Professional Documents
Culture Documents
ANSWERS TO PROBLEMS
1. D
2. B
3. D
4. C
5. C
6. C
7. A Damson's accrual-based income:
Operating income .......................................................................
Defer unrealized gain .................................................................
Damson's accrual-based income ........................................
$200,000
(40,000)
$160,000
$200,000
144,000
$344,000
$300,000
275,200
$575,200
$280,000
(50,000)
$230,000
20%
$46,000
$315,000
(19,000)
184,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
$480,000
20%
$96,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
$50,000
14,000
$64,000
15%
$9,600
$120,000
24,000
$96,000
(76,800)
$19,200
30%
$5,760
$30,000
20%
$6,000
25%
$1,500
12. A Recognition of this gross profit is not required on a consolidated tax return.
13. C Because fair value of the subsidiary's assets exceeds the tax basis by
$100,000, a deferred tax liability of $30,000 (30%) must be recorded. Goodwill
is then computed as follows:
Consideration transferred ........................................
Fair value .................................................................
Deferred tax liability ...................................................
Goodwill ......................................................................
$420,000
$400,000
(30,000)
370,000
$50,000
$288,000
72,000
360,000
(300,000)
$60,000
30 years
$2,000
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14. (continued)
Consideration transferred for Cedar (by Birch) ...........
Noncontrolling interest fair value ..................................
Cedars business fair value ............................................
Book value
.................................................................
Excess to trade name.......................................................
Life ....................................................................................
Annual amortization ........................................................
$104,000
26,000
$130,000
(100,000)
$30,000
30 years
$1,000
Investment in Birch
Birch's reported income-2011
$40,000
Amortization expense
(2,000)
Accrual-based income
$38,000
Aspens percentage ownership
80%
Equity accrual-2011
Dividends received 2011
Birch's reported income-2012
$60,000
Amortization expense
(2,000)
Income from Cedar [80% x ($10,000 - $1,000)] 7,200
Accrual-based income
$65,200
Aspens percentage ownership
80%
Equity accrual-2012
Dividends received from Birch 2012
Investment in Birch 12-31-12
$288,000
$30,400
(8,000)
$52,160
(16,000)
$346,560
Note: Dividends paid by Cedar to Birch do not affect Aspens Investment account.
$1,298,000
(1,025,000)
(3,000)
$ 270,000
$5,800
$17,240
$23,040
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14. (continued)
b. 2012 Realized income of Birch (prior to accounting
for unrealized gross profit) (see a)
2011 Transfer-gross profit recognized in 2012
2012 Transfer-gross profit to be recognized in 2013
2012 Realized income - Birch
$65,200
10,000
(16,000)
$59,200
$86,200
16,000
(25,000)
$77,200
$500,000
125,000
$625,000
600,000
$25,000
10 years
$2,500
$50,000
(2,500)
47,500
80%
$38,000
b. To the outside owners, the $6,000 intra-entity dividends ($20,000 30%) paid by
Uncle are viewed as income because the book value of Nephew is increasing.
Thus, the noncontrolling interest's share of income is computed as follows:
Nephews accrual-based income (above)
$47,500
Dividends paid by Uncle to Nephew
6,000
Nephews accrual-based income
$53,500
Noncontrolling interest percentage
20%
Noncontrolling interest share of Nephews income
$10,700
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$250,000
98,000
140,000
(22,500)
(8,000)
$457,500
$140,000
(8,000)
$132,000
45%
$59,400
$ 98,000
(22,500)
72,600
$148,100
20%
Reconciliation:
Mesas operating income
Mesas share of Buttes operating income (80% $98,000)
Mesas share of Valleys operating income (80% 55% $140,000)
Mesas share of Buttes excess amortization (80% $22,500)
Mesas share of Valleys excess amortization (80% 55% $8,000)
Controlling interest in consolidated net income
Noncontrolling interest in consolidated net income
Consolidated net income
$29,620
$89,020
$250,000
78,400
61,600
(18,000)
(3,520)
$368,480
89,020
$457,500
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
$60,000
(3,000)
$57,000
20%
$11,400
WISCONSIN:
Operating income (sales minus cost of goods sold and
expenses) ....................................................................
$110,000
Defer unrealized gross profit (above) ............................
(12,000)
Investment income (60% of Cleveland's realized income of
$57,000) ......................................................................
34,200
Realized incomeWisconsin ...................................
$132,200
Outside ownership ..........................................................
10%
Noncontrolling interest in Wisconsin's income ......
