Chapter 7 practice problems
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Chapter 7 practice problems
Problem 7-4
Equipment gain
Before Tax
40% tax
After tax
Year 2 sale
–
Sally selling
15,000
Depreciation Years 2 and 3 (3,000
2)
6,000
Balance December 31, Year 3
9,000
3,600
5,400
Depreciation Year 4
3,000
1,200
1,800 (a)
Balance December 31, Year 4
6,000
2,400
3,600 (b)
(a)
Calculation of consolidated profit attributable to Peggy’s shareholders for Year 4
Profit of Peggy
185,000
Profit of Sally
53,000
Add: Equipment gain realized
(a)
1,800
Adjusted profit
54,800 (c)
Consolidated profit
239,800
Attributable to:
Shareholders of Peggy
226,100
NCI (25% x 54,800)
13,700
239,800
(b)
Peggy Company
Consolidated Income Statement
Year 4
Revenues (580,000 + 270,000)
$850,000
Miscellaneous expense (110,000 + 85,000)
195,000
Depreciation expense (162,000 + 97,000 - (a) 3,000)
256,000
Income tax expense (123,000 + 35,000 + (a) 1,200)
159,200
Total expenses
610,200
Consolidated profit
239,800
Attributable to:
Shareholders of Peggy
226,100
NCI (25% x 54,800)
13,700
239,800
(c)
Deferred income taxes - December 31, Year 4
(b)
2,400
Problem 7-18
Calculation, allocation, and changes to acquisition differential
Cost of 80% investment in Spruce Ltd., Jan. 2, Year 4
2,000,000
Implied value of 100%
2,500,000
Carrying amounts of Spruce's net assets:
Common shares
500,000
Retained earnings
1,250,000
Total shareholders' equity
1,750,000
Acquisition differential
750,000
Allocation:
FV
–
CA
Mineral rights
750,000
Balance
0
Balance
Changes
Balance
Jan. 1/4
Years 4 to 6
Year 7
Dec. 31/7
Mineral rights
750,000 (a) (225,000)
(b) (75,000)
450,000 (c)
Intercompany sales and purchases
1,000,000 (d)
Intercompany profits
Before tax
40% tax
After tax
Equipment Jan. 2/5
–
Poplar selling
(500,000
–
400,000)
100,000
(e)
Depreciation Years 5 and 6
40,000
Balance, Dec. 31, Year 6
60,000
24,000
36,000 (f)
Depreciation, Year 7
20,000
8,000
12,000 (g)
Balance, Dec. 31, Year 7
40,000
16,000
24,000 (h)
Inventory Jan. 1, Year 7
–
Spruce selling
200,000
80,000
120,000 (i)
Inventory Dec. 31, Year 7
–
Spruce selling
(300,000 x 35%)
105,000
42,000
63,000 (j)
Spruce’s accumulated depreci
ation, date of acquisition
600,000 (k)
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Poplar’s bonds payable
Jan. 2, Yr 5
Jan. 2, Yr 6
Dec. 31, Yr 7
Par value of bonds
500,000
500,000
500,000
Plus: Premium on bonds
14,000
12,000
8,000
Carrying amount
514,000
512,000
508,000
Annual premium amortization (14,000 / 7)
2,000
50% of carrying amount purchased by Spruce (250 + 6)
256,000
254,000 (l)
50% of carrying amount held by outsiders (250 + 4)
254,000 (m)
Spruce’s investment in bonds
Par value of bonds
250,000
250,000 (n)
Less: Discount on bonds
9,000
6,000 (o)
Carrying amount
241,000
244,000
Annual premium amortization (9,000 / 6)
1,500
Before tax
40% tax
After tax
Realized gain to entity Jan. 2, Year 6 (256
–
241)
15,000
6,000
9,000
Poplar Ltd.
Realized gain Jan. 2, Year 6 (256
–
250)
6,000
2,400
3,600
Interest elimination gain (loss), Year 6*
(1,000)
(400)
(600)
Balance gain Dec. 31, Year 6
5,000
2,000
3,000 (p)
Interest elimination gain (loss), Year 7
(1,000)
(400)
(600) (q)
Balance gain Dec. 31, Year 7
4,000
1,600
2,400 (r)
Spruce Ltd.
