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Chapter 10 Test Bank

SUBSIDIARY PREFERRED STOCK, COSOLIDATED EARNINGS PER SHARE, AND CONSOLIDATED INCOME TAXATION

Multiple Choice Questions

Use the following information for Questions 1 and 2.

Parminter Corporation owns an 80% interest in the common stock of Sanchez Corporation and 20% of Sanchez’s preferred stock on December 31, 2005. Sanchez had 2005 net income of $30,000. Sanchez’s equity was as follows:10% preferred stock $ 50,000Common stock 350,000

LO11. How much should the Parminter’s Investment in Sanchez change

during 2005?

a. $ 5,000.b. $20,000.c. $25,000.d. $30,000.

LO12. What should be the noncontrolling interest expense in the

consolidated financial statements of Parminter?

a. $ 5,000.b. $20,000.c. $25,000.d. $30,000.

Use the following information for Questions 3, 4, and 5.

On January 1, 2005, Pardy Corporation acquired a 70% interest in the common stock of Salter Corporation for $7,000,000 when Salter’s stockholders’ equity was as follows:

10% cumulative, nonparticipating preferred stock, $100 par, with a $105 liquidation preference callable at $110 $ 1,000,000Common stock, $10 par value 6,000,000Additional paid-in capital 1,500,000Retained earnings 2,500,000

©2009 Pearson Education, Inc. publishing as Prentice Hall10-1

Total stockholders’ equity $11,000,000

LO13. There were no dividends in arrears on the date of the business

combination. The goodwill from Pardy’s investment in Salter on January 1, 2005 is

a. $ 0.b. $ 35,000.c. $ 70,000.d. $105,000.

LO14. Salter has a 2005 net loss of $200,000. Pardy’s share of

Salter’s net loss is

a. $ 50,000.b. $ 70,000.c. $140,000.d. $210,000.

LO15. If Salter’s net income is $220,000, what is Pardy’s share of

Salter’s net income?

a. $ 84,000.b. $119,000.c. $154,000.d. $189,000.


LO16. Pamplin Corporation stockholders’ equity consisted of

$1,000,000 of $10 par value Common Stock, $750,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings on January 1, 2005. On this date, Pamplin purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000 with all excess purchase cost assigned to goodwill. The stockholders’ equity of Sage on this date consisted of $800,000 of $100 par value, 8% non-cumulative, preferred stock callable at $105, $900,000 of $10 par value common stock and $500,000 of Retained Earnings. Sage’s net income for 2005 was $100,000.

In a separate transaction on January 1, 2005, Pamplin purchased 70% of Sage’s preferred stock for $600,000. At the end of 2005, the amount of Pamplin’s income from Sage (excluding dividends from preferred stock) and the balance in its Additional Paid-in Capital account, respectively, are

a. $62,400 and $710,000.b. $62,400 and $750,000.c. $32,400 and $710,000.d. $32,400 and $750,000.

LO17. Pan Corporation has total stockholders’ equity of $5,000,000

consisting of $1,000,000 of $10 par value Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. Pan owns 80% of Sailor Corporation’s common stock purchased at book value. Sailor has $900,000 of 10% cumulative preferred stock outstanding. Pan acquired 60% of the preferred stock of Sailor for $500,000. After this transaction the balances in Pan’s Retained Earnings and Additional Paid-in Capital accounts, respectively, are

a. $2,960,000 and $1,000,000.b. $3,000,000 and $960,000.c. $3,000,000 and $1,040,000.d. $3,040,000 and $1,000,000.


LO18. If a company’s preferred stock is cumulative with a call

provision and has dividends in arrears, the amount of total preferred stockholders’ equity would be calculated as the number of shares outstanding times the

a. sum of the par value per share plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared.

b. sum of the par value per share, plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared.

c. call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared.

d. call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared.

LO19. When a parent acquires the preferred stock of a subsidiary,

there will be a constructive retirement that eliminates the equity related to the preferred stock held by the parent and

a. any difference paid above the par value first reduces additional paid-in capital and then retained earnings.

b. any difference paid above the par value first reduces retained earnings and then additional paid-in capital.

c. any difference paid above the par value increases additional paid-in capital.

d. any difference paid above the par value increases retained earnings.