$13,220
TOTAL NONCONTROLLING INTERESTS IN SUBSIDIARIES INCOME: $24,620
($11,400 + $13,220)
CONSOLIDATION TOTALS
Sales = $1,590,000 (add the three book values and eliminate intra-entity
transfers of $40,000 and $100,000)
Cost of goods sold = $1,015,000 (add the three book values, eliminate intraentity transfers of $40,000 and $100,000, and defer [add] unrealized gains of
$3,000 and $12,000)
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
$126,000
30%
$37,800
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
19. (continued)
DOWN:
Reported income .............................................................
Tax rate ............................................................................
Currently payable to government .............................
$100,000
30%
$ 30,000
$500,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
11,200
$511,200
40%
$204,480
$90,000
40%
$36,000
$240,000
96,000
$144,000
80,000
$ 64,000
70%
$ 44,800
35,840
$ 8,960
40%
$ 3,584
36,000
172,064
3,584
204,480
96,000
96,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
21. (20 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns.)
a. Consolidated Return2013
Piranto income 2013 (sales less expenses) .......................................
Slinton income 2013 (sales less expenses) .......................................
2012 gain realized in 2013.....................................................................
2013 deferred gain..................................................................................
Taxable income ................................................................................
Tax rate ..................................................................................................
Income tax payablecurrent ..........................................................
$300,000
100,000
120,000
(150,000)
$370,000
40%
$148,000
$300,000
120,000
(150,000)
$270,000
40%
$108,000
The $12,000 difference between the expense and the payable is the tax effect on
the net unrealized gain ($30,000 40%).
Slinton will have an expense and payable of $40,000 ($100,000 40%).
Consolidated income tax expense is $148,000 ($108,000 + $40,000).
Consolidated income tax payable is $160,000 ($120,000 + $40,000).
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
22. (45 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns. Includes question on mutual ownership and the
conventional approach.)
a. Total income tax expense is $156,877. Because of the level of ownership,
separate returns must be filed. Unrealized gross profits are taxed immediately
as are intra-entity dividends. Because the unrealized gross profits are deferred
on the consolidated financial statements, Boxwood's expense would be $34,400
or 40% of $86,000 in realized income ($100,000 + $18,000 $32,000).
Lake's income subject to taxation includes its $300,000 in operating income
plus $30,960 in income accruing from its investment in Boxwood (60% of the
after-tax income of $51,600 [$86,000 $34,400]). Income tax expense for Lake is
computed as follows:
Operating income ............................................................
Equity income ..................................................................
Taxable portion ................................................................
Income eventually subject to taxation ..........................
Tax rate..............................................................................
Income tax expense Lake (rounded)..............................
Income tax expense Boxwood (above)..........................
Total income tax expense ...............................................
-ORLakes operating income..................................................
Dividends received net of 80% deduction
($10,000 x 60% x 20%)....................................................
Taxable income.................................................................
Tax rate
Lakes income tax payable.........................................
Boxwoods income before income tax...........................
Less: income tax (40%)....................................................
Boxwoods net income.....................................................
Less: dividends paid........................................................
Undistributed income.......................................................
Lakes ownership percentage.........................................
Lakes share of undistributed income............................
Less: dividends-received deduction (80%)....................
Income eventually taxable to Lake.................................
Tax rate..............................................................................
Lakes deferred tax liability (rounded)......................
Income tax expense Lake...........................................
Income tax expense Boxwood (above).....................
Total income tax expense ...............................................
$300,000
$30,960
20%
6,192
$306,192
40%
$122,477
34,400
$156,877
$300,000
1,200
$301,200
40%
$120,480
$ 86,000
34,400
$ 51,600
10,000
$ 41,600
60%
$ 24,960
19,998
$ 4,992
40%
$ 1,997
$122,477
34,400
$156,877
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22. (continued)
Entry on Lakes books:
Income Tax Expense
Deferred Tax Liability
Tax Payable
Entry on Boxwoods books:
Income Tax Expense
Deferred Tax Asset
Tax Payable
122,477
1,997
120,480
34,400
5,600
40,000
b. Boxwood will pay $40,000 ($100,000 40%) because separate returns are filed.
Lake, however, will pay its taxes based on dividends received rather than on the
equity accrual. A deferred income tax liability would be established for the
difference. Lake's payment for the current year is computed as follows:
Operating income.............................................................
Dividend income (60% $10,000) ..................................
$6,000
Taxable portion (net of 80% dividends received deduction)
20%
Income currently taxable ................................................
