Choose the best answer for each of the following questions.
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| 1 | |
On May 1, 2002, Pilsner Corporation acquired for $50,000 cash 5% of the outstanding common stock of Seaward Company. On that date both the carrying amounts and the current fair values of Seaward's identifiable net assets were $1 million. During the fiscal year ended April 30, 2003, Seaward had a net income of $60,000 and declared dividends of $20,000. On May 1, 2003, Pilsner acquired the remainder of Seaward's outstanding common stock for cash. Pilsner's May 1, 2003, journal entries include a credit to the Retained Earnings ledger account in the amount of: |
| | A) | $0 |
| | B) | $2,000 |
| | C) | $40,000 |
| | D) | Some other amount |
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| 2 | |
Proust Corporation sells merchandise to is wholly-owned subsidiary, Samuel Company. Intercompany profit in Samuel's January 1, 2003, inventories was $50,000, and in Samuel's December 31, 2003, inventories was $40,000. If Proust is subject to an income tax rate of 40%, the December 31, 2003, working paper eliminations (in journal entry format) for Proust Corporation and subsidiary should change Proust's income taxes expense by: |
| | A) | An increase of $4,000 |
| | B) | A decrease of $4,000 |
| | C) | An increase of $20,000 |
| | D) | A decrease of $16,000 |
| | E) | Some other amount |
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| 3 | |
Sexton Company, a wholly-owned domestic subsidiary of Poltroon Corporation, had a net income of $60,000 and declared dividends of $20,000 for 2003. In Poltroon's equity method journal entries for Sexton's 2003 operating results, Sexton's $40,000 increase in retained earnings is treated as: |
| | A) | A permanent difference between Poltroon's financial income and taxable income |
| | B) | An increase in Poltroon's Retained Earnings ledger account balance |
| | C) | A temporary difference between Poltroon's financial income and taxable income |
| | D) | None of the foregoing |
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| 4 | |
In an installment acquisition of a controlling interest in an eventual subsidiary, the investor–parent company applies the equity method of accounting for the investment in the investee-subsidiary when the parent acquires: |
| | A) | The first investment in the investee's common stock |
| | B) | At least 20% of the investee's common stock |
| | C) | More than 50% of the investee's common stock |
| | D) | At lease 50% of the investee's common stock |
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| 5 | |
The realized intercompany profit in the beginning inventories of Piedmont Corporation, parent company of Sturdwick Company, was $60,000, and the unrealized intercompany profit in Piedmont's ending inventories was $80,000. Piedmont and Sturdwick file separate income tax returns, and both affiliates are subject to income taxes at a rate of 40%. If the criteria for recording deferred tax assets without a valuation allowance are met, the working paper elimination of Piedmont Corporation and subsidiary should: |
| | A) | Debit Income Taxes Expense—Sturdwick for $24,000 |
| | B) | Debit Deferred Income Tax Asset—Sturdwick for $24,000 |
| | C) | Credit Deferred Income Tax Liability—Piedmont for $32,000 |
| | D) | Do none of the foregoing |
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| 6 | |
In a consolidated statement of cash flows, a parent company's gain or loss on disposal of part of an investment in a subsidiary is displayed as: |
| | A) | A cash flow from financing activities |
| | B) | An adjustment to consolidated net income of the parent company and subsidiary |
| | C) | A decrease in minority interest in net assets of subsidiary |
| | D) | An increase in minority interest in net assets of subsidiary |
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| 7 | |
In the journal entry for a business combination, the combinor recognizes a deferred income tax liability if: |
| | A) | A portion of the current fair value of the combinee's net assets is not deductible for income taxes. |
| | B) | The combinee had temporary differences between financial income and taxable income prior to the business combination. |
| | C) | The affiliated group expects to file consolidated income tax returns. |
| | D) | The business combination was not a "tax-free corporate reorganization." |
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| 8 | |
Estimated future tax effects of differences between the tax bases and amounts otherwise appropriate to assign to assets and liabilities are one of the variables in estimates of current fair values for a combinee in a business combination. |
| | A) | True |
| | B) | False |
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| 9 | |
The amount of undistributed earnings of a domestic subsidiary included in parent company net income under the equity method of accounting is accounted for as a temporary difference between taxable income and financial income of the parent company. |
| | A) | True |
| | B) | False |
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| 10 | |
Income taxes attributable to unrealized intercompany profits (gains) are deferred in consolidated financial statements if the affiliated group files a consolidated income tax return. |
| | A) | True |
| | B) | False |
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| 11 | |
Federal income tax laws permit an affiliated group of corporations to file consolidated tax return. |
| | A) | True |
| | B) | False |
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| 12 | |
Cash dividend paid by subsidiaries to the parent company have no effect on the consolidated statement of cash flows. |
| | A) | True |
| | B) | False |
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