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 Sanchezs preferred stock on December
31, 2005. Sanchez had 2005 net income of $30,000. Sanchezs equity
was as follows:
10% preferred stock $ 50,000
Common stock
350,000
LO1
1.

How much should the Parminters Investment in Sanchez change

during 2005?
a.
b.
c.
d.

LO1
2.

$ 5,000.
$20,000.
$25,000.
$30,000.

What should be the noncontrolling interest expense

consolidated financial statements of Parminter?

in

the

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 Salters
stockholders equity was as follows:
10% cumulative, nonparticipating preferred stock,
$100 par, with a $105 liquidation preference
callable at $110
Common stock, $10 par value
Additional paid-in capital
Retained earnings
Total stockholders equity

$ 1,000,000
6,000,000
1,500,000
2,500,000
$11,000,000

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LO1
3.

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

combination. The goodwill from Pardys investment in Salter on
January 1, 2005 is
a.
b.
c.
d.

LO1
4.

Salter has a 2005 net

Salters net loss is
a.
b.
c.
d.

LO1
5.

$
0.
$ 35,000.
$ 70,000.
$105,000.
loss

of

$200,000.

Pardys

share

of

$ 50,000.
$ 70,000.
$140,000.
$210,000.

If Salters net income is $220,000, what is Pardys share of

Salters net income?
a.
b.
c.
d.

$ 84,000.
$119,000.
$154,000.
$189,000.

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LO1
6.

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. Sages net income for 2005 was $100,000.
In a separate transaction on January 1, 2005, Pamplin purchased
70% of Sages preferred stock for $600,000.
At the end of
2005, the amount of Pamplins income from Sage (excluding
dividends from preferred stock) and the balance in its
Additional Paid-in Capital account, respectively, are
a.
b.
c.
d.

LO1
7.

$62,400
$62,400
$32,400
$32,400

and
and
and
and

$710,000.
$750,000.
$710,000.
$750,000.

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 Corporations 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 Pans Retained Earnings and Additional Paid-in
Capital accounts, respectively, are
a.
b.
c.
d.

$2,960,000
$3,000,000
$3,000,000
$3,040,000

and
and
and
and

$1,000,000.
$960,000.
$1,040,000.
$1,000,000.

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LO1
8.

If a companys 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 years 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 years dividend requirement,
regardless of whether dividends have been declared.
c. call price plus the sum of any preferred dividends in
arrears, plus the current years dividend requirement, but
only if dividends have been declared.
d. call price plus the sum of any preferred dividends in
arrears, plus the current years dividend requirement,
regardless of whether dividends have been declared.

LO1
9.

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.

LO1
10.

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.
b.
c.
d.

I only.
II only.
I and II.
I or II if no redemption feature is present.
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LO2
11.

In a company with minority interest

preferred stock call premium addressed?
a. It is recorded
capital.
b. It is recorded as
c. It is recorded as
d. It is recorded as

LO2
12.

as

an

increase

equity,
in

how

additional

is

the

paid-in

a decrease in additional paid-in capital.

an increase in retained earnings.
a decrease in retained earnings.

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 subsidiarys basic earnings.
b. replace the parents equity in subsidiary earnings with the
parents equity in subsidiarys 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.

LO2
13.

A subsidiary has some outstanding options that permit holders

to purchase the companys common stock. How will the options
affect consolidated EPS?
a. If the exercise price per share is greater
market price then the basic consolidated
decreased.
b. If the exercise price per share is greater
market price then the basic consolidated
increased.
c. If the exercise price per share is greater
market price then the diluted consolidated
increased.
d. If the exercise price per share is greater
market price then the diluted consolidated
decreased.

than average
EPS will be
than average
EPS will be
than average
EPS will be
than average
EPS will be

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LO2
14.

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.
b.
c.
d.

LO2
15.

In computing the diluted EPS of the parent, any replacement

computation of subsidiary income may be affected by
a.
b.
c.
d.

LO2
16.

$5.00.
$6.00.
$7.50.
$9.00.

the
the
the
the

constructive gain from purchase of parent bonds.

constructive loss from purchase of parent bonds.
current amortization from investment in the subsidiary.
parents equity in subsidiary realized income.

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

convertible into the subsidiarys common stock. No bonds are
held by the parent corporation. In calculating the subsidiarys
diluted EPS, the amount of bond interest expense that will be
added
back
to
the
subsidiarys
income
to
the
common
stockholders will be
a. the face amount of the convertible bonds times the bond
coupon rate times the subsidiarys marginal tax rate.
b. the face amount of the convertible bonds times the
effective rate of interest on the bonds times the
subsidiarys marginal tax rate.
c. the face amount of the convertible bonds times the bond
coupon rate times (100% minus the subsidiarys marginal tax
rate).
d. the face amount of the convertible bonds times the
effective rate of interest on the bonds times (100% minus
the subsidiarys marginal tax rate).