Tax rate ............................................................................
Income tax payableLake ..............................................
Income tax payableBoxwood (above) .......................
Total income tax payable current ..................................
$300,000
1,200
$301,200
40%
$120,480
40,000
$160,480
The $3,603 difference between the expense in a. and the payable in b. is created
by the following two effects:
Deferred income tax liability on equity income accrual not yet taxed
($30,960 $6,000) or $24,960 20% 40%.................................
Deferred income tax asset on net unrealized gross profit
($32,000 $18,000) or $14,000 40%...........................................
Net decrease in expense.....................................................................
$1,997
5,600
$3,603
c. Because a consolidated tax return is filed, unrealized gross profits are deferred
as for external reporting purposes. Dividend income is not taxable.
Lake's operating income .................................................
$300,000
Boxwood's operating income ........................................
$100,000
Prior year unrealized gross profit ..................................
18,000
Current year unrealized gross profit .............................
(32,000)
86,000
Income subject to taxation (and currently taxable)......
$386,000
Tax rate .............................................................................
40%
Income tax expense .........................................................
$154,400
23. (30 Minutes) (Computation of income tax expense and income tax payable on
consolidated and separate tax returns.)
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
$450,000
40%
$180,000
The affiliated group would be taxed on its operating income of $450,000 (the
$50,000 unrealized gain is deferred). Intra-entity income and dividends are not
relevant because a consolidated return is filed.
b. Total taxes to be paid are $200,000. Robertson would have to pay $80,000 or
40% of its $200,000 operating income. Garrison would pay $120,000 or 40% of
its $300,000 operating income. The unrealized gain is not deferred because
separate returns are being filed. Intra-entity dividends are not taxable because
the parties still qualify as an affiliated group even though separate returns are
being filed.
c. Robertson must report an income tax expense of $80,000 or 40% of its $200,000
operating income.
Garrison records its expense based on the revenue recognized during the
period. Thus, the expense is computed on an operating income of $250,000 (the
net unrealized gain is not recognized in this period) along with equity income
from Robertson of $84,000 (70% of that company's $120,000 after-tax income).
Garrison will record an income tax expense of $100,000 in connection with the
operating income ($250,000 40%) and $6,720 resulting from its equity income
($84,000 20% 40%). Total expense to be reported amounts to $186,720 for
Garrison and Robertson ($80,000 + $100,000 + $6,720).
d. Garrison will pay $120,000 in connection with its operating income ($300,000
40%) and $2,400 because of the dividends received from Robertson. Garrison
will receive $30,000 in dividends based on its 60% ownership. Of this total, only
$6,000 (20%) is taxable. Thus, at a 40% rate, the tax on the dividends would
amount to $2,400 ($6,000 40%). The total income taxes payable by Garrison is
$122,400 ($120,000 + $2,400).
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24. (10 Minutes) (Impact on goodwill of assets with a different tax vs. book value.)
The assets and liabilities of Kew (the subsidiary) will be consolidated at their
individual net fair values ($500,000). However, both the buildings and equipment
have a tax basis that is lower than fair value. Thus, for tax purposes, future
depreciation expense will be lower on the tax return so that taxable income will
exceed book income. The higher taxable income (anticipated in the future)
creates a deferred tax liability at the time the combination is created.
Buildings ..........................................
Equipment ........................................
Total temporary difference .......
Tax rate .......................................
Deferred tax liability ..................
Tax
Basis
$140,000
150,000
Fair
Value
$180,000
200,000
Temporary
Difference
$40,000
50,000
$90,000
30%
$27,000
$110,000
130,000
100,000
180,000
200,000
(220,000)
(27,000)
473,000
650,000
$177,000
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
25. (continued)
Entry S2
Common Stock (Wilson) .................................................
310,000
Retained Earnings, 1/1/13 (Wilson)
(adjusted by Entry *G) ................................................
578,000
Investment in Wilson (70%) .................................
621,600
Noncontrolling Interest in Wilson (30%) .............
266,400
(To eliminate Wilson's stockholders' equity against corresponding investment
balance and to recognize noncontrolling interest.)
Entry A
Buildings............................................................................
54,000
Franchise Contracts ........................................................
32,000
Goodwill.............................................................................
140,000
Equipment ...................................................................
10,000
Investment in Wilson ..................................................
151,200
Noncontrolling Interest in Wilson..............................
64,800
(To allocate excess payment made in connection with purchase of Wilson
shown above. Amortization for 2011 and 2012 has been taken into account in
determining the January 1, 2013 value for each account.)
