Test bank advanced accounting 10e by beams chapter 10

Chapter 10 Test Bank SUBSIDIARY PREFERRED STOCK, COSOLIDATED EARNINGS PER SHARE, AND CONSOLIDATED INCOME TAXATION Multiple Choice Questions Use the following information for Questions

Chapter 10 Test Bank

SUBSIDIARY PREFERRED STOCK, COSOLIDATED EARNINGS PER SHARE,

AND CONSOLIDATED INCOME TAXATION

Multiple Choice Questions

Use the following information for Questions 1 and 2

Parminter Corporation owns an 80% interest in the common stock of

Sanchez Corporation and 20% of Sanchez’s preferred stock on December

31, 2005 Sanchez had 2005 net income of $30,000 Sanchez’s equity

2 What should be the noncontrolling interest expense in the

consolidated financial statements of Parminter?

Use the following information for Questions 3, 4, and 5

On January 1, 2005, Pardy Corporation acquired a 70% interest in the

common stock of Salter Corporation for $7,000,000 when Salter’s

stockholders’ equity was as follows:

10% cumulative, nonparticipating preferred stock,

$100 par, with a $105 liquidation preference

Common stock, $10 par value 6,000,000

Additional paid-in capital 1,500,000

LO1

3 There were no dividends in arrears on the date of the business

combination The goodwill from Pardy’s investment in Salter on January 1, 2005 is

4 Salter has a 2005 net loss of $200,000 Pardy’s share of

Salter’s net loss is

5 If Salter’s net income is $220,000, what is Pardy’s share of

Salter’s net income?

LO1

6 Pamplin Corporation stockholders’ equity consisted of

$1,000,000 of $10 par value Common Stock, $750,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings

on January 1, 2005 On this date, Pamplin purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000 with all excess purchase cost assigned to goodwill The stockholders’ equity of Sage on this date consisted of $800,000

of $100 par value, 8% non-cumulative, preferred stock callable

at $105, $900,000 of $10 par value common stock and $500,000 of Retained Earnings Sage’s net income for 2005 was $100,000

In a separate transaction on January 1, 2005, Pamplin purchased 70% of Sage’s preferred stock for $600,000 At the end of

2005, the amount of Pamplin’s income from Sage (excluding dividends from preferred stock) and the balance in its Additional Paid-in Capital account, respectively, are

7 Pan Corporation has total stockholders’ equity of $5,000,000

consisting of $1,000,000 of $10 par value Common Stock,

$1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings Pan owns 80% of Sailor Corporation’s common stock purchased at book value Sailor has $900,000 of 10% cumulative preferred stock outstanding Pan acquired 60% of the preferred stock of Sailor for $500,000 After this transaction the balances in Pan’s Retained Earnings and Additional Paid-in Capital accounts, respectively, are

LO1

8 If a company’s preferred stock is cumulative with a call

provision and has dividends in arrears, the amount of total preferred stockholders’ equity would be calculated as the number of shares outstanding times the

a sum of the par value per share plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared

b sum of the par value per share, plus any liquidation premium per share, plus the sum of any preferred dividends

in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared

c call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared

d call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared

LO1

9 When a parent acquires the preferred stock of a subsidiary,

there will be a constructive retirement that eliminates the equity related to the preferred stock held by the parent and

a any difference paid above the par value first reduces additional paid-in capital and then retained earnings

b any difference paid above the par value first reduces retained earnings and then additional paid-in capital

c any difference paid above the par value increases

additional paid-in capital

d any difference paid above the par value increases retained earnings

LO1

10 When a parent acquires subsidiary preferred stock, no

subsequent working paper entry is necessary to adjust additional paid-in capital under which of the following methods?

I The constructive retirement method

II The cost method

a I only

b II only

LO2

11 In a company with minority interest equity, how is the

preferred stock call premium addressed?

a It is recorded as an increase in additional paid-in capital

b It is recorded as a decrease in additional paid-in capital

c It is recorded as an increase in retained earnings

d It is recorded as a decrease in retained earnings

LO2

12 If a parent company has controlling interest in a subsidiary

which has no potentially dilutive securities, then in the calculation of consolidated EPS, it will be necessary to

a only make an adjustment of subsidiary’s basic earnings

b replace the parent’s equity in subsidiary earnings with the parent’s equity in subsidiary’s diluted EPS

c make a replacement calculation in the parent's basicearnings for the EPS

d only use the parent's common shares and common share equivalents

LO2

13 A subsidiary has some outstanding options that permit holders

to purchase the company’s common stock How will the options affect consolidated EPS?

