Parent and Subsidiary Corporations Have Filed Calendar-Year Consolidated Tax Returns

question 16

Multiple Choice

Parent and Subsidiary Corporations have filed calendar-year consolidated tax returns for several years. Parent Corporation uses the cash method of accounting while Subsidiary Corporation uses the accrual method of accounting. If Parent lends Subsidiary money

• A)the interest expense is deductible when accrued.
• B)the interest expense and interest income may be reported in different consolidated return years.
• C)the interest income is reported when the interest expense is accrued by Subsidiary.
• D)the interest expense deduction is taken when Parent reports the interest income.

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Definitions:

Investment Turnover

A measure of a company's efficiency in using its investments to generate sales, usually calculated as sales divided by average invested assets.

Return On Investment

A measure used to evaluate the efficiency or profitability of an investment, calculated by dividing net profit by the cost of the investment.

Sales To Invested Assets

A financial ratio that measures how efficiently a company uses its invested assets to generate sales.

Residual Income

The amount of net income generated beyond the minimum rate of return or benchmarks set by a business or investor.