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LO2
17.

When a subsidiary has outstanding options to purchase common

stock, the number of shares added to the denominator of the
subsidiarys 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.

LO2
18.

When a subsidiary has preferred stock that is convertible into

common stock, the parents equity in the subsidiarys diluted
earnings is calculated by the number of
a. subsidiary shares into which the subsidiarys dilutive
securities can be converted times the subsidiarys basic
EPS figure.
b. parent
shares into
which the
subsidiarys dilutive
securities can be converted times the parents basic EPS
figure.
c. subsidiary shares held by the parent times the subsidiarys
diluted EPS figure.
d. parent
shares into
which the
subsidiarys dilutive
securities can be converted times the subsidiarys basic
EPS figure.

LO3
19.

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

will pay taxes on
a.
b.
c.
d.

none of the dividends it receives from Sable.

20% of the dividends it receives from Sable.
66% of the dividends it receives from Sable.
80% of the dividends it receives from Sable.

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LO3
20.

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

domestic company. Sad had income of $60,000 and paid dividends
of $20,000. Palmers tax rate is 35%. For simplicity, assume
that Sads undistributed earnings are Palmers 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 Sads
undistributed earnings with a credit to deferred income
taxes of $700.
d. Under GAAP, Palmer provides for income taxes on Sads
undistributed earnings with a credit to deferred income
taxes of $1,050.

LO3
21.

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. Palmquists
provision for income taxes on Sadlers undistributed earnings
was
a.
b.
c.
d.

LO3
22.

$
0.
$ 56,000.
$112,000.
$168,000.

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 subsidiarys pretax income included in
consolidated pretax income.
c. on the basis of the income taxes remitted to the IRS.
d. 90% to the subsidiary.

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LO3
23.

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%.
LO3
24.

LO3
25.

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).
The amount of income taxes that Paltridge will have to provide
for the undistributed earnings of Saga will be calculated as
a.
b.
c.
d.

35%
35%
35%
35%

x
x
x
x

$50,000
$50,000
$30,000
$30,000

x
x
x
x

60%
60%
60%
60%

x
x
x
x

20%.
30%.
20%.
30%.

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LO1
Exercise 1
Saito Corporations 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 $
Common stock, $1 par value
Additional paid-in capital
Retained earnings
Total stockholders equity
$

On January 1, 2005, Panata Corporation

interest in Saitos underlying equity.

paid

$300,000

10,000
50,000
150,000
160,000
370,000

for

70%

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.

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LO1
Exercise 2
Samford Corporations 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
Common stock, $25 par value
Additional paid-in capital
Retained earnings
Total stockholders equity

100,000
700,000
250,000
400,000
1,450,000

On January 1, 2005, Park Corporation purchased a 70% interest in

Samfords common stock for $850,000. On this date the book values of
Parks 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?
LO2
Exercise 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. Sakals
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 Sakals stock is $50 per share. Pancinos and
Sakals 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.

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LO2
Exercise 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. Samples
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 Samples 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.

LO3
Exercise 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
From
From
From
From

Alder:
Ball:
Cake:
Dash:
Eager:

$180,000
$170,000
$160,000
$100,000
$ 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.

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LO3
Exercise 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 Pangs 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%.

Sales revenue
Gain on sale of land
Cost of sales
Other expenses
Pretax operating income (does not
include investment income)

(
(

Pang
$ 900,000
35,000
480,000 ) (
192,000 ) (

Sala
$ 600,000

263,000

325,000 )
78,000 )
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 Pangs net income from Sala.

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LO3
Exercise 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 Panitzs 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%.

Sales revenue
Loss on sale of land
Dividend income from Shaw and
Sunny
Cost of sales
Other expenses
Depreciation expense
Pretax operating income (does not
include Salazar investment income)

Panitz
890,000
15,000 )

90,000
400,000 ) (
350,000 ) (
50,000 ) (

(
(
(
$

165,000

Salazar
700,000

250,000 )
350,000 )
35,000 )
$

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 Panitzs net income from Salazar.

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LO3
Exercise 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. Saleys net assets
on this date were as follows:

Cash
Inventories
Land
Building-net
Total assets
Liabilities
Common stock
Retained earnings
Total equities

$
$
$

Saleys
Book
Values
20,000
210,000
200,000
600,000
1,030,000
230,000
400,000
400,000
1,030,000

Saleys
Fair
Values
20,000
240,000
250,000
900,000
1,410,000

230,000

Assume that for federal income tax purposes, the book values of
Saleys 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 Saleys 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.