LO110. When a parent acquires subsidiary preferred stock, no

subsequent working paper entry is necessary to adjust additional paid-in capital under which of the following methods?

I. The constructive retirement method.II. The cost method.

a. I only.b. II only.c. I and II.d. I or II if no redemption feature is present.


LO211. In a company with minority interest equity, how is the

preferred stock call premium addressed?

a. It is recorded as an increase in additional paid-in capital.

b. It is recorded as a decrease in additional paid-in capital.c. It is recorded as an increase in retained earnings.d. It is recorded as a decrease in retained earnings.

LO212. If a parent company has controlling interest in a subsidiary

which has no potentially dilutive securities, then in the calculation of consolidated EPS, it will be necessary to

a. only make an adjustment of subsidiary’s basic earnings.b. replace the parent’s equity in subsidiary earnings with the

parent’s equity in subsidiary’s diluted EPS.c. make a replacement calculation in the parent's basic

earnings for the EPS.d. only use the parent's common shares and common share

equivalents.

LO213. A subsidiary has some outstanding options that permit holders

to purchase the company’s common stock. How will the options affect consolidated EPS?

a. If the exercise price per share is greater than average market price then the basic consolidated EPS will be decreased.

b. If the exercise price per share is greater than average market price then the basic consolidated EPS will be increased.

c. If the exercise price per share is greater than average market price then the diluted consolidated EPS will be increased.

d. If the exercise price per share is greater than average market price then the diluted consolidated EPS will be decreased.


LO214. Parnaby has 25,000 common stock shares outstanding and its

100%-owned subsidiary Sandal has 5,000 common stock shares outstanding. The separate income for Parnaby and Sandal is $150,000 and $75,000 respectively. EPS for the consolidated company is

a. $5.00.b. $6.00.c. $7.50.d. $9.00.

LO215. In computing the diluted EPS of the parent, any replacement

computation of subsidiary income may be affected by

a. the constructive gain from purchase of parent bonds.b. the constructive loss from purchase of parent bonds.c. the current amortization from investment in the subsidiary.d. the parent’s equity in subsidiary realized income.

LO216. An 80%-owned subsidiary has outstanding bonds payable that are

convertible into the subsidiary’s common stock. No bonds are held by the parent corporation. In calculating the subsidiary’s diluted EPS, the amount of bond interest expense that will be added back to the subsidiary’s income to the common stockholders will be

a. the face amount of the convertible bonds times the bond coupon rate times the subsidiary’s marginal tax rate.

b. the face amount of the convertible bonds times the effective rate of interest on the bonds times the subsidiary’s marginal tax rate.

c. the face amount of the convertible bonds times the bond coupon rate times (100% minus the subsidiary’s marginal tax rate).

d. the face amount of the convertible bonds times the effective rate of interest on the bonds times (100% minus the subsidiary’s marginal tax rate).


LO217. When a subsidiary has outstanding options to purchase common

stock, the number of shares added to the denominator of the subsidiary’s EPS calculation is equal to the number of

a. shares that can be purchased with the current market value of the options.

b. shares into which the options can be converted minus the number of shares purchased at the average market price that are assumed to be repurchased from the money received from the option shares.

c. shares into which the options can be converted.d. shares into which the options can be converted minus the

number of shares purchased at the exercise price that are assumed to be purchased from the money received from the option shares.

LO218. When a subsidiary has preferred stock that is convertible into

common stock, the parent’s equity in the subsidiary’s diluted earnings is calculated by the number of

a. subsidiary shares into which the subsidiary’s dilutive securities can be converted times the subsidiary’s basic EPS figure.

b. parent shares into which the subsidiary’s dilutive securities can be converted times the parent’s basic EPS figure.

c. subsidiary shares held by the parent times the subsidiary’s diluted EPS figure.

d. parent shares into which the subsidiary’s dilutive securities can be converted times the subsidiary’s basic EPS figure.

LO319. Palm owns a 70% interest in Sable, a domestic subsidiary. Palm

will pay taxes on

a. none of the dividends it receives from Sable.b. 20% of the dividends it receives from Sable.c. 66% of the dividends it receives from Sable.d. 80% of the dividends it receives from Sable.


