Chapter 10 – Additional Consolidation Reporting Issues
P10-30 Computations Involving Tax Allocation
a.
Equity-method journal entries recorded by Broom Manufacturing:
Investment in Satellite Industries
Income from Satellite Industries
142,500
Record equity-method income for 20X5: $190,000 x 0.75
Cash
Investment in Satellite Industries
112,500
Record dividends for 20X5: $150,000 x 0.75
b.
Income assigned to noncontrolling interest:
Net income of Satellite Industries
$190,000
Unrealized inventory profit ($30,000 x 0.60)
(18,000)
Unrealized profit on sale of land ($120,000 x 0.60)
(72,000)
Satellite’s realized net income
$100,000
Proportion of stock held by noncontrolling interest
x 0.25
Income to noncontrolling interest
$ 25,000
c.
Consolidated net income and income to controlling Interest:
Operating income of Broom Manufacturing
$700,000
Inventory profits realized in 20X5
20,000
Realized operating income of Broom Manufacturing
$720,000
Realized income of Satellite Industries
100,000
Consolidated income before provision for taxes
$820,000
Provision for income taxes on:
Operating income ($720,000 x 0.40)
$288,000
Income from Satellite Industries ($112,500 x 0.20 x 0.40)
9,000
(297,000)
Consolidated Net Income
$523,000
Income to noncontrolling interest
(25,000)
Income to controlling interest
$498,000
d.
Net assets assigned to noncontrolling interest in consolidated balance sheet at
December 31, 20X5:
Net assets reported by Satellite Industries
$900,000
Less: Unrealized inventory profits ($30,000 x 0.60)
(18,000)
Unrealized profit on land ($120,000 x 0.60)
(72,000)
Realized net assets of Satellite Industries
$810,000
Proportion of stock held by noncontrolling interest
x .25
Net assets assigned to noncontrolling interest
$202,500
P10-31 Worksheet Involving Tax Allocation
a. Consolidation entries:
Book Value Calculations:
NCI
30%
+
Hardtack
Bread
=
Common
Stock
+
Retained
Earnings
Original Book Value
60,000
140,000
50,000
150,000
+ Net Income
10,800
25,200
36,000
– Dividends
(3,000)
(7,000)
(10,000)
Ending Book Value
67,800
158,200
50,000
176,000
Adjustment to Basic Consolidation Entry:
NCI
30%
Hardtack
Bread
Net Income
10,800
25,200
+ Reversal of X6 GP, net of taxes (Up)
1,800
4,200
– Deferral of X7 GP, net of taxes (Up)
(4,500)
(10,500)
– Gain on Asset Sale, net of taxes
(Down)
(9,000)
Income to be eliminated
8,100
9,900
————–——–——————–——————–———-———-—————
Ending Book Value
67,800
158,200
+ Reversal of X6 GP, net of taxes (Up)
1,800
4,200
– Deferral of X7 GP, net of taxes (Up)
(4,500)
(10,500)
– Gain on Asset Sale, net of taxes
(Down)
(9,000)
Adjusted Book Value
65,100
142,900
Basic Consolidation Entry
Common Stock
50,000
← Common Stock
Retained Earnings
150,000
← Beginning balance in RE
Income from Custom Pizza
9,900
← Hardtack Bread’s share of NI + GP Reversal – GP Def. – Gain
NCI in NI of Custom Pizza
8,100
← NCI share of Tarp Co.’s NI + GP Reversal – GP Def.
Dividends Declared
10,000
← 100% of Tarp Co.’s dividends
Investment in Custom Pizza
142,900
← Hardtack Bread’s share of BV + GP Reversal – GP Def. – Gain
NCI in NA of Custom Pizza
65,100
← NCI share of BV of net assets + GP Reversal – GP Def.
Eliminate Beginning Inventory Profit:
Investment in Custom Pizza
4,200
NCI in NA of Custom Pizza
1,800
Income Tax Expense
4,000
Cost of Goods Sold
10,000
Eliminate Inventory Purchases:
Sales
120,000
Cost of Goods Sold
95,000
Inventory
25,000
P10-31 (continued)
Eliminate Tax Expense on Unrealized Profit on Inventory Transfer:
Deferred Tax Asset
10,000
Deferred Tax Expense
10,000
Equipment
Accumulated
Depreciation
Custom Pizza
65,000
Actual
0
85,000
100,000
Hardtack Bread
150,000
“As If”
100,000
Eliminate the Gain on Equipment and Correct Asset’s Basis:
Gain on sale
15,000
Equipment
85,000
Accumulated Depreciation
100,000
Eliminate Tax Expense on Unrealized Profit from Asset
Transfer:
Deferred Tax Asset
6,000
Deferred Tax Expense
6,000
P10-31 (continued)
b.
