Question 1

In the installment acquisition of a subsidiary, the investor begins applying the equity method of accounting for the investee's operations when the investor's ownership interest is sufficient to control the investee.

Accepted Answer

The equity method is applied when the investor has significant influence, not control. Control typically requires consolidation, not the equity method.

Question 2

Undistributed earnings of a domestic subsidiary included in consolidated net income are accounted for as a temporary difference between financial income and taxable income.

Accepted Answer

Undistributed earnings of a domestic subsidiary included in consolidated net income create a temporary difference because these earnings are recognized for financial reporting purposes but are not taxed until they are distributed as dividends, leading to a difference between financial income and taxable income.

Question 3

If a parent company and its subsidiary file separate income tax returns, a Deferred Income Tax Liability account is credited in the working paper elimination (in journal entry format) for income taxes attributable to an unrealized intercompany gain in land.

Accepted Answer

False

Question 4

Income taxes accrued or paid on unrealized intercompany profits or gains, either by the parent company or by the subsidiary, are deferred in consolidated financial statements if parent and subsidiary file separate income tax returns.

Accepted Answer

In consolidated financial statements, unrealized intercompany profits or gains are eliminated, and any related income taxes are deferred because the tax effect is not realized until the profits or gains are realized in transactions with outside parties.

Question 5

If a parent company acquires control of its subsidiary in a series of acquisitions of the subsidiary's common stock, a portion of the subsidiary's retained earnings is included in consolidated retained earnings on the date the parent company completes the acquisition of the controlling interest in the subsidiary.

Accepted Answer

When a parent company acquires control of its subsidiary, the parent company consolidates the subsidiary's financial statements with its own, including the subsidiary's retained earnings as part of the consolidated retained earnings from the date control is achieved. This reflects the parent company's claim on the subsidiary's earnings as part of the consolidated entity.

Question 6

If income tax accounting for a business combination differs from financial accounting for the combination, temporary differences between financial income and taxable income may result.

Accepted Answer

In a business combination, differences between the accounting for income tax purposes and financial reporting purposes can lead to temporary differences between the book (financial income) and taxable income, resulting in deferred tax assets or liabilities.

Question 7

Depreciation expense and amortization expense are added to consolidated net income in the computation of net cash provided by operating activities in the consolidated statement of cash flows for a parent company and its partially owned subsidiary.

Accepted Answer

The answer of Depreciation expense and amortization expense are added...

Question 8

A parent company's acquisition of a portion of the minority stockholders' interest in a subsidiary is reported in the consolidated statement of cash flows as a cash flow from financing activities.

Accepted Answer

This transaction is reported in the consolidated statement of cash flows as a cash flow from investing activities, as it involves the acquisition of an investment.

Question 9

All dividends declared by a parent company and its subsidiaries are displayed in the cash flows from financing activities section of a consolidated statement of cash flows.

Accepted Answer

Dividends paid by a parent company are displayed in the cash flows from financing activities section, but dividends received from subsidiaries are typically considered investing activities in a consolidated statement of cash flows.

Question 10

The deferred income tax liability attributable to a subsidiary's realized gain on the parent company's open-market acquisition of the subsidiary's serial bonds reverses when the subsidiary makes serial payments of the principal of the bonds.

Accepted Answer

The answer of The deferred income tax liability attributable to...

Question 11

Generally, several separate goodwill amounts are recognized in a parent company's installment acquisition of a subsidiary.

Accepted Answer

In an installment acquisition, the goodwill is recognized separately for each installment payment made.

Question 12

In the installment acquisition of a controlling interest in a subsidiary, the Retained Earnings of Subsidiary/Investee ledger account is first credited in a journal entry of the parent company/investor to:

Accepted Answer

The Retained Earnings of Subsidiary/Investee ledger account is first credited in a journal entry of the parent company/investor to apply retroactively the equity method of accounting. This method is used when the parent company has significant influence over the investee, typically indicated by owning more than 20% but less than 50% of the voting stock. However, when a controlling interest is acquired, even if over multiple installments, the full consolidation method becomes applicable, and the equity method may be used initially for partial acquisitions leading up to control. Retroactive application adjusts the parent's investment and retained earnings to reflect its share of the subsidiary's earnings and dividends since the acquisition date.