Entry I1
Income of Cuddy ........................................................
56,000
Investment in Cuddy .............................................
56,000
(To eliminate intra-entity income accrued by both House and Wilson during
the year.)
Entry I2
Income of Wilson ........................................................
91,000
Investment in Wilson ............................................
91,000
(To eliminate intra-entity income accrued by House during the year.)
Entry D1
Investment in Cuddy .................................................
40,000
Dividends paid (80%) (Cuddy) .............................
(To eliminate effects of intra-entity dividend payments.)
Entry D2
Investment in Wilson .................................................
67,200
Dividends paid (70%) (Wilson) ............................
(To eliminate effects of intra-entity dividend payments.)
40,000
67,200
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
25. (continued)
Entry E
Operating Expenses ..................................................
2,000
Equipment .................................................................
5,000
Franchise Contracts .............................................
4,000
Buildings.................................................................
3,000
(To record 2013 amortization on excess payment made in connection with
acquisition of Wilson Company.)
Entry TI
Sales and Other Revenues ........................................
200,000
Cost of Goods Sold...............................................
(To eliminate intra-entity inventory sales for the current year.)
Entry G
Cost of Goods Sold.....................................................
Inventory.................................................................
(To defer unrealized gross profit in ending inventory.)
200,000
18,000
18,000
$70,000
20%
$14,000
$130,000
28,000
(2,000)
12,000
(18,000)
$150,000
30%
$ 45,000
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25. (continued)
HOUSE CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidation Worksheet
December 31, 2013
Accounts
Sales and other revenue
Cost of goods sold
Operating expenses
Income of Wilson Company
Income of Cuddy Company
Net income
Consolidated net income
Noncontrolling interest in
Wilson net income
Noncontrolling interest in
Cuddy net income
To House Corporation
Retained earnings, 1/1/13:
House Corporation
Wilson Company
Cuddy Company
Net Income
Dividends paid
House Corporation
Wilson Company
Cuddy Company
Retained earnings, 12/31/13
House
Corp.
Wilson
Company
Cuddy
Company
Consolidation EntriesNoncontrollingConsolidated
Debit
Credit
Interest
Balance
(900,000)
(700,000)
551,000
300,000
219,000
(91,000)
(28,000)
(249,000)
270,000
90,000 (E)
2,000
(I2) 91,000
(I1) 56,000
(70,000)
(28,000)
(158,000)
(1,700,000)
(*G) 12,000
(TI) 200,000
797,000
581,000
-0-0(322,000)
(820,000)
(590,000)
(249,000)
(158,000)
(45,000)
45,000
(14,000)
14,000
(263,000)
(*C) 11,200
(*G) 12,000
(S2)578,000
(150,000) (S1)150,000
(70,000)
(808,800)
-0-0(263,000)
100,000
96,000
(969,000)
(652,000)
50,000
(170,000)
(D2) 67,200
(D1) 40,000
28,800
10,000
100,000
-0-0(971,800)
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duplicated, forwarded, distributed, or posted on a website, in whole or part.
25. (continued)
Accounts
House
Corp.
Wilson
Company
Cuddy
Company
Consolidation EntriesNoncontrollingConsolidated
Debit
Credit
Interest
Balance
220,000
390,200
807,800
334,000
320,000
128,000
128,000
(D1) 40,000
Buildings
Equipment
Land
Goodwill
Franchise Contracts
Total assets
385,000
310,000
180,000
320,000
130,000
300,000
2,421,000
1,532,000
Liabilities
Noncontrolling interest in Cuddy
Noncontrolling interest in Wilson
Noncontrolling interest in
subsidiary companies
Common stock
Retained earnings (above)
Total liabilities and equities
(632,000)
67,000
103,000
(D2) 67,200
(570,000)
(G)
(*C)
(S2)
(I2)
(A)
(S1)
(I1)
(E)
(A)
(E)
(310,000)
(969,000)
(2,421,000)
(652,000)
(1,532,000)
-0900,000
523,000
496,000
140,000
28,000
3,503,200
4,000
(98,000)
(1,300,000)
(S1) 60,000
(S2) 266,400
(A) 64,800
(820,000)
621,000
795,200
-0-
18,000
11,200
621,600
91,000
151,200
240,000
56,000
3,000
10,000
(60,000)
(331,200)
411,400
(411,400)
(820,000)
(971,800)
1,916,400
(3,503,200)
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duplicated, forwarded, distributed, or posted on a website, in whole or part.
