated entity, the determination of the consolidated net income attributable to the noncontrolling interest is based on each subsidiary's (1) - (2) net income.

1. accrual 2. based

In the Big-Middle-Little Companies example, consolidation Entry *G adjusts the retained earnings for each affiliate with previous period intra-entity inventory sales for intra-entity gross profits in (1) inventory.

1. beginning

Pop's $2,400 (30% times $8,000) dividend to Son is (1) in the net income attributable to the noncontrolling interest.

1. included

Alpha Company controls its subsidiary, Beta Company, through a majority voting interest. In turn, Beta Company controls Gamma Company through a majority voting interest. Through this pattern of ownership, Alpha possesses (1) control over Gamma Company.

1. indirect

In accounting for income tax consequence for consolidated reporting entities, U. S. GAAP and IFRS are similar except in accounting for taxes on (1) - (2) asset transfers.

1. intra 2. entity

Consolidation of the net incomes of a father-son-grandson affiliation must also account for the allocation of consolidated net income across the controlling interest and (1) interest of each of the successive affiliated companies.

1. noncontrolling

When preparing a consolidation worksheet for a father-son-grandson affiliation, only the common stock outstanding of the (1) company appears in the final consolidated balance sheet column.

1. parent

When a subsidiary company purchases shares of the parent company on the open market, these parent company shares are reported as (1) stock on the consolidated financial statements.

1. treasury

When preparing a consolidation worksheet for a father-son-grandson affiliation, all Investment in Subsidiary account balance are brought to a (1) balance, regardless of whether the subsidiary is controlled directly or indirectly.

1. zero

Select all that apply What is the effect of Pop and Son's mutual ownership on Consolidation Entry *C?

Pop must include Son's dividend income from Pop in Son's previous year's change in retained earnings. Pop must include its share of dividends declared by Son in Son's previous year's change in retained earnings.

When the acquisition-date fair value of a newly acquired subsidiary depreciable asset exceeds its tax basis

a deferred tax liability is recognized by the consolidated entity.

Select all that apply Possible reasons for a consolidated reporting entity to prepare a separate (as opposed to consolidated) tax return for some affiliated members include situations where

a parent owns less than 80% of a subsidiary. all affiliated companies are profitable and no intra-entity transfers occur among the affiliates. the consolidated entity decides that the subsidiary should maintain its separate accounting methods and fiscal year.

Temporary differences in an asset's tax vs. financial reporting can result when a parent acquires a subsidiary. Such temporary difference may be caused by

a tax-free acquisition where the fair value of an acquired depreciable asset exceeds its tax basis.

Select all that apply Consolidation Entry *G

credits the current period balance of Cost of Good Sold. transfers intra-entity beginning inventory gross profits from the previous period to the current period. debits the Retained Earnings balance of the selling affiliate.

Select all that apply The multiple Consolidation Entries S in father-son-grandson affiliations serve to

establish the book value component of the noncontrolling interest valuation as of the beginning of the period. provide a component in the process to bring the various investment in subsidiary balances to zero. bring the beginning stockholders' equity balances in each subsidiary to a zero amount.

Select all that apply Recognition of an NOL carryforward as an asset can be controversial because

its future economic benefit may turn out to be zero. it requires a company to anticipate future positive taxable income.

Select all that apply To consolidate the income statements of a father-son-grandson affiliation, on the consolidation worksheet

net income attributable to noncontrolling interests is deducted from consolidated net income to derive the parent's share of consolidated net income. the accounts of all controlled affiliates are combined after appropriate adjustments for intra-entity gross profits. the amounts recognized for subsidiary income by each separate affiliate are brought to a zero balance.

Select all that apply When a company incurs a net operating loss (NOL) in a particular year, tax rules allow the NOL to be carried forward to offset future taxable income

only if it has positive taxable income in the future. indefinitely until the NOL is eliminated.