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28. (40 Minutes) (Series of questions about a business combination and its income
tax reporting)
a. Partial equity method. "Income of Soludan" is 80% of Soludan's reported total.
b. $12,000. Reduction is evidenced by a $338,000 figure reported for consolidated
inventory rather than the $350,000 total for the two companies.
f. $20,000. For both receivables and liabilities, the consolidated total is $20,000
less than the sum of the two companies.
g. $8,000. Consolidated cost of goods sold is decreased by $120,000 (to $780,000)
in eliminating intra-entity sales. The increase of $12,000 created by the ending
28.(continued)
h. Because the trademarks balance now stands at $32,500, amortization expense
of $2,500 has been recognized, $2,500 in the previous year. In addition, an
$8,000 unrealized gross profit from the prior year (see part g.) is recognized.
Amortization expense—prior year × 80%....................... $2,000
i. This figure is computed as follows:
Book value of subsidiary—1/1 ....................................... $370,000
Unrealized gross profit in beginning inventory (see above) (8,000)
Realized book value ...................................................... $362,000
Ending noncontrolling interest ...................................... $94 ,100
j. For a consolidated return, unrealized gross profit are deferred as in the
consolidated statements. At a 40% rate, both the expense and payable would be
$117,400.
Income tax expense ......................................................... 117,400
Income tax payable .................................................... 117,400
Consolidated Taxable Income:
k. On a separate return, Politan would report its operating income of $200,000
leading to a tax expense and payable of $80,000. Because of the level of
ownership, intra-entity dividend (or investment) income is omitted.
Income Tax Expense ........................................................ 80,000
28.k. (continued)
On a separate return, Soludan would report $100,000 operating income for a
payable of $40,000. The unrealized gross profits are accounted for in different
time periods in the financial statements, thus, a temporary difference is created.
Income Tax Expense ........................................................ 38,400
Deferred Income Tax Asset.............................................. 1,600
Income Tax Payable ................................................... 40,000
Soludan's entry can also be computed as follows:
Income tax expense ......................................................................... $38,400
Taxes payable.................................................................................... 40,000
Deferred tax asset .................................................................................. $ 1 ,600
29.(45 Minutes) Develop worksheet entries that were used to consolidate the
financial statements of a father-son-grandson combination.
Entry *G
Retained Earnings, 1/1/14 (Delta) ............................. 15,000
Cost of Goods Sold............................................... 15,000
(To recognize gross profit that was unrealized in 2013 [amount provided].)
29. (continued)
Entry *C2
Retained Earnings, 1/1/14 (Alpha) ............................ 27,600
Investment in Delta Company ............................. 27,600
To recognize accrual adjustments for excess amortization
and inventory deferral as follows:
Excess amortization from Delta acquisition
Entry S1
Common Stock (Omega) ........................................... 100,000
Retained Earnings, 1/1/14 (Omega) .......................... 100,000
Investment in Omega (70%) ................................. 140,000
Entry S2
Common Stock (Delta) ............................................... 120,000
Retained Earnings, 1/1/14 (Delta, as adjusted) ....... 378,000
recognize outside ownership.)
Entry A
Investment in Delta ............................................... 90,000
Investment in Omega ............................................ 77,000
Noncontrolling Interest in Delta........................... 22,500
Noncontrolling Interest in Omega........................ 33,000
recorded on first investment but only one year for second.)
29. (continued)
Entry I2
Income of Subsidiary ................................................. 49,000
Investment in Omega ............................................ 49,000
(To eliminate intra-entity income accrual found on Delta's records.)
Entry D2
Investment in Omega ................................................. 35,000
Dividends Declared (Omega) ............................... 35,000
(To eliminate intra-entity dividends.)
Entry Tl
Sales ............................................................................ 200,000
Cost of Goods Sold............................................... 200,000
(To eliminate intra-entity inventory transfer.)
Entry G
Cost of Goods Sold..................................................... 22,000
Inventory................................................................. 22,000
(To defer ending unrealized gross profit on intra-entity transfers.)
Noncontrolling Interest in Omega's Income:
29. (continued)
Noncontrolling Interest in Delta's Net Income:
Reported operating income ............................................ $131,000
Equity income investment in Omega (70% × $60,000) . 42,000
Amortization expense ..................................................... (6,250)
Noncontrolling interest in Delta Company....................
Noncontrolling interest, 1/01/14 (Entry S2).............. $99,600
Noncontrolling interest, 1/01/14 (Entry A)................ 22,500
Noncontrolling interest in Delta’s income (above). . 31,950
Dividends declared to noncontrolling interest
Dividends declared to noncontrolling interest ($50,000 × 30%) (15 ,000)
Noncontrolling interest in Omega, 12/31/14........ $96 ,000
Chapter 7 Excel Case Solution
Operating Dividends Excess
income declared amortizations
Summit $345,000 $150,000
Ownership percentages
Summit-->Treeline 90%
Treeline-->Basecamp 70%
Treeline's share of Basecamp net income:
Basecamp operating income $175,000
Excess amortization (25 ,000)
Excess amortization (20 ,000)
Treeline adjusted income $365,000
Summit ownership percentage 90 %
Summit's share of reported net income $328 ,500
Comparison
Consolidated net income (operating incomes less
amortizations) $755,000
Net income attributable to noncontrolling interests
Difference between Summit’s net income and controlling interest in consolidated
net income = -0-
RESEARCH CASE: CONSOLIDATED TAX EXPENSE
At www.thecoca-colacompany.com the annual 10-K Note 14 provides detailed footnote
disclosures for consolidated income tax. The excerpt below shows a portion of the
footnote relating to deferred tax assets, liabilities, and carryforwards.
From Note 14: Income Taxes
The tax effects of temporary differences and carryforwards that give rise to deferred tax
assets and liabilities consist of the following (in millions):
December 31, 2012 2011
Deferred tax assets:
Derivative financial instruments 116 43
Other liabilities 1,178 1,257
Benefit plans 1,808 2,022
Net operating/capital loss carryforwards 782 818
Other 320 418
Gross deferred tax assets 4,579 5,128
Valuation allowances (487 ) (859 )
Trademarks and other intangible assets (4,133) (4,201)
Equity method investments (including translation adjustment) (712) (816)
Derivative financial instruments (140) (129)
Other liabilities (144) (129)
1 Noncurrent deferred tax assets of $ 403 million and $243 million were included in the line item
other assets in our consolidated balance sheets as of December 31, 2012 and 2011, respectively.
2 Current deferred tax assets of $244 million and $227 million were included in the line item
prepaid expenses and other assets in our consolidated balance sheets as of December 31, 2012
and 2011, respectively.
As of December 31, 2012, we had $6,494 million of loss carryforwards available to reduce
future taxable income. Loss carryforwards of $ 279 million must be utilized within the
next five years, and the remainder can be utilized over a period greater than five years..
