Chapter 10, Problem 10.29P

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 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 1

the complete a consolidated balance sheet worksheet as on December 31, 20X9

Answer to Problem 10.29P

Total consolidation value as per consolidated work sheet $1,477,400

Explanation of Solution

A power and B company Consolidated balance sheet work paper December 31, 20X9

			Eliminations
	A	B	Debit	Credit	consolidation
Cash	44,400	20,000			64,400
Accounts receivable	120,000	60,000			180,000
Inventory	170,000	120,000		20,000
				25,000	245,000
Land	90,000	30,000			120,000
Buildings and equipment	500,000	300,000	30,000		830,000
Investment in B’s common stock	280,000			280,000
Deferred tax asset			8,000
			10,000
			20,000		38,000
	1,204,400	530,000			1,477,400
Accumulated depreciation	180,000	80,000		80,000	340,000
Accounts payable	70,000	20,000			90,000
Wages payable	80,000	30,000			110,000
Bonds payable	200,000				200,000
Common stock	100,000	150,000	150,000		100,000
Retained earnings	574,400	250,000	250,000
			8,400
			15,000
			21,000		530,000
Non-controlling interest			3,600	120,000
			9,000		107,400
	1,204,400	530,000	525,000	525,000	1,477,400

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 balance sheet as of December 31, 20X9.

Answer to Problem 10.29P

Income from non-controlling interest for 20X5 is $1,137,400

Explanation of Solution

A Powder corporation and subsidiary

Consolidated balance sheet

December 31, 20X9

	Amount $	Amount $
Cash		64,400
Accounts receivable		180,000
Inventory		245,000
Land		120,000
Buildings and equipment	830,000
Less: Accumulated depreciation	(340,000)	490,000
Deferred tax asset		38,000
Total assets		1,137,400
Accounts payable		90,000
Wages payable		110,000
Bonds payable		200,000
Stockholders’ equity
Controlling interest:
Common stock	100,000
Retained earnings	530,000
Total controlling interest	630,000
Add non-controlling interest	107,400
Total stockholders’ equity		737,400
Total liabilities and equity		1,137,400