LO320. Palmer Company owns a 25% interest in Sad, Incorporated, a

domestic company. Sad had income of $60,000 and paid dividends of $20,000. Palmer’s tax rate is 35%. For simplicity, assume that Sad’s undistributed earnings are Palmer’s only temporary timing difference. Which of the following statements is correct?

a. Under the Internal revenue Code, Palmer pays current taxes of $700.

b. Under the Internal revenue Code, Palmer pays current taxes of $1,050.

c. Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred income taxes of $700.

d. Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred income taxes of $1,050.

LO321. Palmquist Corporation and its 80%-owned subsidiary, Sadler

Corporation, are members of an affiliated group. Sadler had $3,000,000 of income and paid $1,000,000 dividends in 19X6. Palmquist and Sadler had 35% income tax rates. Palmquist’s provision for income taxes on Sadler’s undistributed earnings was

a. $ 0.b. $ 56,000.c. $112,000.d. $168,000.

LO322. Palomba Corporation allocates income tax expense to its 90%-

owned subsidiary using the percentage allocation method. Under this method, consolidated income tax expense will be allocated

a. on the basis of the tax provisions recorded by both companies.

b. on the basis of the subsidiary’s pretax income included in consolidated pretax income.

c. on the basis of the income taxes remitted to the IRS.d. 90% to the subsidiary.


LO323. Which statement best describes the effect of an inter-company

transaction on income tax expense when corporate affiliates file separate tax returns, but prepare consolidated financial statements?

a. The selling entity excludes the unrealized gain on its separate return and the unrealized gain is eliminated on the consolidated financial statements.

b. The selling entity includes the unrealized gain on its separate return and the unrealized gain is included on the consolidated financial statements as part of consolidated net income.

c. The selling entity includes the unrealized gain on its separate return and the unrealized gain is eliminated on the consolidated financial statements.

d. The selling entity excludes the unrealized gain on its separate return and the unrealized gain is included on the consolidated financial statements.

Use the following information for questions 24 and 25.

Paltridge Company owns 60% of Saga Corporation. At the beginning of the current year no timing differences exist. Saga has $50,000 of net income on its separate return, all of which is subject to tax. Paltridge sells a machine to Saga for $30,000 that has a net book value of $10,000 and a 4-year remaining useful life. Saga has a 40% dividend payout ratio, and the marginal tax rate for both companies is 35%.

LO324. Saga's provision for current income taxes will be calculated as

a. 35% x ($50,000 net income).b. 35% x ($50,000 net income + $5,000 piecemeal recognition of

gain).c. 35% x ($50,000 net income - $20,000 gain on sale + $5,000

piecemeal recognition of gain).d. 35% x ($50,000 net income - $20,000 gain on sale).

LO325. The amount of income taxes that Paltridge will have to provide

for the undistributed earnings of Saga will be calculated as

a. 35% x $50,000 x 60% x 20%.b. 35% x $50,000 x 60% x 30%.c. 35% x $30,000 x 60% x 20%.d. 35% x $30,000 x 60% x 30%.


LO1Exercise 1

Saito Corporation’s stockholders’ equity on December 31, 2004 was as follows:

10% cumulative preferred stock, $100 par value, callable at $105, with one year dividends in arrears $ 10,000Common stock, $1 par value 50,000Additional paid-in capital 150,000Retained earnings 160,000Total stockholders’ equity $ 370,000

On January 1, 2005, Panata Corporation paid $300,000 for a 70% interest in Saito’s underlying equity.

Required:

1. Determine the excess purchase cost in excess of book value that was paid by Panata for its investment in Saito.

2. Determine the January 1, 2005 balance for the minority interest that appeared on a consolidated balance sheet.


LO1Exercise 2

Samford Corporation’s stockholders’ equity on December 31, 2004 was as follows:

8% cumulative preferred stock, $100 par value, callable at $109, with two years of dividends in arrears $ 100,000Common stock, $25 par value 700,000Additional paid-in capital 250,000Retained earnings 400,000Total stockholders’ equity $ 1,450,000

On January 1, 2005, Park Corporation purchased a 70% interest in Samford’s common stock for $850,000. On this date the book values of Park’s assets and liabilities are equal to their fair values.

