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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

CHAPTER 7
CONSOLIDATED FINANCIAL STATEMENTS - OWNERSHIP
PATTERNS AND INCOME TAXES
Answers to Problems
1. D
2. B
3. D
4. C
5. C
6. C
7. A Damson's accrual-based income:
Operational income ...................................................................
Defer unrealized gain ................................................................
Damson's accrual-based income .......................................
Crimson's accrual-based income:
Operational income ...................................................................
Investment Income (90% of Damsons realized income) .......
Crimson's accrual-based income .......................................

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$200,000
(40,000)
$160,000

$200,000
144,000
$344,000

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Bassett's accrual-based income:


Operational income ...................................................................
Investment income (80% of Crimson's realized income) .......
Bassett's accrual-based income ........................................

$300,000
275,200
$575,200

8. C Icede's accrual-based income:


Operational income ...................................................................
Defer unrealized gain ................................................................
Icede's accrual-based income ............................................
Outside ownership ....................................................................
Noncontrolling interest .......................................................

$220,000
(60,000)
$160,000
20%
$32,000

Healthstone's accrual-based income:


Operational income ...................................................................
Defer unrealized gain ................................................................
Investment income (80% of Icede's accrual-based income) .
Healthstone's accrual-based income .................................
Outside ownership ....................................................................
Noncontrolling interest .......................................................

$300,000
(30,000)
128,000
$398,000
20%
$79,600

Total noncontrolling interest = ($32,000 + $79,600) = $111,600


9. D Juvyn's operational income ..........................................................
Dividend income .............................................................................
Juvyn's income ...............................................................................
Outside ownership .........................................................................
Noncontrolling interest ..................................................................

$50,000
14,000
$64,000
10%
$6,400

10. A Equity income (60% of $200,000) ..................................................


Dividend income (60% of $40,000) ................................................
Tax difference ............................................................................
Dividend deduction upon eventual distribution (80%) ................
Temporary portion of tax difference ........................................
Tax rate ..........................................................................................
Deferred income tax liability ....................................................

$120,000
24,000
$96,000
(76,800)
$19,200
30%
$5,760

11. C Unrealized Gain:


Total gain .....................................................................................
Portion still held .........................................................................
Unrealized gain ..........................................................................
Tax rate ..........................................................................................
Deferred tax asset ......................................................................

$30,000
20%
$6,000
25%
$1,500

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

12. A Recognition of this gain 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

14. (35 Minutes) (Series of reporting and consolidation questions pertaining to a


father-son-grandson combination. Includes unrealized inventory gains)
a. Consideration transferred (by Tree) .............................
Noncontrolling interest fair value .................................
Limbs business fair value .............................................
Book value
...............................................................
Trade name ......................................................................
Life ..................................................................................
Annual amortization ......................................................

$252,000
108,000
360,000
(300,000)
$60,000
30 years
$2,000

14. (continued)
Consideration transferred for Leaf (by Limb) ..............
Noncontrolling interest fair value .................................
Leafs business fair value .............................................
Book value
...............................................................
Trade name ......................................................................
Life ..................................................................................
Annual amortization ......................................................

$91,000
39,000
$130,000
(100,000)
$30,000
30 years
$1,000

a. Investment in Limb
Limb's reported income-2009
Amortization expense
Accrual-based income
Limbs percentage ownership
Equity accrual-2009
Dividends received 2009
Limb's reported income-2010
Amortization expense
Income from Leaf
Accrual-based income
Limbs percentage ownership
Equity accrual-2010

$252,000
$40,000
(2,000)
$38,000
70%
$26,600
(7,000)
$60,000
(2,000)
6,300
$64,300
70%
$45,010

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Dividends received 2010


Investment in Limb 12-31-10

(14,000)
$302,610

b. Leaf2010 income (revenues minus expenses)


Amortization
Accrual-based income
Limb's ownership percentage
Equity income accrual
Income recognized ($2,000 dividends 70%)
Retained earnings increase (Limb), 1/1/11
Limb2009 operating income
Limb2010 operating income
Amortization (2 years at $2,000 per year)
Equity income from ownership of Leaf (above)
Total income for previous periods
Tree's ownership percentage
Equity income accrual
Income recognized ($10,000 [2009] + $20,000 [2010]
dividends 70% ownership)
Retained earnings increase (Tree), 1/1/11

$10,000
(1,000)
$9,000
70%
$6,300
(1,400)
$4,900
$40,000
60,000
(4,000)
6,300
102,300
70%
71,610
(21,000)
$50,610

