chapter 10

Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)Chapter 10 Subsidiary Preferred Stock, Consolidated Earnings Per Share, and Consolidated Income Taxation

Multiple Choice Questions

Use the following information to answer the question(s) below.

On December 31, 2010, Parminter Corporation owns an 80% interest in the common stock of Sanchez Corporation and an 80% interest in Sanchez's preferred stock. On December 31, 2010, Sanchez's stockholders' equity was as follows:

10% preferred stock, cumulative, $10 par value $50,000Common stock 350,000Retained earnings 100,000Total stockholders' equity $500,000

On December 31, 2010, preferred dividends are not in arrears. Sanchez had 2011 net income of $30,000 and only preferred dividends are declared and paid in 2011. There are no book value/fair value differentials associated with Parminter's investments.

1) How much should the Parminter's Investment in Sanchez—Common Stock, change during 2011?A) $5,000B) $20,000C) $25,000D) $30,000Answer: BExplanation: B) ($30,000 - $5,000) × 80%Objective: LO1Difficulty: Moderate

2) What should be the noncontrolling interest share, common in the consolidated financial statements of Parminter for the year ending December 31, 2011?A) $ 5,000B) $20,000C) $25,000D) $30,000Answer: AExplanation: A) ($25,000 × 20%)Objective: LO1Difficulty: Moderate

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3) What should be the noncontrolling interest share, preferred in the consolidated financial statements of Parminter for the year ending December 31, 2011?A) $1,000B) $2,000C) $4,000D) $5,000Answer: AExplanation: A) ($5,000 × 20%)Objective: LO1Difficulty: Moderate

4) A subsidiary has dilutive securities outstanding that include convertible bonds payable. The bonds are convertible into the parent's common stock. When calculating consolidated diluted earnings per share, the convertible bonds will affect A) the numerator of consolidated diluted EPS only.B) the denominator of consolidated diluted EPS only.C) the numerator and denominator of consolidated diluted EPS.D) None of the above will be affected.Answer: CObjective: LO2Difficulty: Moderate



On January 1, 2011, 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 $ 1,000,000

Common stock, $10 par value 6,000,000Additional paid-in capital 1,500,000Retained earnings 2,500,000Total stockholders' equity $11,000,000

There were no preferred dividends in arrears on January 1, 2011. There are no book value/fair value differentials.

5) What is the implied goodwill for Salter based on Pardy's purchase price for Salter on January 1, 2011?A) $ 0B) $ 35,000C) $ 70,000D) $100,000Answer: DExplanation: D) Stockholders' equity $11,000,000Less: Preferred stockholders' equity (10,000 × $110) 1,100,000Common stockholders' equity 9,900,000

Cost of 70% interest acquired $7,000,000Implied fair value of investment ($7,000,000/0.7) 10,000,000Common stockholders' equity 9,900,000Goodwill $100,000Objective: LO1Difficulty: Moderate

6) Salter has a 2011 net loss of $200,000. No dividends are declared or paid in 2011. What is the change in Pardy's Investment in Salter for the year ending December 31, 2011?A) $ 50,000B) $ 70,000C) $140,000D) $210,000Answer: DExplanation: D) Salter's net loss $(200,000)Preferred dividend 10% × $1,000,000 (100,000)Total Loss to common stockholders (300,000)Pardy's ownership percentage 70%Pardy's share of the loss on investment $(210,000)Objective: LO1Difficulty: Moderate

7) Assume Salter's net income for 2011 is $220,000. No dividends are declared or paid in 2011. What is the change in Pardy's Investment in Salter for the year ending December 31, 2011?A) $ 84,000B) $119,000C) $154,000


D) $189,000Answer: AExplanation: A) Salter's net income $220,000Less: Income to the preferred stockholders (100,000)Income to the common stockholders 120,000Pardy's ownership percentage 70%Pardy's share of the income $84,000Objective: LO1Difficulty: Moderate


On January 1, 2011, 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, 2011, 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% 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 2011 was $100,000.

On January 1, 2011, no preferred dividends are in arrears. No dividends are declared or paid in 2011. In a separate transaction on January 1, 2011, Pamplin purchased 70% of Sage's preferred stock for $600,000.

