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SUBSIDIARIES A ITH PREFERRED STOCK OUTSTANDING !I""#$trat%&' 10(1)
The stockholders’ equity of a subsidiary with preferred stock outstanding is allocated to the preferred stockholders, based on the preferred contract, and the remainder is common stockholders’ equity. 1 * + The preferred stockholders’ equity is based on the call or redemption price. If the preferred stock has no redemption provision, the preferred equity is based on par value plus any liquidation premium. If the preferred stock is cumulative, the preferred stockholders’ equity includes any dividends in arrears.
Net income of an investee or subsidiary with preferred stock outstanding is allocated to the preferred stockholders, based on the preferred contract, and the remainder is allocated to common stockholders. 1 * If the preferred stock is nonparticipating, income is assigned to preferred stockholders based on the preference rate or amount. If the preferred stock is cumulative and nonparticipating, the current year dividend requirement is assigned to preferred stock, regardless of whether the directors declare the current year dividend, the current year plus dividends in arrears from a prior year, or no dividend. If the preferred stock is noncumulative and nonparticipating, only dividends declared and in the amount declared are assigned to preferred stockholders.
A parent company buys common stock of a subsidiary with cumulative, nonparticipating preferred stock in its capital structure 1 !referred equity is deducted from total stockholders’ equity to determine common stockholders’ equity.
the parent’s retained earnings is charged. - . #Income to preferred is the same whether or not dividends are declared. a The retirement of the preferred stock is really a constructive retirement because the stock will be reported as outstanding in the separate financial statements of the subsidiary.$ In the consolidation working papers. In the consolidation working papers. "inority interest that appears in the consolidated balance sheet consists of the preferred stockholders’ equity plus the minority interest in the subsidiary’s common stockholders’ equity. If additional paid) in capital is insufficient to absorb the e*cess of purchase price over book value. The parent’s share of subsidiary reported income is its ownership interest times the subsidiary’s income allocated to the common. In the parent company’s separate books. The price paid for the investment in common equity is compared to the fair value the common equity interest acquired to determine goodwill. the investment in subsidiary preferred stock is ad+usted to its book value at acquisition and the parent’s additional paid) in capital is charged or credited for the difference between the cost of the investment and its underlying book value.& at the beginning of the period. an entry is necessary to reclassify the preferred stock as minority interest. "inority interest income in the consolidated income statement consists of the income to preferred stockholders plus the minority interest’s share of the subsidiary’s income to common. D A parent company acquires the preferred stock of a subsidiary 1 'rom the viewpoint of the consolidated entity. / The constructive retirement is reported as an actual retirement in the consolidated financial statements. * + . the preferred stock is retired and no longer a minority interest.* + . a The investment in preferred stock %$ a00&#'te1 2&r &' the /a$%$ &2 %t$ /&&3 4a"#e. dividends in arrears. and not on the basis of the cost or equity methods. the equity related to the preferred stock held by the parent and the investment in preferred stock are eliminated( any difference is charged or credited to additional paid)in capital. This is done by a debit to the subsidiary’s preferred stock %for par value of the stock& and a debit to the subsidiary’s retained earnings for any difference between par value and the preferred stockholders’ equity %for call premiums. etc.
!/ are the same as for separate entities. In this case subsidiary . . If the constructive retirement is not recorded on the parent’s books. If the subsidiary’s potentially dilutive securities are convertible into parent company common stock.ithout this ad+ustment on the parent company books.!/ computations. the potential dilution must be considered in computing the parent’s diluted .hen a subsidiary has '& potentially dilutive securities. a working paper ad+ustment to additional paid)in capital is required for each year the statements are consolidated. the procedures for computing consolidated . a The 2parent’s equity in subsidiary reali3ed income4 is the parent’s percentage interest in the reported income of the subsidiary ad+usted for the effects of intercompany profits from upstream sales and constructive gains or losses of the subsidiary. unreali3ed profits for downstream sales.hen a subsidiary ha$ potentially dilutive securities. which are then used in determining parent company . / B 1ilutive securities of the subsidiary convertible into subsidiary shares 1 The diluted earnings of the parent company are ad+usted to replace the parent’s e6#%t7 %' $#/$%1%ar7 rea"%8e1 %'0&9e with the parent’s share of the diluted earnings of the subsidiary.!/ computations are not used in parent company .!/. 1 * . the potential dilution is reflected in subsidiary . 0 PARENT COMPANY AND CONSOLIDATED EARNINGS PER SHARE !I""#$trat%&' 10(*) A !arent company and consolidated earnings per share are %1e't%0a"5 -asic earnings per share are always identical when the parent company uses the complete equity method. In this case. they are treated as parent company dilutive securities and are included directly in computing the parent company0s . The consolidated financial statements are not affected by the parent company’s accounting for its investment./ .!/.!/. and constructive gains and losses . parent company net income and stockholders’ equity would not equal consolidated net income and stockholders’ equity. a If the subsidiary’s potentially dilutive securities are convertible into subsidiary common stock. the investment is maintained on a cost basis. !1) The amorti3ation of cost5book value differentials.!/ computations.
