Any company within the business combination that is in both a parent and a subsidiary position must recognize the equity income accruing from its subsidiary before computing its own inco
Trang 1CHAPTER 7 CONSOLIDATED FINANCIAL STATEMENTS - OWNERSHIP PATTERNS AND INCOME TAXES Chapter Outline
I Indirect subsidiary control
A Control of subsidiary companies within a business combination is often of an indirect nature; one subsidiary possesses the stock of another rather than the parent having direct ownership.
1 These ownership patterns may be developed specifically to enhance control or for organizational purposes.
2 Such ownership patterns may also result from the parent company's acquisition of a company that already possesses subsidiaries.
B One of the most common corporate structures is the father-son-grandson configuration where each subsidiary in turn owns one or more subsidiaries.
C The consolidation process is altered somewhat when indirect control is present.
1 The worksheet entries are effectively doubled by each corporate ownership layer but the concepts underlying the consolidation process are not changed.
2 Calculation of the accrual-based income of a subsidiary recognizing the consolidated relationships is an important step in an indirect ownership structure.
a. The determination of accrual-based income figures is needed for equity income accruals as well as for the computation of noncontrolling interest balances.
b. Any company within the business combination that is in both a parent and a subsidiary position must recognize the equity income accruing from its subsidiary before computing its own income.
II Indirect subsidiary control-connecting affiliation
A A connecting affiliation exists whenever two or more companies within a business combination hold an equity interest in another member of that organization.
B Despite this variation in the standard ownership pattern, the consolidation process is essentially the same for a connecting affiliation as for a father-son-grandson organization.
C Once again, any company in both a parent and a subsidiary position must recognize an appropriate equity accrual in computing its own income.
III Mutual ownership
A A mutual affiliation exists whenever a subsidiary owns shares of its parent company.
B Parent shares being held by a subsidiary are accounted for by the treasury stock approach.
1 The cost paid to acquire the parent's stock is reclassified within the consolidation process to a treasury stock account and no income is accrued
2 The treasury stock approach is popular in practice because of its simplicity and is now
required by the FASB Codification.
Trang 2IV Income tax accounting for a business combination—consolidated tax returns
A A consolidated tax return can be prepared for all companies comprising an affiliated group Any other companies within the business combination file separate tax returns.
B A domestic corporation may be included in an affiliated group if the parent company (either directly or indirectly) owns at least 80 percent of the voting stock of the subsidiary as well
as 80 percent of each class of its nonvoting stock.
C The filing of a consolidated tax return provides several potential advantages to the members of an affiliated group.
1 Intra-entity profits are not taxed until realized.
2 Intra-entity dividends are not taxed (although these distributions are nontaxable for all members of an affiliated group whether a consolidated return or a separate return is filed).
3 Losses of one affiliate can be used to reduce the taxable income earned by other members of the group.
D Income tax expense—effect on noncontrolling interest valuation
1 If a consolidated tax return is filed, an allocation of the total expense must be made to each of the component companies to arrive at the realized income figures that serve
as a basis for noncontrolling interest computations.
2 Income tax expense is frequently assigned to each subsidiary based on the amounts that would have been paid on separate returns.
V Income tax accounting for a business combination—separate tax returns
A Members of a business combination that are foreign companies or that do not meet the 80 percent ownership rule (as described above) must file separate income tax returns.
B Companies in an affiliated group can elect to file separate tax returns Deferred income taxes are often recognized when separate returns are filed due to temporary differences stemming from unrealized gains and losses as well as intra-entity dividends.
VI Temporary tax differences can stem from the creation of a business combination
A The tax basis of a subsidiary's assets and liabilities may differ from their consolidated values (which is based on the fair market value on the date the combination is created).
B If additional taxes will result in future years (for example, it the tax basis of an asset is lower than its consolidated value so that future depreciation expense for tax purposes will
be less), a deferred tax liability is created by a combination.
C The deferred tax liability is then written off (creating a reduction in tax expense) in future years so that the net expense recognized (a lower number) matches the combination's book income (a lower number due to the extra depreciation of the consolidated value).
