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LO1
1. How much should the Parminter’s Investment in Sanchez change
during 2005?
a. $ 5,000.
b. $20,000.
c. $25,000.
d. $30,000.
LO1
2. 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.
LO1
3. 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.
LO1
4. 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.
LO1
5. 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.
LO1
7. 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. 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.
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
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?
a. I only.
b. II only.
c. I and II.
d. I or II if no redemption feature is present.
©2009 Pearson Education, Inc. publishing as Prentice Hall
10-4
LO2
11. In a company with minority interest equity, how is the
preferred stock call premium addressed?
LO2
12. 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
LO2
13. A subsidiary has some outstanding options that permit holders
to purchase the company’s common stock. How will the options
affect consolidated EPS?
a. $5.00.
b. $6.00.
c. $7.50.
d. $9.00.
LO2
15. In computing the diluted EPS of the parent, any replacement
computation of subsidiary income may be affected by
LO2
16. 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
LO2
18. 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
LO3
19. Palm owns a 70% interest in Sable, a domestic subsidiary. Palm
will pay taxes on
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. Palmquist’s
provision for income taxes on Sadler’s undistributed earnings
was
a. $ 0.
b. $ 56,000.
c. $112,000.
d. $168,000.
LO3
22. 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
LO3
24. Saga's provision for current income taxes will be calculated as
Required:
Required:
2. How much did Park pay for goodwill when it acquired its interest
in Samford?
LO2
Exercise 3
Required:
Compute the amount of basic and diluted earnings per share for
Pancino and Sakal Corporations.
Required:
Compute the amount of basic and diluted earnings per share for
Parker and Sample Corporations.
LO3
Exercise 5
Required:
Pang Sala
Sales revenue $ 900,000 $ 600,000
Gain on sale of land 35,000
Cost 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:
Panitz Salazar
Sales revenue $ 890,000 $ 700,000
Loss on sale of land ( 15,000 )
Dividend income from Shaw and
Sunny 90,000
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) $ 165,000 $ 65,000
Required:
Saley’s Saley’s
Book Fair
Values Values
Cash $ 20,000 $ 20,000
Inventories 210,000 240,000
Land 200,000 250,000
Building-net 600,000 900,000
Total assets $ 1,030,000 $ 1,410,000
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:
Required:
Salmon’s Salmon’s
Book Fair
Values Values
Cash $ 20,000 $ 20,000
Inventories 210,000 240,000
Land 200,000 320,000
Building-net 600,000 500,000
Total assets $ 1,030,000 $ 1,080,000
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:
2. d
3. c
4. b
5. a
Preliminary computations:
Total stockholders’ equity $ 2,200,000
Less: Preferred stockholders’ equity 840,000
Equals: Common stockholders’ equity $ 1,360,000
7. c
8. b
9. a
10. a
11. 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
Requirement 1:
Total stockholders’ equity at December 31, 2004 $ 370,000
Less: Preferred stockholders’ equity 100 shares x
($105 call price + $10 dividend per share in arrears) ( 11,500 )
Common stockholders’ equity $ 358,500
Requirement 2
Minority interest at January 1, 2005:
Minority interest: Preferred (100 shares x $115) $ 11,500
Minority interest: Common ($358,500 x 30%) 107,550
Total minority interest $ 119,050
Exercise 2
Requirement 1:
Book value available to common stockholders:
Total stockholders’ equity at December 31, 2004 $ 1,450,000
Less: 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
Basic Diluted
Sakal’s Basic and Diluted EPS:
Sakal’s income to common shareholders $ 80,000 $ 80,000
Basic Diluted
Replacement computation:
Reverse: Pancino’s income from Sakal ( 72,000 ) ( 72,000 )
18,000 shares x $4.00 72,000
18,000 shares x $3.76 67,680
Income to common $ 172,000 $ 167,680
Exercise 4
Basic Diluted
Sample’s Basic and Diluted EPS:
Sample’s income to common shareholders $ 75,000 $ 75,000
Add: Net of tax interest expense
$50,000 x 8% x 66% 0 2,640
Adjusted subsidiary earnings $ 75,000 $ 77,640
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 51,760
Income to common $ 160,000 $ 211,760
Exercise 5
Requirement 1:
Excluded dividend income:
From Alder: $180,000 x 100% $ 180,000
From Ball: $170,000 x 100% 170,000
From Cake: $160,000 x 80% 128,000
From Dash: $100,000 x 80% 80,000
From Eager: $60,000 x 70% 42,000
Total excluded dividend income $ 600,000
Requirement 2:
Total dividend income received $ 670,000
Total excluded dividend income 600,000
Included dividend income $ 70,000
Current Income Tax Liability:
$70,000 x 35% = $24,500
Requirement 2
Pre-tax income from Sala $ 197,000
Exercise 7
Requirement 2
Panitz’s income from Salazar:
Assuming taxable income is the
same as GAAP income $ 65,000
Less: Current income taxes 22,100
Net income $ 42,900
Panitz’s ownership percentage 80%
Net Income from Salazar $ 34,320
Preliminary calculations:
Goodwill purchased:
Total acquisition cost $1,300,000
Less: Fair value of net assets:
$1,410,000 - $230,000 = 1,180,000
Goodwill 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) 0
Total deferred items $ 380,000
Tax rate 34%
Deferred income taxes $ 129,200
Requirement 2
Timing differences expiring or
accruing during the first year
after acquisition:
Inventory sold $ 15,000
Goodwill amortized - tax ( 8,000)
Excess building depreciation 15,000
Total timing differences $ 22,000
Tax rate 34%
Tax effect $ 7,480
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%.
Preliminary calculations:
Goodwill purchased:
Total acquisition cost $ 1,020,000
Less: Fair value of net assets:
$1,080,000 - $210,000 = 870,000
Goodwill 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 (100,000)
Liabilities $210,000 - $230,000 20,000
Goodwill (accrue annually - tax) 0
Total deferred items $ 70,000
Tax rate 34%
Deferred income taxes $ 23,800
Requirement 2
Timing differences expiring/
accruing during the first year
after acquisition:
Inventory sold $ 30,000
Liabilities amortized 4,000
Goodwill amortized (tax only) (10,000)
Excess building depreciation ( 5,000)
Total timing differences $ 19,000
Tax rate 34%
Tax effect $ 6,460