Chapter 10, Problem 10.31P

a

To determine

Introduction:The legal structure of acquisition can result in taxable or non-taxable transactions. In the taxable transaction, the assets acquired and liabilities assumed will have a 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 in a way to avoid being classified as a taxable transaction. Any difference arising out of fair market value and tax basis should be recorded as deferred tax asset or liability. Consolidated company’s files separate tax returns, intercompany income dividends, accruals and transfers must be eliminated while computing of 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.

The consolidation entries needed for December 31, 20X7.

Explanation of Solution

Elimination entries:

Particulars	Debit $	Credit $
1. To eliminate income from subsidiary
Income from subsidiary	25,200
Dividends declared		7,000
Investment in C pizza common stock		18,200
(Income from subsidiary eliminated)
2. To assign income to non-controlling interest
Income to non-controlling interest	8,100
Dividends declared		3,000
Non-controlling interest		5,100
(Income assigned to non-controlling interest)
3. Beginning investment eliminated
Common stock- CP	50,000
Retained earnings January 1	150,000
Investment in CP common stock		140,000
Non-controlling interest		60,000
(Investment in CP stock is eliminated)
4. 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
(Unrealized profit on beginning inventory eliminated)
5. Eliminating unrealized profit on ending inventory
Sales	120,000
Cost of goods sold		95,000
Inventory		25,000
(Unrealized profit on ending inventory eliminated)
6. Eliminating tax expense on unrealized intercompany profit
Deferred tax asset	10,000
Tax expense		10,000
(Elimination of tax expenses on unrealized intercompany profit)
7. Eliminate unrealized profit on sale of equipment
Building and equipment	85,000
Gain on sale of equipment	15,000
Accumulated depreciation		100,000
(Unrealized profit on sale of equipment eliminated)
8. Eliminate income tax on unrealized gain on equipment
Deferred tax asset	6,000
Tax expense		6,000
(Income tax on unrealized gain on equipment eliminated)

1. Income from subsidiary is eliminated by reverse entry, debit income from subsidiary $\$36,000\times \text{0}.70=\$25,200$ and dividends $\$10,000\times .70$
2. Income to non-controlling interest $\text{Income to non-controlling interest:}\text{\$8,100=}\left(\text{\$36,000 +\$6,000–\$15,000}\right)\text{×0}\text{.30}$

$\text{Non-Controlling}\text{Interest:}\text{\$5,100 = \$8,100 – 3,000}$

3. Elimination of beginning investment by reversal entry
4. Unrealized profit in beginning inventory $10,000

Tax expenses $\$4,000=\$10,000\times .40$

Non-controlling interest $\$1,800=\$7,000\times .30$

Retained earnings $\$4,200=\$7,000\times .70$

Profit on sale of inventory is eliminated by reverse entry

5. Tax on unrealized intercompany profit is eliminated by reversal $\$10,000=\$25,000\times .40$
6. Gain on sale of equipment $\$15,000=\$100,000–85,000$
7. Deferred tax expenses on unrealized gain on sale of equipment $\$6,000=\$15,000\times \text{0}.40$

b

To determine

Introduction: The legal structure of acquisition can result in taxable or non-taxable transactions. In the taxable transaction, the assets acquired and liabilities assumed will have a 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 in a way to avoid being classified as a taxable transaction. Any difference arising out of fair market value and tax basis should be recorded as deferred tax asset or liability. Consolidated company’s files separate tax returns, intercompany income dividends, accruals and transfers must be eliminated while computing of 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.

The preparation of consolidated worksheet for 20X7.

Answer to Problem 10.31P

Consolidated retained earnings as on December 31 are $424,500 and total assets are $1,617,800

Explanation of Solution

HB and CP Corporation

Consolidation work paper

December 31, 20X7

			Eliminations
Particulars	HB Co $	CP $	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
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 CP stock	158,200			18,200
				140,000
Deferred tax asset			10,000
			6,000		16,000
Total Assets	1,124,000	576,000			1,617,800
Accumulated depreciation	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
Total Liabilities & Equity	1,124,000	576,000	479,300	479,300	1,617,800