ADVANCED ACCOUNT CHAPTER 7 QUESTIONS WITH
ACCURATE ANSWERS
1. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned
35% of Tayle.
When Buckette prepared consolidated financial statements, it should include
A. Shuvelle but not Tayle.
B. Tayle but not Shuvelle.
C. either Shuvelle or Tayle.
D. Shuvelle and Tayle.
E. neither Shuvelle nor Tayle. - CORRECT ANSWER✅✅✅D
2. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned
35% of Tayle.
What is this pattern of ownership called?
A. pyramid ownership.
B. a connecting affiliation.
C. mutual ownership.
D. an indirect affiliation.
E. an affiliated group. - CORRECT ANSWER✅✅✅B
,3. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned
35% of Tayle.
What percentage of Tayle's income is attributed to Buckette's ownership interest?
A. 100%.
B. 75%.
C. 61%.
D. 40%.
E. 74%. - CORRECT ANSWER✅✅✅C
40% + 21% [60% × 35%] = 61%
4. D Corp. had investments, direct and indirect, in several subsidiaries:
• E Co. is a domestic firm in which D Corp. owned a 90% interest
• F Co. is a domestic firm in which D Corp. owned 60% and E Co. owned 30%
• G Co. is a domestic firm wholly owned by E Co.
• H Co. is a foreign subsidiary in which D Corp. owned a 90% interest
• I Co. is a domestic firm in which D Corp. owned 50% and G Co. owned 25%
Which of these subsidiaries may be included in a consolidated income tax return?
A. E, F, G, H, and I.
B. E, G, H, and I.
C. E and F.
D. E, F, G, and H.
,E. E, F, and G. - CORRECT ANSWER✅✅✅E
5. 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
A. mutual ownership.
B. direct control.
C. indirect control.
D. an affiliated group.
E. a connecting affiliation. - CORRECT ANSWER✅✅✅A
6. In a tax-free business combination,
A. the income tax basis for acquired assets and liabilities is adjusted to current fair value.
B. any goodwill created by the combination may be amortized in calculating taxable income.
C. the subsidiary's assets and liabilities are assigned an income tax basis of zero dollars, so that
they will have no future income tax consequences.
D. any goodwill created by the combination must be deducted in total in calculating taxable
income.
E. the subsidiary's cost basis for assets are retained for income tax calculations. - CORRECT
ANSWER✅✅✅E
, 7. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass
Co. West and East both used the initial value method to account for their investments. The
following information was available from the financial statements and records of the three
companies:
Operating income included unrealized intra-entity gains (which are related to inventory transfers)
but did not include dividend income from investment in subsidiary.
The accrual-based income of East Co. is calculated to be
A. $385,700.
B. $581,000.
C. $557,000.
D. $551,000.
E. $707,000. - CORRECT ANSWER✅✅✅D
East Income $600,000
[Compass Income ($120,000) - Excess Amort ($20,000) - Unrealized I/E Gains ($15,000)] ×
60% = East's Share of Compass Income ($51,000)
Excess Amort of West ($30,000) - Unrealized I/E Gains ($70,000) = $100,000
$600,000 + $51,000 - $100,000 = $551,000
8. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass
Co. West and East both used the initial value method to account for their investments. The
following information was available from the financial statements and records of the three
companies:
Operating income included unrealized intra-entity gains (which are related to inventory transfers)
but did not include dividend income from investment in subsidiary.
The accrual-based income of West Corp. is calculated to be
ACCURATE ANSWERS
1. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned
35% of Tayle.
When Buckette prepared consolidated financial statements, it should include
A. Shuvelle but not Tayle.
B. Tayle but not Shuvelle.
C. either Shuvelle or Tayle.
D. Shuvelle and Tayle.
E. neither Shuvelle nor Tayle. - CORRECT ANSWER✅✅✅D
2. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned
35% of Tayle.
What is this pattern of ownership called?
A. pyramid ownership.
B. a connecting affiliation.
C. mutual ownership.
D. an indirect affiliation.
E. an affiliated group. - CORRECT ANSWER✅✅✅B
,3. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned
35% of Tayle.
What percentage of Tayle's income is attributed to Buckette's ownership interest?
A. 100%.
B. 75%.
C. 61%.
D. 40%.
E. 74%. - CORRECT ANSWER✅✅✅C
40% + 21% [60% × 35%] = 61%
4. D Corp. had investments, direct and indirect, in several subsidiaries:
• E Co. is a domestic firm in which D Corp. owned a 90% interest
• F Co. is a domestic firm in which D Corp. owned 60% and E Co. owned 30%
• G Co. is a domestic firm wholly owned by E Co.
• H Co. is a foreign subsidiary in which D Corp. owned a 90% interest
• I Co. is a domestic firm in which D Corp. owned 50% and G Co. owned 25%
Which of these subsidiaries may be included in a consolidated income tax return?
A. E, F, G, H, and I.
B. E, G, H, and I.
C. E and F.
D. E, F, G, and H.
,E. E, F, and G. - CORRECT ANSWER✅✅✅E
5. 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
A. mutual ownership.
B. direct control.
C. indirect control.
D. an affiliated group.
E. a connecting affiliation. - CORRECT ANSWER✅✅✅A
6. In a tax-free business combination,
A. the income tax basis for acquired assets and liabilities is adjusted to current fair value.
B. any goodwill created by the combination may be amortized in calculating taxable income.
C. the subsidiary's assets and liabilities are assigned an income tax basis of zero dollars, so that
they will have no future income tax consequences.
D. any goodwill created by the combination must be deducted in total in calculating taxable
income.
E. the subsidiary's cost basis for assets are retained for income tax calculations. - CORRECT
ANSWER✅✅✅E
, 7. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass
Co. West and East both used the initial value method to account for their investments. The
following information was available from the financial statements and records of the three
companies:
Operating income included unrealized intra-entity gains (which are related to inventory transfers)
but did not include dividend income from investment in subsidiary.
The accrual-based income of East Co. is calculated to be
A. $385,700.
B. $581,000.
C. $557,000.
D. $551,000.
E. $707,000. - CORRECT ANSWER✅✅✅D
East Income $600,000
[Compass Income ($120,000) - Excess Amort ($20,000) - Unrealized I/E Gains ($15,000)] ×
60% = East's Share of Compass Income ($51,000)
Excess Amort of West ($30,000) - Unrealized I/E Gains ($70,000) = $100,000
$600,000 + $51,000 - $100,000 = $551,000
8. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass
Co. West and East both used the initial value method to account for their investments. The
following information was available from the financial statements and records of the three
companies:
Operating income included unrealized intra-entity gains (which are related to inventory transfers)
but did not include dividend income from investment in subsidiary.
The accrual-based income of West Corp. is calculated to be