Hardtack
Bread
Custom
Pizza
Consolidation Entries
DR
CR
Consolidated
Income Statement
Sales
580,000
300,000
120,000
760,000
Less: COGS
(435,000)
(210,000)
10,000
(540,000)
95,000
Less: Depreciation Expense
(40,000)
(20,000)
(60,000)
Less: Tax Expense
(44,000)
(24,000)
4,000
10,000
(56,000)
6,000
Less: Other Expenses
(11,400)
(10,000)
(21,400)
Income from Custom Pizza
9,900
0
9,900
0
Gain on Sale of Equipment
15,000
0
15,000
0
Consolidated Net Income
74,500
36,000
148,900
121,000
82,600
NCI in Net Income
8,100
(8,100)
Controlling Interest in Net Income
74,500
36,000
157,000
121,000
74,500
Statement of Retained Earnings
Beginning Balance
370,000
150,000
150,000
370,000
Net Income
74,500
36,000
157,000
121,000
74,500
Less: Dividends Declared
(20,000)
(10,000)
10,000
(20,000)
Ending Balance
424,500
176,000
307,000
131,000
424,500
Balance Sheet
Cash
35,800
56,000
91,800
Accounts Receivable
130,000
40,000
170,000
Inventory
220,000
60,000
25,000
255,000
Land
60,000
20,000
80,000
Buildings and Equipment
450,000
400,000
85,000
935,000
Less: Accumulated Depreciation
(150,000)
(160,000)
100,000
(410,000)
Patents
70,000
0
70,000
Investment in Custom Pizza
138,700
0
4,200
142,900
0
Deferred Tax Asset
10,000
16,000
6,000
Total Assets
954,500
416,000
105,200
267,900
1,207,800
Accounts Payable
40,000
30,000
70,000
Wages Payable
70,000
20,000
90,000
Bonds Payable
200,000
100,000
300,000
Deferred Income Taxes
120,000
40,000
160,000
Common Stock
100,000
50,000
50,000
100,000
Retained Earnings
424,500
176,000
307,000
131,000
424,500
NCI in NA of Custom Pizza
1,800
65,100
63,300
Total Liabilities & Equity
954,500
416,000
358,800
196,100
1,207,800
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Basic earnings per share
Branch Manufacturing income from operations
$100,000
Short Retail Stores net income
$49,200
Preferred dividends ($100,000 x 0.08)
(8,000)
Earnings available
$41,200
Short shares outstanding
÷20,000
Computed EPS for Short
$ 2.06
Shares held by Branch Manufacturing
x16,000
Contribution to Branch Manufacturing earnings
32,960
Total earnings of Branch Manufacturing
$132,960
Preferred dividends of Branch Manufacturing
(22,000)
Earnings to Branch common shareholders
$110,960
Branch Manufacturing shares outstanding
÷ 15,000
Basic earnings per share
$ 7.40
Diluted earnings per share
Branch Manufacturing income from operations
$100,000
Short Retail Stores net income
$49,200
Assumed conversion of bonds:
$20,000 x 0.60
12,000
Earnings available
$61,200
Short shares outstanding
20,000
Assumed conversion of bonds
8,000
Assumed conversion of preferred
12,000
Total shares
÷40,000
Computed EPS for Short
$ 1.53
Shares held by Branch Manufacturing
x16,000
Contribution to Branch Manufacturing earnings
24,480
Total earnings of Branch Manufacturing
$124,480
Preferred dividends of Branch Manufacturing
(22,000)
Earnings to Branch common shareholders
$102,480
Branch Manufacturing shares outstanding
÷ 15,000
Diluted earnings per share
$ 6.83
P10-33 Comprehensive Earnings per Share
Basic earnings per share
Mighty Corporation operating income
$300,000
Longfellow net income
$115,000
Preferred dividends ($200,000 x 0.11)
(22,000)
Earnings available to common shareholders
$ 93,000
Longfellow shares outstanding
÷ 40,000
Computed EPS for Longfellow
$ 2.325
Shares held by Mighty Corporation
x 32,000
Contribution to Mighty Corporation earnings
74,400
Total earnings of Mighty Corporation
$374,400
Mighty Corporation shares outstanding
÷100,000
Basic earnings per share
$ 3.74
Diluted earnings per share
Mighty Corporation operating income
$300,000
Longfellow net income
$115,000
Assumed conversion of bonds
($500,000 x 0.08) x 0.60
24,000
Earnings available to common
$139,000
Longfellow shares outstanding
40,000
Assumed conversion of bonds
30,000
Assumed conversion of preferred
20,000
Exercise of warrants:
10,000 – [($8 x 10,000) / $40]
8,000
Total shares
÷ 98,000
Computed EPS for Longfellow
$ 1.418
Shares held by Mighty Corporation
x 32,000
Contribution to Mighty Corporation Earnings
45,376
Total earnings of Mighty Corporation
$345,376
Interest savings on assumed conversion
of bonds ($800,000 x 0.10) x 0.60
48,000
$393,376
Mighty Corporation shares
÷125,000
Diluted earnings per share
$
3.15