Required:

1. Determine the book value of the common stockholders’ interest in Samford Corporation.

2. How much did Park pay for goodwill when it acquired its interest in Samford?

LO2Exercise 3

Pancino Corporation owns a 90% interest in Sakal Corporation. Throughout 2005, Sakal had 20,000 shares of common stock outstanding and Pancino has 50,000 shares of common stock outstanding. Sakal’s only dilutive security also consists of 10,000 stock options. It takes 4 options plus $20 to acquire one share of Sakal common stock. The average price of Sakal’s stock is $50 per share. Pancino’s and Sakal’s separate incomes for the year are $100,000 and $80,000, respectively.

Required:

Compute the amount of basic and diluted earnings per share for Pancino and Sakal Corporations.


LO2Exercise 4

Parker Corporation owns an 80% interest in Sample Corporation. Throughout 2005, Sample had 10,000 shares of common stock outstanding and Parker had 100,000 shares of common stock outstanding. Sample’s only dilutive security consists of $50,000 face amount of 8% bonds payable. Each bond is convertible into 20 shares of Sample stock. Parker and Sample’s separate incomes for the year are $100,000 and $75,000, respectively.

Required:

Compute the amount of basic and diluted earnings per share for Parker and Sample Corporations.

LO3Exercise 5

Pane Corporation owns 100% of Alder Corporation, 85% of Ball Corporation, 70% of Cake Corporation, 40% of Dash Corporation, and 10% of Eager Corporation. All of these corporations are domestic corporations. Pane's marginal income tax rate is 35%. During 2008, Pane Corporation received the following cash dividends:

From Alder: $180,000From Ball: $170,000From Cake: $160,000From Dash: $100,000From Eager: $ 60,000

Required:

1. Compute the amount of the dividend income that would be excluded from taxation under the current Internal Revenue Code.

2. Compute Pane's current income tax liability for the dividend income received in 2008.


LO3Exercise 6

Pretax operating incomes of Pang Corporation and its 70%-owned subsidiary, Sala Corporation, for the year 2005, are shown below. Sala pays total dividends of $60,000 for the year. There are no unamortized cost-book differentials relating to Pang’s investment in Sala. During the year, Pang sold land to Sala for a gain of $35,000 and Sala holds this land at the end of the year. The marginal corporate tax rate for both corporations is 34%.

Pang SalaSales revenue $ 900,000 $ 600,000Gain on sale of land 35,000Cost of sales ( 480,000 ) ( 325,000 )Other expenses ( 192,000 ) ( 78,000 )Pretax operating income (does not include investment income) $ 263,000 $ 197,000

Required:

1. Determine the separate amounts of income tax expense for Pang and Sala as if they had filed separate tax returns.

2. Determine Pang’s net income from Sala.


LO3Exercise 7

Pretax operating incomes of Panitz Corporation and its 80%-owned subsidiary, Salazar Corporation, for the year 2005, are shown below. Salazar pays total dividends of $65,000 for the year. There are no unamortized cost-book differentials relating to Panitz’s investment in Salazar. During the year, Panitz sold land to Hamilton at a total loss of $15,000 which is included in its pretax operating income. Salazar still holds this land at the end of the year. Also included in its pretax operating income are $40,000 of dividends received from Shaw Corporation of which Panitz owns 8% and $50,000 of dividends from Sunny Corporation of which Salazar owns 6%. The marginal corporate tax rate for both corporations is 34%.

Panitz SalazarSales revenue $ 890,000 $ 700,000Loss on sale of land ( 15,000 )Dividend income from Shaw and Sunny 90,000Cost of sales ( 400,000 ) ( 250,000 )Other expenses ( 350,000 ) ( 350,000 )Depreciation expense ( 50,000 ) ( 35,000 )Pretax operating income (does not include Salazar investment income) $ 165,000 $ 65,000

Required:

1. Determine the separate amounts of income tax expense for Panitz and Salazar as if they had filed separate tax returns.

2. Determine Panitz’s net income from Salazar.


LO3Exercise 8

On January 1, 2005, Panos Corporation acquired all of the outstanding voting common stock of Saley Corporation in an acquisition. The total purchase price for the stock was $1,300,000. Saley’s net assets on this date were as follows:

Saley’sBook

Values

Saley’s Fair

ValuesCash $ 20,000 $ 20,000Inventories 210,000 240,000Land 200,000 250,000Building-net 600,000 900,000Total assets $ 1,030,000 $ 1,410,000

Liabilities $ 230,000 $ 230,000Common stock 400,000Retained earnings 400,000Total equities $ 1,030,000

Assume that for federal income tax purposes, the book values of Saley’s assets and liabilities will be carried over for tax purposes but that the fair values will be recorded for GAAP purposes. The remaining useful life for the building is 20 years and goodwill will be amortized over the 15-year time period allowed for tax purposes. All depreciation and amortization is done on the straight-line basis and the federal tax rate is 34%. Half of the inventory to which the excess of cost over book value applies is sold in 2005. Ignore any tax effect on Saley’s undistributed earnings.

