Advanced Financial Accounting
Advanced Financial Accounting
12th Edition
ISBN: 9781259916977
Author: Christensen, Theodore E., COTTRELL, David M., Budd, Cassy
Publisher: Mcgraw-hill Education,
Question
Book Icon
Chapter 10, Problem 10.31P

a

To determine

Consolidation income tax issues: the legal structure of an acquisition can result in a taxable or non-taxable transactions. In taxable transaction, the assets acquired and liabilities assumed will have tax basis equal to the fair market values because the subsidiary is required to recognize all inherent gains and losses for tax purposes. In order to avoid this many acquisitions are structured to avoid classification as taxable transaction.

Any difference arising out of fair market value and tax basis should be recorded as deferred tax asset or liability.

When companies in the consolidated group files separate tax returns, intercompany income accruals and dividend transfers must be considered in computing income tax expense for the period. When an investor and investee files separate tax returns, the investor is taxed on the dividends received from the investee rather than on the amount of investment income reported.

Requirement 1

the preparation of consolidated entries needed as of December 31, 20X7, needed for consolidated financial statements.

a

Expert Solution
Check Mark

Answer to Problem 10.31P

Elimination entries:

    DebitCredit
    To eliminate income from subsidiary
    Income from subsidiary25,200
    Dividends declared7,000
    Investment in SC common stock18,200
    To assign income to non-controlling interest
    Income to non-controlling interest8,100
    Dividends declared3,000
    Non-controlling interest5,100
    Common stock- SC50,000
    Retained earnings January 1150,000
    Investment in SC common stock140,000
    Non-controlling interest60,000
    Eliminate unrealized profit in beginning inventory
    Tax expense4,000
    Retained earnings January 14,200
    Non-controlling interest1,800
    Cost of goods sold10,000
    Eliminating unrealized profit on ending inventory
    Sales120,000
    Cost of goods sold95,000
    Inventory25,000
    Eliminating tax expense on unrealized intercompany profit
    Deferred tax asset10,000
    Tax expense10,000
    Eliminate unrealized profit on sale of equipment
    Building and equipment85,000
    Gain on sale of equipment15,000
    Accumulated depreciation100,000
    Eliminate income tax on unrealized gain on equipment
    Deferred tax asset6,000
    Tax expense6,000

Explanation of Solution

  1. Income from subsidiary is eliminated by reverse entry, debit income from subsidiary $36,000 x .70 = $25,200 and dividends 10,000 x .70
  2. Income to non-controlling interest $8,100 = ($36,000 + 6,000 − 15,000) x .30
  3. Dividends $3,000 = $10,000 x .30 non-controlling interest $5,100 = $8,100 − 3,000.
  4. Elimination of beginning investment by reversal entry
  5. Unrealized profit in beginning inventory $10,000
  6. Tax expenses $4,000 = $10,000 x .40

    Non-controlling interest $1,800 = $7,000 x .30

    Retained earnings $4,200 = $7,000 x .70

  7. Profit on sale of inventory is eliminated by reverse entry
  8. Tax on unrealized intercompany profit is eliminated by reversal $10,000 = $25,000 x .40
  9. Gain on sale of equipment $15,000 = $100,00 − 85,000
  10. Deferred tax expenses on unrealized gain on sale of equipment $6,000 = $15,000 x .40

b

To determine

Consolidation income tax issues: the legal structure of an acquisition can result in a taxable or non-taxable transactions. In taxable transaction, the assets acquired and liabilities assumed will have tax basis equal to the fair market values because the subsidiary is required to recognize all inherent gains and losses for tax purposes. In order to avoid this many acquisitions are structured to avoid classification as taxable transaction.

Any difference arising out of fair market value and tax basis should be recorded as deferred tax asset or liability.

When companies in the consolidated group files separate tax returns, intercompany income accruals and dividend transfers must be considered in computing income tax expense for the period. When an investor and investee files separate tax returns, the investor is taxed on the dividends received from the investee rather than on the amount of investment income reported.

