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17. (30 Minutes) (Consolidated net income figures for a connecting affiliation)
UNREALIZED GROSS PROFIT:
Wisconsin ($40,000 remaining inventory × 30% markup) = $12,000
NONCONTROLLING INTERESTS:
CLEVELAND:
Operating income (sales minus cost of goods sold and
expenses) ......................................................................... $60,000
Defer unrealized gross profit (above) ................................. (3 ,000)
Noncontrolling interest in Cleveland's net income ...... $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
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 intra-
entity transfers of $40,000 and $100,000, and defer [add] unrealized gains of
$3,000 and $12,000)
18. (12 Minutes) (Acquisition accounting for a subsidiary’s operating loss
carryforward)
a. Consideration transferred 1/1/14 $1,080,000
Fair value of identifiable assets acquired:
Software licensing agreements $830,000
Deferred tax asset from NOL (.35 × $155,000) 54 ,250
Fair value of net identifiable assets acquired 884 ,250
Goodwill $195 ,750
b. Consideration transferred 1/1/14 $1,080,000
Fair value of identifiable assets acquired:
Goodwill $250 ,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 intra-
entity 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 2014,
and defer [add] $40,000 intra-entity gain into 2015)
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) ................................ $126,000
19. (continued)
DOWN:
Reported income .............................................................. $100,000
Total income tax payable: Current = $67,800 ($37,800 + $30,000)
difference results in a deferred tax asset of $3,000 ($10,000 x 30%).
CONSOLIDATED INCOME TAX EXPENSE:
Income tax liability ($37,800 + $30,000 = $67,800) less deferred tax asset ($3,000)
= income tax expense $64,800.
20. (45 Minutes) (Computation of income tax expense and the related payable
balances)
a. $260,000 ($650,000 × 40%)
The affiliated group is taxed on its operating income of $650,000 ($500,000 -
b. $260,000 ($650,000 × 40%)
The affiliated group is taxed on its operating income of $650,000 (the net
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
20.(continued)
d. Clarke’s operating income $500,000
Dividends received net of 80% deduction
($80,000 x 70% x 20%) 11,200
Taxable income $511,200
Tax rate 40%
Rogers’ income before income tax $240,000
Less: income tax (40%) 96,000
Rogers net income $144,000
Less: dividends paid 80,000
Entry on Clarke’s books:
Deferred Tax Asset 36,000
Income Tax Expense 172,064
Deferred Tax Liability 3,584
Tax Payable 96,000
Consolidated tax expense = $172,064 + $96,000 = $268,064
e. $204,480 (see part d. above) Clarke owes $200,000 on its operating income
($500,000 × 40%) because the unrealized gain cannot be deferred. Clarke also owes
excess of dividends received ($56,000).
21. (20 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns.)
a. Consolidated Return—2014
Piranto income 2014 (sales less expenses) ....................................... $300,000
Slinton income 2014 (sales less expenses) ........................................ 100,000
2013 gain realized in 2014...................................................................... 120,000
Because no temporary differences exist in this problem, the income tax expense
b. Separate Returns—2014
On its separate tax return, Piranto will report taxable income of $300,000—the
unrealized gains cannot be deferred. The dividends would not be taxable
To determine the income tax expense for Piranto, the two temporary differences
must be taken into account:
Taxable income ................................................................ $300,000
Gain taxed in 2013 although realized
in 2014 ......................................................................... 120,000
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 gross profits are taxed immediately
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 ............................................................ $300,000
Equity income .................................................................. $30,960
Taxable portion ................................................................ 20% 6,192
Income eventually subject to taxation ........................... $306,192
-OR-
Lake’s operating income.................................................. $300,000
Dividends received net of 80% deduction
($10,000 x 60% x 20%).................................................... 1,200
Taxable income................................................................. $301,200
Tax rate 40%
Less: dividends paid........................................................ 10,000
Undistributed income....................................................... $ 41,600
Lake’s ownership percentage......................................... 60%
Lake’s share of undistributed income............................ $ 24,960
Less: dividends-received deduction (80%).................... 19,998
Income eventually taxable to Lake................................. $ 4,992
Tax rate............................................................................... 40%
22. (continued)
Entry on Lake’s books:
Income Tax Expense 122,477
Deferred Tax Liability 1,997
Tax Payable 120,480
Entry on Boxwood’s books:
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............................................................. $300,000
Dividend income (60% × $10,000) .................................. $6,000
Taxable portion (net of 80% dividends received deduction) 20% 1,200
Income currently taxable ................................................ $301,200
Tax rate ............................................................................ 40%
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%)................................... $1,997
Deferred income tax asset on net unrealized gross profit
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
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 ............................................................ $450,000
Tax rate . ............................................................................ 40%
Taxes to be paid ............................................................... $180,000
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
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
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
24.(10 Minutes) (Impact on goodwill of assets with a different tax vs. book value.)
a. The assets and liabilities of Oxford (the subsidiary) will be consolidated at
their individual net fair values ($558,000). However, both the buildings and
Tax Fair Temporary
Basis Value Difference
Buildings .................................... $221,000 $276,000 $ 55,000
Equipment .................................. 160,000 233,000 73,000
b. Consequently, Oxford's accounts will be consolidated as follows:
(parentheses indicate a credit balance)
Accounts receivable .................................................. $153,000
Inventory ..................................................................... 141,000
Land ............................................................................. 136,000
Assigned to specific accounts ................................. 606,800
Acquisition consideration ......................................... 850 ,000
c. Excess assigned to goodwill .................................... $243 ,200
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 gross profits in beginning and ending
inventory.
Beginning Unrealized Gross Profit (Wilson)
(January 1, 2014 Inventory Transfer Price (goods remaining) =
Balance) Cost + .25 Cost
Ending Unrealized Gross Profit (Wilson)
(December 31, 2014 Inventory Transfer Price (goods remaining) =
Balance) Cost + .25 Cost
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/14 (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, 1/1/14 (House) ................................. 11,200
Investment in Wilson ............................................ 11,200
Entry S1
Common Stock (Cuddy) .................................................. 150,000
Retained Earnings, 1/1/14 (Cuddy) ................................ 150,000
25.(continued)
Entry S2
Common Stock (Wilson) ................................................. 310,000
Retained Earnings, 1/1/14 (Wilson)
(adjusted by Entry *G) ................................................ 578,000
Entry A
Buildings............................................................................ 54,000
Franchise Contracts ........................................................ 32,000
Goodwill............................................................................. 140,000
Equipment ................................................................... 10,000
Investment in Wilson ................................................. 151,200
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
Dividends declared (80%) (Cuddy) ...................... 40,000
(To eliminate effects of intra-entity dividend payments.)
Entry D2