1. (continued)
c. Consolidated sales (total for the companies)
Consolidated expenses (total for the companies)
Total amortization expense (see a.)
Consolidated net income for 2011
d. Noncontrolling interest in income of Leaf
Revenues less expenses
Excess amortization
Accrual-based income
Noncontrolling interest percentage
Noncontrolling interest in income of Leaf

$30,000
(1,000)
$29,000
30%

Noncontrolling interest in income of Limb:


Revenues less expenses
$65,000
Excess amortization
(2,000)
Equity in Leaf income [(30,000-1,000) 70%] 20,300
Realized income of Limb2011
$83,300
Outside ownership
30%
NCI share of consolidated income

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$1,260,000
(1,025,000)
(3,000)
$232,000

$8,700

$24,990
$33,690

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

e. 2010 Realized income of Limb (prior to accounting


for unrealized gains) (see a)
2009 Transfer-gain recognized in 2010
2010 Transfer-gain to be recognized in 2011
2010 Realized income Limb

$64,300
10,000
(16,000)
$58,300

2011 Realized income of Limb (prior to accounting


for unrealized gains) (see d.)
2010 Transfer-gain recognized in 2011
2011 Transfer-gain to be recognized in 2012
2011 Realized incomeLimb

$83,300
16,000
(25,000)
$74,300

f. In b., an adjustment of $50,610 was made to the beginning 2011 retained


earnings. Question e. takes this same question and alters it by including
unrealized gains. The $10,000 gain does not affect the answer because the 2010
and 2011 effects cancel each other.
Thus, only the $16,000 gain must be taken into consideration on January 1,
2011. Limbs realized income in 2010 is reduced by $16,000 because of the
deferred gain. The parent's equity accrual would be reduced by $11,200 or 70%
of that figure. The adjustment as of January 1, 2011 is $39,410 ($50,610
$11,200).
2. (15 minutes) (Income and noncontrolling interest with mutual ownership.)
a. Consideration transferred by Uncle .............................
Noncontrolling interest fair value .................................
Nephews business fair value .......................................
Book value ......................................................................
Intangible assets ............................................................
Life ..................................................................................
Amortization expense (annual) .....................................
Income reported by Nephew2011 ..............................
Amortization expense (above) ......................................
Accrual-based income ....................................................
Uncle's ownership percentage .....................................
Income of subsidiary recognized by Uncle .................

$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 $10,700 or 20% of
[$47,500 income ($50,000 operational income less $2,500 excess amortization)

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

plus the $6,000 in dividends].


3. (35 Minutes) (Consolidated income for a father-son-grandson combination.)
a. Mesa's operating income
Butte's operating income
Valley's operating income
Amortization expenseMesa's investment in Butte
Amortization expenseButte's investment in Valley
Consolidated net income
b. Valley's operating income
Amortization expense (on Butte's investment)
Valley's accrual-based income
Outside ownership
Noncontrolling interest in Valley's income
Butte's operating income
Amortization expense (on Mesa's investment)
Equity accrual from ownership of Valley
($132,000 55%)
Butte's accrual-based income
Outside ownership
Noncontrolling interest in Butte's income
Total noncontrolling interest in income of subsidiaries

$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%
$29,620
$89,020

16. (Continued)
Mesas operating income
$250,000
Mesas share of Buttes operating income (80% $98,000)
78,400
Mesas share of Valleys operating income (80% 55% $140,000)
61,600
Mesas share of Buttes excess amortization (80% $22,500)
(18,000)
Mesas share of Valleys excess amortization (80% 55% $8,000)
(3,520)
Controlling interest in consolidated net income
$368,480
Noncontrolling interest in consolidated net income
89,020
Consolidated net income
$457,500
17. (30 Minutes) (Consolidated income figures for a connecting affiliation)
UNREALIZED GAINS:
Cleveland ($12,000 remaining inventory 25% markup) = $3,000
Wisconsin ($40,000 remaining inventory 30% markup) = $12,000
NONCONTROLLING INTERESTS:
CLEVELAND:

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Operational income (sales minus cost of goods sold and


expenses) ..................................................................
$60,000
Defer unrealized gain (above) .......................................
(3,000)
Realized incomeCleveland ...................................
$57,000
Outside ownership ........................................................
20%
Noncontrolling interest in Cleveland's income ......
$11,400
WISCONSIN:
Operational income (sales minus cost of goods sold and
expenses) ..................................................................
$110,000
Defer unrealized gain (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: $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)

17. (continued)

Expenses = $200,000 (add the three book values)

Dividend income = -0- (eliminated for consolidation purposes)

Consolidated net income = $375,000 (consolidated revenues less


consolidated cost of goods sold and expenses)

Noncontrolling interests in subsidiaries' income = $24,620 (computed above)

