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Chapter 10 - Additional Consolidation Reporting Issues
P10-28 Deferred Tax Assets and Liabilities in a Consolidated Balance Sheet
Deferred Tax Asset
$8,000
Tax Rate
÷ 0.40
Book-Tax Difference (future deductible difference)
Amount related to Vacation Payable
Remainder related to Allowance for Doubtful Accounts
20,000
(15,000)
5,000
Deferred Tax Liability
$6,000
Tax Rate
÷ 0.40
Book-Tax Difference (future taxable difference) related to Equipment
15,000
Tax basis of Accounts Receivable = $55,000 (50,000 book value + 5,000 book-tax difference
related to the allowance)
Deferred Tax Asset
$1,000
Tax Rate
÷ 0.40
Book-Tax Difference (future deductible difference) related
to Allowance for Doubtful Accounts
2,500
Deferred Tax Liability
$2,000
Tax Rate
÷ 0.40
Book-Tax Difference (future taxable difference) related to Equipment
5,000
Tax basis of Accounts Receivable = $14,500 (12,000 book value + 2,500 book-tax difference
P10-28 (continued)
As stated in the problem, all other items have no book-tax differences.
b. The fair value of the DTAs and DTLs will be the tax-effected differences between the tax
bases and the book bases of Harmony’s identifiable assets and liabilities.
Harmony Corporation
Fair Value
Tax Basis
Difference
Tax-
effected
Cash
$ 8,000
$ 8,000
0
0
Accounts Receivable, net
12,000
14,500
2,500
1,000
Inventory
10,000
7,000
(3,000)
(1,200)
Equipment, net
40,000
20,000
(20,000)
(8,000)
Patent
20,000
0
(20,000)
(8,000)
Accounts Payable
$ 13,000
$ 13,000
0
0
Long Term Debt
8,000
8,000
0
0
Total DTA = 1,000 related to Accounts receivable
Total DTL = 17,200 related to Inventory, Equipment and Patent
c. Consolidation entries:
Peace
=
Common
Stock
+
Retained
Earnings
Book value at
acquisition date
30,000
20,000
10,000
Basic Consolidation Entry
Common Stock
20,000
Retained Earnings
10,000
Investment in Harmony Co.
30,000
P10-28 (continued)
Excess Value (Differential) Calculations:
Peace
=
Inventory
+
Equip
+
Patent
+
Goodwill
-
DTL
Beginning Balance
30,000
3,000
15,000
20,000
7,200
(15,200)
Excess Value (Differential) Reclassification Entry:
Inventory
3,000
Equipment
15,000
Patent
20,000
Goodwill
7,200
Deferred Tax Liability
15,200
Investment in Harmony
30,000
Optional Accumulated Depreciation Consolidation Entry
Accumulated Depreciation
10,000
Equipment
10,000
Peace
Harmony
Consolidation
Entries
DR
CR
Consolidated
Balance Sheet
Cash
30,000
8,000
38.000
Accounts Receivable
50,000
12,000
62,000
Inventory
75,000
7,000
3,000
85,000
Deferred Tax Asset
8,000
1,000
9,000
Equipment
200,000
35,000
15,000
10,000
240,000
Less: Accumulated
Depreciation
(40,000)
(10,000)
10,000
(40,000)
Investment in Harmony
60,000
30,000
0
30,000
Patent
20,000
20,000
Goodwill
7,200
7,200
Total Assets
383,000
53,000
55,200
70,000
421,200
Accounts Payable
62,000
13,000
75,000
Accrued Vacation Payable
15,000
15,000
Deferred Tax Liability
6,000
2,000
15,200
23,200
Long Term Debt
100,000
8,000
108,000
Common Stock
150,000
20,000
20,000
150,000
Retained Earnings
50,000
10,000
10,000
50,000
Total Liabilities & Equity
383,000
53,000
30,000
15,200
421,200
P10-29 Tax Allocation in Consolidated Balance Sheet
Consolidation entries (not required):
Book Value Calculations:
NCI
30%
+
Acme
Powder
70%
=
Common
Stock
+
Retained
Earnings
Ending book value
120,000
280,000
150,000
250,000
Adjustment to Basic Consolidation Entry
NCI
Acme
Powder
Ending Book Value
120,000
280,000
- Gross profit deferral, net of taxes (up)
(3,600)
(8,400)
- Gross profit deferral, net of taxes (down)
(15,000)
- Gain on Assets Sale, net of taxes (up)
(9,000)
(21,000)
Adjusted Book Value
107,400
235,600
108,000
242,000
Deferred Gain Calculations:
Total
=
Acme
Powder's
share
+
NCI's
share
Upstream GP Deferral (net of taxes)
(12,000)
(8,400)
(3,600)
Downstream GP Deferral (net of taxes)
(15,000)
(15,000)
Upstream Gain on Asset Sale (net of taxes)
(30,000)
(21,000)
(9,000)
Total
(57,000)
(44,400)
(12,600)
Basic Consolidation Entry
Common Stock
150,000
← Common Stock
Retained Earnings
250,000
← Beginning balance in RE
Income from Brown Co.