8) For the year ending December 31, 2011, the amount of Pamplin's income from Sage (associated with the common stock investment in Sage) isA) $32,400.B) $36,000.C) $60,000.D) $90,000.Answer: AExplanation: A) Preliminary computations:Total stockholders' equity (Sage) $2,200,000Less: Preferred stockholders' equity($800,000 × 1.05) 840,000Equals: Common stockholders' equity $1,360,000

Net income as given $100,000Less: Preferred dividends ($800,000 × 8%) 64,000Income available to the common stockholders $36,000Ownership percentage 90%Income from Sage $32,400Objective: LO1Difficulty: Moderate

9) What is the goodwill on the consolidated balance sheet for Pamplin and Subsidiaries on December 31, 2011 based on Pamplin's purchase of Sage's common stock?A) $140,000B) $240,000C) $290,000D) $306,667Answer: DExplanation: D) Implied fair value ($1,500,000/0.90) $1,666,667Less: Common stockholders' equity 1,360,000Goodwill $306,667


Objective: LO1Difficulty: Moderate

10) 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, which equals fair value. Sailor has $900,000 of 10% cumulative preferred stock outstanding, with no preferred dividends in arrears. The preferred stock has no call price, redemption price or liquidation price. 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, areA) $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.Answer: CExplanation: C) If the book value ($900,000 × 60%) of preferred stock is greater than the price paid ($500,000) for the preferred stock, then the difference is added to the parent's additional paid-in capital.Objective: LO1Difficulty: Moderate

11) Assume a company's preferred stock is cumulative with a call provision and has dividends in arrears. The amount of stockholders' equity allocated to preferred stockholders is equal to the number of shares outstanding times theA) 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.Answer: DObjective: LO1Difficulty: Moderate


12) When a parent acquires the preferred stock of a subsidiary, there will be a constructive retirement andA) any difference paid above the book value of the preferred stock reduces the parent's additional paid-in capital.B) any difference paid above the book value of the preferred stock reduces the subsidiary's retained earnings.C) any difference paid above the book value of the preferred stock increases the parent's additional paid-in capital.D) any difference paid above the book value of the preferred stock increases the parent's retained earnings.Answer: AObjective: LO1Difficulty: Moderate

13) If a parent company has controlling interest in a subsidiary which has no potentially dilutive securities outstanding, then in the calculation of consolidated diluted EPS, it will be necessary toA) 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 shares represented by the parent's potentially dilutive securities.Answer: DObjective: LO2Difficulty: Moderate

14) Parnaby has 25,000 common stock shares outstanding and its 100%-owned subsidiary Sandal has 5,000 common stock shares outstanding. Parnaby and Sandal do not have any potentially dilutive securities outstanding. The separate net incomes for Parnaby and Sandal is $150,000 and $75,000 respectively. Diluted EPS for the consolidated company isA) $5.00.B) $6.00.C) $7.50.D) $9.00.Answer: DExplanation: D) ($150,000 + $75,000)/25,000Objective: LO2Difficulty: Moderate

15) In computing consolidated diluted EPS, the replacement calculation replaces the parent's equity in subsidiary earnings with theA) parent's share of basic EPS of the subsidiary.B) subsidiary's share of basic EPS of the parent.C) parent's share of diluted EPS of the subsidiary.D) subsidiary's share of diluted EPS of the parent.Answer: CObjective: LO2Difficulty: Moderate


16) When a subsidiary has preferred stock that is convertible into subsidiary common stock, the parent's equity in the subsidiary's diluted earnings is calculated by the number ofA) 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 common 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.Answer: CObjective: LO2Difficulty: Moderate

17) Palm owns a 70% interest in Sable, a domestic subsidiary. Sable is not part of Palm's affiliated group. Palm will pay taxes onA) 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.Answer: BObjective: LO3Difficulty: Moderate

18) Palmer Company owns a 25% interest in Sad, Incorporated, a domestic company. Sad had net 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. Assume Sad qualifies for the 80% dividend received deduction. Which of the following statements is correct?A) The current tax liability is $700.B) The current tax liability is $1,050.C) Under GAAP, Palmer provides for income taxes on Sad's undistributed earnings with a credit to deferred tax liability of $700.D) Under GAAP, Palmer provides for income taxes on Sad's undistributed earnings with a credit to deferred tax liability of $1,050.Answer: CObjective: LO3Difficulty: Moderate