Required:

1. Calculate the amount of deferred income taxes that result from the acquisition transaction that are attributable to the net assets being recorded at book values for tax purposes, but at fair values for financial accounting purposes.

2. Identify and calculate the dollar amount of any timing differences that accrue or reverse by the end of the first year after the acquisition.


LO3Exercise 9

Paradise Corporation owns 100% of Aldred Corporation, 90% of Balme Corporation, 80% of Calder Corporation, 75% of Dale Corporation, 20% of East Corporation, and 8% of Faber Corporation. All of these corporations are domestic corporations. During 2005, Paradise Corporation reports net income of $1,500,000. This net income includes the full amount of dividends received from Aldred and Faber, but does not include the dividends received from Balme, Calder, Dale, and East Corporations. All investees have paid out all of their net income in the form of dividends. Paradise’s share of the various dividend distributions is as follows:

From Aldred: $90,000From Balme: $92,000From Calder: $88,000From Dale: $66,000From East: $50,000From Faber: $40,000

Required:

Calculate the correct amount of taxable income for Pal Corporation if a consolidated tax return is filed.


LO3Exercise 10

On January 1, 2005, Parcel Corporation acquired all of the outstanding voting common stock of Salmon Corporation in an acquisition. The total purchase price for the stock was $1,020,000. Salmons’s net assets on this date were as follows:

Salmon’sBook

Values

Salmon’s Fair

ValuesCash $ 20,000 $ 20,000Inventories 210,000 240,000Land 200,000 320,000Building-net 600,000 500,000Total assets $ 1,030,000 $ 1,080,000

Liabilities $ 230,000 $ 210,000Common stock 400,000Retained earnings 400,000Total equities $ 1,030,000

Assume that for federal income tax purposes, the book values of Salmon’s assets and liabilities will be carried over for tax purposes but that the fair values will be recorded for GAAP purposes. The remaining useful life for the building is 20 years and goodwill will be amortized over the 15-year time period allowed for tax purposes. The liabilities are amortized over a 5-year period. All depreciation and amortization is done on the straight-line basis and the federal tax rate is 34%. All inventories to which the excess of cost over book value applies were sold in 2005. Ignore any tax effect on Salmon’s undistributed earnings.

Required:

1. Calculate the amount of deferred income taxes that resulted from the acquisition transaction that were attributable to the net assets being recorded at book values for tax purposes but at fair values for financial accounting purposes.

2. Identify and calculate the dollar amount of any timing differences that accrued or reversed by the end of the first year after the acquisition.


SOLUTIONS

Multiple Choice Questions

1. b Of the $30,000, 5,000 is preferred dividends and in the remainder 25,000 has 80% go to Parminter for $20,000.

2. d

3. c

Stockholders’ equity $ 11,000,000Less: Preferred stockholders’ equity 1,100,000Common stockholders’ equity 9,900,000

Cost of 70% interest acquired $ 7,000,000Book value of 70% interest ($9,900,000) x (70%) 6,930,000Goodwill $ 70,000

4. b

Salter’s net loss $ ( 200,000 )Income to the preferred stockholders 100,000Loss to common stockholders 100,000Pardy’s ownership percentage 70%Pardy’s share of the loss on investment $ 70,000

5. a

Salter’s net income $ 220,000Income to the preferred stockholders 100,000Income to the common stockholders 120,000Pardy’s ownership percentage 70%Pardy’s share of the income to the common shareholders $ 84,000


6. c

Preliminary computations:Total stockholders’ equity $ 2,200,000Less: Preferred stockholders’ equity 840,000Equals: Common stockholders’ equity $ 1,360,000

Price paid by Pamplin $ 1,500,000Book value acquired ($1,360,000 x 90%) 1,224,000Goodwill $ 276,000

