40. Plymouth Company holds a 90% interest in Savannah, Inc., which was acquired in a previous year. As of
the end of the current fiscal period, the following information is available:
Plymouth
Savannah
Company
Inc.
Internally generated net income
$80,000
$60,000
Weighted average common shares outstanding
25,000
12,000
Warrants to acquire sub’s common stock:
Held by unaffiliated investors
2,000
Warrants to acquire parent’s common stock:
Held by Savannah
1,000
Held by unaffiliated investors
2,000
Preferred shares 5% convertible, par $100
1,000
Preferred shares 10% nonconvertible, par $2
5,000
Additional information:
·
The warrants to acquire Savannah stock were issued July 1 of the current year. Exercise price is $9; stock price is $12.
·
The warrants to acquire Plymouth stock were issued in a previous fiscal period. Exercise price is $12; stock price is $18.
·
Each share of convertible preferred can be converted into 5 shares of Savannah common stock. Plymouth owns 60% of the convertible
preferred stock.
Required:
Compute consolidated basic and diluted earnings per share for the current year. Ignore any tax effects.
SUBSIDIARY
CONSOLIDATED
inator
inator
Income
$ 60,000
$ 80,000
Weighted Average Shares
O/S
12,000
25,000
Preferred dividends
(5,000)
(1,000)
$ 55,000
12,000
[a]
49,464
$128,464
25,000
Internal BEPS numerator
$ 55,000
12,000
$ 79,000
25,000
Exercise of Sub Stock
250
Exercise of Par Stock
1,000
Convert preferred to common
5,000
5,000
$ 60,000
17,250
[c]
48,024
26,000
[a]
parent-owned equivalent sub shares ´
Sub BEPS = (12,000 ´ 90%) ´ $4.58
(10,800 + 3,000) ´ $3.48
41. Plymouth Company holds a 90% interest in Savannah, Inc., which was acquired in a previous year. As of
the end of the current fiscal period, the following information is available:
Plymouth
Savannah
Company
Inc.
Internally generated net income
$20,000
$7,000
Weighted average common shares outstanding
10,000
4,000
Subsidiary common stock warrants to
acquire 200 shares parent common stock
200
Dilutive convertible bonds:
Dilutive convertible bonds:
4,000
Parent common stock issued on conversion
2,500
Assume a 50% treasury stock method effect on the stock warrants
Required:
Compute consolidated basic and diluted earnings per share for the current year; ignore income taxes.
inator
inator
Income
$ 7,000
$ 20,000
$ 7,000
4,000
[a]
6,300
10,000
denominator
Conversion of bonds
4,000
2,500
$ 11,000
6,500
6,084
$ 26,084
10,100
42. Dills Company purchased an 80% interest in the common stock of Sarada Company for $140,000 on
January 1, 20X7. On this date the book value of Sarada’s net identifiable assets totaled $100,000. Any excess
was attributed to a patent with a 10-year life.
During 20X9, Dills Company and Sarada Company reported the following internally generated income before
taxes:
Dills Co.
Sarada Co.
Sales
$300,000
$120,000
Cost of goods sold
(200,000)
(90,000)
Gain on machine
10,000
—
Expenses
(40,000)
(20,000)
Income before taxes
$ 70,000
$ 10,000
Sarada Company routinely sells goods to Dills Company. This year those sales amounted to $60,000. Dills Company inventories included
intercompany goods of $30,000 at the beginning of the year and $12,000 at the end of the year. Sarada Company sells goods to Dills Company at a
gross profit of 16.67%.
On January 1, 20X9 Dills Company sold a new machine to Sarada Company, for $40,000. The cost of the machine was $30,000. It has a 5-year life.
The affiliated group files a consolidated tax return and is taxed at 30%.
Required:
Prepare a consolidated income statement for 20X9. Include income distribution for both firms.
Dills Company and Sarada Company
Consolidated Income Statement
For the Year Ended December 31, 20X9
Sales
$360,000
Cost of goods sold
(227,000)
Expenses
(65,500)
Income before taxes
$ 67,500
Provision for income tax
(20,700)
Consolidated net income
$ 46,800
Distributed to:
NCI
$ 320
Controlling interest
$ 46,480
Sales
(300,000)
(120,000)
60,000
(360,000)
COGS
200,000
90,000
2,000
60,000
227,000
5,000
Gain on Sale
(10,000)
F
10,000
–
Expenses
40,000
20,000
A
7,500
F
2,000
65,500
(70,000)
(10,000)
43. Dills Company purchased an 80% interest in the common stock of Sarada Company for $140,000 on
January 1, 20X7. On this date the book value of Sarada’s net identifiable assets totaled $100,000. Any excess
was attributed to a patent with a 10-year life.
During 20X9, Dills Company and Sarada Company reported the following internally generated income before
taxes:
Dills Co.
Sarada Co.
Sales
$300,000
$120,000
Cost of goods sold
(200,000)
(90,000)
Gain on machine
10,000
—
Expenses
(40,000)
(20,000)
Income before taxes
$ 70,000
$ 10,000
Sarada Company routinely sells goods to Dills Company. This year those sales amounted to $60,000. Dills Company inventories included
intercompany goods of $30,000 at the beginning of the year and $12,000 at the end of the year. Sarada Company sells goods to Dills Company at a
gross profit of 16.67%.
