Chapter 7 Exam 3

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1. 3-     Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott.  No              goodwill or other allocations were recognized in connection with either of these acquisitions.  Prescott reported net             income of $266,000 for 2018 whereas Bell recognized $98,000 during the same period.  No investment income was        included within either of these income totals.         On a consolidated income statement, what is the net income attributable to the noncontrolling interest?

Explanation

 Bell’s net income ($98,000) × Noncontrolling interest (10 %) = $9,800

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Chapter 7 Exam 3 - Quiz

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2. 18.      How is goodwill amortized?

Explanation

Goodwill is an intangible asset that represents the value of a company's brand, reputation, and customer relationships. It is not amortized for reporting purposes because it is considered to have an indefinite useful life. However, for tax purposes, goodwill is amortized over a 15-year life. This means that for tax calculations, the cost of acquiring goodwill is spread out over a 15-year period, reducing the taxable income each year. This treatment allows the company to receive tax benefits over time for the acquisition of goodwill.

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3. 2-      Evanston Co. owned 60% of Montgomery Corp.  Montgomery owned 75% of Noir Inc., and Noir owned 15% of  Montgomery.  This pattern of ownership would be called…

Explanation

The pattern of ownership described in the question is mutual ownership because Evanston Co. owns 60% of Montgomery Corp., Montgomery Corp. owns 75% of Noir Inc., and Noir Inc. owns 15% of Montgomery Corp. This means that there is a mutual ownership relationship between the three companies, as each company owns a portion of the other companies involved in the ownership chain.

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4. 8.  Which of the following statements is false concerning a father-son-grandson configuration?

Explanation

In a father-son-grandson configuration, consolidated financial statements are required for all the companies involved, including the father, son, and grandson companies. Therefore, statement E is false.

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5. 9.  Which of the following statements is true regarding a subsidiary's investment in the parent company's stock?

Explanation

not-available-via-ai

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6. 12.  Which of the following statements is true regarding goodwill?

Explanation

not-available-via-ai

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7.
  1. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. When Buckette prepares consolidated financial statements, it should include

Explanation

Buckette Co. owns 60% of Shuvelle Corp. and 40% of Tayle Corp. Additionally, Shuvelle Corp. owns 35% of Tayle Corp. When preparing consolidated financial statements, Buckette should include both Shuvelle and Tayle because it has a controlling interest in both companies. Consolidated financial statements combine the financial information of a parent company and its subsidiaries into one set of financial statements. In this case, Buckette has a controlling interest in Shuvelle and Tayle, so their financial information should be included in the consolidated statements.

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8. 5-   Beagle Co. owned 80% of Maroon Corp.  Maroon owned 90% of Eckston Inc.  Separate company net incomes for  2018 are shown below; these figures contained no investment income.  Amortization expense was not required by any of these acquisitions.  Included in Eckston's operating income was a $56,000 gross profit on intra-entity transfers to Maroon.       The accrual-based net income of Eckston Inc. is calculated to be  

Explanation

Feedback: Net income ($280,000) – deferral of gross profit from intra-entity transfers ($56,000) = Accrual-based
net income $224,000

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9. 20-   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?

Explanation

Feedback:
Consideration transferred (cash) $300,000
to net assets at fair value $250,000
to deferred tax liability on net
assets [($250,000 − $200,000) × 40%] (20,000) 230,000
Goodwill $70,000

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10. 10.  Which of the following statements is true regarding the filing of income taxes for an affiliated group?

Explanation

not-available-via-ai

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11. 11.  The benefits of filing a consolidated tax return include all of the following except

Explanation

The correct answer is E) Gross profits on intra-entity transfers are taxed before they are recognized for financial statement reporting purposes in the year of the transfer, but any such losses are deferred. This means that while the profits from intra-entity transfers are subject to immediate taxation, any losses incurred from these transfers are not recognized for tax purposes until a later date. This is the opposite of the benefits of filing a consolidated tax return, which typically allow for the deferral of recognition of gross profits from intra-entity transfers for income tax purposes.

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12. 13-  Chase Company owns 80% of Lawrence Company and 40% of Ross Company.  Lawrence Company also owns 30% of Ross Company.  Separate company net incomes for 2018 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively.  Each company also defers a $20,000 intra-entity gain in its current income figures. Excess annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross.       Compute the  net income attributable to the noncontrolling interest in Ross for 2018.