Question 13

Pomp Corporation and its wholly owned subsidiary Stage Company file separate income tax returns. Pomp's income taxes expense for 2006 included $60,000 attributable to $100,000 unrealized intercompany profits on sales of merchandise to Stage. In the preparation of consolidated financial statements for 2006, assuming the criteria for recognition of a deferred tax asset without a valuation allowance are met:

Accepted Answer

In consolidated financial statements, unrealized intercompany profits are eliminated, and the related income taxes are deferred, recognizing a deferred tax asset.

Question 14

Generally, undistributed earnings of a domestic subsidiary are treated in the computation of parent company income taxes expense:

Accepted Answer

Undistributed earnings of a domestic subsidiary are considered a temporary difference because they may eventually be distributed and taxed, affecting the timing of tax expense recognition.

Question 15

On January 2, 2006, Pagan Corporation acquired 40% of the outstanding common stock of Sancto Company for $1,000,000. On that date, the current fair value of Sancto's identifiable net assets was $2,000,000, and Pagan did not attribute the excess of the cost of its investment in Sancto over its equity in Sancto's identifiable net assets to any one factor. Sancto's 2006 net income was $250,000. Pagan planned to increase its investment in Sancto to a controlling interest, and Pagan accounted for its investment in Sancto under the equity method of accounting. The maximum amount that may be included in Pagan's 2006 income before income taxes to reflect investment income from Sancto is:

Accepted Answer

Rationale: $250,000 x 0.40 = $100,000 (assumes goodwill unimpaired)

Question 16

In the preparation of a consolidated statement of cash flows, dividends declared and paid to minority shareholders of a subsidiary are:

Accepted Answer

Dividends declared and paid to minority shareholders of a subsidiary are included with cash flows from financing activities in the consolidated statement of cash flows, reflecting the cash outflows to those shareholders.

Question 17

Ply Corporation acquired the outstanding common stock of Simi Company as follows:
10%, Jan. 2, 2006
25%, June 1, 2006
25%, Aug. 1, 2006
40%, Sept. 30, 2006

The fiscal year of both companies ends on September 30. Simi's common stock was acquired by Ply at its carrying amount in Simi's accounting records. Consolidated net income for the year ended September 30, 2006, includes the following earnings of Simi:

Accepted Answer

Rationale: (10% of earnings, January - May; 35% of earnings, June - July; and 60% of earnings, August - September)

Question 18

Which of the following is not included in a consolidated statement of cash flows?

Accepted Answer

Acquisition by the parent company of additional shares of common stock directly from a subsidiary is an intra-group transaction and does not impact the consolidated statement of cash flows. This transaction is eliminated in consolidation as it is an internal group transaction and does not represent a flow of cash into or out of the consolidated entity.

Question 19

Included in the identifiable net assets of Sapphire Company on the date of its business combination with Palumbo Corporation was a building with an appraised value of $900,000 and a carrying amount of $600,000. If the Palumbo-Sapphire business combination met the requirements of a "tax-free corporate reorganization" for income tax purposes and the income tax rate was 40%, the current fair value of Sapphire's building for inclusion in the consolidated financial statements of Palumbo Corporation and subsidiary is:

Accepted Answer

The correct answer is D) $900,000. In a business combination, assets are typically recorded at their fair value at the date of acquisition in the consolidated financial statements. The tax implications of the transaction do not affect the recording of the asset's fair value in the consolidated financial statements. Therefore, the building's current fair value of $900,000 is the amount to be included in the consolidated financial statements of Palumbo Corporation and its subsidiary.

Question 20

The starting point for the computation of net cash provided by operating activities in a consolidated statement of cash flows (indirect method) for a parent company and its partially owned subsidiary is:

Accepted Answer

The starting point for the indirect method in a consolidated statement of cash flows is the consolidated net income, which includes the results of both the parent company and its subsidiaries.

Quiz 9: Consolidated Financial Statements: Income Taxes, Cash Flows, and Installment Acquisitions