Realized gain Jan. 2, Year 6 (250
–
241)
9,000
3,600
5,400
Interest elimination gain (loss), Year 6*
(1,500)
(600)
(900)
Balance gain Dec. 31, Year 6
7,500
3,000
4,500 (s)
Interest elimination gain (loss), Year 7
(1,500)
(600)
(900) (t)
Balance gain Dec. 31, Year 7
6,000
2,400
3,600 (u)
* 6 years to maturity
Intercompany interest revenue for Spruce
(250,000
8% + (t) 1,500) =
21,500 (v)
Intercompany interest expense for Poplar
(250,000
8% - (q) 1,000) =
19,000 (w)
Net loss on elimination of intercompany revenues and expenses (15,000 / 6 yrs)
2,500
Deferred income tax
–
Dec. 31, Year 7
Equipment
(h)
16,000
Inventory
(j)
42,000
Bonds retired [(r) 1,600 + (u) 2,400]
(4,000)
Deferred income tax asset
54,000 (x)
Calculation of consolidated net income
–
Year 7
Income of Poplar
1,100,000
Less: Dividend from Spruce (250,000
80%)
(200,000)
Add: Equipment profit realized
(g)
12,000
Less:
Interest elimination loss
(q)
(600)
Adjusted net income
911,400
Income of Spruce
521,500
Less: Changes to acquisition differential
(b) (75,000)
Less: Unrealized profit in closing inventory
(j)
(63,000)
Less:
Interest elimination loss
(t)
(900)
382,600
Add: Realized profit in opening inventory
(i)
120,000
Adjusted net income
502,600 (y)
Consolidated net income
1,414,000
Attributable to:
Shareholders of Poplar
1,313,480
NCI (20% x (y) 502,600)
100,520
1,414,000
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(a) (i)
Poplar Ltd.
Consolidated Income Statement
Year 7
Sales (4,900,000 + 2,000,000
–
1,000,000 (d))
5,900,000
Interest revenue (0 + 21,500
–
(v) 21,500)
0
Total revenues
5,900,000
Cost of goods sold
(2,400,000 + 850,000
–
(d) 1,000,000
–
(i) 200,000 + (j) 105,000)
2,155,000
Other expenses (962,000 + 300,000 + (b) 75,000
–
(g) 20,000)
1,317,000
Interest expense (38,000 + 0
–
(w) 19,000)
19,000
Income tax expense
(600,000+350,000+ (i) 80,000
–
(j) 42,000+ (g) 8,000
–
(q) 400
–
(t) 600)
995,000
Total expenses
4,486,000
Net income
1,414,000
Attributable to:
Shareholders of Poplar
1,313,480
NCI (20% x (y) 502,600)
100,520
1,414,000
Calculation of consolidated retained earnings
–
Jan. 1, Year 7
Retained earnings of Poplar, Jan. 1, Year 7
10,000,000
Less: Unrealized profit in equipment
(f)
(36,000)
Add: Realized gain on bonds
(p)
3,000
9,967,000
Retained earnings of Spruce, Jan. 1, Year 7
2,000,000
At acquisition
1,250,000
Increase
750,000
Less: Change in acquisition differential
(a) (225,000)
Less: Unrealized profit in opening inventory
(i) (120,000)
Add: Realized gain on bonds
(s)
4,500
Adjusted increase
409,500
(y)
Poplar's ownership %
80%
327,600
Consolidated retained earnings, Jan. 1 Year 7
10,294,600
(ii)
Poplar Ltd.
Consolidated Statement of Retained Earnings
Year 7
Retained earnings, Jan. 1, Year 7
$10,294,600
Add: net income
1,313,480
11,608,080
Less: dividends
590,000
Retained earnings, Dec. 31, Year 7
$11,018,080
Calculation of noncontrolling interest
–
Dec. 31, Year 7
Common shares of Spruce
500,000
)
Retained earnings of Spruce, Jan. 1, Year 7
2,000,000
)
Net income, Year 7
521,500
)
Dividends, Year 7
(250,000)
Total shareholders' equity, Dec. 31, Year 7
2,771,500
Add: Realized gain on bonds (u)
3,600
)
Less: Unrealized profit in ending inventory (j)
(63,000)
)
2,712,100
)
Add: Undepleted acquisition differential
(c) 450,000
Adjusted shareholders' equity, Spruce
3,162,100
)
Noncontrolling interest’s share
20%
Noncontrolling interest, Dec. 31, Year 7
632,420 (z)
)
(iii)
Poplar Ltd.
Consolidated Balance Sheet
Dec. 31, Year 7
Cash (1,000,000 + 500,000)
1,500,000
)
Accounts receivable (2,000,000 + 356,000)
2,356,000
)
Inventory (3,010,000 + 2,006,000
–
(j) 105,000)
4,911,000
)
Plant and equipment (14,000,000 + 3,144,000
–
(e) 100,000
–
(k) 600,000) 16,444,000
)
Accum. depreciation (4,000,000 + 1,000,000
–
(f) 60,000
–
(k) 600,000)
(4,340,000)
Investment in bonds
000
Mineral rights (c)
450,000
)
Deferred income taxes
(x)
54,000
)
Total assets
21,375,000
)
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Accounts payable (2,492,000 + 2,478,500)
4,970,500
Bonds payable (500,000 + 0
–
(n) 250,000)
250,000
Premium on bonds payable (8,000 + 0
–
(m) 4,000)
4,000
Common shares
4,500,000
Retained earnings
11,018,080
Noncontrolling interest (z)
632,420
Total liabilities and shareholders' equity
21,375,000
(b)
Investment Account, Dec. 31, Year 7 - Equity Method
Balance, Dec. 31, Year 7
–
cost method
2,000,000
Less: Unrealized profit in equipment
(h)
(24,000)
Add: Realized gain on bond
(r)
2,400
1,978,400
Add:
Adjusted increase in Spruce's retained earnings to
Jan. 1, Year 7
(n) 409,500
Poplar's ownership %
80%
327,600
2,306,000
Add:
Adjusted income of Spruce, Year 7
(y) 502,600
Poplar's ownership %
80%
402,080
2,708,080
Less: Dividend from Spruce (250,000
80%)
200,000
Balance, Dec. 31, Year 7
2,508,080
Alternative calculation:
Consolidated retained earnings, Dec. 31, Year 7
11,018,080
Retained earnings
–
Poplar Dec. 31, Year 7
–
cost
method (10,000,000 + 1,100,000
–
590,000)
10,510,000
Difference
508,080
Investment in Spruce
–
cost method
2,000,000
Investment in Spruce
–
equity method, Dec. 31, Year 7
2,508,080
(c)
Gains should be recognized when they are realized i.e., when there has been a transaction with
outsiders and consideration has been given/received.
