AICPA: FN Measurement
Feedback: Since a consolidated tax return is filed, the gross profit remaining in the inventory of the
consolidated entity is deferred until transfer to outsiders or until consumption or use by the consolidated
82. Assuming that separate income tax returns are being filed, what deferred income tax asset is created?
A) $ 0.
B) $ 360.
C) $ 450.
D) $2,250.
E) $3,600.
83. Assuming that a consolidated income tax return is being filed, what deferred income tax asset is
created?
A) $ 0.
B) $ 360.
C) $ 450.
D) $2,250.
E) $3,600.
84. 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?
A) $ 0.
B) $ 50,000.
C) $ 70,000.
D) $100,000.
E) $150,000.
85. 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?
A) $ 0.
B) $50,000.
C) $65,000.
D) $66,400.
E) $57,500.
[($350,000 − $325,000) × 30%]
Goodwill
$57,500
[QUESTION]
86. 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?
A) $ 47,542.
B) $117,850.
C) $125,000.
D) $137,500.
E) $250,000.
to net assets at fair value
$750,000
87. What configuration of corporate ownership is described as a father-son-grandson relationship?
88. What ownership structure is referred to as a connecting affiliation? Describe briefly or illustrate with
a diagram.
89. What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a
diagram.
90. What are the essential criteria for including a subsidiary within an affiliated group?
91. 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?
92. What term is used to describe a parent and subsidiaries that are eligible to file a consolidated income
tax return?
93. What method is used in consolidation to account for a subsidiary’s ownership of shares of its parent
corporation?
94. What are the benefits or advantages of filing a consolidated income tax return?
95. How is the amortization of goodwill treated for income tax purposes? How does the amortization of
goodwill affect deferred income taxes?
96. 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?
97. 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?
98. 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.
99. 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?
100. Under what conditions must a deferred income tax asset be recorded?
101. 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.
102. Required:
Under the treasury stock approach, what is the net income attributable to the noncontrolling interest?
103. Required:
Under the treasury stock approach, what is Jull’s net income attributable to the controlling interest in
Solaver Co..?
104. Required:
Using the treasury stock approach, prepare a schedule to show what is reported as the net income
attributable to the noncontrolling interest in Luvyn.
105. Required:
Prepare a schedule to show consolidated net income.
106. Required:
Prepare a schedule to show net income attributable to the controlling interest of Kurton.
107. Wilkins Inc. owned 60% of Motumbo Co. During the current year, Motumbo reported net income of
$280,000 but paid a total cash dividend of only $56,000.
Required:
Assuming an income tax rate of 30%, what amount of Deferred Income Tax Liability arising this year
must be recognized in the consolidated balance sheet?
108. Required:
Determine the total amount of goodwill for the January 1, 2017 acquisition of Curle Co. and for the
acquisition of Lance Co. on the same date.
Goodwill
$ 347,200
Learning Objective: 07-03
Topic: Consolidation―Mutual ownership
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
[QUESTION]
REFER TO: 07-18
109. Required:
Determine net income attributable to the noncontrolling interest in Curle for the year 2018.
Separate net income for 2018―Curle
$140,000
Accrual-based net income for 2018―Curle
$137,312
Noncontrolling interest percentage
20%
110. Required:
Determine the net income attributable to the noncontrolling interest in Lace for the year 2018.
Separate net income for 2018―Lance
$280,000
Noncontrolling interest percentage
25%
Deferral of 2018 intra-entity gross profit (Entry G)
( 13,440)
111. Required:
Determine the accrual-based net income of Mace Co for the year 2018.
112. On January 1, 2018, Youder Inc. bought 120,000 shares of Nopple Co. for $384,000, giving Youder
30% ownership and the ability to apply significant influence to the operating and financing decisions of
Nopple. Youder anticipated holding this investment for an indefinite time. In making this acquisition,
Youder paid an amount equal to the book value for these shares. The fair value of each asset and liability
was the same as its book value. Dividends and income for Nopple for 2018 were as follows:
Dividends declared and paid: $ .40 per share
Income before income tax provision: $400,000
Required:
Assume a 40% income tax rate. Prepare all necessary journal entries for Youder for 2018 beginning at
acquisition and ending at tax accrual.
113. Dice Inc. owns 40% of the outstanding shares of Spalding Corp., an investment accounted for by the
equity method. During 2018, Dice had operating income (not including income from its investment in
Spalding) of $370,000. For this same period, Spalding reported net income of $160,000 and paid cash
dividends of $60,000. Dice has an effective income tax rate of 35% and anticipates holding its
investment in Spalding for an indefinite period.
Required:
(A.) What income tax expense journal entry would Dice Inc. record at the end of 2018?
(B.) If Dice expects to sell its interest in Spalding in the near future, how does that decision change the
2018 income tax expense journal entry?
114. Dotes, Inc. owns 40% of Abner Co. Dotes accounts for its investment using the equity method.
Abner follows a policy of declaring and paying dividends equal to 30% of its income each year. During
the current year, Abner reported net income of $216,000. Dotes has an effective income tax rate of 32%.
Required:
What journal entry would Dotes record at the end of the current year for income taxes relating to the
investment in Abner? Assume the investment is to be held for an indefinite time and that all amounts are
to be rounded to the nearest dollar.
115. Assume Patton owns 90 percent of the voting stock of Stevens and files a consolidated income tax
return. What amount of income taxes would be paid?
116. Assume Patton owns 90 percent of the voting stock of Stevens and they each file separate income tax
returns. What amount of total income tax would be paid?
117. How much will the consolidated group save if it decides to file a consolidated income tax return?
118. For each of the following situations, select the best answer concerning accounting for income taxes
in combinations:
(A) May file a consolidated income tax return.
(B) May not a file consolidated income tax return.
(C) Must file a consolidated income tax return.
_____1. Parent company owns 85% of the voting stock of the subsidiary, and there are significant intra-
entity transfers.
_____2. Subsidiary is a foreign corporation.
_____3. Parent company owns 90% of the voting stock of the subsidiary, but there are no intra-entity
transfers of inventory.
_____4. Parent company owns 75% of the voting stock of the subsidiary but there are no intra-entity
transfers of inventory.
_____5. Parent company owns 90% of the voting stock of the subsidiary, and there are intra-entity
transfers of inventory.
_____6. Parent company owns 75% of the voting stock of the subsidiary and there are intra-entity
transfers of inventory.