Requirement 2

the preparation of consolidated work sheet for 20X7

b

Expert Solution
Check Mark

Answer to Problem 10.31P

Consolidated retained earnings December 31 $424,500 and total Assets $1,617,800

Explanation of Solution

PC and SC Corporation

Consolidation work paper

December 31, 20X7

    Eliminations
    PC CoSCDebitCreditConsolidation
    Sales580,000300,000120,000760,000
    Gain on sale of equipment’s15,00015,000
    Income from subsidiary25,20025,200
    620,200300,000760,000
    Less cost of sales(435,000)(210,000)10,000
    95,000(540,000)
    Dep & amortization(40,000)(20,000)(60,000)
    Tax expense(44,000)(24,000)4,00010,000
    6,000(56,000)
    Other expenses(11,400)(10,000)(21,400)
    Consolidated net income82,600
    Income to NCI8,100(8,100)
    Income89,80036,000172,300121,00074,500
    Retained earnings January 1374,200150,000150,000
    4,200370,000
    Income available464,000186,000444,500
    Dividends declared(20,000)(10,000)7,000
    3,000(20,000)
    Retained earnings December 31444,000176,000326,500131,000424,500
    Eliminations
    PC CoSCDebitCreditConsolidation
    Cash35,80056,00091,800
    Accounts receivable130,00040,000170,000
    Inventory220,00060,00025,000255,000
    Land60,00020,00080,000
    Buildings and equipment450,000400,00085,000935,000
    Patients70,00070,000
    Investment in SC stock158,20018,200
    140,000
    Deferred tax asset10,000
    6,00016,000
    1,124,000576,0001,617,800
    Accumulated depreciation150,000160,000100,000410,000
    Accounts payable40,00030,00070,000
    Wages payable70,00020,00090,000
    Bonds payable200,000100,000300,000
    Deferred income tax120,00040,000160,000
    Common stock100,00050,00050,000100,000
    Retained earnings444,000176,000326,500131,000424,500
    Non-controlling interest1,8005,100
    60,00063,300
    1,124,000576,000479,300479,3001,617,800

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Braviary Corp. acquired a 70% interest in Vullaby Company in 20A. For the year ended December 31, 20A and 20B, Vullaby Company reported an income of P160,000 and P180,000, respectively. During 20A, Vullaby sold merchandise to Braviary Corp. for P20,000 at a profit of P4,000. The merchandise was later resold by Braviary Corp. to outsider for P30,000 during 20B. For consolidation purposes, what is the minority interest's share of Vullaby's net income for 20A and 20B, respectively. *   A. P49,200 and P52,800 B. Answer not given C. P53,200 and P50,000 D. P46,800 and P55,200 E. P48,000 and P54,000
Par Inc owns 77.11% of Sub Corp. During the year, Par sold inventory to Sub for $79,271. Exactly 47.83% of this inventory remained in Y's warehouse at year end. Sub sold inventory to Par for $39,636 of which 39.47% remained in X's warehouse at year end. Both companies are subject to a tax rate of 28.35%. The gross profit percentage on sales is 20% for both companies. What is the after-tax dollar value of Par's unrealized profits during the year on its sales to Sub? a. $5,433 b. $5,977 c. $5,705 d. $5,569 e. $5,841
On January 2, 20X1, Padre Corporation (PC) purchases 80% of the common stock of Son Company (SC) for P300,000. SC’s has P200,000 and P50,000 book value of common stock and retained earnings. The book values of SC identifiable net assets approximate their related fair values. On May 20X1, PC sold merchandise costing P19,600 to SC for P24,500. Out of which, only P5,000 remains unsold by SC at the end of 20X1. PC and Saul use the same mark-up based on cost.In 20X2, PC sold another merchandise to SC for P30,000. Of the said merchandise, P8,000 remains in the ending inventory of 20X2. PC has P50,000 and P80,000 comprehensive income from its operations on 20X1 and 20X2, respectively. On the other hand, SC has P20,000 and P50,000 comprehensive income from its operations for 20X1 and 20X2.Required:• Prepare the necessary entries to be made by both companies for 20X1 and 20X2.• Allocate the consolidated comprehensive income to the controlling and non-controlling interest for 20X1 and 20X2.

Chapter 10 Solutions

Advanced Financial Accounting

Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
SWFT Essntl Tax Individ/Bus Entities 2020
Accounting
ISBN:9780357391266
Author:Nellen
Publisher:Cengage