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Question;14.;On January 1, 20X1, Parent Company purchased 90% of;the common stock of Subsidiary Company for $562,000. On this date Subsidiary;had total owner's equity of $550,000, including retained earning of $250,000.;On January;1, 20X1, the only tangible asset of Subsidiary that was undervalued was;building, which was worth $30,00 more than book value. The building has a;remaining life of 9 years and is depreciated using the straight-line method.;Any excess from the purchase is attributed to goodwill.;During 20X1 and 20X2, Parent has appropriately accounted for its;investment in Subsidiary using the simple equity method.;On January;1, 20X2, Parent held merchandise acquired from Subsidiary for $15,000. During;20X2, Subsidiary sold merchandise to Parent for $80,000, of which $20,000 is;held by Parent on December 31, 20X2. Subsidiary's usual gross profit on;affiliated sales is 40%.;On December;31, 20X1, Parent sold some equipment to Subsidiary with a cost of $50,000, and;a book value of $25,000. The sales price was $40,000. Subsidiary is;depreciating the equipment over 3-year life, assuming no salvage value and;using the straight-line method.;Parent and Subsidiary qualify as an affiliated group for tax;purposes and thus will file a consolidated tax return. Assume a 30% corporate;income tax rate.;Required;Complete the Figure 6-9 vertical worksheet for consolidated;financial statements for the year ended December 31, 20X2.;6-37;Chapter;6;6-38;Chapter 6;15.;On January 1, 20X1, Parent Company acquired 70% of;the common stock of Subsidiary Company for $340,400, in a taxable combination.;On this date, Subsidiary had total owners' equity of $422,000, including;retained earnings of $222,000. Any excess of cost over book value is;attributable to a patent, which is to be amortized over 15 years.;During 20X1 and 20X2, Subsidiary Company reported the following;information:....................;Net income before taxes;20X1;20X2;$40,000;$80,000;Dividends..................................;0;30,000;During 20X1;and 20X2, Parent has appropriately accounted for its investment in Subsidiary;using the simple equity method, including income tax effects.;On January;1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During;20X2, Subsidiary sold merchandise to Parent for $60,000, of which $20,000 is;held by Parent on December 31, 20X2. Subsidiary's usual gross profit on;affiliated sales is 40%.;Parent and;Subsidiary do not qualify as an affiliated group for tax purposes and thus will;file separate tax returns. Assume a 30% corporate tax rate and an 80%;dividends-received deduction.;Required;Complete;Figure 6-10 the worksheet for consolidated financial statements for the year;ended December 31, 20X2. Round all computations to the nearest dollar.;6-39;Chapter;6;6-41;Chapter 6;16.;On January 1, 20X1, Parent Company acquired 70% of;the common stock of Subsidiary Company for $340,400, in a taxable combination.;On this date, Subsidiary had total owners' equity of $422,000, including;retained earnings of $222,000. Any excess of cost over book value is;attributable to a patent, which is to be amortized over 15 years.;During 20X1 and 20X2, Subsidiary Company reported the following;information:....................;Net income before taxes;20X1;20X2;$40,000;$80,000;Dividends..................................;0;30,000;During 20X1;and 20X2, Parent has appropriately accounted for its investment in Subsidiary;using the simple equity method, including income tax effects.;On January;1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During;20X2, Subsidiary sold merchandise to Parent for $60,000, of which $20,000 is;held by Parent on December 31, 20X2. Subsidiary's usual gross profit on;affiliated sales is 40%.;On December;31, 20X1, Parent sold some equipment to Subsidiary with a cost of $40,000 and a;book value of $18,000. The sales price was $30,000. Subsidiary is depreciating;the equipment over a 3-year life, assuming no salvage value and using the;straight-line method.;Parent and;Subsidiary do not qualify as an affiliated group for tax purposes and thus will;file separate tax returns. Assume a 30% corporate tax rate and an 80%;dividends-received deduction.;Required;Complete;the Figure 6-11 worksheet for consolidated financial statements for the year;ended December 31, 20X2. Round all computations to the nearest dollar.;6-42;Chapter 6;6-44;Chapter 6;17.;On January 1, 20X1, Parent Company acquired 70% of;the common stock of Subsidiary Company for $340,400, in a taxable combination.;On this date, Subsidiary had total owners' equity of $422,000, including;retained earnings of $222,000. Any excess of cost over book value is;attributable to a patent, which is to be amortized over 15 years.;During 20X1 and 20X2, Subsidiary Company reported the following;information:......................;Net income before taxes;20X1;20X2;$40,000;$80,000;Dividends....................................;0;30,000;During 20X1;and 20X2, Parent has appropriately accounted for its investment in Subsidiary;using the cost method, including income tax effects.;On January;1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During;20X2, Subsidiary sold merchandise to Parent for $60,000, of which $20,000 is;held by Parent on December 31, 20X2. Subsidiary's usual gross profit on;affiliated sales is 40%.;On December;31, 20X1, Parent sold some equipment to Subsidiary with a cost of $40,000 and a;book value of $18,000. The sales price was $30,000. Subsidiary is depreciating;the equipment over a 3-year life, assuming no salvage value and using the;straight-line method.;Parent and;Subsidiary do not qualify as an affiliated group for tax purposes and thus will;file separate tax returns. Assume a 30% corporate tax rate and an 80%;dividends-received