19) Palmquist Corporation and its 80%-owned subsidiary, Sadler Corporation, are members of an affiliated group. They do not file consolidated tax returns. Sadler had $3,000,000 of income and paid $1,000,000 dividends in 2010. Palmquist and Sadler had 35% income tax rates. What amount of Sadler's dividends is taxable to Palmquist in 2010?A) $0B) $ 70,000C) $160,000D) $200,000Answer: AObjective: LO3Difficulty: Moderate

20) Palomba Corporation allocates consolidated income taxes to its 90%-owned subsidiary using the percentage allocation method. Under this method, consolidated income tax expense will be allocated to a subsidiaryA) on the basis of the agreement between the parent and subsidiary.B) on the basis of the subsidiary's pretax income as a percentage of consolidated pretax income.


C) on the basis of the income taxes remitted to the IRS.D) 90% to the subsidiary.Answer: BObjective: LO3Difficulty: Moderate


Exercises

1) Saito Corporation's stockholders' equity on December 31, 2010 was as follows:

10% cumulative preferred stock, $100 par value,callable at $105, with one year dividends in arrears $10,000

Common stock, $1 par value 50,000Additional paid-in capital 150,000Retained earnings 160,000Total stockholders' equity $370,000

On January 1, 2011, Panata Corporation paid $300,000 for a 70% interest in Saito's common stock. On January 1, 2011, the book values of Saito's assets and liabilities were equal to fair values.

Required:1. Determine the book value of the common stockholders' equity for Saito Corporation on January 1, 2011.

2. What is the amount of goodwill reported on the consolidated balance sheet for Panata Corporation (and Subsidiary) at January 2, 2011?

3. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panata Corporation (and Subsidiary) on January 2, 2011?Answer: Requirement 1:Total stockholders' equity at December 31, 2010 $370,000Less: Preferred stockholders' equity 100 shares ×($105 call price + $10 dividend per share in arrears) (11,500)Common stockholders' equity $358,500

Requirement 2:Implied fair value of investment ($300,000/0.7) $428,571Book value of common stockholders' equity 358,500Goodwill $70,071

Requirement 3Noncontrolling interest at January 2, 2011:Noncontrolling portion of Goodwill ($70,071 × 30%) $21,021Noncontrolling interest: Preferred (100 shares × $115) 11,500Noncontrolling interest: Common ($358,500 × 30%) 107,550Total noncontrolling interest $140,071Objective: LO1Difficulty: Moderate


2) Sally Corporation's stockholders' equity on December 31, 2010 was as follows:

10% cumulative preferred stock, $100 par value,callable at $105, with one year dividends in arrears $10,000


On January 1, 2011, Panera Corporation paid $500,000 for a 70% interest in Sally's common stock. On January 1, 2011, the book values of Sally's assets and liabilities were equal to fair values.

Required:1. Determine the book value of the common stockholders' equity for Sally Corporation on January 1, 2011.

2. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and Subsidiary at January 2, 2011?

3. On January 2, 2011, Panera purchased 70% of Sally's preferred stock for $5,000. Prepare the journal entry(ies) for Panera for this purchase on January 2, 2011.

4. Prepare the elimination entry on the consolidating work papers for the Investment in Sally, Preferred Stock and Sally's Preferred Stock on January 2, 2011.Answer: Requirement 1Total stockholders' equity at December 31, 2010 $370,000Less: Preferred stockholders' equity 100 shares ×($105 call price + $10 dividend per share in arrears) (11,500)Common stockholders' equity $358,500

Requirement 2Implied fair value of investment ($500,000/0.7) $714,286Book value of common stockholders' equity 358,500Goodwill $355,786

Requirement 3Investment in Sally, Preferred Stock 5,000

Cash 5,000

Investment in Sally, Preferred Stock 3,050Additional paid-in capital 3,050

($11,500 × 70%) = $8,050 - $5,000 = $3,050


Requirement 4Preferred stock 10,000Retained earnings 1,500

Investment in Sally, Preferred Stock 8,050Noncontrolling interest share

In Sally, Preferred Stock 3,450Objective: LO1Difficulty: Moderate


3) Samford Corporation's stockholders' equity on December 31, 2010 was as follows:

8% cumulative preferred stock, $100 par value,callable at $109, with two years of dividendsin arrears $100,000

Common stock, $25 par value 700,000Additional paid-in capital 250,000Retained earnings 400,000Total stockholders' equity $1,450,000

On January 1, 2011, Panera Corporation purchased a 70% interest in Samford's common stock for $1,400,000. On this date the book values of Samford's assets and liabilities are equal to their fair values.