Controlling interest in consolidated net income = $350,380 (consolidated net


income less noncontrolling interest share)

18. (12 Minutes) (Acquisition accounting for a subsidiarys operating loss


carryforward)
a. Consideration transferred 1/1/11
Fair value of identifiable assets acquired:

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$900,000

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Software licensing agreements


$750,000
Deferred tax asset from NOL (.35 $120,000)
42,000
Fair value of net identifiable assets acquired
792,000
Goodwill
$108,000
b. Consideration transferred 1/1/11
$900,000
Fair value of identifiable assets acquired:
Software licensing agreements
$750,000
Deferred tax asset from NOL (.35 $120,000)
42,000
Valuation allowance for NOL
(42,000)
750,000
Fair value of net identifiable assets acquired
Goodwill
$150,000
19. (25 Minutes) (Tax expense with separate tax returns for a combination.)
a. CONSOLIDATED TOTALS
Sales = $790,000 (add the two book values and eliminate the $110,000 intraentity transfer)
Cost of goods sold = $340,000 (add the book values, eliminate intra-entity
transfers of $110,000, recognize [subtract] $30,000 deferred gain from 2011,
and defer [add] $40,000 intra-entity gain into 2012)
Operating expenses = $234,000 (add the two book values)
Dividend income = -0- (eliminated for consolidation purposes)
Consolidated net income = $216,000 (Revenues less expenses)
Noncontrolling interest in Down's Income = $18,000 (20 percent of reported
Income of $100,000 plus $30,000 gain deferred from 2011 less $40,000 gain
deferred into 2012)
Controlling interest in consolidated net income = $198,000
19.

(continued)

b. On separate returns, the unrealized gains are reported as taxable income.


Because Up owns 80 percent of Down's stock, the dividends are tax- free and
no deferred tax liability is necessary on the undistributed income.
DUE TO GOVERNMENT: (separate returns)
UP:
Income (without dividend income) ...............................
Tax rate ..........................................................................
Currently payable to government ............................

$126,000
30%
$37,800

DOWN:
Reported income ............................................................
Tax rate ..........................................................................

$100,000
30%

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Currently payable to government ............................

$30,000

Total income tax payable: Current = $67,800 ($37,800 + $30,000)


CURRENT EXPENSE:
Consolidated net income (part a.) ...........................
Eliminate noncontrolling interest ............................
Income to be taxed ..............................................
Tax rate ..................................................................
Income tax expense .................................................

$198,000
+18,000
$216,000
30%
$64,800

The $3,000 difference between the liability and the expense is an increase in the
Deferred Income Tax Asset account. It is created by the tax effect (30%) on the
net unrealized gain for the period ($10,000 or $40,000 $30,000).
20. (45 Minutes) (Series of questions requires computation of income tax expense
and the related payable balance)
a. $260,000 ($650,000 40%)
The affiliated group would be taxed on its operating income of $650,000 (the
net unrealized gain is deferred on a consolidated return). The intra-entity
income and dividends are not relevant since a consolidated return is filed.
b. $260,000 ($650,000 40%)
The affiliated group would be taxed on its operating income of $650,000 (the
net unrealized gain is deferred on a consolidated return). The intra-entity
income and dividends are not relevant because a consolidated return is filed.
The percentage ownership does not affect the figures on a consolidated
return.
20. (continued)
c. $296,000 ($96,000 + $200,000)
Rogers would pay $96,000 or 40% of its $240,000 operating income. Clarke
would pay $200,000 or 40% of its $500,000 operating income. The unrealized
gain is not deferred when separate returns are filed. Intra-entity dividends are
not taxable because the parties qualify as an affiliated group even though
separate returns are being filed. Answer (c.) differs from (a.) and (b.) because
tax on the $90,000 unrealized gain (40% or $36,000) is paid immediately.
d. $268,064
Rogers would record income tax expense of $96,000 or 40% of its $240,000
operating income.

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Clarke must record its expense based on the revenue recognized during the
period. Thus, the tax expense is based on operating income of $410,000 (the net
unrealized gain is not being recognized in this period) plus equity income
accruing from Rogers of $100,800 (70% of that company's after-tax income).
Clarke will record an income tax expense of $164,000 in connection with the
operating income ($410,000 40%). The expense recognized in connection with
the equity accrual is affected by the dividends-received deduction:
Equity income of subsidiary ..........................................
Dividends-received deduction (when received) (80%)
Income subject to taxation ............................................
Tax rate ..........................................................................
Income tax expenseequity income (Clarke) .............
Income tax expenseoperating income (Clarke)
(above) .......................................................................
Income tax expenseoperating income (Rogers)
(above) .......................................................................
Income tax expense .......................................................