26. (20 Minutes) (Consolidation entries for a mutual holding business combination)
a. Acquisition Allocation and Amortization
Consideration transferred .............................................
Noncontrolling interest fair value ..................................
Lowlys business fair value.............................................
Book value acquired.........................................................
Trademarks........................................................................
Annual amortization (20-year life)...................................
$420,000
280,000
700,000
(600,000)
$100,000
$ 5,000
CONSOLIDATION ENTRIES
Entry *C
Investment in Lowly ...................................................
117,000
Retained Earnings, 1/1/13 (Mighty) .....................
117,000
(To accrue income to parent during the previous years as measured by
increase in book value [$200,000 60%] and amortization expense of $3,000
[$5,000 60%] for the previous year.)
Entry S1
Common Stock (Lowly) .............................................
300,000
Retained Earnings, 1/1/13 (Lowly) ............................
500,000
Investment in Lowly (60%) ...................................
480,000
Noncontrolling Interest in Lowly 1/1/13 (40%) ...
320,000
(To eliminate subsidiary stockholders' equity accounts against investment
account and to recognize noncontrolling interest ownership.)
Entry S2
Treasury Stock ............................................................
240,000
Investment in Mighty ............................................
(To reclassify cost of parent shares as treasury stock.)
240,000
Entry A
Trademarks .................................................................
95,000
Investment in Lowly ..............................................
57,000
Noncontrolling Interest in Lowly 1/1/13 (40%) ...
38,000
(To recognize unamortized portion of acquisition-date excess fair value.)
Entry E
Amortization Expense ................................................
Trademarks ............................................................
(To record trademarks amortization expense for 2013.)
5,000
5,000
$344,000
86,000
$430,000
(380,000)
$ 50,000
10 Years
$ 5,000
$720,000
80,000
$800,000
740,000
$ 60,000
15 Years
$ 4,000
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/13 (Stookey) ........................
7,680
Cost of Goods Sold...............................................
7,680
(To give effect to unrealized gross profit from 2012. Amount is calculated
based on normal 48% markup [found from Income Statement] multiplied by
$16,000 retained inventory [20% of $80,000])
Entry *C1
Investment in Stookey ...............................................
85,856
Retained Earnings, 1/1/13 (Yarrow) .....................
85,856
(To recognize equity income accruing from Yarrow's investment in Stookey
during 2012. Because the initial value method is applied and no dividends
paid, no income has been recognized in connection with the 2012 ownership
of Stookey. Reported income of $120,000 [2012] less unrealized gain of
$7,680 deferred above indicates income of $112,320. Based on 80%
ownership, an $89,856 accrual is needed, which is reduced by the $4,000
amortization (80% $5,000) for that year.
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
27.(continued)
Entry *C2
Investment in Yarrow ..................................................
217,670
Retained Earnings, 1/1/13 (Travers) ....................
217,670
(To recognize equity income accruing from Travers' investment in Yarrow
during 2012. Because the initial method is applied and no dividends paid,
income has not been recognized in connection with the 2012 ownership of
Yarrow. Income of $245,856 is calculated based on reported income of
$160,000 [2012] plus the $85,856 accrual recognized in Entry *C1. Ownership
of 90% dictates a $221,270 accrual that is then reduced to $217,670 by the
$3,600 [90% $4,000] amortization applicable to 2012.)
Entry S1
Common Stock (Stookey) .........................................
200,000
Retained Earnings, 1/1/13 (Stookey, as adjusted
by Entry *G) ...........................................................
292,320
Investment in Stookey (80%) ..........................
393,856
Noncontrolling Interest in Stookey (20%) .....
98,464
(To eliminate stockholders' equity accounts of subsidiary [Stookey] against
corresponding balance in investment account and to recognize
noncontrolling interest ownership.)
Entry S2
Common Stock (Yarrow) ............................................
300,000
Retained Earnings, 1/1/13 (Yarrow, as adjusted
by Entry *C1) ..........................................................
685,856
Investment in Yarrow (90%) ............................
887,270
Noncontrolling Interest in Yarrow (10%) .......
98,586
(To eliminate stockholders equity accounts of subsidiary Yarrow against
corresponding balance in investment account and to recognize
noncontrolling interest ownership.)
Entry A1
Copyright......................................................................
Investment in Stookey ..........................................
Noncontrolling Interest in Stookey (20%) ..........
45,000
36,000
9,000
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
27. (continued)
Entry A2
Customer List ..............................................................