Required:1. Determine the book value of the common stockholders' equity for Samford Corporation on January 1, 2011.

2. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and Subsidiary at January 2, 2011?

3. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panera Corporation and Subsidiary on January 2, 2011?Answer: Requirement 1Total stockholders' equity at December 31, 2010 $1,450,000Less: Preferred stockholders' equity 1000 shares ×[$109 call price + ($8 dividend per share in arrears × 2 years)](125,000)Common stockholders' equity $1,325,000

Requirement 2Implied fair value of investment($1,400,000/0.70) $2,000,000Less: Common stockholders' equity (1,325,000)Goodwill $675,000

Requirement 3Noncontrolling interest, January 2, 2011:Preferred stockholders' equity $125,000Common stockholders' equity (30% × $1,325,000) 397,500Goodwill (30% × $675,000) 202,500Total $725,000Objective: LO1Difficulty: Moderate


4) Savy Corporation's stockholders' equity on December 31, 2010 was as follows:

8% cumulative preferred stock, $100 par value,callable at $109, with two years of dividendsin arrears $100,000

Common stock, $25 par value 700,000Additional paid-in capital 250,000Retained earnings 400,000Total stockholders' equity $1,450,000

On January 1, 2011, Paul Corporation purchased a 70% interest in Savy's common stock for $2,100,000. On this date the book values of Savy's assets and liabilities are equal to their fair values.

Required:1. Determine the book value of the common stockholders' equity for Savy Corporation on January 1, 2011.

2. What is the amount of goodwill reported on the consolidated balance sheet for Paul Corporation and Subsidiary at January 2, 2011?

3. On January 2, 2011, Paul purchased 70% of Savy's preferred stock for $50,000. Prepare the journal entry(ies) for Paul for this purchase on January 2, 2011.

4. Prepare the elimination entry on the consolidating work papers for the Investment in Savy, Preferred Stock and Savy's Preferred Stock on January 2, 2011.Answer: Requirement 1Total stockholders' equity at December 31, 2010 $1,450,000Less: Preferred stockholders' equity 1000 shares ×[$109 call price + ($8 dividend per share in arrears × 2 years)](125,000)Common stockholders' equity $1,325,000

Requirement 2Implied fair value of investment ($2,100,000/0.70) $3,000,000Less: Common stockholders' equity 1,325,000Goodwill $1,675,000

Requirement 3Investment in Savy, Preferred Stock 50,000

Cash 50,000

Investment in Savy, Preferred Stock 37,500Additional paid-in capital 37,500

($125,000 × 70%) - $50,000 = $37,500


Requirement 4Preferred Stock 100,000Retained earnings 25,000Investment in Savy, Preferred Stock 87,500

Noncontrolling interest 37,500Objective: LO1Difficulty: Moderate

5) Pancino Corporation owns a 90% interest in Sakal Corporation's common stock. Throughout 2010, Sakal had 20,000 shares of common stock outstanding and Pancino had 50,000 shares of common stock outstanding. Sakal's only dilutive security consists of 2,500 stock options, with an exercise price of $20 per share. The average price of Sakal's stock is $50 per share in 2010. The options are exercisable for one share of Sakal's common stock. Pancino's and Sakal's separate net incomes for the year are $100,000 and $80,000, respectively.

Required:Compute the amount of basic and diluted earnings per share for Pancino (Consolidated) and Sakal Corporations.Answer:

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

Common shares outstanding 20,000 20,000Options:Diluted EPS:($50-$20)/$50 × 2,500 _______ 1,500Common shares and common equivalents 20,000 21,500Earnings per share $4.00 $3.72

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

Replacement computation: (72,000)

18,000 shares × $3.72 ________ 66,960Income to common $172,000 $166,960

Common shares outstanding 50,000 50,000

Earnings per share 3.44 3.34Objective: LO2Difficulty: Moderate


6) Pandy Corporation owns a 90% interest in Sakaj Corporation's common stock. Throughout 2010, Sakaj had 20,000 shares of common stock outstanding and Pandy had 50,000 shares of common stock outstanding. Sakaj's only dilutive security consists of 10,000 stock options, with an exercise price of $20 per share. The average price of Sakaj's stock is $50 per share in 2010. The options are exercisable for one share of Sakaj's common stock. Pandy's and Sakaj's separate net incomes for the year are $200,000 and $180,000, respectively.