$100,800
80,640
$20,160
40%
$8,064
164,000

$172,064
96,000
$268,064

e. $204,480
Clarke will pay $200,000 in connection with its operating income ($500,000
40%) because the unrealized gain cannot be deferred. Clarke also receives
$56,000 in dividends from Rogers ($80,000 70%). Tax payment on these
dividends is $4,480 ($56,000 20% 40%). The difference between the payment
by Clarke ($204,480) and the company's expense in (d.) ($172,064) is created by
the premature payment of the tax (a deferred tax asset) on the unrealized gain
($90,000) less the deferred tax liability on the parent's equity accrual ($100,800)
in excess of dividends received ($56,000).
21. (20 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns.)
a. Consolidated Return2011
Piranto income 2011 (sales less expenses) ......................................
Slinton income 2011 (sales less expenses) ......................................
2010 gain realized in 2011 ....................................................................
2011 deferred gain ................................................................................
Taxable income ..............................................................................
Tax rate ................................................................................................
Income tax payablecurrent .........................................................

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$300,000
100,000
120,000
(150,000)
$370,000
40%
$148,000

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Because no temporary differences exist in this problem, the income tax


expense would also be $148,000. The unrealized gain is not taxed until realized.
Dividend income is not important because a consolidated return is being filed.
b. Separate Returns2011
On its separate tax return, Piranto will report taxable income of $300,000the
unrealized gains cannot be deferred. The dividends would not be taxable
because Slinton still meets the criteria to be a member of an affiliated group. A
consolidated return is not a requirement for these dividends to be excluded.
Thus, income taxes payable by Piranto would be $120,000 ($300,000 40%).
To determine the income tax expense for Piranto, the two temporary differences
must be taken into account:
Taxable income ..............................................................
Gain taxed in 2010 although realized
in 2011 .......................................................................
Gain taxed in 2011 although not yet realized ...............
2011 realized income subject to taxation ....................
Tax rate ...........................................................................
Income tax expense .......................................................

$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%).
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 gains are taxed immediately as are
intra-entity dividends.
Because the unrealized gains 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:

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

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 .............................................

$300,000
$30,960
20%

6,192
$306,192
40%
$122,477
34,400
$156,877

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) .................................
Taxable portion ..............................................................
Income currently taxable ...............................................
Tax rate ..........................................................................
Income tax payableLake ............................................
Income tax payableBoxwood (above) ......................
Total income tax payable current .................................

$300,000
$6,000
20%

1,200
$301,200
40%
$120,480
40,000
$160,480

22. (continued)
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 = $24,960 20% 40%)..................................
Deferred income tax asset on net unrealized gain
($32,000 $18,000 = $14,000 40%) ...........................................
Net decrease in expense ...................................................................

$1,997
5,600
$3,603

c. Because a consolidated tax return is filed, unrealized gains are deferred in the
same manner as for external reporting purposes. Dividend income is not
taxable.
Lake's operating income ...............................................
Boxwood's operating income .......................................
Prior year unrealized gain .............................................
Current year unrealized gain ........................................
Income subject to taxation (and currently taxable) .....
Tax rate ...........................................................................

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$300,000
$100,000
18,000
(32,000)

86,000
$386,000
40%

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Income tax expense .......................................................

$154,400

23. (30 Minutes) (Computation of income tax expense and income tax payable on
consolidated and separate tax returns.)
a. Operating income ..........................................................
Tax rate ..........................................................................
Taxes to be paid .............................................................

$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.
23. (continued)
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).

24. (10 Minutes) (Impact on goodwill of assets with a different tax vs. book value.)
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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

The assets and liabilities of Kew (the subsidiary) will be consolidated at their
individual fair values (netting to $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.
Tax
Basis
$140,000
150,000

Buildings ........................................
Equipment ......................................
Total temporary difference ......
Tax rate ......................................
Deferred tax liability .................

Fair
Value
$180,000
200,000

Temporary
Difference
$40,000
50,000
$90,000
30%
$27,000

Consequently, Kew's accounts will be consolidated as follows: (parentheses


indicate a credit balance)
Accounts receivable ......................................................
Inventory .........................................................................
Land ...............................................................................
Buildings ........................................................................
Equipment .......................................................................

$110,000
130,000
100,000
180,000
200,000

24. (continued)
Liabilities .........................................................................
Deferred tax liability .......................................................
Assigned to specific accounts .....................................
Purchase price ...............................................................
Excess assigned to goodwill ........................................