Vll Operating loss carryforwards
A Net operating losses recognized by a company can be used to reduce taxable income from the previous two years (a carryback) or for the future 20 years (a carryforward).
B If one company in a newly created combination has a tax carryforward, the future tax benefits are recognized as a deferred income tax asset.
Trang 3C However, a valuation allowance must also be recorded to reduce the deferred tax asset to the amount that is more likely than not to be realized.
Answers to Questions
1 A father-son-grandson relationship is a specific type of ownership configuration often
encountered in business combinations The parent possesses the stock of one or more companies At least one of these subsidiaries holds a majority of the voting stock of its own subsidiary Each subsidiary controls other subsidiaries with the chain of ownership going on indefinitely The parent actually holds control over all of the companies within the business combination despite having direct ownership in only its own subsidiaries.
2 In a business combination having an indirect ownership pattern, at least one company is in
both a parent and a subsidiary position To calculate the accrual-based income earned by that company, a proper recognition of the equity income accruing from its own subsidiary must initially be made Structuring the income calculation in this manner is necessary to ensure that all earnings are properly included by each company.
3 Able—100% of income accrues to the consolidated entity (as parent company).
Baker—70% (percentage of stock owned by Able).
Carter—56% (80% of stock owned by Baker multiplied by the 70% of Baker controlled by Able).
Dexter—33.6% (60% of stock owned by Carter multiplied by the 80% of Carter controlled by Baker multiplied by the 70% of Baker owned by Able).
4 When an indirect ownership is present, the quantity of consolidation entries will increase,
perhaps significantly An additional set of entries is included on the worksheet for each separate investment Furthermore, the determination of realized income figures for each subsidiary must be computed in a precise manner For any company in both a parent and a subsidiary position, equity income accruals are recognized prior to the calculation of that company's realized income This realized income total is significant because it serves as the basis for noncontrolling interest calculations as well as the equity accruals to be recognized by that company's parent.
5 In a connecting affiliation, two (or more) companies within a business combination own shares
in a third member A mutual ownership, in contrast, exists whenever a subsidiary possesses
an equity interest in its own parent.
6 In accounting for a mutual ownership, U.S GAAP requires the treasury stock approach The
treasury stock approach presumes that the cost of the parent shares should be reclassified as treasury stock within the consolidation process The subsidiary is being viewed, under this method, as an agent of the parent Thus, the shares are accounted for as if the parent had actually made the acquisition
Trang 47 According to present tax laws, an affiliated group can be comprised of all domestic
corporations in which a parent holds 80 percent ownership More specifically, the parent must own (directly or indirectly) 80 percent of the voting stock of the corporation as well as at least
80 percent of each class of nonvoting stock.
8 Several basic advantages are available to combinations that file a consolidated tax return.
First, entity profits are not taxed until realized For companies with large amounts of entity transactions, the deferral of unrealized gains causes a delay in the making of significant tax payments Second, losses incurred by one company can be used to reduce or offset taxable income earned by other members of the affiliated group In addition, intra-entity dividends are not taxable but that exclusion applies to the members of an affiliated group regardless of whether a consolidated or separate tax return is filed.
intra-Members of a business combination may be forced to file separate tax returns Foreign corporations, for example, must always file separately Domestic companies that do not meet the 80 percent ownership rule are also required to file in this manner Furthermore, companies that are in an affiliated group may still elect to file separately If all companies within the combination are profitable and few intra-entity transactions are carried out, little advantage may accrue from preparing a consolidated return With a separate filing, a subsidiary has more flexibility as to accounting methods as well as its choice of a fiscal year-end.
9 The allocation of income tax expense among the component companies of a business
combination has a direct bearing on realized income totals and, therefore, noncontrolling interest calculations Obviously, the more expense that is assigned to a particular company the less realized income is attributed to that concern Income tax expense can be allocated based on the income totals that would have been reported by various companies if separate tax returns had been filed or on the portion of taxable income derived from each company.