56,000
Investment in Yarrow ............................................
50,400
Noncontrolling Interest in Yarrow........................
5,600
(To recognize January 1, 2013 unamortized portion of acquisition price
assigned to copyright.)
Entry E
Operating Expenses ...................................................
9,000
Customer List.........................................................
4,000
Copyright................................................................
5,000
(To recognize amortization expense for 2013$4,000 in connection with
Travers' investment and $5,000 in connection with Yarrow's investment.)
Entry Tl
Sales ............................................................................
100,000
Cost of Goods Sold...............................................
(To eliminate intra-entity inventory transfers made during 2013.)
100,000
Entry G
Cost of Goods Sold.....................................................
9,600
Inventory (current assets) ....................................
9,600
(To defer unrealized gross profit on ending inventory$20,000 48%
markup.)
Noncontrolling Interest in Stookey's Net Income
2013 Reported net income ..............................................
Copyright amortization ...................................................
Realization of 2012 deferred gross profit (*G) ..............
Deferral of 2013 unrealized gross profit (G) .................
Realized income 2013 .....................................................
Outside ownership ..........................................................
Noncontrolling interest in Stookey's net income .........
Noncontrolling Interest in Yarrow's Net Income
2013 Reported net income ..............................................
Customer list amortization .............................................
Accrual of Stookey's income (80% of $93,080
realized income [computed above]) .........................
Realized income2013 ...................................................
Outside ownership ..........................................................
Noncontrolling interest in Yarrow's net income ...........
$100,000
(5,000)
7,680
(9,600)
$93,080
20%
$18,616
$200,000
(4,000)
74,464
$270,464
10%
$ 27,046
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
.
27. (continued)
Accounts
(900,000)
480,000
(600,000)
320,000
(500,000)
260,000
(Tl)
(G)
100,000
9,600
Operating expenses
Separate company net income
Consolidated net income
NCI in Yarrow's net income
NCI in Stookey's net income
To controlling interest
Retained earnings, 1/1/13:
Travers Company
Yarrow Company
Stookey Company
100,000
(320,000)
80,000
(200,000)
140,000
(100,000)
(E)
9,000
(320,000)
128,000
(892,000)
(200,000)
444,000
720,000
380,000
Current assets
Investment in Yarrow Company
(700,000)
(600,000)
(300,000)
329,000
(800,000)
2,113,000
(*C2) 217,670
836,000
1,560,000
(*C1)
(917,670)
-0-0-
85,856
(G)
(S2)
(A2)
(S1)
(A1)
9,600
887,270
50,400
393,856
36,000
1,094,400
-0-0-
520,000
(A2)
800,000
(460,000)
(300,000)
(200,000)
(200,000)
(892,000)
(800,000)
(400,000)
(1,560,000)
(*C2) 217,670
(*C1) 85,856
(800,000)
(609,080)
27,046
18,616
(563,418)
(563,418)
128,000
(1,353,088)
280,000
(721,000)
(500,000)
(2,113,000)
685,856
7,680
292,320
(400,000)
344,000
949,000
(S2)
(*G)
(S1)
(100,000)
Liabilities
Common stock
(1,900,000)
961,920
7,680
100,000
(27,046)
(18,616)
(*G)
(TI)
(A1)
45,000
56,000
(E)
(E)
4,000
2,305,000
40,000
5,000
52,000
3,491,400
(1,381,000)
(S1)
(S2)
200,000
300,000
(S1)
(A1)
(S2)
(A2)
2,008,982
98,464
9,000
98,586
5,600
2,008,982
(500,000)
(1,353,088)
(107,464)
(104,186)
(257,312)
(257,312)
(3,491,400)
27.(continued)
b. Travers' reported income ......................................................................
Yarrow's reported income .....................................................................
Dividend income (none collected) .......................................................
Intra-entity gains (no transfers) ...........................................................
Amortization expense ...........................................................................
Taxable income ......................................................................................
Tax rate ...................................................................................................
Income tax payable ...............................................................................
$320,000
200,000
-0-0(9,000)
$511,000
45%
$229,950
$100,000
45%
$45,000
d. (1) Because Yarrow owns 80% of Stookey's stock, intra-entity dividends are
nontaxable. Thus, no temporary difference is created by Stookey's failure to
pay a dividend.
(2) Stookey's unrealized gains are recognized in one time period for financial
reporting purposes and in a different time period for tax purposes. This
temporary increases taxable income by $1,920 over reported income:
2013 Unrealized gross profit taxed in 2013.........................................
2012 Unrealized gross profit taxed previously in 2012......................
Increase in taxable income ...................................................................
