Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
7-20
Education.
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.
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/18 (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, 1/1/18 (House) …………………………. 11,200
Investment in Wilson …………………………………… 11,200
(To convert investment account from partial equity method to equity method.
Intra-entity gross profit shown in Entry *G is not properly reflected by parent
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
7-21
Education.
25. (continued)
Entry S2
Common Stock (Wilson) ……………………………………….. 310,000
Retained Earnings, 1/1/18 (Wilson)
(adjusted by Entry *G) ………………………………………. 578,000
Entry A
Buildings ………………………………………………………………. 54,000
Franchise Contracts ……………………………………………… 32,000
Goodwill ………………………………………………………………… 140,000
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
Doupnik, 13e
7-22
Education.
25. (continued)
Entry E
Operating Expenses …………………………………………. 2,000
Equipment ……………………………………………………… 5,000
Entry G
Cost of Goods Sold …………………………………………… 18,000
Inventory ……………………………………………………… 18,000
(To defer intra-entity gross profit in ending inventory.)
Noncontrolling Interest in Net Income of Cuddy:
Reported net income $70,000
Outside ownership 20%
Noncontrolling interest in Cuddy net income ………………………. $14,000
Noncontrolling Interest in Net Income of Wilson:
Reported operating income $130,000
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer, Doupnik, 13e
7-23
25. (continued)
HOUSE CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidation Worksheet
December 31, 2018
Accounts House Wilson Cuddy Consolidation EntriesNoncontrollingConsolidated
Corp. Company Company Debit Credit Interest Balance
Sales and other revenue (900,000) (700,000) (300,000) (TI) 200,000 (1,700,000)
Cost of goods sold 551,000 300,000 140,000 (G) 18,000 (*G) 12,000 797,000
Net income attributable to House Corporation (263,000)
Retained earnings, 1/1/18:
—House Corporation (820,000) (*C) 11,200 (808,800)
—Wilson Company (590,000) (*G) 12,000 -0-
(S2)578,000
—Cuddy Company (150,000) (S1)150,000 -0-
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer, Doupnik, 13e
7-24
25. (continued)
Accounts House Wilson Cuddy Consolidation EntriesNoncontrollingConsolidated
Corp. Company Company Debit Credit Interest Balance
Cash and receivables 220,000 334,000 67,000 621,000
Inventory 390,200 320,000 103,000 (G) 18,000 795,200
Investment in Wilson Company 807,800 (D2) 67,200 (*C) 11,200 -0-
(S2) 621,600
(I2) 91,000
(A) 151,200
Investment in Cuddy Company 128,000 128,000 (D1) 40,000 (S1) 240,000 -0-
(I1) 56,000
Buildings 385,000 320,000 144,000 (A) 54,000 (E) 3,000 900,000
Equipment 310,000 130,000 88,000 (E) 5,000 (A) 10,000 523,000
Doupnik, 13e
26. (20 Minutes) (Consolidation entries for a mutual holding business combination)
a. Acquisition Allocation and Amortization
Consideration transferred …………………………………….. $420,000
Noncontrolling interest fair value …………………………... 280,000
CONSOLIDATION ENTRIES
Entry *C
Investment in Lowly …………………………………………. 117,000
Retained Earnings, 1/1/18 (Mighty) ……………….. 117,000
(To accrue income to parent during the previous years as measured by
increase in book value [$200,000 × 60%] and amortization expense of $3,000
[$5,000 × 60%] for the previous year.)
Entry S1
Common Stock (Lowly) …………………………………….. 300,000
Amortization Expense ………………………………………. 5,000
Trademarks …………………………………………………. 5,000
(To record trademarks amortization expense for 2018.)
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
7-26
Education.
27. (80 Minutes) (Prepare consolidation worksheet for a father-son-grandson
combination. Also asks about income taxes paid on both a separate and a
consolidated return)
a. Acquisition-Date Allocation and Amortization
The January 1, 2017 book values are determined by removing the 2017 income
from the January 1, 2018 book values (based on equity accounts).