a If the exercise price per share is greater than average market price then the basic consolidated EPS will be decreased

b If the exercise price per share is greater than average market price then the basic consolidated EPS will be increased

c If the exercise price per share is greater than average market price then the diluted consolidated EPS will be increased

d If the exercise price per share is greater than average market price then the diluted consolidated EPS will be decreased

LO2

14 Parnaby has 25,000 common stock shares outstanding and its

100%-owned subsidiary Sandal has 5,000 common stock shares outstanding The separate income for Parnaby and Sandal is

$150,000 and $75,000 respectively EPS for the consolidated company is

15 In computing the diluted EPS of the parent, any replacement

computation of subsidiary income may be affected by

a the constructive gain from purchase of parent bonds

b the constructive loss from purchase of parent bonds

c the current amortization from investment in the subsidiary

d the parent’s equity in subsidiary realized income

LO2

16 An 80%-owned subsidiary has outstanding bonds payable that are

convertible into the subsidiary’s common stock No bonds are held by the parent corporation In calculating the subsidiary’s diluted EPS, the amount of bond interest expense that will be added back to the subsidiary’s income to the common stockholders will be

a the face amount of the convertible bonds times the bond coupon rate times the subsidiary’s marginal tax rate

b the face amount of the convertible bonds times the

effective rate of interest on the bonds times the subsidiary’s marginal tax rate

c the face amount of the convertible bonds times the bond coupon rate times (100% minus the subsidiary’s marginal tax rate)

d the face amount of the convertible bonds times the

effective rate of interest on the bonds times (100% minus the subsidiary’s marginal tax rate)

LO2

17 When a subsidiary has outstanding options to purchase common

stock, the number of shares added to the denominator of the subsidiary’s EPS calculation is equal to the number of

c shares into which the options can be converted

d shares into which the options can be converted minus the number of shares purchased at the exercise price that are assumed to be purchased from the money received from the option shares

LO2

18 When a subsidiary has preferred stock that is convertible into

common stock, the parent’s equity in the subsidiary’s diluted earnings is calculated by the number of

a subsidiary shares into which the subsidiary’s dilutive securities can be converted times the subsidiary’s basic EPS figure

b parent shares into which the subsidiary’s dilutive

securities can be converted times the parent’s basic EPS figure

c subsidiary shares held by the parent times the subsidiary’s diluted EPS figure

d parent shares into which the subsidiary’s dilutive

securities can be converted times the subsidiary’s basic EPS figure

LO3

19 Palm owns a 70% interest in Sable, a domestic subsidiary Palm

will pay taxes on

a none of the dividends it receives from Sable

b 20% of the dividends it receives from Sable

c 66% of the dividends it receives from Sable

d 80% of the dividends it receives from Sable

LO3

20 Palmer Company owns a 25% interest in Sad, Incorporated, a

domestic company Sad had income of $60,000 and paid dividends

of $20,000 Palmer’s tax rate is 35% For simplicity, assume that Sad’s undistributed earnings are Palmer’s only temporary timing difference Which of the following statements is correct?

d Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred income taxes of $1,050

LO3

21 Palmquist Corporation and its 80%-owned subsidiary, Sadler

Corporation, are members of an affiliated group Sadler had

$3,000,000 of income and paid $1,000,000 dividends in 19X6 Palmquist and Sadler had 35% income tax rates Palmquist’s provision for income taxes on Sadler’s undistributed earnings was

22 Palomba Corporation allocates income tax expense to its

90%-owned subsidiary using the percentage allocation method Under this method, consolidated income tax expense will be allocated

a on the basis of the tax provisions recorded by both companies

b on the basis of the subsidiary’s pretax income included in consolidated pretax income

c on the basis of the income taxes remitted to the IRS

d 90% to the subsidiary

LO3

23 Which statement best describes the effect of an inter-company

transaction on income tax expense when corporate affiliates file separate tax returns, but prepare consolidated financial statements?

a The selling entity excludes the unrealized gain on its separate return and the unrealized gain is eliminated on the consolidated financial statements

b The selling entity includes the unrealized gain on its separate return and the unrealized gain is included on the consolidated financial statements as part of consolidated net income

c The selling entity includes the unrealized gain on its separate return and the unrealized gain is eliminated on the consolidated financial statements

d The selling entity excludes the unrealized gain on its separate return and the unrealized gain is included on the consolidated financial statements

