Advanced Financial Accounting
12th Edition
ISBN: 9781259916977
Author: Christensen, Theodore E., COTTRELL, David M., Budd, Cassy
Publisher: Mcgraw-hill Education,
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Question
Chapter 10, Problem 10.31P
a
To determine
Consolidation income tax issues: the legal structure of an acquisition can result in a taxable or non-taxable transactions. In taxable transaction, the assets acquired and liabilities assumed will have tax basis equal to the fair market values because the subsidiary is required to recognize all inherent gains and losses for tax purposes. In order to avoid this many acquisitions are structured to avoid classification as taxable transaction.
Any difference arising out of fair market value and tax basis should be recorded as
When companies in the consolidated group files separate tax returns, intercompany income accruals and dividend transfers must be considered in computing income tax expense for the period. When an investor and investee files separate tax returns, the investor is taxed on the dividends received from the investee rather than on the amount of investment income reported.
Requirement 1
the preparation of consolidated entries needed as of December 31, 20X7, needed for consolidated financial statements.
a
Expert Solution
Answer to Problem 10.31P
Elimination entries:
| Debit | Credit | |
| To eliminate income from subsidiary | ||
| Income from subsidiary | 25,200 | |
| Dividends declared | 7,000 | |
| Investment in SC common stock | 18,200 | |
| To assign income to non-controlling interest | ||
| Income to non-controlling interest | 8,100 | |
| Dividends declared | 3,000 | |
| Non-controlling interest | 5,100 | |
| Common stock- SC | 50,000 | |
| 150,000 | ||
| Investment in SC common stock | 140,000 | |
| Non-controlling interest | 60,000 | |
| Eliminate unrealized profit in beginning inventory | ||
| Tax expense | 4,000 | |
| Retained earnings January 1 | 4,200 | |
| Non-controlling interest | 1,800 | |
| Cost of goods sold | 10,000 | |
| Eliminating unrealized profit on ending inventory | ||
| Sales | 120,000 | |
| Cost of goods sold | 95,000 | |
| Inventory | 25,000 | |
| Eliminating tax expense on unrealized intercompany profit | ||
| 10,000 | ||
| Tax expense | 10,000 | |
| Eliminate unrealized profit on sale of equipment | ||
| Building and equipment | 85,000 | |
| Gain on sale of equipment | 15,000 | |
| | 100,000 | |
| Eliminate income tax on unrealized gain on equipment | ||
| Deferred tax asset | 6,000 | |
| Tax expense | 6,000 |
Explanation of Solution
- Income from subsidiary is eliminated by reverse entry, debit income from subsidiary $36,000 x .70 = $25,200 and dividends 10,000 x .70
- Income to non-controlling interest $8,100 = ($36,000 + 6,000 − 15,000) x .30 Dividends $3,000 = $10,000 x .30 non-controlling interest $5,100 = $8,100 − 3,000.
- Elimination of beginning investment by reversal entry
- Unrealized profit in beginning inventory $10,000 Tax expenses $4,000 = $10,000 x .40
- Profit on sale of inventory is eliminated by reverse entry
- Tax on unrealized intercompany profit is eliminated by reversal $10,000 = $25,000 x .40
- Gain on sale of equipment $15,000 = $100,00 − 85,000
Deferred tax expenses on unrealized gain on sale of equipment $6,000 = $15,000 x .40
Non-controlling interest $1,800 = $7,000 x .30
Retained earnings $4,200 = $7,000 x .70
b
To determine
Consolidation income tax issues: the legal structure of an acquisition can result in a taxable or non-taxable transactions. In taxable transaction, the assets acquired and liabilities assumed will have tax basis equal to the fair market values because the subsidiary is required to recognize all inherent gains and losses for tax purposes. In order to avoid this many acquisitions are structured to avoid classification as taxable transaction.
Any difference arising out of fair market value and tax basis should be recorded as deferred tax asset or liability.
When companies in the consolidated group files separate tax returns, intercompany income accruals and dividend transfers must be considered in computing income tax expense for the period. When an investor and investee files separate tax returns, the investor is taxed on the dividends received from the investee rather than on the amount of investment income reported.
Requirement 2
the preparation of consolidated work sheet for 20X7
b
Expert Solution
Answer to Problem 10.31P
Consolidated retained earnings December 31 $424,500 and total Assets $1,617,800
Explanation of Solution
PC and SC Corporation
Consolidation work paper
December 31, 20X7
| Eliminations | |||||
| PC Co | SC | Debit | Credit | Consolidation | |
| Sales | 580,000 | 300,000 | 120,000 | 760,000 | |
| Gain on sale of equipment’s | 15,000 | 15,000 | |||
| Income from subsidiary | 25,200 | 25,200 | |||
| 620,200 | 300,000 | 760,000 | |||
| Less cost of sales | (435,000) | (210,000) | 10,000 | ||
| 95,000 | (540,000) | ||||
| Dep & amortization | (40,000) | (20,000) | (60,000) | ||
| Tax expense | (44,000) | (24,000) | 4,000 | 10,000 | |
| 6,000 | (56,000) | ||||
| Other expenses | (11,400) | (10,000) | (21,400) | ||
| Consolidated net income | 82,600 | ||||
| Income to NCI | 8,100 | (8,100) | |||
| Income | 89,800 | 36,000 | 172,300 | 121,000 | 74,500 |
| Retained earnings January 1 | 374,200 | 150,000 | 150,000 | ||
| 4,200 | 370,000 | ||||
| Income available | 464,000 | 186,000 | 444,500 | ||
| Dividends declared | (20,000) | (10,000) | 7,000 | ||
| 3,000 | (20,000) | ||||
| Retained earnings December 31 | 444,000 | 176,000 | 326,500 | 131,000 | 424,500 |
| Eliminations | |||||
| PC Co | SC | Debit | Credit | Consolidation | |
| 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 | |
| Patients | 70,000 | 70,000 | |||
| Investment in SC stock | 158,200 | 18,200 | |||
| 140,000 | |||||
| Deferred tax asset | 10,000 | ||||
| 6,000 | 16,000 | ||||
| 1,124,000 | 576,000 | 1,617,800 | |||
| Accumulated | 150,000 | 160,000 | 100,000 | 410,000 | |
| 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 tax | 120,000 | 40,000 | 160,000 | ||
| Common stock | 100,000 | 50,000 | 50,000 | 100,000 | |
| Retained earnings | 444,000 | 176,000 | 326,500 | 131,000 | 424,500 |
| Non-controlling interest | 1,800 | 5,100 | |||
| 60,000 | 63,300 | ||||
| 1,124,000 | 576,000 | 479,300 | 479,300 | 1,617,800 | |
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Chapter 10 Solutions
Advanced Financial Accounting
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