Chapter 7: Consolidated Financial Statements Flashcards
Connecting Affiliation
two or more companies own an interest in another member of that organization
direct ownership
there is no affiliation between subsidiaries
Indirect ownership
One subsidiary possesses the stock of another rather than the parent having direct ownership
Why does indirect ownership occur?
developed to enhance control, result from the parent company’s acquisition of a company that already possesses subsidiaries
How does the consolidation process change when indirect control is present?
the worksheet entries are effectively doubled by each corporate ownership layer but the concepts underlying the consolidation process are not changed.
How is income recognized when there are multiple companies in both a parent and a subsidiary position?
Must recognize the equity income accruing from its own subsidiary before computing its own income.
Mutual Ownership
A subsidiary owns shares of its parent company
How are parent shares being held by the subsidiary accounted for?
the cost paid to acquire the parent’s stock is reclassified within the consolidation process to a treasury stock account and no income is accrued.
According to tax laws do consolidated entities have to file a consolidated return?
A consolidated entity may elect to file a consolidated return encompassing all companies that compose an affiliated group as defined by the IRC. The Code automatically requires all other corporations to submit separate income tax returns.
When should a parent include a subsidiary within an affiliated group?
Parent’s ownership is at least 80% of the voting stock and at least 80% of the nonvoting stock. They must be a domestic entity and not a foreign entity.
What are some benefits to consolidated tax returns?
↔Intra-entity profits are not taxed until the asset leaves the consolidated entity, losses incurred by one affiliated company can be used to reduce taxable income recognized by other group members, intra-entity dividends are not taxed
temporary differences
a variation between an asset or liabilities recorded book value and its tax basis exist, results in differences in taxable income in future years
deferred tax liability
additional taxes will result in future years, a DTL is written off in future years so that the net expense recognized matches the combination’s book income
when are dividends removed from income in tax accounting?
only if at least 80% of subsidiary’s stock is held
what happens is a parents has less than 80% of a subsidiary’s stock, and dividends need to be recognized?
An income tax liability is created based on the dividends collected and a deferred tax liability is recorded for the taxable portion of any income not paid to the parent
How does goodwill affect taxes?
the amortization of goodwill and other purchased intangibles is allowed over a 15 year period
When are intra-entity profits deferred?
gross profits in inventory are removed until the transferred asset leaves the group
What occurs if separate tax returns are filed and intra-entity profits are present?
Tax laws require the inclusion of inventory profits in the period of inventory transfer even though not yet recognized by the consolidated entity
What occurs if there are intra-entity profits that are not inventory?
Recognize the related income tax effects in the period in which the transfer occurs.
How does a parent company compute income taxes for financial reporting purposes
A parent company includes a single total income tax expense figure on its consolidated income statement.
Percentage allocation method
Attributes the GAAP tax expense based on the relative contribution of each affiliate to taxable income
Can a company elect to file separate returns if they previously elected to use consolidated returns?
No, unless they obtain permission from the IRS to file separately
What temporary differences emerge from income being recognized for consolidated financial reporting versus income tax reporting when filing separately?
The immediate taxation of intra-entity profits and possible future tax effects of the subsidiary income in excess of dividend payments
What are delayed tax payments for a parent that waits to pay on profits from subsidiary dividend?
deferred tax liability
When are deferred taxes on dividend payments not required?
When ownership equals or exceeds 80%. The tax law provides a 100% dividends-received deduction
When do net operating losses benefit the company?
carrying the loss forward reduces subsequent taxable income, this only benefits the company if it has future taxable income
How does a parent company account for a subsidiary with a NOL carryforward?
If it is more likely than not that the benefit will be realized than the parent will recognize remaining as goodwill. If the chances the sub will use the benefit are less than 50% than the NOL carryfoward should be recognized as a valuation allowance
How does the parent company remove the valuation allowance?
Must be reported as reduction or increase in income tax expense
In a father-son-grandson business combination, which of the following is true?
A. The father company always must have its total accrual-based income computed first.
B. The computation of a company’s accrual-based net income has no effect on the accrual-based net income of other companies within a business combination.
C. A f-s-g configuration does not require consolidation unless one company owns shares in all of the other companies.
D. All companies solely in subsidiary positions must have their accrual-based net income computed first within the consolidation process.
D
A subsidiary owns shares of its parent company. Which of the following is true concerning treasury stock approach?
a. it is one of several options to account for mutual holdings available under current accounting standards.
b. the original cost of the subsidiary’s investment is a reduction in consolidated stockholder’s equity.
c. the subsidiary accrues income on its investment by using the equity method.
d. the treasury stock approach eliminates these shares entirely within the consolidation approach?
B
On January 1, Balanger Company buys 10 percent of the outstanding shares of its parent, Altgeld, Inc, Although the total book and fair value of Altgeld’s assets equaled 3.2 million, the price paid for shares was 340,000. During the year, Altgeld reported 415,000 of separate operating income and declared dividends of 35,000. How are the shares of the parents owned by the subsidiary reported at December 31?
a. consolidate SE is reduced by 340,000
b. an investment balance of $378000 is eliminated
c. Consolidated SE is reduced by 378,000
d. an investment balance of 358,000 is eliminated
A
Which of the following is correct for two companies that want to file a consolidated tax return as an affiliated group?
a. one company must hold at least 51% of voting stock
b. one company must hold at least 65%
c. one company must hold at least 80%
d. they cannot file unless one company owns 100%
C
How does the amortization of tax-deductible goodwill affect the computation of a parent’s company’s income taxes?
a. it is a deductible expense only if the parents owns at least 80% of subs voting stock
b. it is deductible only as impairments are recognized
c. it is deductible item over a 15 year period
d. it is deductible only if a consolidated tax return is filed
C