Use the following information for questions 24 and 25

Paltridge Company owns 60% of Saga Corporation At the beginning of the current year no timing differences exist Saga has $50,000 of net income on its separate return, all of which is subject to tax Paltridge sells a machine to Saga for $30,000 that has a net book value of $10,000 and a 4-year remaining useful life Saga has a 40% dividend payout ratio, and the marginal tax rate for both companies

25 The amount of income taxes that Paltridge will have to provide

for the undistributed earnings of Saga will be calculated as

a 35% x $50,000 x 60% x 20%

b 35% x $50,000 x 60% x 30%

c 35% x $30,000 x 60% x 20%

d 35% x $30,000 x 60% x 30%

10% cumulative preferred stock, $100 par value,

callable at $105, with one year dividends in arrears $ 10,000

Total stockholders’ equity $ 370,000

On January 1, 2005, Panata Corporation paid $300,000 for a 70% interest in Saito’s underlying equity

8% cumulative preferred stock, $100 par value,

callable at $109, with two years of dividends

Total stockholders’ equity $ 1,450,000

On January 1, 2005, Park Corporation purchased a 70% interest in Samford’s common stock for $850,000 On this date the book values of Park’s assets and liabilities are equal to their fair values

Required:

Compute the amount of basic and diluted earnings per share for

Pancino and Sakal Corporations

LO2

Exercise 4

Parker Corporation owns an 80% interest in Sample Corporation Throughout 2005, Sample had 10,000 shares of common stock outstanding and Parker had 100,000 shares of common stock outstanding Sample’s only dilutive security consists of $50,000 face amount of 8% bonds payable Each bond is convertible into 20 shares of Sample stock Parker and Sample’s separate incomes for the year are $100,000 and

$75,000, respectively

Required:

Compute the amount of basic and diluted earnings per share for

Parker and Sample Corporations

LO3

Exercise 5

Pane Corporation owns 100% of Alder Corporation, 85% of Ball Corporation, 70% of Cake Corporation, 40% of Dash Corporation, and 10% of Eager Corporation All of these corporations are domestic corporations Pane's marginal income tax rate is 35% During 2008, Pane Corporation received the following cash dividends:

LO3

Exercise 6

Pretax operating incomes of Pang Corporation and its 70%-owned subsidiary, Sala Corporation, for the year 2005, are shown below Sala pays total dividends of $60,000 for the year There are no unamortized cost-book differentials relating to Pang’s investment in Sala During the year, Pang sold land to Sala for a gain of $35,000 and Sala holds this land at the end of the year The marginal corporate tax rate for both corporations is 34%

Pretax operating income (does not

include investment income) $ 263,000 $ 197,000

LO3

Exercise 7

Pretax operating incomes of Panitz Corporation and its 80%-owned subsidiary, Salazar Corporation, for the year 2005, are shown below Salazar pays total dividends of $65,000 for the year There are no unamortized cost-book differentials relating to Panitz’s investment

in Salazar During the year, Panitz sold land to Hamilton at a total loss of $15,000 which is included in its pretax operating income Salazar still holds this land at the end of the year Also included

in its pretax operating income are $40,000 of dividends received from Shaw Corporation of which Panitz owns 8% and $50,000 of dividends from Sunny Corporation of which Salazar owns 6% The marginal corporate tax rate for both corporations is 34%

Panitz Salazar Sales revenue $ 890,000 $ 700,000 Loss on sale of land ( 15,000 )

Dividend income from Shaw and

Other expenses ( 350,000 ) ( 350,000 )Depreciation expense ( 50,000 ) ( 35,000 )Pretax operating income (does not

include Salazar investment income) $ 165,000 $ 65,000

LO3

Exercise 8

On January 1, 2005, Panos Corporation acquired all of the outstanding

voting common stock of Saley Corporation in an acquisition The

total purchase price for the stock was $1,300,000 Saley’s net assets

on this date were as follows:

Book Values

Saley’s

Fair Values

Assume that for federal income tax purposes, the book values of

Saley’s assets and liabilities will be carried over for tax purposes

but that the fair values will be recorded for GAAP purposes The

remaining useful life for the building is 20 years and goodwill will

be amortized over the 15-year time period allowed for tax purposes

All depreciation and amortization is done on the straight-line basis

and the federal tax rate is 34% Half of the inventory to which the

excess of cost over book value applies is sold in 2005 Ignore any

tax effect on Saley’s undistributed earnings

Required:

1 Calculate the amount of deferred income taxes that result from

the acquisition transaction that are attributable to the net

assets being recorded at book values for tax purposes, but at

fair values for financial accounting purposes

2 Identify and calculate the dollar amount of any timing

differences that accrue or reverse by the end of the first year

after the acquisition