44,400
← Acme Powder’s share GP Deferrals – Gain
NCI in NI of Brown Co.
12,600
← NCI share of GP Deferral – Gain
Investment in Brown Co.
235,600
← Acme Powder's share of BV with adjustments
NCI in NA of Brown Co.
107,400
← NCI share of BV of net assets with adjustments
Total
=
Re-sold
+
Ending Inventory
Sales
70,000
0
70,000
COGS
50,000
0
50,000
Gross Profit
20,000
0
20,000
Gross Profit %
28.57%
P10-29 (continued)
Eliminate Inventory Purchases:
Sales
70,000
Cost of Goods Sold
50,000
Inventory
20,000
Eliminate Tax Expense on Unrealized Profit on Inventory Transfer:
Deferred Tax Asset
8,000
Deferred Tax Expense
8,000
Total
=
Re-sold
+
Ending Inventory
Sales
85,000
0
85,000
COGS
60,000
0
60,000
Gross Profit
25,000
0
25,000
Gross Profit %
29.41%
Eliminate Inventory Purchases:
Sales
85,000
Cost of Goods Sold
60,000
Inventory
25,000
Eliminate Tax Expense on Unrealized Profit on Inventory Transfer:
Deferred Tax Asset
10,000
Deferred Tax Expense
10,000
Equipment
Accumulated
Depreciation
Acme Powder
90,000
Actual
0
30,000
80,000
Brown Co.
120,000
"As If"
80,000
Eliminate the Gain on Equipment and Correct Asset's Basis:
Gain on sale
50,000
Equipment
30,000
Accumulated Depreciation
80,000
Eliminate Tax Expense on Unrealized Profit from Asset Transfer:
Deferred Tax Asset
20,000
Deferred Tax Expense
20,000
P10-29 (continued)
a.
Acme
Powder
Brown
Co.
Consolidation
Entries
DR
CR
Consolidated
Balance Sheet
Cash
44,400
20,000
64,400
Accounts Receivable
120,000
60,000
180,000
Inventory
170,000
120,000
20,000
245,000
25,000
Land
90,000
30,000
120,000
Buildings and Equipment
500,000
300,000
30,000
830,000
Less: Accumulated
Depreciation
(180,000)
(80,000)
80,000
(340,000)
Investment in Brown Co.
235,600
0
235,600
0
Deferred Tax Asset
8,000
38,000
10,000
20,000
Total Assets
980,000
450,000
68,000
360,600
1,137,400
Accounts Payable
70,000
20,000
90,000
Wages Payable
80,000
30,000
110,000
Bonds Payable
200,000
0
200,000
Common Stock
100,000
150,000
150,000
100,000
Retained Earnings
530,000
250,000
250,000
44,400
530,000
70,000
12,600
85,000
50,000
50,000
8,000
60,000
10,000
20,000
NCI in NA of Brown Co.
107,400
107,400
Total Liabilities & Equity
980,000
450,000
605,000
312,400
1,137,400
P10-29 (continued)
b.
Acme Powder Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 20X9
Cash
$ 64,400
Accounts Receivable
180,000
Inventory
245,000
Land
120,000
Buildings and Equipment
$830,000
Less: Accumulated Depreciation
(340,000)
490,000
Deferred Tax Asset
38,000
Total Assets
$1,137,400
Accounts Payable
$ 90,000
Wages Payable
110,000
Bonds Payable
200,000
Stockholders' Equity:
Controlling Interest:
Common Stock
$100,000
Retained Earnings
530,000
Total Controlling Interest
$630,000
Noncontrolling Interest
107,400
Total Stockholders’ Equity
737,400
Total Liabilities and Stockholders' Equity
$1,137,400