10 In filing a separate tax return (assuming that the two companies do not qualify as members of
an affiliated group), the parent must include as income the dividends received from the subsidiary For financial reporting purposes, however, income is accrued based on the ownership percentage of the realized income of the subsidiary Because income is frequently recognized by the parent prior to being received in the form of dividends (when it is subject to taxation), deferred income taxes must be recognized.
Either the parent or the subsidiary might also have to record deferred income taxes in connection with any unrealized intra-entity gain On a separate tax return, such gains are reported at the time of transfer while for financial reporting purposes they are appropriately deferred until realized Once again, a temporary difference is created which necessitates the recognition of deferred income taxes.
11 If the consolidated value of a subsidiary’s assets exceeds their tax basis, depreciation
expense in the future will be less on the tax return than is shown for external reporting purposes The reduced expense creates higher taxable income and, thus, increases taxes Therefore, the difference in values dictates an anticipated increase in future tax payments This deferred liability is recognized at the time the combination is created Subsequently, when actual tax payments do arise, the deferred liability is written off rather than recognizing expense based
Trang 5solely on the current liability In this manner, the expense is shown at a lower figure, one that
is matched with reported income (which is also a lower balance because of the extra depreciation).
Recognition of this deferred liability at date of acquisition also reduces the net amount attributed to the subsidiary's assets and liabilities in the initial allocation process Therefore, the residual asset (goodwill) is increased by the amount of any liability that must be recognized.
12 A net operating loss carryforward allows the company to reduce taxable income for up to 20
years into the future Thus, a benefit may possibly be derived from the carryforward but that benefit is based on Wilson (the subsidiary) being able to generate taxable income to be decreased by the carryforward To reflect the potential tax reduction, a deferred income tax asset is recorded for the total amount of anticipated benefit However, because of the uncertainty, unless the receipt of this benefit is more likely than not to be received, a valuation allowance must also be recorded as a contra account to the asset The valuation allowance may be for the entire amount or just for a portion of the asset.
13 At the date of acquisition, the valuation allowance was $150,000 As a contra asset account,
recognition of this amount reduced the net assets attributed to the subsidiary and, hence, increased the recording of goodwill (assuming that the price did not indicate a bargain purchase) If the valuation allowance is subsequently reduced to $110,000, the net assets have increased by $40,000 This change is reflected by a decrease in income tax expense.
Operating income $200,000 Investment Income (90% of Damson’s realized income) 144,000 Crimson's accrual-based income $344,000
Trang 6Bassett's accrual-based income:
Operating income $300,000 Investment income (80% of Crimson's realized income) 275,200 Bassett's accrual-based income $575,200
8 C Cherry's accrual-based income:
Operating income $280,000 Defer unrealized gain (50,000) Cherry's accrual-based income $230,000 Outside ownership 20% Noncontrolling interest $46,000
Beech's accrual-based income:
Operating income $315,000 Defer unrealized gain (19,000) Investment income (80% of Cherry's accrual-based income) 184,000 Beech's accrual-based income $480,000 Outside ownership 20% Noncontrolling interest $96,000 Total noncontrolling interest = ($46,000 + $96,000) = $142,000
9 C Satellite's operating income $50,000
Dividend income 14,000 Satellite 's income $64,000 Outside ownership 15% Noncontrolling interest $9,600
10 A Equity income (60% of $200,000) $120,000
Dividend income (60% of $40,000) 24,000 Tax difference $96,000 Dividends received deduction upon eventual distribution (80%) (76,800) Temporary portion of tax difference $19,200 Tax rate 30% Deferred income tax liability $5,760
11 C Unrealized Gross Profit:
Total gross profit $30,000 Portion still held 20% Unrealized gross profit $6,000 Tax rate 25% Deferred tax asset $1,500
Trang 712 A Recognition of this gross profit is not required on a consolidated tax return.