When the parent acquires the subsidiary’s
bonds for cash in the open market, it is transacting with an outsider and giving cash as
consideration.
From the separate entity perspective, the parent is investing in bonds.
However,
from a consolidated point of view, the parent is retiring the bonds of the subsidiary when it
purchases the bonds from the outside entity.
Therefore, when the investment in bonds is offset
against the bonds payable on consolidation, any difference in the carrying amounts is recorded
as a gain or loss on the deemed retirement of the bonds.
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5-Year
7-Year
10-Year
15-Year
20-Year
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33.33%
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14.29%
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5.00%
3.750%
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32.00
24.49
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9.50
7.219
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14.40
8.55
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11.52
12.49
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9.22
6.93
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Table 9.7 Modified ACRS depreciation allowances
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Property Class
Year
3-Year
5-Year
7-Year
Check my work
1
33.33%
20.00%
14.29%
2
44.45
32.00
24.49
3
14.81
19.20
17.49
4
7.41
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5
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[The following information applies to the questions displayed below.]
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X Answer is complete but not entirely correct.
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Year 0
Depreciation Rate 33.33%
$55,998
$79,608
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end of Year 2 if the firm's marginal tax rate is 35%?
$62,985
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44.45%
$70,795
Year 2
14.81%
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Net Present Value Method
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Net Cash Flow
Year 1
$32,000
$55,000
Year 2
20,000
42,000
Year 3
10,000
32,000
Year 4
(1,000)
21,000
Present Value of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683
0.636
0.572
0.482
5.
0.747
0.621
0.567
0.497
0.402
6
0.705
0.564
0.507
0.432
0.335
0.665
0.513
0.452
0.376
0.279
0.627
0.467
0.404
0.327
0.233
9
0.592
0.424
0.361
0.284
0.194
10
0.558
0.386
0.322
0.247
0.162
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Exercise 8-21 (LO. 2)
Lopez acquired a building on June 1, 2015, for $1,000,000. Compute the depreciation deduction assuming the building is classified as (a)
residential and (b) non residential.
Click here to access the depreciation table to use for this problem.
If required, round your answers to the nearest dollar.
a. Calculate Lopez's cost recovery deduction for 2020 if the building is classified as residential rental real estate.
b. Calculate Lopez's cost recovery deduction for 2020 if the building is classified as nonresidential real estate.
ets
al.a
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216 PM
59 F Partly suney
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4 de
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PARRISH 8 8-1 ACQUISITIONS OF ASSETS
For the following asset plese identify the costs. For any costs that are not included in the asset cost, specify how they would be recorded.
Invoice price $90,000 (2/10, n/30)
Sales Tax 3,400
Freight to ship to Company 6,000
Transport to factory 1.900
Repair of chip in machine from damage in loading 500
Training of operators 3,600
Lunch for truck drivers in transit 25
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Question 12 of 20
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Pina Corporation had net income for 2024 of $2960000. Additional information is as follows:
Depreciation of plant assets
Amortization of intangibles
Increase in accounts receivable
Increase in accounts payable
$1208000
O $2484000.
O $4270000.
O $4530000.
O $4400000.
232000
417000
547000
Pina's net cash provided by operating activities for 2024 was
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QUESTION 9
Amotor vehicle which cost £30,000 is depreciated at 20% per annum using the reducing balance
method. The depreciation charge for the second
year
would be:
a. £13,800
b.E8,000
c. £4,800
24,000x20%=£4,800
d.£7,200
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8
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You have been asked by the president of your company to evaluate the proposed acquisition of a new
special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, is not eligible for either
bonus depreciation or Section 179 expensing, and it will be sold after three years for $20,000. Use of the
truck will require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect on
revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor.
The firm's marginal tax rate is 21 percent.
ts
What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign.
Round your answers to 2 decimal places.)
Print
Year
1
2
ferences
FCF
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