Tax rate ...................................................................................................
Deterred income tax asset ....................................................................
$9,600
(7,680)
$1,920
45%
$ 864
$229,950
45,000
$274,950
(864)
$274,086
Because a single rate is used, income tax expense can also be computed by
taking consolidated net income (prior to noncontrolling interest reduction) of
$609,080 (part a.) and multiplying by the 45% tax rate to obtain $274,086.
Income tax expensecurrent .........................................
Deferred income taxasset ...........................................
Income tax payable ....................................................
274,086
864
274,950
28. (40 Minutes) (Series of questions about a business combination and its income
tax reporting)
a. Partial equity method. "Income of Soludan" is 80% of Soludan's reported total.
b. $12,000. Reduction is evidenced by a $338,000 figure reported for consolidated
inventory rather than the $350,000 total for the two companies.
c. $37,500. Consolidated operating expenses have increased by $2,500, evidently
the annual amortization. Because a 15-year life is assumed by the combination,
the amount originally allocated to trademarks must have been $37,500.
d. $120,000. Decrease shown in consolidated sales account.
e. Upstream. "Noncontrolling interest in Soludan Company's income" is $18,700.
Because this amount is not equal to 20% of Soludan's reported income less
excess amortization ($100,000 $2,500), realized income must have been
adjusted for unrealized gross profits. Subsidiary income is only adjusted to
show the effects of upstream transfers.
f. $20,000. For both receivables and liabilities, the consolidated total is $20,000
less than the sum of the two companies.
g. $8,000. Consolidated cost of goods sold is decreased by $120,000 (to $780,000)
in eliminating intra-entity sales. The increase of $12,000 created by the ending
unrealized gross profit (see part b.) would then leave a $792,000 balance.
Because $784,000 is the ending balance reported for consolidated cost of
goods sold, an $8,000 unrealized gross profit must have been deferred from the
previous year.
28. (continued)
h. Because the trademarks balance now stands at $32,500, amortization expense
of $2,500 has been recognized, $2,500 in the previous year. In addition, an
$8,000 unrealized gross profit from the prior year (see part g.) is recognized.
Amortization expenseprior year 80%.......................
Unrealized gross profitupstream effect on
parent's retained earnings is $8,000 80%..............
Adjustment to parents beginning retained earnings...
$2,000
6,400
$8,400
(8,000)
$79,400
18,700
(4,000)
$94,100
117,400
117,400
80,000
80,000
28. k. (continued)
On a separate return, Soludan would report $100,000 operating income for a
payable of $40,000. The unrealized gross profits are accounted for in different
time periods in the financial statements, thus, a temporary difference is created.
The beginning inventory gross profit of $8,000 was taxed in the previous year
rather than currently. The current unrealized gross profit of $12,000 is taxed
now rather than next year; the tax paid this year on the net $4,000 ($1,600) is a
prepayment.
Income Tax Expense .......................................................
Deferred Income Tax Asset..............................................
Income Tax Payable ...................................................
38,400
1,600
40,000
$100,000
8,000
(12,000)
$96,000
40%
$38,400
40,000
$ 1,600
29. (45 Minutes) Develop worksheet entries that were used to consolidate the
financial statements of a father-son-grandson combination.
Entry *G
Retained Earnings, 1/1/13 (Delta) .............................
15,000
Cost of Goods Sold...............................................
15,000
(To recognize gross profit that was unrealized in 2012 [amount provided].)
Entry *C1
Retained Earnings, 1/1/13 (Delta) .............................
7,000
Investment in Omega Company ..........................
7,000
(To recognize amortization expense from Deltas acquisition for 2012.)
29. (continued)
Entry *C2
Retained Earnings, 1/1/13 (Alpha) ............................
27,600
Investment in Delta Company ..............................
27,600
To recognize accrual adjustments for excess amortization
and inventory deferral as follows:
Excess amortization from Delta acquisition
(80% $6,250 2 years).........................................
$10,000
Deltas share of excess amortization from Omega acquisition
(80% [70% $10,000] 1 year)...........................
5,600
Inventory profit deferral at 1/1/13 (80% $15,000). .
12,000
*C2 adjustment............................................................
$27,600
Entry S1
Common Stock (Omega) ...........................................
100,000
Retained Earnings, 1/1/13 (Omega) ..........................
100,000
Investment in Omega (70%) .................................