13 C Because fair value of the subsidiary's assets exceeds the tax basis by
$100,000, a deferred tax liability of $30,000 (30%) must be recorded Goodwill
is then computed as follows:
Consideration transferred $420,000 Fair value $400,000
Deferred tax liability (30,000) 370,000 Goodwill $50,000
14. (30 Minutes) (Series of reporting and consolidation questions pertaining to a father-son-grandson combination Includes unrealized inventory gains)
a Consideration transferred (by Aspen) $288,000
Noncontrolling interest fair value 72,000
Birch’s business fair value 360,000
Consideration transferred for Cedar (by Birch) $104,000
Noncontrolling interest fair value 26,000
Cedar’s business fair value $130,000
Trang 8Equity accrual-2012 $52,160
Dividends received from Birch 2012 (16,000 )
Note: Dividends paid by Cedar to Birch do not affect Aspen’s Investment account.
b Consolidated sales (total for the companies) $1,298,000
Consolidated expenses (total for the companies) (1,025,000)
Total amortization expense (see a.) (3,000 )
c Noncontrolling interest in income of Cedar
Noncontrolling interest percentage 20 %
Noncontrolling interest in income of Cedar $5,800
Noncontrolling interest in income of Birch:
Equity in Cedar income [(30,000-1,000) × 80%] 23,200
14 (continued)
d 2012 Realized income of Birch (prior to accounting
for unrealized gross profit) (see a) $65,200
2011 Transfer-gross profit recognized in 2012 10,000
2012 Transfer-gross profit to be recognized in 2013 (16,000 )
2013 Realized income of Birch (prior to accounting
for unrealized gross profit) (see c.) $86,200
2012 Transfer-gross profit recognized in 2013 16,000
2013 Transfer-gross profit to be recognized in 2014 (25,000 )
15. (15 minutes) (Income and noncontrolling interest with mutual ownership.)
a Consideration transferred by Uncle $500,000
Noncontrolling interest fair value 125,000
Nephew’s business fair value $625,000
Trang 9Intangible assets $25,000
Life 10 years
Amortization expense (annual) $2,500
Income reported by Nephew—2013 $50,000
Amortization expense (above) (2,500)
Accrual-based income 47,500
Uncle's ownership percentage 80%
Income of subsidiary recognized by Uncle $38,000
b To the outside owners, the $6,000 intra-entity dividends ($20,000 × 30%) paid by Uncle are viewed as income because the book value of Nephew is increasing Thus, the noncontrolling interest's share of income is computed as follows:
Noncontrolling interest share of Nephew’s income $10,700
16 (35 Minutes) (Consolidated income for a father-son-grandson combination.)
Amortization expense–Butte's investment in Valley (8,000 )
Amortization expense (on Butte's investment) (8,000 )
Noncontrolling interest in Valley's income $59,400
Amortization expense (on Mesa's investment) (22,500)
Equity accrual from ownership of Valley
Total noncontrolling interest in income of subsidiaries $89,020
Trang 10Reconciliation:
Mesa’s share of Butte’s operating income (80% × $98,000) 78,400 Mesa’s share of Valley’s operating income (80% × 55% × $140,000) 61,600 Mesa’s share of Butte’s excess amortization (80% × $22,500) (18,000) Mesa’s share of Valley’s excess amortization (80% × 55% × $8,000) (3,520 )
Noncontrolling interest in consolidated net income 89,020
17 (30 Minutes) (Consolidated income figures for a connecting affiliation)
UNREALIZED GROSS PROFIT:
Cleveland ($12,000 remaining inventory × 25% markup) = $3,000
Wisconsin ($40,000 remaining inventory × 30% markup) = $12,000
Defer unrealized gross profit (above) (12,000)
Investment income (60% of Cleveland's realized income of
$57,000) 34,200
Realized income—Wisconsin $132,200
Outside ownership 10%
Noncontrolling interest in Wisconsin's income $13,220
TOTAL NONCONTROLLING INTERESTS: $24,620 ($11,400 + $13,220)
Trang 11 Expenses = $200,000 (add the three book values)
Dividend income = -0- (eliminated for consolidation purposes)
Consolidated net income = $375,000 (consolidated revenues less
consolidated cost of goods sold and expenses)
Noncontrolling interests in subsidiaries' income = $24,620 (computed above)
Controlling interest in consolidated net income = $350,380 (consolidated net income less noncontrolling interest share)
18 (12 Minutes) (Acquisition accounting for a subsidiary’s operating loss
carryforward)
Fair value of identifiable assets acquired:
Deferred tax asset from NOL (.35 × $120,000) 42,000
Fair value of net identifiable assets acquired 792,000
Fair value of identifiable assets acquired:
Deferred tax asset from NOL (.35 × $120,000) 42,000
Fair value of net identifiable assets acquired 750,000
Operating expenses = $234,000 (add the two book values)
Dividend income = -0- (eliminated for consolidation purposes)
Consolidated net income = $216,000 (Revenues less expenses)
Noncontrolling interest in Down's Income = $18,000 (20 percent of reported Income of $100,000 plus $30,000 gain deferred from 2013 less $40,000 gain deferred into 2014)
Controlling interest in consolidated net income = $198,000
Trang 12b On separate returns, the unrealized gains are reported as taxable income
Because Up owns 80 percent of Down's stock, the dividends are tax- free and no deferred tax liability is necessary on the undistributed income.