Consideration transferred for Stookey ……………………. $344,000
Noncontrolling interest fair value …………………………... 86,000
Stookey business fair value …………………………………… $430,000
Stookey book value ………………………………………………. (380,000)
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/18 (Stookey) ………………….. 7,680
Cost of Goods Sold ………………………………………. 7,680
(To give effect to intra-entity gross profit deferral from 2017. Amount is
calculated based on normal 48% markup [found from Income Statement]
multiplied by $16,000 retained inventory [20% of $80,000])
Entry *C1
Investment in Stookey ………………………………………. 85,856
Retained Earnings, 1/1/18 (Yarrow) ………………. 85,856
(To recognize equity income accruing from Yarrow’s investment in Stookey
during 2017. Because the initial value method is applied and no dividends
declared, no income has been recognized in connection with the 2017
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
27. (continued)
Entry *C2
Investment in Yarrow ……………………………………….. 217,670
Retained Earnings, 1/1/18 (Travers) ………………. 217,670
(To recognize equity income accruing from Travers’ investment in Yarrow
$217,670 by the $3,600 [90% × $4,000] amortization applicable to 2017.)
Entry S1
Common Stock (Stookey) …………………………………. 200,000
Retained Earnings, 1/1/18 (Stookey, as adjusted
by Entry *G) …………………………..……………………. 292,320
Entry S2
Common Stock (Yarrow) …………………………………… 300,000
Retained Earnings, 1/1/18 (Yarrow, as adjusted
by Entry *C1) ……………………………………………….. 685,856
Entry A1
Investment in Stookey …………………………………. 36,000
Noncontrolling Interest in Stookey (20%) ……… 9,000
(To recognize January 1, 2018 unamortized portion of acquisition price
Education.
27. (continued)
Entry A2
Customer List …………………………………………………… 56,000
Investment in Yarrow . ………………………………….. 50,400
Noncontrolling Interest in Yarrow …………………. 5,600
Customer List ………………………………………………. 4,000
(To recognize amortization expense for 2018—$5,000 in connection with
Yarrow’s investment and $4,000 in connection with Travers’ investment.)
Entry Tl
Sales …………………………..…………………………………… 100,000
(To defer intra-entity gross profit on ending inventory—$20,000 × 48%
markup.)
Noncontrolling Interest in Stookey’s Net Income
2018 Reported net income …………………………………….. $100,000
Noncontrolling Interest in Yarrow’s Net Income
2018 Reported net income …………………………………….. $200,000
Customer list amortization …………………………………….. (4,000)
Accrual of Stookey’s income (80% of $93,080
net income [computed above]) ………………………….. 74,464
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer, Doupnik, 13e
7-29
27. (continued) TRAVERS COMPANY AND CONSOLIDATED SUBSIDIARIES
Consolidation Worksheet
December 31, 2018
Travers Yarrow Stookey Consolidation EntriesNoncontrollingConsolidated
Accounts Company Company Company Debit Credit Interest Balances
Sales and other revenues (900,000) (600,000) (500,000) (Tl) 100,000 (1,900,000)
Cost of goods sold 480,000 320,000 260,000 (G) 9,600 (*G) 7,680 961,920
(TI) 100,000
Operating expenses 100,000 80,000 140,000 (E) 9,000 329,000
Separate company net income (320,000) (200,000) (100,000)
Consolidated net income (609,080)
Net income attributable to NCI (Yarrow) (27,046) 27,046
Net income attributable to NCI (Stookey) (18,616) 18,616
Net income attributable to Travers Company (563,418)
Retained earnings, 1/1/18:
Dividends declared 128,000 128,000
Retained earnings, 12/31/18 (892,000) (800,000) (400,000) (1,353,088)
Current assets 444,000 380,000 280,000 (G) 9,600 1,094,400
Investment in Yarrow Company 720,000 (*C2) 217,670 (S2) 887,270 -0-
(A2) 50,400
Total assets 2,113,000 1,560,000 800,000 3,491,400
Liabilities (721,000) (460,000) (200,000) (1,381,000)
Common stock (500,000) (300,000) (200,000) (S1) 200,000
(S2) 300,000 (500,000)
Retained earnings, 12/31/18 (above) (892,000) (800,000) (400,000) (S1) 98,464 (1,353,088)
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
Education.
27. (continued)
b. Travers’ reported pre-tax income ………………………………………………. $320,000
Yarrow’s reported pre-tax income ……………………………………………… 200,000
Dividend income (none collected) ……………………………………………… -0-
Income tax payable …………………………………………………………………… $229,950
c. Stookey’s reported pre-tax income ……………………………………………. $100,000
(Intra-entity gross profits in ending inventory
are not deferred on a separate tax return.)