(220,000)
(27,000)
473,000
650,000
$177,000

25. (55 Minutes) (Consolidation worksheet for a father-son-grandson combination.


Includes intra-entity inventory transfers.)
The following computations are needed before the consolidation worksheet is
prepared: calculation of the deferred gains in beginning and ending inventory.
Beginning Unrealized Gain (Wilson)
(January 1, 2011 Inventory
Balance)

Transfer Price (goods remaining) =


Cost + .25 Cost
$60,000 = 1.25 Cost
$48,000 = Cost

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

$12,000 is Unrealized gain


Ending Unrealized Gain (Wilson)
(December 31, 2011 Inventory
Balance)

Transfer Price (goods remaining) =


Cost + .25 Cost
$90,000 = 1.25 Cost
$72,000 = Cost
$18,000 is Unrealized gain

CONSOLIDATION ENTRIES
Entry *G
Retained earnings, 1/1/11 (Wilson) .........................
12,000
Cost of goods sold ..............................................
12,000
(To recognize income on intra-entity inventory transfers made in previous
year but not resold until current year as per above computation.)
Entry *C
Retained earnings, 1/1/11 (House) ...............................
11,200
Investment in Wilson ..........................................
11,200
(To convert investment account from partial equity method to equity method.
Unrealized gain shown in Entry *G is not properly reflected by parent under
partial equity method [12,000 70% = $8,400 income decrease] nor would the
$2,800 in amortization expense for 20092010. Thus, a reduction of $11,200 is
required. Because Cuddy is a current year acquisition, no prior conversion to
equity method is required for the investment.)
25. (continued)
Entry S1
Common stock (Cuddy) .................................................
150,000
Retained earnings, 1/1/11 (Cuddy) ...............................
150,000
Investment in Cuddy (80%) .......................................
240,000
Noncontrolling interest in Cuddy common stock (20%)
60,000
(To eliminate Cuddy's stockholders' equity against the corresponding
investment balance and to recognize noncontrolling interest on common stock.)
Entry S2
Common stock (Wilson) ................................................
310,000
Retained earnings, 1/1/11 (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 .........................................................................
7-15

54,000

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

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 2009 and 2010 has been taken into account in
determining the January 1, 2011 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.)

40,000

25. (continued)
Entry D2
Investment in Wilson ...............................................
67,200
Dividends paid (70%) (Wilson) ...........................
(To eliminate effects of intra-entity dividend payments.)

67,200

Entry E
Operating expenses .................................................
2,000
Equipment ...............................................................
5,000
Franchise contracts ............................................
4,000
Buildings ...............................................................
3,000
(To record 2011 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.)

7-16

200,000

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Entry G
Cost of goods sold ...................................................
Inventory ...............................................................
(To defer unrealized gain in ending inventory.)

18,000
18,000

Noncontrolling Interest in Net Income of Cuddy:


Reported net income
Outside ownership
Noncontrolling interest in Cuddy incomecommon ...............

$70,000
20%
$14,000

Noncontrolling Interest in net income of Wilson:


Reported operational income
Equity income of Cuddy ($70,000 40%) ...................................
Excess amortization .....................................................................
Recognition of 2010 gain (Entry *G)
Deferral of 2011 unrealized gain (Entry G)
Realized income
Outside ownership
Noncontrolling interest in net income of Wilson

7-17

$130,000
28,000
(2,000)
12,000
(18,000)
$150,000
30%
$ 45,000

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

25. (continued)
HOUSE CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidation Worksheet
December 31, 2011
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, 1/1/11:
House Corporation
Wilson Company
Cuddy Company
Net Income
Dividends paid
House Corporation
Wilson Company
Cuddy Company
Retained earnings, 12/31/11

House
Corp.

Wilson
Company

Cuddy
Company

Consolidation EntriesNoncontrollingConsolidated
Debit
Credit
Interest
Balance

(900,000)

(700,000)

(300,000) (TI) 200,000

551,000

300,000

140,000 (G) 18,000

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)

7-18

50,000
(170,000)

(D2) 67,200
(D1) 40,000

28,800
10,000

100,000
-0-0(971,800)

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

25. (continued)
Accounts

House
Corp.

Wilson
Company

Cuddy
Company

Consolidation EntriesNoncontrollingConsolidated
Debit
Credit
Interest
Balance

Cash and receivables


Inventory
Investment in Wilson Company

220,000
390,200
807,800

334,000
320,000

Investment in Cuddy Company

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

144,000 (A) 54,000


88,000 (E)
5,000
16,000
(A) 140,000
(A) 32,000
418,000

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)

Parentheses indicate a credit balance.

