(Multiple Choice)
1. In a father-son-grandson business combination, which of the following is true?
a. The father company always must have its realized income computed first.
b. The computation of a company’s realized income has no effect on the realized income of other companies within a business combination.
c. A father-son-grandson 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 realized income computed first within the consolidation process.

2. A subsidiary owns shares of its parent company. Which of the following is true concerning the 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 stockholders’ 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 process.

3. On January 1, a subsidiary buys 10 percent of the outstanding shares of its parent company. Although the total book value and fair value of the parent’s net assets were $4 million, the price paid for these shares was $420,000. An intangible asset is amortized in this business combination over a 40-year period.
During the year, the parent reported $510,000 of operational income (no investment income was included) and paid dividends of $140,000. How are these shares reported at December 31?
a. The investment is recorded as $457,000 and then eliminated for consolidation purposes.
b. Consolidated stockholders’ equity is reduced by $457,000.
c. The investment is recorded as $456,500 and then eliminated for consolidation purposes.
d. Consolidated stockholders’ equity is reduced by $420,000.

4. 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 percent of the other company’s voting stock.
b. One company must hold at least 65 percent of the other company’s voting stock.
c. One company must hold at least 80 percent of the other company’s voting stock.
d. They cannot file one unless one company owns 100 percent of the other’s voting stock.

5. How does the amortization of tax-deductible goodwill affect the computation of a parent company’s income taxes?
a. It is a deductible expense only if the parent owns at least 80 percent of subsidiary’s voting stock.
b. It is deductible only as impairments are recognized.
c. It is a deductible item over a 15-year period.
d. It is deductible only if a consolidated tax return is filed.

6. Which of the following is not a reason for two companies to file separate tax returns?
a. The parent owns 68 percent of the subsidiary.
b. They have no intra-entity transactions.
c. Intra-entity dividends are tax free only on separate returns.
d. Neither company historically has had an operating tax loss.

7. What would be the answer to problem 11 if a consolidated tax return were filed?
a. –0–.
b. $300.
c. $1,500.
d. $7,500.