Tax rate …………………………..……………………………………………………….. 45%
Income tax payable …………………………………………………………………… $45,000
d. (1) Because Yarrow owns 80% of Stookey‘s stock, intra-entity dividends are
reported income:
2018 Intra-entity gross profit taxed in 2018 …………………………………. $9,600
2017 Intra-entity gross profit taxed previously in 2017 ………………… (7,680)
Increase in taxable income ……………………………………………………….. $1,920
Tax rate …………………………..……………………………………………………….. 45%
Prepayment (asset) (above) ………………………………………………….. (864)
Income tax expense 2018………………………………………………………. $274,086
Because a single rate is used, income tax expense can also be computed by
taking consolidated net income (prior to noncontrolling interest reduction) of
$609,080 (part a.) and multiplying by the 45% tax rate to obtain $274,086.
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
7-31
Education.
28. (40 Minutes) (Series of questions about a business combination and its income
tax reporting)
a. Partial equity method. “Income of Syber” is 80% of Syber‘s reported total,
suggesting neither amortization nor intra-entity profit adjustments. Also,
Parson’s recognition of “Income of Syber” does not equal its share of
the annual amortization. Because a 15-year life is assumed by the combination,
the amount originally allocated to trademarks must have been $37,500.
d. $120,000. Decrease shown in consolidated sales account.
e. Upstream. “Net income attributable to the noncontrolling interest“ is $18,700.
Doupnik, 13e
Education.
28. (continued)
h. This figure is computed as follows:
Book value of subsidiary—1/1 ……………………………….. $370,000
Intra-entity gross profit in beg. inventory (see above) . (8,000)
Adjusted book value ……………………………………………. $362,000
Excess allocation at 1/1 ………………………………………….. 35,000
i. For a consolidated return, intra-entity gross profits in ending inventory are
Sales …………………………..…………………………………………………….. $1,280,000
Cost of goods sold ……………………………………………………….…….. (784,000)
Operating expenses …………………………………………………………… (202,500)
Taxable income …………………………..………………………………… $ 293,500
j. On a separate return, Parson would report its operating income of $200,000
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
28. k. (continued)
On a separate return, Syber would report $100,000 operating income for a
payable of $40,000. The intra-entity gross profits in inventory are accounted for
in different time periods in the financial statements, thus, a temporary difference
29. (45 Minutes) Develop worksheet entries that were used to consolidate the
financial statements of a father-son-grandson combination.
Entry *G
Retained Earnings, 1/1/18 (Delta) ………………………. 15,000
Education.
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
7-35
Education.
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 D1
Investment in Delta …………………………………………… 32,000
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
7-36
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, 1/01/18 (Entry S2) …………. $99,600
Noncontrolling interest, 1/01/18 (Entry A) …………… 22,500
Noncontrolling interest in Delta’s income (above) . 31,950
Dividends declared to noncontrolling interest
($40,000 × 20%) ………………………………………………. (8,000)
Noncontrolling interest in Delta, 12/31/18 ………. $146,050
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
7-37
Education.
Chapter 7 Excel Case Solution
Operating Dividends Excess
income declared amortizations
Highpoint $425,000 $200,000
Middlebury $340,000 $150,000 $20,000
Lowton $250,000 $ 75,000 $25,000
Middlebury’s share of Lowton net income:
Lowton operating income $250,000
Excess amortization (25,000)
Accrual based income $225,000
Middlebury ownership percentage 80%
Excess amortization (20,000)
Middlebury accrual-based net income $500,000
Highpoint ownership percentage 95%
Highpoint’s share of reported net income $475,000
Comparison
Consolidated net income (operating incomes less
amortizations) $970,000
Chapter 07 – Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
Education.
RESEARCH CASE: CONSOLIDATED TAX EXPENSE
assets and liabilities consist of the following (in millions):
December 31, 2015 2014
Deferred tax assets:
Property, plant and equipment $ 192 $ 96
Trademarks and other intangible assets 68 68
Other 175 196
Gross deferred tax assets 4,300 4,440
Valuation allowances (477) (649)
Total deferred tax assets1,2 $ 3,823 $ 3,791
Deferred tax liabilities:
Property, plant and equipment $ (1,887) $ (2,342)
Trademarks and other intangible assets (3,422) (4,020)
1 Noncurrent deferred tax assets of $360 million and $319 million were included in the line item
accounts payable and accrued expenses in our consolidated balance sheets as of December 31,
2015 and 2014, respectively.
As of December 31, 2015 and 2014, we had $62 million of net deferred tax assets and
$643 million of net deferred tax liabilities, respectively, located in countries outside the
United States.