DUE TO GOVERNMENT: (separate returns)
Currently payable to government $ 30,000
Total income tax payable: Current = $67,800 ($37,800 + $30,000)
Taxable income is not reduced by the unrealized gain Therefore, the gain is recognized for tax purposes but not for book purposes and this temporary difference results in a deferred tax asset of $3,000 ($10,000 x 30%).
CONSOLIDATED INCOME TAX EXPENSE:
Income tax liability ($37,800 + $30,000 = $67,800) less deferred tax asset ($3,000)
= income tax expense $64,800.
Otherwise stated as: Up has a tax expense of $37,800 and Down has a tax expense of $27,000 ($30,000 payable - $3,000 deferred tax asset) Income tax expense on the consolidated income statement is $64,800.
20 (45 Minutes) (Computation of income tax expense and the related payable balances)
a $260,000 ($650,000 × 40%)
The affiliated group is taxed on its operating income of $650,000 ($500,000 -
$90,000 + $240,000: the net unrealized gross profit is deferred on a
consolidated return) The intra-entity income and dividends are not relevant since a consolidated return is filed
Trang 13b $260,000 ($650,000 × 40%)
The affiliated group is taxed on its operating income of $650,000 (the net
unrealized gross profit is deferred on a consolidated return) The intra-entity income and dividends are not relevant if a consolidated return is filed The percentage ownership does not affect the figures on a consolidated return.
c $296,000 ($96,000 + $200,000)
Rogers would pay $96,000 or 40% of its $240,000 operating income Clarke would pay $200,000 or 40% of its $500,000 operating income The unrealized gross profit is not deferred when separate returns are filed Intra-entity
dividends are not taxable because the parties qualify as an affiliated group even though separate returns are being filed Answer (c.) differs from (a.) and (b.) because tax on the $90,000 unrealized gross profit (40% or $36,000) is paid immediately.
20.(continued)
Dividends received net of 80% deduction
Clarke’s deferred taxes:
Entry on Clarke’s books:
Trang 14Tax Payable 204,480
Entry on Rogers’ books:
Consolidated tax expense = $172,064 + $96,000 = $268,064
e $204,480 (see part d above) Clarke owes $200,000 on its operating income ($500,000 × 40%) because the unrealized gain cannot be deferred Clarke also owes
$4,480 from the dividends received ($56,000 × 20% × 40%) The difference between the Clarke’s $204,480 payment and the $172,064 tax expense in (d.) is created by the premature payment of the tax (a deferred tax asset) on the unrealized gain ($90,000) less the deferred tax liability on the parent's equity accrual ($100,800) in excess of dividends received ($56,000).
21 (20 Minutes) (Comparison of income tax expense and payable on separate and consolidated tax returns.)
Because no temporary differences exist in this problem, the income tax expense would also be $148,000 The unrealized gain is not taxed until realized Dividend income is not important because a consolidated return is being filed
To determine the income tax expense for Piranto, the two temporary differences must be taken into account:
Trang 15Taxable income $300,000
Gain taxed in 2012 although realized
in 2013 120,000
Gain taxed in 2013 although not yet realized (150,000)
2013 realized income subject to taxation $270,000
Tax rate 40%
Income tax expense $108,000
The $12,000 difference between the expense and the payable is the tax effect on the net unrealized gain ($30,000 × 40%).
