1) Cash dividends are viewed as a distribution ofthe most recent earnings. How are
stock dividends viewed?
2) Why is the date of acquisition of subsidiary stock important under the purchase
method?
3) Define constructive retirement of debt. How isthe total constructive gain or loss
computed?
4) Describe the principal financial statements used to report on the activities and status
of expendable fund entities.
5) Pulman Company acquired 90% of the stock of Spectrum Company for $6,300,000
on January 1, 2013. On this date, the fair value of the assets and liabilities of Spectrum
Company was equal to their book value except for the inventory and equipment
accounts. The inventory had a fair value of $2,300,000 and a book value of $1,900,000.
The equipment had a fair value of $3,300,000 and a book value of $2,800,000.
The balances in Spectrum Company’s capital stock and retained earnings accounts on
the date of acquisition were $3,700,000 and $1,900,000, respectively.
Required:
In general journal form, prepare the entries on Spectrum Company’s books to record the
effect of the pushed down values implied by the acquisition of its stock by Pulman
Company assuming that:
Avalues are allocated on the basis of the fair value of Spectrum Company as a whole
imputed from the transaction.
Bvalues are allocated on the basis of the proportional interest acquired by Pulman
Company.
6) How do you determine the amount of the difference between book value and the
value implied by the purchase price to be allocated to a specific asset of a less than
wholly owned subsidiary?
7) Morgan Company prepares quarterly financial statements. The following information
is available concerning calendar year 2014:
Estimated full-year earnings$3,000,000
Full-year permanent differences:
Penalty for pollution150,000
Estimated dividend income exclusion60,000
Actual pretax earnings, 1/1/11 to 3/31/11480,000
Nominal income tax rate40%
Required:
Compute the income tax provision for the first quarter of 2014.