7-19

-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

(150,000) (S1) 150,000


(S2) 310,000
(170,000)
(418,000)
1,916,400

1,916,400

(60,000)
(331,200)
411,400

(411,400)
(820,000)
(971,800)
(3,503,200)

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

26. (20 Minutes) (Consolidation entries for a mutual holding business combination)
a. Acquisition Price Allocation and Amortization Mighty's Purchase of Lowly
Consideration transferred ............................................
$420,000
280,000
Noncontrolling interest fair value .................................
Lowlys business fair value ...........................................
700,000
Book value acquired .......................................................
(600,000)
Trademarks .....................................................................
$100,000
Annual amortization (20-year life) .................................
$ 5,000
CONSOLIDATION ENTRIES
Entry *C
Investment in Lowly .................................................
117,000
Retained earnings, 1/1/11 (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, 1/1/11 (Lowly) ...........................
500,000
Investment in Lowly (60%) .................................
480,000
Noncontrolling interest in Lowly 1/1/11 (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 1/1/11 (40%) ..
38,000
(To recognize unamortized portion of acquisition-date excess fair value.)
Entry E
Amortization Expense ..............................................
Trademarks ..........................................................
(To record trademarks amortization expense for 2011.)

5,000
5,000

Noncontrolling interest in subsidiary income = 40% ($40,000 - $5,000) = $14,000

7-20

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

27. (80 Minutes) (Prepare consolidation worksheet for a father-son-grandson


combination. Also asks about income taxes paid on both a separate and a
consolidated return)
a. Acquisition-Date Allocation and Amortization
The January 1, 2010 book values are determined by removing the 2010 income
from the January 1, 2011 book values (based on equity accounts).
Consideration transferred for Stookey .........................
Noncontrolling interest fair value .................................
Stookey business fair value ..........................................
Stookey book value .......................................................
Customer List ..................................................................
Life ..................................................................................
Annual amortization ......................................................

$344,000
86,000
$430,000
(380,000)
$ 50,000
10 Years
$ 5,000

Consideration transferred for Yarrow ...........................


Noncontrolling interest fair value .................................
Yarrow business fair value ...........................................
Yarrow book value ..........................................................
Copyright ........................................................................
Life ..................................................................................
Annual amortization ......................................................

$720,000
80,000
$800,000
740,000
$ 60,000
15 Years
$ 4,000

CONSOLIDATION ENTRIES
Entry *G
Retained earnings, 1/1/11 (Stookey) .......................
7,680
Cost of goods sold ..............................................
7,680
(To give effect to unrealized gain from 2010. 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, 1/1/11 (Yarrow) ...................
85,856
(To recognize equity income accruing from Yarrow's investment in Stookey
during 2010. Because the initial value method is applied and no dividends
paid, no income has been recognized in connection with the 2010 ownership
of Stookey. Reported income of $120,000 [2010] 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.

7-21

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

27. (continued)
Entry *C2
Investment in Yarrow ...............................................
217,670
Retained earnings, 1/1/11 (Travers) ...................
217,670
(To recognize equity income accruing from Travers' investment in Yarrow
during 2010. Because the initial method is applied and no dividends paid,
income has not been recognized in connection with the 2010 ownership of
Yarrow. Income of $245,856 is calculated based on reported income of
$160,000 [2010] 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 2010.)
Entry S1
Common stock (Stookey) ........................................
200,000
Retained earnings, 1/1/11 (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, 1/1/11 (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
Customer list..............................................................
Investment in Stookey ........................................
Noncontrolling interest in Stookey (20%) .........

45,000
36,000
9,000

(To recognize January 1, 2011 unamortized portion of acquisition price


assigned to Stookeys customer list.)

27. (continued)

7-22

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Entry A2
Copyright ...................................................................
56,000
Investment in Yarrow . .........................................
50,400
Noncontrolling interest in Yarrow ......................
5,600
(To recognize January 1, 2011 unamortized portion of acquisition price
assigned to copyright.)
Entry E
Operating expenses ..................................................
9,000
Customer list ........................................................
5,000
Copyright ..............................................................
4,000
(To recognize amortization expense for 2011$5,000 in connection with
Travers' investment and $3,000 in connection with Yarrow's investment.)
Entry Tl
Sales ..........................................................................
100,000
Cost of goods sold ..............................................
(To eliminate intra-entity inventory transfers made during 2011.)