Slinton will have an expense and payable of $40,000 ($100,000 × 40%).
Consolidated income tax expense is $148,000 ($108,000 + $40,000).
Consolidated income tax payable is $160,000 ($120,000 + $40,000).
22 (45 Minutes) (Comparison of income tax expense and payable on separate and consolidated tax returns Includes question on mutual ownership and the
conventional approach.)
a Total income tax expense is $156,877 Because of the level of ownership,
separate returns must be filed Unrealized gross profits are taxed immediately
as are intra-entity dividends Because the unrealized gross profits are deferred
on the consolidated financial statements, Boxwood's expense would be $34,400
or 40% of $86,000 in realized income ($100,000 + $18,000 – $32,000).
Lake's income subject to taxation includes its $300,000 in operating income plus $30,960 in income accruing from its investment in Boxwood (60% of the after-tax income of $51,600 [$86,000 – $34,400]) Income tax expense for Lake is computed as follows:
Operating income $300,000 Equity income $30,960
Taxable portion 20% 6,192 Income eventually subject to taxation $306,192 Tax rate 40% Income tax expense Lake (rounded) $122,477 Income tax expense Boxwood (above) 34,400 Total income tax expense $156,877
-OR-Lake’s operating income $300,000
Dividends received net of 80% deduction
($10,000 x 60% x 20%) 1,200
Taxable income $301,200
Trang 16Tax rate 40%
Lake’s income tax payable $120,480 Boxwood’s income before income tax $ 86,000
Less: income tax (40%) 34,400
Boxwood’s net income $ 51,600
Less: dividends paid 10,000
Undistributed income $ 41,600
Lake’s ownership percentage 60%
Lake’s share of undistributed income $ 24,960
Less: dividends-received deduction (80%) 19,998
Income eventually taxable to Lake $ 4,992
Tax rate 40%
Lake’s deferred tax liability (rounded) $ 1,997
Income tax expense Lake $122,477 Income tax expense Boxwood (above) 34,400 Total income tax expense $156,877
22 (continued)
Entry on Lake’s books:
Entry on Boxwood’s books:
b Boxwood will pay $40,000 ($100,000 × 40%) because separate returns are filed Lake, however, will pay its taxes based on dividends received rather than on the equity accrual A deferred income tax liability would be established for the difference Lake's payment for the current year is computed as follows:
Operating income $300,000 Dividend income (60% × $10,000) $6,000
Taxable portion (net of 80% dividends received deduction) 20% 1,200 Income currently taxable $301,200 Tax rate 40% Income tax payable—Lake $120,480 Income tax payable—Boxwood (above) 40,000 Total income tax payable current $160,480
Trang 17The $3,603 difference between the expense in a and the payable in b is created
by the following two effects:
Deferred income tax liability on equity income accrual not yet taxed
($30,960 – $6,000 = $24,960 × 20% × 40%) $1,997 Deferred income tax asset on net unrealized gross profit
($32,000 – $18,000 = $14,000 × 40%) 5,600 Net decrease in expense $3,603
c Because a consolidated tax return is filed, unrealized gross profits are deferred
as for external reporting purposes Dividend income is not taxable.
Lake's operating income $300,000
Boxwood's operating income $100,000
Prior year unrealized gross profit 18,000
Current year unrealized gross profit (32,000) 86,000 Income subject to taxation (and currently taxable) $386,000 Tax rate 40% Income tax expense $154,400
23 (30 Minutes) (Computation of income tax expense and income tax payable on consolidated and separate tax returns.)
a Operating income $450,000
Tax rate 40%
Taxes to be paid $180,000
The affiliated group would be taxed on its operating income of $450,000 (the
$50,000 unrealized gain is deferred) Intra-entity income and dividends are not relevant because a consolidated return is filed.
b Total taxes to be paid are $200,000 Robertson would have to pay $80,000 or 40% of its $200,000 operating income Garrison would pay $120,000 or 40% of its $300,000 operating income The unrealized gain is not deferred because separate returns are being filed Intra-entity dividends are not taxable because the parties still qualify as an affiliated group even though separate returns are being filed.
c Robertson must report an income tax expense of $80,000 or 40% of its $200,000 operating income.