deduction.;Required;Complete;the Figure 6-12 worksheet for consolidated financial statements for the year;ended December 31, 20X2. Round all computations to the nearest dollar.;6-45;Chapter;6;6-47;Chapter 6;18.;On January 1, 20X6, Company P purchased a 15% interest;in Company S. On July 1, 20X9, Company P purchased an additional 20% interest;in Company S. Both purchases were at a cost in excess of underlying book value.;Company;S paid dividends each December from 20X6 to 20X9.;Required;a. How would;Company P record its investment in Company S in its financial statements;originally issued for 20X6 to 20X8?;b. Does a 35%;ownership interest absolutely require the use of the equity method?;c. How will;Company P account for its investment in Company S in its 20X9 financial;statements?;d.;How will Company P account for its investment in;Company S in the 20X6 to 20X9 comparative statements published in March 20X0?;6-48;Chapter 6;19.;Company P purchased a 30% interest in Company S for;$120,000 on January 1, 20X7, when Company S had the following stockholders;equity;Common;stock ($10 par).................................;$100,000;Paid-in;capital in excess of par.......................;200,000;Retained;earnings (deficit)............................;(20,000);Total..................................................;$280,000;========;Any excess cost was due to equipment that is being depreciated;over 5 years using straight-line depreciation.;Since the;investment, Company P has consistently sold goods to Company S to realize a 30%;gross profit. Such sales totaled $50,000 during 20X9. Company S had $10,000 of;such goods in its beginning inventory and $40,000 in its ending inventory.;On January;1, 20X9, Company S sold a machine with a book value of $15,000 to Company P for;$30,000. The machine has a 5-year life and is being depreciated on a;straight-line basis.;Company S;reported a net income of $75,000 before taxes for 20X9. Both firms are subject;to a 30% corporate tax rate. Company S paid no dividends in 20X9. An 80%;dividend earned exclusion rate applies.;Required;Prepare all;entries caused by Company P's investment in Company S for 20X3 (including tax;ramifications). Assume that Company P has recorded the tax on its internally;generated income. Company P has properly recorded the investment in previous;periods. Assume that sufficient previously recorded tax liability exists to;offset any deferred tax expense.;20. Patro;Company purchased a 80% interest in the Selma Company on January 1, 20X5 for;$630,000. Any excess cost was attributed to goodwill.;Equity;balances for the Selma Company on January 1, 20X5 were as follows;Common stock, $5;par................................;$300,000;Retained earnings...................................;400,000;Total equity....................................;$700,000;Selma sold;a machine to Patro for $30,000 on January 1, 20X5. The cost of the machine to;Sara was $20,000. The machine has a 5 year life and is being depreciated on a;straight-line basis.;During 20X6, Patro sold merchandise to Selma for $50,000. This;was the first year of intercompany merchandise sales. Patro records a 25% gross;profit on the sales price. $20,000 of the goods held by Selma, purchased from;Patro, are still in the inventory at year end.;The firms;do not meet the criteria to be taxed as a consolidated group, and thus are;subject to separate (double) taxation. The parent company receives an 80%;dividend exclusion. The tax rate applicable to both companies is 30%.;The trial;balances of Patro and Selma are inserted on the following worksheet which is;dated December 31, 20X6.;Complete the Figure 6-13 worksheet. Include;1. A determination and;distribution of excess schedule;2. Keyed elimination entries;with short explanations;3. Income;distribution schedules to support the allocation of consolidated net income;6-50;Chapter 6;6-52;Chapter 6;21.;Parent Company purchased a 60% interest in the;Subsidiary Company on January 1, 20X5 for $481,000. Any excess cost was;attributed to patent, which has a 20-year life.;Equity;balances for the Subsidiary Company on January 1, 20X5 were as follows;Common;stock...........................................;$400,000;Retained;earnings......................................;235,000;Total;equity.......................................;$635,000;The Parent;Company leased equipment to the Subsidiary Company on January 1, 20X6 under the;following terms;?;Payment for 5 years of $20,000, payable each January;1, starting January 1, 20X6.;?;Guaranteed residual value of $10,000 at the end of;the lease term, December 31, 20Y0.;?;Annual implicit interest rate is 12%.;?;The;sales profit is $10,000.;The;equipment has a 5-year life and is depreciated on a straight-line basis.;The;Subsidiary Company sells merchandise to the Parent Company at a gross profit;rate of 40%. Intercompany sales during 20X7 were $80,000. The Parent Company;had $10,000 of Subsidiary Company goods in its beginning inventory and $20,000;of Subsidiary goods in its ending inventory. The inventory values reflect the;intercompany sales price;The firms;do not meet the criteria to be taxed as a consolidated group, and thus are;subject to separate (double) taxation. The parent company receives and 80%;dividend exclusion. The tax rate applicable to both companies is 30%.;The trial;balances of Parent Company and Subsidiary Company are inserted on the following;worksheet which is dated December 31, 20X7.;Complete the Figure 6-14 worksheet. Include;a. A determination and;distribution of excess schedule;b. Keyed elimination entries;with short explanations;c. Income;distribution schedules to support the allocation of consolidated net income;6-53

 

Paper#44375 | Written in 18-Jul-2015

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