Explanation

$250,000 - $20,000 - $15,000 = $215,000 × .30 = $64,500

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13. 16. Which of the following is true concerning the treasury stock approach in accounting for a subsidiary's investment in parent company stock?

Explanation

The correct answer is A) The original cost of the subsidiary's investment reduces long-term liabilities. This means that when a subsidiary purchases stock in its parent company, the original cost of that investment is deducted from the subsidiary's long-term liabilities. This reduces the subsidiary's overall debt and can improve its financial position.

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14. 15-  Which of the following statements is true concerning connecting affiliations and mutual ownerships?

Explanation

In a mutual ownership, the subsidiary owns a portion of the parent's stock. This means that the subsidiary company has invested in the parent company by purchasing some of its shares. This creates a direct financial relationship between the two companies, with the subsidiary having a stake in the ownership and performance of the parent company.

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15. 19-   Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc., all of which are domestic corporations.  There are no excess amortizations associated with any of the acquisitions. Information for the three companies for the year ending December 31, 2018 follows:         Which of the following statements is true?

Explanation

not-available-via-ai

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16. 7- .  When indirect control is present, which of the following statements is true?

Explanation

When indirect control is present, it means that there is a chain of ownership between the parent company and the subsidiary, with one or more intermediate companies in between. In this scenario, at least one company within the consolidated entity must hold a parent and a subsidiary relationship. This means that there is a direct ownership relationship between at least one company and another company within the consolidated entity. Therefore, option A is the correct statement.

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17. 14-     White Company owns 60% of Cody Company.  Separate tax returns are required.  For 2017, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of  $125,000.  During the period, Cody declared total dividends of $25,000; $15,000 (60%) to White and $10,000 to the noncontrolling interest. White declared dividends of $180,000.  The income tax rate for both companies is 30%.   Compute the income tax liability of Cody for 2018.

Explanation

Feedback: Separate tax return calculation: Cody’s operating income $125,000 × .30 = $37,500 Cody’s income tax
liability

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18. 4-      Jastoon Co. acquired all of Wedner Co. for $588,000 cash in a tax-free transaction.  On that date, the subsidiary had          net assets with a $560,000 fair value but a $420,000 book value and income tax basis.  The income tax rate was          30%.  What amount of goodwill should have been recognized on the date of the acquisition?

Explanation

Feedback: FV ($560,000) – Tax Basis ($420,000) = Temporary Tax Difference ($140,000) × .30 = Deferred Tax Liability ($42,000) + [Cash Paid ($588,000) – FV Assets ($560,000)] $28,000 = Goodwill ($70,000)

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19. 6-   Hardford Corp. held 80% of Inglestone Inc., which, in turn, owned 80% of Jade Co.  Excess amortization expense was not required by any of these acquisitions. Separate net income figures (without investment income) as well as upstream intra-entity gross profits (before deferral) included in the income for the current year follow:         The accrual-based net  income of Jade Co. is calculated to be

Explanation

Feedback: Separate net income ($280,000) – intra-entity gross profit to be deferred ($84,000) = Accrual-based net
income $196,000

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3-     Prescott Corp. owned 90% of Bell Inc.,...
18.      How is goodwill amortized?
2-      Evanston Co. owned 60% of Montgomery...
8.  Which of the following statements is false concerning a...
9.  Which of the following statements is true regarding a...
12.  Which of the following statements is true regarding...
Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and...
5-   Beagle Co. owned 80% of Maroon Corp.  Maroon owned...
20-   Horse Corporation acquires all of Pony, Inc. for...
10.  Which of the following statements is true regarding the...
11.  The benefits of filing a consolidated tax return include all...
13-  Chase Company owns 80% of Lawrence Company and 40% of Ross...
16. Which of the following is true concerning the treasury stock...
15-  Which of the following statements is true concerning...
19-   Delta Corporation owns 90 percent of Sigma Company,...
7- .  When indirect control is present, which of the following...
14-     White Company owns 60% of Cody...
4-      Jastoon Co. acquired all of Wedner...
6-   Hardford Corp. held 80% of Inglestone Inc., which, in...
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