Net income as given $ 100,000Less: Preferred dividends ($800,000 x 8%) 64,000Income available to the common stockholders $ 36,000Majority percentage 90%Income from Sage $ 32,400

Reduction in paid-in capital due to Pamplin’s purchase of preferred stockPar value of acquired preferred stock $ 560,000Purchase price 600,000Reduction in Pamplin’s additional paid-in capital $ 40,000Ending balance in the paid-in capital account $ 710,000

7. c

When preferred stock of the subsidiary is acquired at an amount above or below the par value of the preferred stock, the excess cost over par value is subtracted from the parent’s additional paid-in capital and any excess par value over cost is added to the parent’s additional paid-in capital. The $40,000 by which the cost of the preferred stock is less than the par value is added to the parent’s additional paid-in capital.

8. b

9. a

10. a

11. d


12. d

13. d

14. d (150,000+75,000)/25,000

15. d

16. d

17. b

17. a

18. c

19. b

20. c

21. a

22. b

23. c

24. a

25. c


Exercise 1

Requirement 1:Total stockholders’ equity at December 31, 2004 $ 370,000Less: Preferred stockholders’ equity 100 shares x($105 call price + $10 dividend per share in arrears) ( 11,500 )Common stockholders’ equity $ 358,500

Price paid for common stock investment $ 300,000Book value of 70% interest ($358,500 x 70%) 250,950Excess of cost over book value $ 49,050

Requirement 2Minority interest at January 1, 2005:Minority interest: Preferred (100 shares x $115) $ 11,500Minority interest: Common ($358,500 x 30%) 107,550Total minority interest $ 119,050

Exercise 2

Requirement 1:Book value available to common stockholders:Total stockholders’ equity at December 31, 2004 $ 1,450,000Less: Preferred stockholders’ equity 1000 shares x($109 call price + $8 dividend per share in arrears x 2 years) ( 125,000 )Common stockholders’ equity $ 1,325,000

Book value of the common stockholders’ equity $ 1,325,000Percentage acquired 70%80% of book value $ 927,500Purchase cost 850,000Equals: Goodwill $ 77,500


Exercise 3

Basic DilutedSakal’s Basic and Diluted EPS:Sakal’s income to common shareholders $ 80,000 $ 80,000

Common shares outstanding 20,000 20,000Incremental shares:Diluted EPS:2,500 shares – ($50,000 proceeds/$40 average price per share) 1,250Common shares and common equivalents 20,000 21,250Earnings per share $ 4.00 $ 3.76

Basic Diluted

Pancino’s Basic and Diluted EPS:Pancino’s separate income $ 100,000 $ 100,000Pancino’s income from Sakal 72,000 72,000

Replacement computation:Reverse: Pancino’s income from Sakal ( 72,000 ) ( 72,000 )18,000 shares x $4.00 72,00018,000 shares x $3.76 67,680Income to common $ 172,000 $ 167,680

Common shares outstanding 50,000 50,000

Earnings per share $ 3.44 $ 3.35

Exercise 4

Basic DilutedSample’s Basic and Diluted EPS:Sample’s income to common shareholders $ 75,000 $ 75,000Add: Net of tax interest expense $50,000 x 8% x 66% 0 2,640Adjusted subsidiary earnings $ 75,000 $ 77,640

Common shares outstanding 10,000 10,000Incremental shares:Diluted EPS:100 bonds x 20 shares 2,000Common shares and common equivalents 10,000 12,000Earnings per share $ 7.50 $ 6.47


Basic Diluted

Parker’s Basic and Diluted EPS:Parker’s separate income $ 100,000 $ 100,000Parker’s income from Sample 60,000 60,000

Replacement computation:Reverse: Parker’s income from Sample ( 60,000 ) ( 60,000 ) 8,000 shares x $7.50 60,000 8,000 shares x $6.47 51,760Income to common $ 160,000 $ 211,760

Common shares outstanding 100,000 100,000

Earnings per share $ 1.60 $ 1.52

Exercise 5

Requirement 1:Excluded dividend income:From Alder: $180,000 x 100% $ 180,000From Ball: $170,000 x 100% 170,000From Cake: $160,000 x 80% 128,000From Dash: $100,000 x 80% 80,000From Eager: $60,000 x 70% 42,000Total excluded dividend income $ 600,000

