Chapter 7, Problem 27P

a.

To determine

Prepare the business combination’s 2018 consolidation worksheet.

Explanation of Solution

The consolidation worksheet of the business combination is as follows:

Company T and Consolidated Subsidiaries
Consolidation Worksheet
as on 12/31/2018
	Company T	Company Y	Company S	Consolidation Entries				Non-controlling	Consolidated
Accounts				Debit		Credit		Interest	Balances
Sales and other revenues	($900,000)	($600,000)	($500,000)	(Tl)	$100,000				($1,900,000)
Cost of goods sold	$480,000	$320,000	$260,000	(G)	$9,600	(*G)	$7,680		$961,920
						(TI)	$100,000
Operating expenses	$100,000	$80,000	$140,000	(E)	$9,000				$329,000
Separate company net income	($320,000)	($200,000)	($100,000)
Consolidated net income									($609,080)
Net income attributable to Non-controlling interest (Company Y)								($27,046)	$27,046
Net income attributable to Non-controlling interest (Company S)								($18,616)	$18,616
Net income attributable to Non-controlling interest (Company T)									($563,418)
Balance Sheet
Current assets	$444,000	$380,000	$280,000			(G)	$9,600		$1,094,400
Investment in Company Y	$720,000			(*C2)	$217,670	(S2)	$887,270		$0
						(A2)	$50,400
Investment in Company S		$344,000		(*C1)	$85,856	(S1)	$393,856		$0
						(A1)	$36,000
Land, buildings, & equipment (net)	$949,000	$836,000	$520,000						$2,305,000
Copyright				(A1)	$45,000	(E)	$5,000		$40,000
Customer list
				(A2)	$56,000	(E)	$4,000		$52,000
Total assets	$2,113,000	$1,560,000	$800,000						$3,491,400
Liabilities	($721,000)	($460,000)	($200,000)						($1,381,000)
Common stock	($500,000)	($300,000)	($200,000)	(S1)	$200,000
				(S2)	$300,000				($500,000)
Retained earnings, 12/31/18	($892,000)	($800,000)	($400,000)			(S1)	$98,464		($1,353,088)
Non-controlling interest in Company S, 1/1/18						(A1)	$9,000	($107,464)
						(S2)	$98,586
Non-controlling interest in Company Y, 1/1/18						(A2)	$5,600	($104,186)
Non-controlling interests in subsidiaries
								($257,312)	($257,312)
Total liabilities and equities	($2,113,000)	($1,560,000)	($800,000)		$2,008,982		$2,008,982		($3,491,400)

Table: (1)

Working note:

Statement of	Company T	Company Y	Company S	Consolidation Entries				Non-controlling	Consolidated
Retained Earnings				Debit		Credit		Interest	Balances
Retained earnings as on 1/1/18:
Company T	($700,000)					(*C2)	$217,670		($917,670)
Company Y		($600,000)		(S2)	$685,856	(*C1)	$85,856		$0
Company S			($300,000)	(*G)	$7,680				$0
				(S1)	$292,320
Net Income	($320,000)	($200,000)	($100,000)						($563,418)
Dividends declared	$128,000								$128,000
Retained earnings, 12/31/18	($892,000)	($800,000)	($400,000)						($1,353,088)

Table: (2)

Computation of amortization expense and fair value allocation:

Particulars	Amount
Consideration transferred for Company S	$    344,000
Non-controlling interest fair value	$      86,000
Company S's business fair value	$    430,000
Company S's book value	$  (380,000)
Copyright	$      50,000
Life	10 Years
Annual amortization	$        5,000

Table: (3)

Computation of amortization expense and fair value allocation:

Particulars	Amount
Consideration transferred for Company Y	$    720,000
Non-controlling interest fair value	$      80,000
Company Y's business fair value	$    800,000
Company Y's book value	$    740,000
Customer List	$      60,000
Life	15 Years
Annual amortization	$        4,000

Table: (4)

Computation of Non-controlling interest in Company S's net income:

Particulars	Amount
Non-controlling Interest in Company S's Net Income
Reported net income in 2018	$    100,000
Copyright amortization	$      (5,000)
Recognition of 2017 deferred gross profit (*G)	$        7,680
Deferral of 2018 intra-entity gross profit (G)	$      (9,600)
Accrual-based net income 2018	$      93,080
Outside ownership	20%
Non-controlling interest in Company S's net income	$      18,616

Table: (5)

Computation of Non-controlling interest in Company Y's net income:

Particulars	Amount
Non-controlling Interest in Company Y's Net Income
Reported net income in 2018	$    200,000
Customer list amortization	$      (4,000)
Accrual of Company S's income
$(80\%\text{ of \$93,080}\text{net income})$	$      74,464
Accrual-based netincome—2018	$    270,464
Outside ownership	10%
Non-controlling interest in Company Y's net income	$      27,046

Table: (6)

b.

To determine

Determine the amount of income tax for Company T and Company Y on a consolidated tax return for 2018.

Explanation of Solution

Computation of the amount of income tax for Company T and Company Y on a consolidated tax return for 2018:

Particulars	Amount
Company T's reported pre-tax income	$    320,000
Company Y's reported pre-tax income	$    200,000
Dividend income	$               -
Intra-entity gains	$               -
Amortization expense	$      (9,000)
Taxable income	$    511,000
Tax rate	45%
Income tax payable	$    229,950

Table: (7)

c.

To determine

Determine the amount of Company S’s income tax on a separate tax return for 2018.

Explanation of Solution

Computation of the amount of Company S’s income tax on a separate tax return for 2018:

Particulars	Amount
Company S's reported pre-tax income	$    100,000
(Intra-entity gross profits in ending inventory are not deferred on a separate tax return.)
Tax rate	45%
Income tax payable	$      45,000

Table: (8)

d.

To determine

Identify the journal entry which this combination makes to record 2018 income tax.

Explanation of Solution

The journal entry which this combination makes to record 2018 income tax:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Income tax expense		274,086
	Deferred Income Tax Asset		864
	Income tax payable			274,950
	(being intra-entity gross profit deferred for purpose of filing separate tax return)

Table: (9)

Working note:

Computation of deferred tax asset:

Particulars	Amount
2018 Intra-entity gross profit taxed in 2018	$        9,600
2017 Intra-entity gross profit taxed previously in 2017	$      (7,680)
Increase in taxable income	$        1,920
Tax rate	45%
Deferred income tax asset	$           864

Table: (10)

Computation of Income Tax Expense:

Particulars	Amount
Income Tax Expense:
Company T and Company Y payable	$    229,950
Company S payable	$      45,000
Total taxes to be paid in 2018	$    274,950
Pre-payment (asset)	$         (864)
Income tax expense 2018	$    274,086

Table: (11)