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LO3
Exercise 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. Paradises share of the various
dividend distributions is as follows:
From
From
From
From
From
From

Aldred:
Balme:
Calder:
Dale:
East:
Faber:

$90,000
$92,000
$88,000
$66,000
$50,000
$40,000

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

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LO3
Exercise 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.
Salmonss net assets on this date were as follows:

Cash
Inventories
Land
Building-net
Total assets
Liabilities
Common stock
Retained earnings
Total equities

$
$
$

Salmons
Book
Values
20,000
210,000
200,000
600,000
1,030,000
230,000
400,000
400,000
1,030,000

Salmons
Fair
Values
20,000
240,000
320,000
500,000
1,080,000

210,000

Assume that for federal income tax purposes, the book values of
Salmons 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
Salmons 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.

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SOLUTIONS
Multiple Choice Questions
1.

2.

3.

Of the $30,000, 5,000 is preferred dividends and in the

remainder 25,000 has 80% go to Parminter for $20,000.

Stockholders equity
Less: Preferred stockholders equity
Common stockholders equity

11,000,000
1,100,000
9,900,000

Cost of 70% interest acquired

Book value of 70% interest ($9,900,000) x (70%)
Goodwill

7,000,000
6,930,000
70,000

4.

Salters net loss

Income to the preferred stockholders
Loss to common stockholders
Pardys ownership percentage
Pardys share of the loss on investment

5.

$ (

200,000 )
100,000
100,000
70%
70,000

Salters net income

Income to the preferred stockholders
Income to the common stockholders
Pardys ownership percentage
Pardys share of the income to
shareholders

6.

the

220,000
100,000
120,000
70%

84,000

common

c
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Preliminary computations:
Total stockholders equity
Less: Preferred stockholders equity
Equals: Common stockholders equity

$
$

Price paid by Pamplin

Book value acquired ($1,360,000 x 90%)
Goodwill

Net income as given

Less: Preferred dividends ($800,000 x 8%)
Income available to the common stockholders
Majority percentage
Income from Sage

2,200,000
840,000
1,360,000
1,500,000
1,224,000
276,000

100,000
64,000
36,000
90%
32,400

Reduction in paid-in capital due to Pamplins

purchase of preferred stock
Par value of acquired preferred stock
$
Purchase price
Reduction in Pamplins additional paid-in capital
$

560,000
600,000
40,000

Ending balance in the paid-in capital account

710,000

7.

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 parents additional paid-in capital
and any excess par value over cost is added to the parents
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 parents
additional paid-in capital.
8.

9.

10.

11.

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12.

13.

14.

15.

16.

17.

17.

18.

19.

20.

21.

22.

23.

24.

25.

(150,000+75,000)/25,000

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Exercise 1
Requirement 1:
Total stockholders equity at December 31, 2004
Less: Preferred stockholders equity 100 shares x
($105 call price + $10 dividend per share in arrears)
Common stockholders equity
Price paid for common stock investment
Book value of 70% interest ($358,500 x 70%)
Excess of cost over book value

$
(
$
$
$

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

370,000

$
$

11,500 )
358,500
300,000
250,950
49,050

11,500
107,550
119,050

Exercise 2
Requirement 1:
Book value available to common stockholders:
Total stockholders equity at December 31, 2004
$
Less: Preferred stockholders equity 1000 shares x
($109 call price + $8 dividend per share in arrears
x 2 years)
(
Common stockholders equity
$
Book value of the common stockholders equity
Percentage acquired
80% of book value
Purchase cost
Equals: Goodwill

$
$
$

1,450,000
125,000 )
1,325,000
1,325,000
70%
927,500
850,000
77,500

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Exercise 3
Basic
Sakals Basic and Diluted EPS:
Sakals income to common shareholders

80,000

Common shares outstanding

Incremental shares:
Diluted EPS:
2,500 shares ($50,000 proceeds/$40
average price per share)
Common shares and common equivalents
Earnings per share

Diluted
$

20,000

20,000

20,000

1,250
21,250

4.00

Basic
Pancinos Basic and Diluted EPS:
Pancinos separate income
Pancinos income from Sakal
Replacement computation:
Reverse: Pancinos income from Sakal
18,000 shares x $4.00
18,000 shares x $3.76
Income to common

Common shares outstanding

Earnings per share

100,000
72,000
(

72,000 ) (
72,000
172,000

3.44

3.76

Diluted

50,000
$

80,000

100,000
72,000
72,000 )
67,680
167,680
50,000

3.35

Exercise 4
Basic
Samples
Samples
Add: Net
$50,000
Adjusted

Basic and Diluted EPS:

income to common shareholders
of tax interest expense
x 8% x 66%
subsidiary earnings

75,000

0
75,000

Common shares outstanding

Incremental shares:
Diluted EPS:
100 bonds x 20 shares
Common shares and common equivalents
Earnings per share