Requirement 2:Total dividend income received $ 670,000Total excluded dividend income 600,000Included dividend income $ 70,000Current Income Tax Liability:$70,000 x 35% = $24,500


Exercise 6

Requirement 1 Pang SalaIncome taxes currently payable:Taxes on operating income $263,000 x 34% $ 89,420 $197,000 x 34% $ 66,980Taxes on dividends received: $60,000 x 70% x 20% x 34% 2,856Income taxes currently payable 92,276 66,980

Tax on undistributed income: $137,000 x 70% x 20% x 34% 6,521Deferred tax on gain on land $35,000 x 34% ( 11,900 )Income tax expense $ 86,897 $ 66,980

Requirement 2Pre-tax income from Sala $ 197,000

Less: income tax expense ( 66,980 )Net Income from Sala $ 130,014

Exercise 7

Requirement 1 Panitz SalazarTaxable Income Calculation:Sales Revenue $ 890,000 $ 700,000Loss on sale of land ( 15,000 )Cost of sales ( 400,000 ) ( 250,000 )Other expenses ( 350,000 ) ( 350,000 )Depreciation expense ( 50,000 ) ( 35,000 )Dividend income: From Shaw $40,000 x 30% 12,000 From Sunny $50,000 x 30% 15,000Taxable income $ 102,000 $ 65,000Tax rate 34% 34%Income taxes currently payable $ 34,680 $ 22,100

Requirement 2Panitz’s income from Salazar:Assuming taxable income is the same as GAAP income $ 65,000Less: Current income taxes 22,100Net income $ 42,900Panitz’s ownership percentage 80%Net Income from Salazar $ 34,320


Exercise 8

Preliminary calculations:Goodwill purchased:Total acquisition cost $1,300,000Less: Fair value of net assets: $1,410,000 - $230,000 = 1,180,000Goodwill acquired $ 120,000

Requirement 1:Deferred incomes taxes:Excess fair value over book value: Inventories $240,000 - $210,000 $ 30,000 Land $250,000 - $200,000 50,000 Building-net $900,000 - $600,000 300,000 Goodwill (accrue annually - tax) 0Total deferred items $ 380,000Tax rate 34%Deferred income taxes $ 129,200

Requirement 2Timing differences expiring or accruing during the first year after acquisition: Inventory sold $ 15,000 Goodwill amortized - tax ( 8,000) Excess building depreciation 15,000Total timing differences $ 22,000Tax rate 34%Tax effect $ 7,480

The net deferred income tax liability will be reduced by $7,480 as a result of these timing differences.


Exercise 9

Net income as reported: $ 1,500,000Excludable amount of dividends included in net income: Exclude 100% of Aldred dividends ( 90,000 ) Exclude 70% of Faber dividends ( 28,000 )Includable amount of dividends not yet added to net income: Include 20% of Dale dividends 13,200 Include 20% of East dividends 10,000Taxable income $ 1,405,200

The dividends from Balme and Calder are excluded in full. This problem also emphasizes the dividend exclusion ratio applicable when the percentage of stock held is right on the dividing line between the different exclusion percentages. The 70% exclusion ratio applies for stock holdings less than 20% and the 80% exclusion ratio applies for holdings less than 80% but at least 20%.


Exercise 10

Preliminary calculations:Goodwill purchased:Total acquisition cost $ 1,020,000Less: Fair value of net assets: $1,080,000 - $210,000 = 870,000Goodwill acquired $ 150,000

Requirement 1:Deferred incomes taxes:Excess fair value over book value: Inventories $240,000 - $210,000 $ 30,000 Land $320,000 - $200,000 120,000 Building-net $500,000 - $600,000 Liabilities $210,000 - $230,000

(100,000) 20,000

Goodwill (accrue annually - tax) 0Total deferred items $ 70,000Tax rate 34%Deferred income taxes $ 23,800

Requirement 2Timing differences expiring/ accruing during the first year after acquisition: Inventory sold Liabilities amortized

$ 30,000 4,000

Goodwill amortized (tax only) (10,000) Excess building depreciation ( 5,000)Total timing differences $ 19,000Tax rate 34%Tax effect $ 6,460

The net deferred income tax liability will be reduced by $6,460 as a result of these timing differences.


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