a.
Prepare the business combination’s 2018 consolidation worksheet.
a.

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) | ||||||||
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) | |||||||
($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 | |
$ 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.
Determine the amount of income tax for Company T and Company Y on a consolidated tax return for 2018.
b.

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

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.
Identify the
d.

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
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)
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