Exam 7: Consolidated Financial Statements - Ownership Patterns and Income

Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported operating income of $266,000 for 2011 whereas Bell earned $98,000 during the same period. No investment income was included within either of these income totals. How would the 10% investment in Prescott owned by Bell be presented in the consolidated balance sheet?

Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc., all of which are domestic corporations. Information for the three companies for the year ending December 31, 2011 follows: -Which of the following statements is true?

B Co. owned 70% of the voting common stock of C Corp.; C Corp. owned 20% of B Co. For 2011, B Co. and C Corp. reported net income (not including the investment) of $600,000 and $300,000, respectively. B Co. and C Corp. paid dividends of $80,000 and $60,000, respectively. Required: Prepare a schedule showing B Co.'s share of consolidated net income for 2011 using the treasury stock approach.

White Company owns 60% of Cody Company. Separate tax returns are required. For 2010, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody paid a total of $25,000 in cash dividends; $15,000 (60%) to White and $10,000 to the noncontrolling interest. White paid dividends of $180,000. The income tax rate for both companies is 30%. -Compute White's deferred income taxes for 2011.

Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc., all of which are domestic corporations. Information for the three companies for the year ending December 31, 2011 follows: -What is the total noncontrolling interest in the subsidiaries' income for 2011?

Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2011, Jull and Solaver reported operating income (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver paid dividends of $120,000 and $50,000, respectively. -Required: Under the treasury stock approach, what is Jull's controlling interest in Solaver Co.'s net income?

Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc., all of which are domestic corporations. Information for the three companies for the year ending December 31, 2011 follows: -What is the noncontrolling interest in Gamma's income for 2011?

Strong Company has had poor operating results in recent years and has a $160,000 net operating loss carryforward. Leader Corp. pays $700,000 to acquire Strong and is optimistic about its future profitability potential. The book value and fair value of Strong's identifiable net assets is $500,000 at date of acquisition. Strong's tax rate is 30% and Leader's tax rate is 40%. What is goodwill resulting from this business combination?

Pear, Inc. owns 80 percent of Apple Corporation. During the current year, Apple reported earnings before tax of $400,000 and paid a dividend of $120,000. The income tax rate for each company is 40 percent and separate tax returns are prepared. What deferred income tax liability arising this year must be recognized in the consolidated balance sheet?

On January 1, 2010, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2010 or 2011. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2010 were as follows: Following are the 2011 financial statements for these three companies. Curle made numerous transfers of inventory to Lance since the takeover: $112,000 (2010) and $140,000 (2011). These transactions included the same markup applicable to Curle's outside sales. In each of these years, Lance carried 20% of this inventory into the succeeding year before disposing of it. An effective income tax rate of 45% was applicable to all companies. -Required: Determine the total amount of goodwill for the January 1, 2010 acquisition of Curle Co. and for the acquisition of Lance Co. on the same date.

On January 1, 2010, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2010 or 2011. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2010 were as follows: Following are the 2011 financial statements for these three companies. Curle made numerous transfers of inventory to Lance since the takeover: $112,000 (2010) and $140,000 (2011). These transactions included the same markup applicable to Curle's outside sales. In each of these years, Lance carried 20% of this inventory into the succeeding year before disposing of it. An effective income tax rate of 45% was applicable to all companies. -Required: Determine the noncontrolling interest in Curle Co.'s net income for the year 2011.

Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2011 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also retains a $20,000 unrealized gain in their current income figures. Annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross. -Compute Chase's attributed ownership in Ross.

Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent. -Horse Corporation acquires all of Pony, Inc. for $300,000 cash. On that date, Pony has net assets with fair value of $250,000 but a book value and tax basis of $200,000. The tax rate is 40 percent. Prior to this date, neither Horse nor Pony has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc., all of which are domestic corporations. Information for the three companies for the year ending December 31, 2011 follows: -What is Delta's accrual-based income for 2011?

For each of the following situations, select the best answer concerning accounting for income taxes in combinations:

Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent. -Dog Corporation acquires all of Cat, Inc. for $400,000 cash. On that date, Cat has net assets with fair value of $350,000 but a book value and tax basis of $325,000. The tax rate is 30 percent. Prior to this date, neither Dog nor Cat has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent. -Britain Corporation acquires all of English, Inc. for $800,000 cash. On that date, English has net assets with fair value of $750,000 but a book value and tax basis of $500,000. The tax rate is 35 percent. Prior to this date, neither Britain nor English has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

Reggie, Inc. owns 70 percent of Nancy Corporation. During the current year, Nancy reported earnings before tax of $100,000 and paid a dividend of $30,000. The income tax rate for both companies is 30 percent. What deferred income tax liability arising in the current year must be recognized in the consolidated balance sheet?