On January 1, 20X9 Dills Company sold a new machine to Sarada Company, for $40,000. The cost of the machine was $30,000. It has a 5-year life.
The firms file separate tax returns. Both are subject to a 30% tax rate. Dills Company receives an 80% dividend deduction.
Required:
Prepare a consolidated income statement for 20X9. Include income distribution for both firms.
Dills Company and Sarada Company
Consolidated Income Statement
For the Year Ended December 31, 20X9
Sales
$360,000
Cost of goods sold
(227,000)
Expenses
(65,500)
Income before taxes
$ 67,500
Provision for income tax
(20,885)
Consolidated net income
$ 46,615
Distributed to:
NCI
$ 320
Controlling interest
$ 46,295
Sales
(300,000)
(120,000)
60,000
(360,000)
COGS
200,000
90,000
2,000
60,000
227,000
5,000
Gain on Sale
(10,000)
F
10,000
–
Expenses
40,000
20,000
A
7,500
F
2,000
65,500
(70,000)
(10,000)
44. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company in a
stock exchange. On this date Subsidiary had total owners’ equity of $550,000 and book value approximated fair
value.
During 20X1 and 20X2, Parent has accounted for its investment in Subsidiary using the simple equity method.
On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $75,000. During 20X2, Subsidiary
sold merchandise to Parent for $100,000, of which $25,000 is held by Parent on December 31, 20X2.
Subsidiary’s usual gross profit on affiliated sales is 50%.
On December 31, 20X1, Parent sold to Subsidiary some equipment with a cost of $75,000 and a book value of
$30,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a 5-year life, assuming no
salvage value and using the straight-line method.
Parent and Subsidiary qualify as an affiliated group for tax purposes and thus will file a consolidated tax return.
Assume a 30% corporate income tax rate.
Required:
Complete the Figure 6-10 worksheet for consolidated financial statements for the year ended December 31,
20X2.
Figure 6-10
Trial Balance
Eliminations and
Parent
Sub.
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Inventory, December 31
100,000
60,000
Other Current Assets
374,000
520,000
Investment in Sub. Company
740,000
Land
240,000
120,000
Buildings and Equipment
515,000
380,000
Accumulated Depreciation
(120,000)
(140,000)
Current Liabilities
(150,000)
(50,000)
Long-Term Liabilities
(200,000)
(150,000)
Common Stock – P Co.
(300,000)
Other Paid-in Capital – P Co.
(300,000)
Retained Earnings – P Co.
(679,000)
Common Stock – S Co.
(50,000)
Other Paid-in Capital – S Co.
(200,000)
Retained Earnings – S Co.
(350,000)
Net Sales
(600,000)
(500,000)
Cost of Goods Sold
360,000
200,000
Operating Expenses
120,000
150,000
Subsidiary Income
(150,000)
Dividends Declared – P Co.
50,000
Dividends Declared – S Co.
10,000
0
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company
Land
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Paid-in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
Dividends Declared – P Co.
Dividends Declared – S Co.
For the worksheet solution, please refer to Answer 6-10.
45. On January 1, 20X8, Paul Company purchased 80% of the common stock of Smith Company for $300,000.
On this date Smith had total owners’ equity of $350,000. Any excess of cost over book value is attributed to a
patent, to be amortized over 10 years.
During 20X8, Paul has accounted for its investment in Smith using the simple equity method.
During 20X8, Paul sold merchandise to Smith for $50,000, of which $10,000 is held by Smith on December 31,
20X8. Paul’s gross profit on sales is 40%.
During 20X8, Smith sold some land to Paul at a gain of $10,000. Paul still holds the land at year end.
Paul and Smith qualify as an affiliated group for tax purposes and thus will file a consolidated tax return.
Assume a 30% corporate income tax rate.
Required:
Complete the Figure 6-11 worksheet for consolidated financial statements for the year ended December 31,
20X8.
Figure 6-11
Trial Balance
Eliminations and
Parent
Sub.
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Inventory, December 31
100,000
50,000
Other Current Assets
168,000
250,000
Invest in Smith Company
348,000
Land
240,000
100,000
Buildings and Equipment
300,000
200,000
Accumulated Depreciation
(80,000)
(60,000)
Current Liabilities
(150,000)
(30,000)
Long-Term Liabilities
(200,000)
(100,000)
Common Stock – P Co.
(100,000)
Other Paid-in Capital – P Co.
(180,000)
Retained Earnings – P Co.
(320,000)
Common Stock – S Co.
(100,000)
Other Paid-in Capital – S Co.
(100,000)
Retained Earnings – S Co.
(150,000)
Net Sales
(500,000)
(300,000)
Cost of Goods Sold
300,000
160,000
Operating Expenses
100,000
80,000
Subsidiary Income
(56,000)
Gain on Sale of Land
(10,000)
Dividends Declared – P Co.
30,000
Dividends Declared – S Co.
10,000
0
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Inventory, December 31
Other Current Assets
Invest in Smith Company
Land
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Long-Term Liabilities
Common Stock – P Co.
Other Paid-in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Paid-in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
Gain on Sale of Land
Dividends Declared – P Co.
Dividends Declared – S Co.
For the worksheet solution, please refer to Answer 6-11.
46. Discuss how the following items affecting shareholder equity are disclosed in a consolidated statement of
cash flows:
1) The acquisition of controlling interest by issuing shares of stock
2) The purchase of additional subsidiary shares from the noncontrolling interest
3) Subsidiary dividends