Required:Compute the amount of basic and diluted earnings per share for Pandy (Consolidated) and Sakaj Corporations.Answer:

Basic DilutedSakaj's Basic and Diluted EPS:Sakaj's income to common shareholders $180,000 $180,000

Common shares outstanding 20,000 20,000Options:Diluted EPS:($50-$20)/$50 × 10,000 _______ 6,000Common shares and common equivalents 20,000 26,000Earnings per share $9.00 $6.92

Basic DilutedPandy's Basic and Diluted EPS:Pandy's separate income $200,000 $200,000Pandy's income from Sakaj ($180,000 × 90%)162,000 162,000

Replacement computation:(162,000)

18,000 shares × $6.92 ________ 124,560Income to common $362,000 324,560


Earnings per share $7.24 $6.49Objective: LO2Difficulty: Moderate


7) Parker Corporation owns an 80% interest in Sample Corporation's common stock. Throughout 2010, 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 $1,000 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. Assume a 34% flat income tax rate.

Required:Compute the amount of basic and diluted earnings per share for Parker (Consolidated) and Sample Corporations.

Answer: Basic Diluted

Sample's Basic and Diluted EPS:Sample's income to common shareholders $75,000 $75,000Add: Net of tax interest expense

$50,000 × 8% × 66% 0 2,640Adjusted subsidiary earnings $75,000 $77,640

Common shares outstanding 10,000 10,000Incremental shares:Diluted EPS:50 bonds × 20 shares ______ 1,000Common shares and common equivalents 10,000 11,000Earnings per share $7.50 $7.06

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

Replacement computation:Parker's income from Sample (60,000)

8,000 shares × $7.06 ________ 56,480Income to common $160,000 $156,480


Earnings per share $1.60 $1.56Objective: LO2Difficulty: Moderate


8) Peyton Corporation owns an 80% interest in Sampe Corporation's common stock. Throughout 2011, Sampe had 10,000 shares of common stock outstanding and Peyton had 100,000 shares of common stock outstanding. Sampe's only dilutive security consists of $100,000 face amount of 8% bonds payable. Each $1,000 bond is convertible into 20 shares of Sampe stock. Peyton and Sampe's separate net incomes for the year are $200,000 and $150,000, respectively. Assume a 34% flat income tax rate.

Required:Compute the amount of basic and diluted earnings per share for Peyton (consolidated) and Sampe Corporations.Answer: Basic DilutedSampe's Basic and Diluted EPS:Sampe's income to common shareholders $150,000 $150,000Add: Net of tax interest expense

$100,000 × 8% × 66% 0 5,280Adjusted subsidiary earnings $150,000 $155,280

Common shares outstanding 10,000 10,000Incremental shares:Diluted EPS:100 bonds × 20 shares _______ 2,000Common shares and common equivalents 10,000 12,000Earnings per share $15.00 $12.94

Basic DilutedPeyton's Basic and Diluted EPS:Peyton's separate income $200,000 $200,000Peyton's income from Sampe(80% × $150,000) 120,000 120,000

Replacement computation:Peyton's income from Sampe (120,000)8,000 shares × $12.94 ________ 103,520Income to common $320,000 $303,520


Earnings per share $3.20 $3.04



9) 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, Alder and Ball belong to an affiliated group. Pane's marginal income tax rate is 35%. All investees have paid out all their net income in the form of dividends. During 2011, 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 2011.Answer: Requirement 1Excluded dividend income:From Alder: $180,000 × 100% $180,000From Ball: $170,000 × 100% 170,000From Cake: $160,000 × 80% 128,000From Dash: $100,000 × 80% 80,000From Eager: $60,000 × 70% 42,000Total excluded dividend income $600,000

Requirement 2Total dividend income received $670,000Total excluded dividend income 600,000Included dividend income $70,000Current Income Tax Liability:$70,000 × 35% = $24,500Objective: LO3Difficulty: Moderate


10) 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. Paradise, Aldred, Balme and Calder belong to an affiliated group. All of these corporations are domestic corporations. During 2011, 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 Paradise Corporation if a consolidated tax return is filed.Answer: 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 13,200Include 20% of East dividends 10,000

Taxable 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%.Objective: LO3Difficulty: Moderate


11) Peter Corporation owns 90% of the common stock of Subsidiary Subway. The following data is available:

Peter SubwayNet income for 2011 $150,000 $50,000Preferred dividends for 2011 $10,000Common dividends for 2011 $15,000Number of common shares outstanding 200,000 20,00010% Preferred Stock, $100 par $100,000

The preferred stock is cumulative and convertible. The annual preferred dividends are $10,000.