100,000

Entry G
Cost of goods sold ...................................................
9,600
Inventory (current assets) ..................................
9,600
(To defer unrealized gain on ending inventory$20,000 48% markup.)
Noncontrolling Interest in Stookey's Net Income
2011 Reported net income ............................................
Customer list amortization ............................................
Realization of 2010 deferred income (*G) ....................
Deferral of 2011 unrealized gain (G) .............................
Realized income 2011 ....................................................
Outside ownership ........................................................
Noncontrolling interest in Stookey's net income ........
Noncontrolling Interest in Yarrow's Net Income
2011 Reported net income ............................................
Copyright amortization ..................................................
Accrual of Stookey's income (80% of $93,080
realized income [computed above]) ........................
Realized income2011 .................................................
Outside ownership ........................................................
Noncontrolling interest in Yarrow's net income .........

7-23

$100,000
(5,000)
7,680
(9,600)
$93,080
20%
$18,616

$200,000
(4,000)
74,464
$270,464
10%
$27,046

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

27. (continued)

Accounts

TRAVERS COMPANY AND CONSOLIDATED SUBSIDIARIES


Consolidation Worksheet
December 31, 2011
Travers
Yarrow
Stookey
Consolidation EntriesNoncontrollingConsolidated
Company
Company
Company
Debit
Credit
Interest
Balances

Sales and other revenues


Cost of goods sold

(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, 1/1/11:
Travers Company
Yarrow Company
Stookey Company

100,000
(320,000)

80,000
(200,000)

140,000
(100,000)

(E)

9,000

Net Income (above)


Dividends paid
Retained earnings, 12/31/11

(320,000)
128,000
(892,000)

Current assets
Investment in Yarrow Company

(700,000)
(600,000)
(300,000)

444,000
720,000

(200,000)

329,000

(800,000)
380,000

2,113,000

836,000

(*C2)
(*C1)

217,670
85,856

(917,670)
-0-0-

(*C2)

217,670

(*C1)

85,856

(A1)
(A2)

45,000
56,000

(S1)
(S2)

200,000
300,000

(G)
(S2)
(A2)
(S1)
(A1)

9,600
887,270
50,400
393,856
36,000

1,094,400
-0-0-

520,000

1,560,000

(E)
(E)

2,305,000
40,000
52,000
3,491,400

5,000
4,000

800,000

(460,000)
(300,000)

(200,000)
(200,000)

Retained earnings, 12/31/11 (above)


NCI interest in Stookey, 1/1/11

(892,000)

(800,000)

(400,000)

(1,560,000)

(800,000)

7-24

(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

Noncontrolling interest in Yarrow, 1/1/11


Noncontrolling interests in subsidiaries
Total liabilities and equities

(1,900,000)
961,920

7,680
100,000

(27,046)
(18,616)

Investment in Stookey Company


Land, buildings, & equipment (net)
Customer list
Copyright
Total assets

(*G)
(TI)

(1,381,000)

(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)

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

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

c. Stookey's reported income .................................................................


(Unrealized gains are not deferred on a separate
tax return.)
Tax rate .................................................................................................
Income tax payable ..............................................................................

$100,000

45%
$45,000

d. (1) Because 80% of Stookey's stock is owned by Yarrow, intra-entity dividends


would be nontaxable. Consequently, 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. A
temporary difference is created. The net effect is an increase in taxable
income by $1,920 over reported income:
2011 Unrealized gain taxed in 2011 .....................................................
2010 Unrealized gain taxed previously in 2010 ..................................
Increase in taxable income .................................................................
Tax rate .................................................................................................
Deterred income tax asset ..................................................................

$9,600
(7,680)
$1,920
45%
$ 864

Income Tax Expense:


Travers and Yarrowpayable (part b) ..........................................
Stookeypayable (part c) ..............................................................
Total taxes to be paid2011 ..........................................................
Prepayment (asset) (above) ...........................................................
Income tax expense 2011 ...............................................................

$229,950
45,000
$274,950
(864)
$274,086

27. d. (continued)
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.
7-25

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

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 gains. 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 gain (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 gain 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 gain from the prior year (see part g.) is recognized.
Amortization expenseprior year 80% .....................
Unrealized gainupstream effect on
parent's retained earnings is $8,000 80%.............
Adjustment to parents beginning retained earnings ..

7-26

$2,000
6,400
$8,400

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

i. This figure is computed as follows:


Book value of subsidiary1/1 ......................................
Unrealized gain in beginning inventory (see above) ..
Realized book value ....................................................
Excess allocation at 1/1 .................................................
Subsidiary valuation basis 1/1 ......................................
Noncontrolling interest percentage ..............................
Noncontrolling interest 1/1 ...........................................
Noncontrolling interest in Soludan's income
(as reported) ..............................................................
Noncontrolling interest in Soludan's dividends
($20,000 20%) .........................................................
Ending noncontrolling interest .....................................

