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