140,000
Noncontrolling Interest in Omega (30%) ............
60,000
(To eliminate stockholders' equity accounts of Omega against parent's
Investment account and to recognize outside ownership.)
Entry S2
Common Stock (Delta) ...............................................
120,000
Retained Earnings, 1/1/13 (Delta, as adjusted) .......
378,000
Investment in Delta (80%) ....................................
398,400
Noncontrolling Interest in Delta (20%) ................
99,600
(To eliminate stockholders' equity accounts of Delta [as adjusted as Entry *G
and Entry *C1] against corresponding balance in Investment account and to
recognize outside ownership.)
Entry A
Copyrights ...................................................................
222,500
Investment in Delta ...............................................
90,000
Investment in Omega ............................................
77,000
Noncontrolling Interest in Delta...........................
22,500
Noncontrolling Interest in Omega........................
33,000
(To recognize January 1, 2013 unamortized copyrights, 2 years amortization
recorded on first investment but only one year for second.)
Entry I1
Income of Subsidiary .................................................
144,000
Investment in Delta ...............................................
144,000
(To eliminate intra-entity income accrual found on Alpha's records.)
29. (continued)
Entry I2
Income of Subsidiary .................................................
49,000
Investment in Omega ............................................
49,000
(To eliminate intra-entity income accrual found on Delta's records.)
Entry D1
Investment in Delta .....................................................
32,000
Dividends Paid (Delta) ..........................................
32,000
(To eliminate intra-entity dividend payments, 80% of Delta's payment.)
Entry D2
Investment in Omega .................................................
35,000
Dividends Paid (Omega) ......................................
35,000
(To eliminate intra-entity dividend payments, 70% of Omega's payment.)
Entry E
Operating Expenses ..................................................
16,250
Copyrights .............................................................
16,250
(Current year amortization, $6,250 on first acquisition and $10,000 on
second.)
Entry Tl
Sales ............................................................................
Cost of Goods Sold...............................................
(To eliminate intra-entity inventory transfer.)
200,000
200,000
Entry G
Cost of Goods Sold.....................................................
22,000
Inventory.................................................................
(To defer ending unrealized gross profit on intra-entity transfers.)
Noncontrolling Interest in Omega's Income:
Reported income .............................................................
Excess fair value amortization .......................................
Accrual-based income.....................................................
Outside ownership ..........................................................
Noncontrolling interest in Omegas income .................
22,000
$70,000
(10,000)
60,000
30%
$18,000
29. (continued)
Noncontrolling Interest in Delta's Income:
Reported operating income ............................................
Equity income investment in Omega (70% $60,000) .
Amortization expense .....................................................
2012 Unrealized income realized in 2013.......................
2013 Unrealized income realized in 2013 ......................
Accrual-based incomeDelta (2013) ............................
Outside ownership ..........................................................
Noncontrolling interest in Delta's income (2013) .........
Noncontrolling interest in Delta Company....................
Noncontrolling interest, 1/01/13 (Entry S2)..............
Noncontrolling interest, 1/01/13 (Entry A)................
Noncontrolling interest in Deltas income (above)..
Dividends paid to noncontrolling interest
($40,000 20%).........................................................
Noncontrolling interest in Delta, 12/31/13...........
Noncontrolling interest in Omega Company.................
Noncontrolling interest, 1/01/13 (Entry S1)..............
Noncontrolling interest in Omegas income (above)
Noncontrolling interest, 1/01/13 (Entry A)................
Dividends paid to noncontrolling interest ($50,000 30%)
Noncontrolling interest in Omega, 12/31/13.......
$131,000
42,000
(6,250)
15,000
(22,000)
$159,750
20%
$31,950
$99,600
22,500
31,950
(8,000)
$146,050
$60,000
18,000
33,000
(15,000)
$96,000
Summit
Treeline
Basecamp
Operating
income
$345,000
$280,000
$175,000
Ownership percentages
Summit-->Treeline
Treeline-->Basecamp
Dividends
paid
$150,000
$100,000
$40,000
Excess
amortizations
$20,000
$25,000
90%
70%
$175,000
(25,000)
$150,000
70%
$105,000
$280,000
105,000
(20,000)
$365,000
90%
$328,500
$345,000
328,500
$673,500
Comparison
Consolidated net income (operating incomes less
amortizations)
Noncontrolling interest in consolidated net income
(30% $150,000 plus 10% $365,000)
Controlling interest in consolidated net income
$755,000
81,500
$673,500