Diluted
$

75,000

2,640
77,640

10,000

10,000

10,000

2,000
12,000

7.50

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6.47

Basic
Parkers Basic and Diluted EPS:
Parkers separate income
Parkers income from Sample
Replacement computation:
Reverse: Parkers income from Sample
8,000 shares x $7.50
8,000 shares x $6.47
Income to common

(
$

Common shares outstanding

Earnings per share

100,000
60,000

Diluted
$

60,000 ) (
60,000
160,000

100,000
$

1.60

100,000
60,000
60,000 )
51,760
211,760
100,000

1.52

180,000
170,000
128,000
80,000
42,000
600,000

Exercise 5
Requirement 1:
Excluded dividend income:
From Alder:
$180,000 x 100%
From Ball:
$170,000 x 100%
From Cake: $160,000 x 80%
From Dash: $100,000 x 80%
From Eager: $60,000 x 70%
Total excluded dividend income

Requirement 2:
Total dividend income received
Total excluded dividend income
Included dividend income

$
$

670,000
600,000
70,000

Current Income Tax Liability:

$70,000 x 35% = $24,500

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Exercise 6
Requirement 1
Income taxes currently payable:
Taxes on operating income
$263,000 x 34%
$197,000 x 34%
Taxes on dividends received:
$60,000 x 70% x 20% x 34%
Income taxes currently payable

Pang
$

Sala

89,420
$

66,980

2,856
92,276

Tax on undistributed income:

$137,000 x 70% x 20% x 34%
Deferred tax on gain on land
$35,000 x 34%
Income tax expense

66,980

6,521
(

11,900 )
86,897
$

66,980

Requirement 2
Pre-tax income from Sala

197,000

Less: income tax expense

Net Income from Sala

(
$

66,980 )
130,014

Exercise 7
Requirement 1
Taxable Income Calculation:
Sales Revenue
Loss on sale of land
Cost of sales
Other expenses
Depreciation expense
Dividend income:
From Shaw
$40,000 x 30%
From Sunny $50,000 x 30%
Taxable income
Tax rate
Income taxes currently payable
Requirement 2
Panitzs income from Salazar:
Assuming taxable income is
same as GAAP income
Less: Current income taxes
Net income
Panitzs ownership percentage
Net Income from Salazar

Panitz
$

$
$

the

(
(
(
(

Salazar

890,000
15,000
400,000
350,000
50,000

$
)
) (
) (
) (

700,000

12,000
15,000
102,000
34%
34,680

65,000
34%
22,100

250,000 )
350,000 )
35,000 )

$
$
$

65,000
22,100
42,900
80%
34,320

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Exercise 8
Preliminary calculations:
Goodwill purchased:
Total acquisition cost
Less: Fair value of net assets:
$1,410,000 - $230,000 =
Goodwill acquired
Requirement 1:
Deferred incomes taxes:
Excess fair value over book value:
Inventories $240,000 - $210,000
Land
$250,000 - $200,000
Building-net $900,000 - $600,000
Goodwill (accrue annually - tax)
Total deferred items
Tax rate
Deferred income taxes
Requirement 2
Timing
differences
expiring
or
accruing during the first year
after acquisition:
Inventory sold
Goodwill amortized - tax
Excess building depreciation
Total timing differences
Tax rate
Tax effect

$1,300,000
1,180,000
$ 120,000

$
$

$
$
$

30,000
50,000
300,000
0
380,000
34%
129,200

15,000
( 8,000)
15,000
22,000
34%
7,480

The net deferred income tax liability will be reduced by $7,480 as a

result of these timing differences.

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Exercise 9
Net income as reported:
Excludable
amount
of
dividends
included in net income:
Exclude 100% of Aldred dividends
Exclude 70% of Faber dividends
Includable amount of dividends not
yet added to net income:
Include 20% of Dale dividends
Include 20% of East dividends
Taxable income

1,500,000
(
(

90,000 )
28,000 )
13,200
10,000
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%.

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Exercise 10
Preliminary calculations:
Goodwill purchased:
Total acquisition cost
Less: Fair value of net assets:
$1,080,000 - $210,000 =
Goodwill acquired
Requirement 1:
Deferred incomes taxes:
Excess fair value over book value:
Inventories $240,000 - $210,000
Land
$320,000 - $200,000
Building-net $500,000 - $600,000
Liabilities $210,000 - $230,000
Goodwill (accrue annually - tax)
Total deferred items
Tax rate
Deferred income taxes
Requirement 2
Timing
differences
expiring/
accruing during the first year
after acquisition:
Inventory sold
Liabilities amortized
Goodwill amortized (tax only)
Excess building depreciation
Total timing differences
Tax rate
Tax effect

$
$

$
$

1,020,000

870,000
150,000

30,000
120,000
(100,000)
20,000
0
70,000
34%
23,800

30,000
4,000
(10,000)
( 5,000)
19,000
34%
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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10-27