Required:1. Subway's preferred stock is convertible into 12,000 shares of Subway's common stock. Peter and Subway do not have any other potentially dilutive securities outstanding.a. What is Subway's basic EPS and diluted EPS?b. What is consolidated basic EPS and diluted EPS?

2. Subway's preferred stock is convertible into 12,000 shares of Peter's common stock. Peter and Subway do not have any other potentially dilutive securities outstanding. What is consolidated basic EPS and diluted EPS?Answer: Requirement 1

Subway Basic EPS:

= $2.00

Subway Diluted EPS:

= $1.56

Consolidated Basic EPS:

= $0.93

Consolidated Diluted EPS:

= $0.89


Requirement 2


= $0.93


= $0.92



12) Jeff Corporation owns 90% of the common stock of Subsidiary Jordan. The following data is available:

Jeff JordanNet income for 2011 $250,000 $150,000Preferred dividends for 2011 $20,000Common dividends for 2011 $25,000Number of common shares outstanding 200,000 20,00010% Preferred Stock, $100 par $200,000

The preferred stock is cumulative and convertible. The annual preferred dividends are $20,000.

Required:1. Jordan's preferred stock is convertible into 20,000 shares of Jordan's common stock. Jeff and Jordan do not have any other potentially dilutive securities outstanding.a. What is Jordan's basic EPS and diluted EPS?b. What is consolidated basic EPS and diluted EPS?

2. Jordan's preferred stock is convertible into 20,000 shares of Jeff's common stock. Jeff and Jordan do not have any other potentially dilutive securities outstanding. What is consolidated basic EPS and diluted EPS?Answer: Requirement 1

Jordan Basic EPS:

= $6.50

Jordan Diluted EPS:

= $3.75


= $1.84


= $1.59

Requirement 2


= $1.84


= $1.75

Objective: LO2Difficulty: Moderate13) Sandy Corporation's stockholders' equity on December 31, 2010 was as follows:

10% cumulative preferred stock, $100 par value,


callable at $105, with one year dividends in arrears$100,000Common stock, $1 par value 200,000Additional paid-in capital 40,000Retained earnings 160,000Total stockholders' equity $500,000

On January 1, 2011, Bombard Corporation paid $200,000 for a 90% interest in Sandy's common stock. On January 1, 2011, the book values of Sandy's assets and liabilities were equal to fair values. On January 2, 2011, Bombard Corporation paid $120,000 for a 90% interest in Sandy's preferred stock.

Required:1. Determine the book value of the common stockholders' equity for Sandy Corporation on January 1, 2011.

2. Prepare the journal entry(ies) on January 1, 2011 for Bombard Corporation.

3. Prepare the journal entry(ies) on January 2, 2011 for Bombard Corporation.

4. For the year ending December 31, 2011, Sandy Corporation reported net income of $50,000. Sandy Corporation declared and paid dividends of $20,000 to preferred stockholders and $10,000 to common stockholders. Prepare the journal entries for Bombard Corporation relating to this information.Answer: Requirement 1Total stockholders' equity $500,000Less: Preferred stockholders' equity($105 call price + $10 dividend) × 1,000 (115,000)Book value of common stockholders' equity $385,000

Requirement 2Investment in Sandy Corp.—common stock 200,000

Cash 200,000

Requirement 3Investment in Sandy Corp.—pref. stock 120,000

Cash 120,000

Additional paid-in capital 16,500Investment in Sandy Corp.—pref. stock 16,500

($120,000 - $103,500)($115,000 × 90%) = $103,500


Requirement 4Cash ($20,000 × 90%) 18,000

Investment Income in Sandy Corp.—pref. stock 18,000

Cash ($10,000 × 90%) 9,000Investment in Sandy Corp.—common stock 9,000

Investment in Sandy Corp.—common stock 27,000Investment income in Sandy Corp.—

common stock 27,000($50,000 - $20,000) × 90%Objective: LO1Difficulty: Moderate


14) Stello Corporation's stockholders' equity on December 31, 2010 was as follows:

10% cumulative preferred stock, $100 par value,callable at $110, with no dividends in arrears $100,000


On January 1, 2011, Kaprelian Corporation paid $300,000 for a 90% interest in Stello's common stock. On January 1, 2011, the book values of Stello's assets and liabilities were equal to fair values. On January 2, 2011, Kaprelian Corporation paid $100,000 for a 90% interest in Stello's preferred stock.