Trang 18Garrison records its expense based on the revenue recognized during the
period Thus, the expense is computed on an operating income of $250,000 (the net unrealized gain is not recognized in this period) along with equity income from Robertson of $84,000 (70% of that company's $120,000 after-tax income) Garrison will record an income tax expense of $100,000 in connection with the operating income ($250,000 × 40%) and $6,720 resulting from its equity income ($84,000 ×
20% × 40%) Total expense to be reported amounts to $186,720 for Garrison and Robertson ($80,000 + $100,000 + $6,720).
d Garrison will pay $120,000 in connection with its operating income ($300,000 × 40%) and $2,400 because of the dividends received from Robertson Garrison will receive $30,000 in dividends based on its 60% ownership Of this total, only
$6,000 (20%) is taxable Thus, at a 40% rate, the tax on the dividends would amount to $2,400 ($6,000 × 40%) The total income taxes payable by Garrison is
$122,400 ($120,000 + $2,400).
24 (10 Minutes) (Impact on goodwill of assets with a different tax vs book value.)
The assets and liabilities of Kew (the subsidiary) will be consolidated at their individual net fair values ($500,000) However, both the buildings and equipment have a tax basis that is lower than fair value Thus, for tax purposes, future depreciation expense will be lower on the tax return so that taxable income will exceed book income The higher taxable income (anticipated in the future) creates a deferred tax liability at the time the combination is created.
Buildings $140,000 $180,000 $40,000 Equipment 150,000 200,000 50,000
Consequently, Kew's accounts will be consolidated as follows: (parentheses indicate a credit balance)
Trang 19Deferred tax liability (27,000)
Assigned to specific accounts 473,000
Acquisition consideration 650,000
Excess assigned to goodwill $177,000
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.
Beginning Unrealized Gross Profit (Wilson)
(January 1, 2013 Inventory Transfer Price (goods remaining) =
$60,000 = 1.25 Cost
$48,000 = Cost
$12,000 is Unrealized gross profit Ending Unrealized Gross Profit (Wilson)
(December 31, 2013 Inventory Transfer Price (goods remaining) =
Retained Earnings, 1/1/13 (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.)
Trang 20Entry *C
Retained Earnings, 1/1/13 (House) 11,200
Investment in Wilson 11,200 (To convert investment account from partial equity method to equity method Unrealized gross profit shown in Entry *G is not properly reflected by parent under partial equity method [12,000 × 70% = $8,400 income decrease] nor would
be the $2,800 in amortization expense for 2011–2012 Thus, a reduction of
$11,200 is required Because Cuddy is a current year acquisition, no prior
conversion to equity method is required for the investment.)
Entry S1
Common Stock (Cuddy) 150,000
Retained Earnings, 1/1/13 (Cuddy) 150,000
Investment in Cuddy (80%) 240,000 Noncontrolling Interest in Cuddy Common Stock (20%) 60,000 (To eliminate Cuddy's stockholders' equity against the corresponding
investment balance and to recognize noncontrolling interest in common stock.)
25 (continued)
Entry S2
Common Stock (Wilson) 310,000
Retained Earnings, 1/1/13 (Wilson)
(adjusted by Entry *G) 578,000
Investment in Wilson (70%) 621,600 Noncontrolling Interest in Wilson (30%) 266,400 (To eliminate Wilson's stockholders' equity against corresponding investment balance and to recognize noncontrolling interest.)
shown above Amortization for 2011 and 2012 has been taken into account in determining the January 1, 2013 value for each account.)
Trang 21Entry 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
Investment in Wilson 91,000 (To eliminate intra-entity income accrued by House during the year.)
Entry TI
Sales and Other Revenues 200,000
Cost of Goods Sold 200,000 (To eliminate intra-entity inventory sales for the current year.)