$370,000
(8,000)
$362,000
35,000
397,000
20%
$79,400
18,700
(4,000)
$94,100

j. For a consolidated return, unrealized gains are deferred as in the consolidated


statements. At a 40% rate, both the expense and payable would be $117,400.
Income Tax Expense .....................................................
Income Tax Payable .................................................

117,400
117,400

Consolidated Taxable Income:


Sales .............................................................................................. $1,280,000
Cost of goods sold .......................................................................
(784,000)
Operating expenses .....................................................................
(202,500)
Taxable income ....................................................................... $ 293,500
k. On a separate return, Politan would report its operating income of $200,000
leading to a tax expense and payable of $80,000. Because of the level of
ownership, intra-entity dividend (or investment) income is omitted.
Income tax expense .......................................................
Income tax payable ..................................................

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 gains are accounted for in different time
periods in the financial statements, thus, a temporary difference is created. The
beginning gain of $8,000 was taxed in the previous year rather than currently.
The current gain 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 .......................................................
7-27

38,400

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Deferred income tax - asset ..........................................


Income tax payable ..................................................

1,600
40,000

Soludan's entry can also be computed as follows:


Reported income ............................................................................
Unrealized gain from previous period realized currently ............
Deferral of current unrealized gain ...............................................
Realized income .............................................................................
Tax rate
.....................................................................................
Income tax expense .......................................................................
Taxes payable ..................................................................................
Deferred tax asset ................................................................................

$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, 1/1/11 (Delta) ............................
15,000
Cost of goods sold ..............................................
15,000
(To recognize gain that was unrealized in 2010 [amount provided].)
Entry *C1
Retained earnings, 1/1/11 (Delta) ............................
7,000
Investment in Omega Company .........................
7,000
(To recognize amortization expense from Deltas acquisition for 2010.)
29. (continued)
Entry *C2
Retained earnings, 1/1/11 (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 1/1/11 (80% $15,000) .
12,000
*C2 adjustment ..........................................................
$27,600
Entry S1
Common stock (Omega) ..........................................
Retained earnings, 1/1/11 (Omega) .........................
Investment in Omega (70%) ................................

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100,000
100,000
140,000

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

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, 1/1/11 (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, 2011 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.)

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

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 gain 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 ....................................................
2010 Unrealized income realized in 2011......................
2011 Unrealized income realized in 2011 .....................
Accrual-based incomeDelta (2011) ...........................
Outside ownership ........................................................
Noncontrolling interest in Delta's income (2011) ........
Noncontrolling interest in Delta Company ...................
Noncontrolling interest, 1/01/11 (Entry S2) .............
Noncontrolling interest, 1/01/11 (Entry A) ...............
Noncontrolling interest in Deltas income (above) .
Dividends paid to noncontrolling interest
($40,000 20%) .......................................................

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$131,000
42,000
(6,250)
15,000
(22,000)
$159,750
20%
$31,950

$99,600
22,500
31,950
(8,000)

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

Noncontrolling interest in Delta, 12/31/11 ..........

$146,050

Noncontrolling interest in Omega Company ................


Noncontrolling interest, 1/01/11 (Entry S1) .............
Noncontrolling interest in Omegas income (above)
Noncontrolling interest, 1/01/11 (Entry A) ...............
Dividends paid to noncontrolling interest ($50,000 30%)
Noncontrolling interest in Omega, 12/31/11 ......

$60,000
18,000
33,000
(15,000)
$96,000

Chapter 7 Excel Case Solution

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%

Treeline's share of Basecamp income:


Basecamp operating income
Excess amortization
Accrual based income
Treeline ownership percentage
Equity income from Basecamp

$175,000
(25,000)
$150,000
70%
$105,000

Summit's share of Treeline income:


Treeline operating income
Equity income from Basecamp
Excess amortization
Treeline adjusted income
Summit ownership percentage
Summit's share of reported income

$280,000
105,000
(20,000)
$365,000
90%
$328,500

Controlling interest in net income


Summit's operating income
Equity earnings in Treeline and Basecamp
Summits net income

$345,000
328,500
$673,500

Comparison
Consolidated net income (operating incomes less

7-31

Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

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

Difference between Summits net income and controlling interest in


consolidated net income = -0RESEARCH CASE: CONSOLIDATED TAX EXPENSE
At www.thecoca-colacompany.com the annual financial statements and 10-K
provide an excellent set of statements and footnotes to review disclosures for
consolidated income tax issues.
In particular Note 17 provides details of the consolidated tax expense in CocaColas 2006 annual report. The excerpt below shows the portion of the
footnote relating to components of deferred tax assets and liabilities and
carryforwards.

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes

7-33