Required:1. Determine the book value of the common stockholders' equity for Stello Corporation on January 1, 2011.

2. Prepare the journal entry(ies) on January 1, 2011 for Kaprelian Corporation.

3. Prepare the journal entry(ies) on January 2, 2011 for Kaprelian Corporation.

4. For the year ending December 31, 2011, Stello Corporation reported net income of $50,000. Stello Corporation declared and paid dividends of $10,000 to preferred stockholders and $10,000 to common stockholders. Prepare the journal entries for Kaprelian Corporation relating to this information.Answer: Requirement 1Total stockholders' equity $600,000Less: Preferred stockholders' equity$110 call price × 1,000 (110,000)Book value of common stockholders' equity $490,000

Requirement 2Investment in Stello Corp.—common stock 300,000

Cash 300,000

Requirement 3Investment in Stello Corp.—pref. stock 100,000

Cash 100,000

Additional paid-in capital 1,000Investment in Stello Corp.—pref. stock 1,000

($100,000 - $99,000) = $1,000($110,000 × 90%) = $99,000


Requirement 4Cash ($10,000 × 90%) 9,000

Investment Income in Stello Corp.— 9,000 pref. stock

Cash ($10,000 × 90%) 9,000Investment in Stello Corp.—common 9,000

stock

Investment in Stello Corp.—common stock 36,000Investment income in Stello Corp.— 36,000 common stock

($50,000 - $10,000) × 90%Objective: LO1Difficulty: Moderate


15) Pretax operating incomes of Pang Corporation and its 70%-owned subsidiary, Sala Corporation, for the year 2011, are shown below. Sala pays total dividends of $60,000 for the year. There are no unamortized book value/fair value 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.Answer: Requirement 1 Pang SalaIncome taxes currently payable:Taxes on operating income

$263,000 × 34% $89,420$197,000 × 34% $66,980

Taxes on dividends received:$60,000 × 70% × 20% × 34% 2,856 ________

Income taxes currently payable 92,276 66,980

Add: Tax on undistributed income:($197,000 - $66,980 - $60,000) ×70% × 20% × 34% 3,333Less: Deferred tax on gain on sale of land ($35,000 × 34%)(11,900) ________Income tax expense $83,709 $66,980

Requirement 2Pre-tax income from Sala $197,000Less: income tax expense (66,980)Net Income 130,020Ownership Percentage × 70% Subtotal $91,014Less: Unrealized gain on sale of landIncome from Sala (35,000)

$56,014Objective: LO3Difficulty: Moderate


16) Pretax operating incomes of Panitz Corporation and its 80%-owned subsidiary, Salazar Corporation, for the year 2011, are shown below.

Panitz and Salazar belong to an affiliated group. Salazar pays total dividends of $35,000 for the year. There are no unamortized book value/fair value differentials relating to Panitz's investment in Salazar. During the year, Panitz sold land to Salazar 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. The marginal corporate tax rate for both corporations is 34%.

Panitz SalazarSales 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)Pretax operating income

(does not include Salazar investment income) $75,000 $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.Answer: 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)Taxable income $75,000 $65,000Tax rate 34% 34%Income taxes currently payable $25,500 $22,100Add: Deferred taxes on loss on sale of land ($15,000 × 34%)5,100 _______Income tax expense $30,600 $22,100

Requirement 2Panitz's income from Salazar:Assuming taxable income is the same as GAAP income $65,000Less: Current income taxes expense 22,100Net income 42,900Panitz's ownership percentage 80%Subtotal 34,320Add: Unrealized loss on sale of land 15,000Income from Salazar $49,320Objective: LO3Difficulty: Moderate


chapter 10

Documents

preferred stockholders

subsidiary preferred

sanchezs preferred stock

common stockholders

parents common stock

preferred dividends

d explanation

c objective