corporations to file a consolidated tax return

19. For two or more corporations to file a consolidated tax return, the parent must own what percentage of the voting power of all classes of stock and what percentage of the fair value of all the outstanding stock of the corporation?

a. 90%

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b. 80%

c. 70%

d. 60%

20. In calculating the voting power and market value for two or more corporations to file a consolidated tax return, preferred stock is included only if it

a. is entitled to vote.

b. is not limited and not preferred as to dividends.

c. does have redemption rights beyond its issue price plus a reasonable redemption or liquidation premium and is convertible into the other class of stock.

d. meets any the above conditions.

21. Consolidated firms that meet the tax law requirements to be an affiliated group

a. must file a consolidated return.

b. must receive permission of the Internal Revenue Service to file separately.

c. may elect to file as a single entity or as a consolidated group.

d. cannot change the method of filing in the future.

22. When an affiliated group elects to be taxed as a single entity, taxable income is calculated based on

a. consolidated income as determined on the consolidated worksheet.

b. each firms separate income.

c. each firms separate income with adjustments for intercompany transactions.

d. none of the above.

6-6

Chapter 6

23. For companies that meet the requirements of an affiliated firm filing separately, the parent may exclude how much of the dividends received from reported income?

a. 100%

b. 80%

c. 70%

d. 20%

24. For ownership interest of at least 20% but less than 80%, the parent may exclude how much of the dividends received from its reported income when filing separately?

a. 100%

b. 80%

c. 70%

d. 20%

25. For ownership interest of less than 20%, the parent may exclude how much of the dividends received from its reported income when filing separately?

a. 100%

b. 80%

c. 70%

d. 20%

26. Company P purchased an 80% interest in Company S on January 1, 20X3, for $800,000. On the purchase date, Company S stockholders’ equity was $800,000. Any excess of cost over book value was attributed to a patent with a 10-year remaining life. In 20X3, Company P reported internally generated net income before taxes of $150,000. Company S reported a net income before taxes of $50,000. The firms file a consolidated tax return at a 30% tax rate. The controlling share of consolidated net income

is __________.

a. $140,000

b. $121,800

c. $133,000

d. $152,000

6-7

Chapter 6

27. Company P purchased an 80% interest in Company S on January 1, 20X3, for $700,000. On the purchase date, Company S stockholders’ equity was $800,000. Any excess of cost over book value was attributed to a patent with a 15-year life. In 20X3, Company P reported internally generated net income before taxes of $80,000. Company S reported a net income before taxes of $40,000. The firms file separate tax returns at a 30% tax rate. Assume an 80% dividend exclusion rate on intercompany dividends. The controlling share of consolidated net income is

__________.

a. $81,200

b. $79,280

c. $78,480

d. $74,256

28. Which of the following statements is true?

a. When an affiliated group elects separate taxation, an additional tax needs to be calculated.

b. An affiliated group filing a consolidated tax return may record on its own books its share of the consolidated provision for income tax.

c. Nonaffiliated tax filing is less complex than filing a consolidated tax return since there is no impact of intercompany transactions when separate returns are filed.

d. With regard to prior years, subsidiary income, no deferred tax liability needs to be recognized when the cost method is used.

29. How will the investor’s investment account be affected by the investor’s share of the earnings of the investee after the date of acquisition under each of the following accounting methods?

30. Company P purchased a 30% interest in the Company S for $345,000 on January 1, 20X1. At that time, Company S had stockholders’ equity of $1,000,000. Any excess cost over book value was attributed to a patent with a 15-year life. During 20X1, Company S earned $60,000 and paid dividends of $15,000. What is the balance in the investment account on December 31, 20X1, using the sophisticated equity method?

a. $363,000

b. $360,000

c. $355,500

d. $349,500

6-8

Chapter 6

31. Company P owns a 30% interest in Company S and accounts for the investment under the sophisticated equity method. The investment was purchased at underlying book value, and there is no excess of cost or book value. Company S sells merchandise to Company P at cost plus 25%. Intercompany sales during 20X1 were $100,000. There were $20,000 worth of such goods in Company P’s beginning inventory and $30,000 worth of such goods in Company P’s ending inventory. Company S’s reported income for 20X1 is $40,000, and no dividends were paid. What amount will Company P record as investment income in 20X1?

a. $12,000

b. $11,400

c. $9,750

d. $4,500

32. Company P Company uses the equity method to account for its January 1, 20X1, purchase of 30% of Company S’s common stock. On January 1, 20X1, the market values of Tun’s FIFO inventory and land exceed their book values. How do these excesses of market values over book values affect Company P’s reported equity in Tun’s Company S’s 20X1 earnings?

33. Company P purchased a 30% interest in Company S on January 1, 20X1, for $100,000. The price was equal to the book value of the equity acquired. The reported income (loss) and dividends paid by the Company S are as follows:

Investment income reported in 20X4 under the sophisticated equity method would be __________.

a. $15,000

b. $13,500

c. $5,500

d. $0

6-9

Chapter 6

34. Company P uses the sophisticated equity method of accounting for its 30% investment in Company S’s common stock. During 20X9, Company S reported earnings of $650,000 and paid dividends of $150,000. Assume that all the undistributed earnings of Company S will be distributed as dividends in future periods. The dividends received from Flax are eligible for the 80% dividends received deduction. Company P’s 20X9, tax rate is 30%. Tax rates after 20X9 are 25%. In its December 31, 20X9, balance sheet, the increase in the deferred tax liability from these transactions would

be __________.

a. $7,500

b. $9,000

c. $150,000

d. $30,000

35. Assume that Company P purchases a 10% common stock interest in Company S for $12,000 on January 1, 20X2, and an additional 20% interest on January 1, 20X3, for $26,000. There was no excess of cost or book value on either investment. The balance sheets of Company, S which pays no dividends, follow:

………..

For 20X3, Company P reports investment income of __________.

a. $18,000

b. $12,000

c. $9,000

d. $6,000

36. Company P acquired 30% of Company S’s common stock on January 1, 20X8, for $100,000. Company P’s 30% interest constitutes significant influence. There is no excess of cost over book value. During 20X8, Company S earned $40,000 and paid dividends of $25,000. During 20X9, Company S earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, 20X9, Company P sold half of its interest in Company S for $66,000 cash. The gain on the sale of the investment in Company P’s 20X9 income statement should be __________.

a. $16,000

b. $13,700

c. $12,250

d. $10,00