!1) /ubsidiary . 1 An affiliated group e*ists when a common parent corporation owns at least <9= of the voting power of all classes of stock and <9= or more of the total value of all outstanding stock of each of the includable corporations. / This computation of the subsidiary’s . The common parent must meet the <9= requirements directly for at least one includable corporation.!/ is made only for the purpose of calculating the parent’s . C 1ilutive securities of a subsidiary convertible into parent company shares 1 * The parent company common shares are ad+usted when potentially dilutive securities of the subsidiary are convertible into parent company stock. 'or this purpose.!/ computations are based on subsidiary reali3ed income. Income attributable to the potentially dilutive securities of the subsidiary under the 2if converted4 method is added to the parent’s earnings in calculating the parent’s diluted earnings. unreali3ed profits of the subsidiary are eliminated and constructive gains and losses of the subsidiary are included.onsolidated ta* returns of consolidated entities 1 Intercompany dividends are e*cluded from ta*able income. . This is because these items do not affect the subsidiary’s equity.assigned to the parent company that are e*cluded from the computation of income from subsidiary are '&t considered in the computation of the parent’s equity in subsidiary reali3ed income.!/ and it may not be the same as one prepared by the subsidiary for its own e*ternal reporting. All consolidated entities that are not an affiliated group must file separate returns for each affiliated company. This 799= e*clusion of dividends from members of the affiliated group applies even if the companies file separate ta* returns.!/. 0 The 2parent’s equity in the subsidiary’s diluted earnings4 is computed by multiplying the subsidiary shares owned by the parent by the subsidiary’s diluted . * B .. ACCOUNTING FOR INCOME TAXES OF CONSOLIDATED ENTITIES A A consolidated entity may elect to file a consolidated ta* return if it is classified as an a22%"%ate1 :r&#p under 6 7897 through 7898 of the I:.
ach subsidiary included in the consolidated ta* return must use the parent’s ta* year. C /eparate ta* returns of consolidated entities 1 * 1ividends from members of the same affiliated group are 799= e*cludable from income even when separate returns are filed. a Anreali3ed and constructive gains and losses from intercompany transactions are temporary differences when separate ta* returns are filed.* >osses of one affiliate can be offset against income of other affiliates. . . but ta*es otherwise payable are reduced for unreali3ed intercompany losses. Intercompany profits and losses are deferred until reali3ed. the ob+ectives of accounting for income ta*es are 1 * B To recogni3e the amount of ta*es payable or refundable for the current year and To recogni3e deferred ta* liabilities and assets for the future ta* consequences of events that have been recogni3ed in the financial statements or ta* returns. This is because the gains and losses are not included in accounting income until reali3ed( but the individual companies are ta*ed on the income included in their separate statements. Anreali3ed and constructive gains and losses from intercompany transactions are '&t temporary differences when consolidated returns are filed. + . /ince ?9= of the dividends . This is because the gains and losses are deferred until reali3ed in both the consolidation working papers and the consolidated ta* return. but not when consolidated ta* returns are filled. + INCOME TAX ALLOCATION !I""#$trat%&' 10(+) A Ander FAS 109. Income ta*es are payable on unreali3ed intercompany profits. / * Bther accounting5income ta* differences are temporary differences when either separate or consolidated ta* returns are filed. <9= of the dividends received from domestic corporations that are ?9= to <9= owned are e*cludable and @9= of the dividends received from domestic corporations that are less than ?9= owned are e*cludable from ta*able income. >oss carryforwards e*isting at the time an affiliate is acquired can be offset only against ta*able income of that affiliate.vents that have future ta* consequences are te9p&rar7 1%22ere'0e$5 1 /ome accounting5income ta* differences are temporary differences when separate ta* returns are filed.
C Temporary differences 1 Temporary differences from undistributed earnings of a subsidiary %or equity investee& a / Investors pay income ta*es on dividends currently received %distributed income& from equity investees and subsidiaries that are not members of the affiliated group. . is not deductible for ta* purposes in either separate or consolidated ta* returns.onsolidated income ta* e*pense is equal to the combined income ta* e*pense of the consolidated entities. * Temporary differences from unreali3ed gains and losses from intercompany transactions in separate ta* returns a The selling entity includes the gain or loss from the intercompany sale in its separate ta* return and pays the ta* or receives the ta* benefit currently. undistributed income. The investor provides for deferred income ta*es on its share of the investee’s undistributed income %i. Ander this approach !1) !*) Intercompany profits are eliminated on a gross basis. / D . future dividends.e.. Coodwill amorti3ation. creates a temporary difference in both separate and consolidated ta* returns. The four methods currently used to allocate income ta*es among affiliates are 1 * /eparate return method ) each subsidiary computes its income ta*es as if it were filing a separate return Agreement method ) the ta* e*pense is allocated by agreement between the parent and subsidiaries . + /ome accounting5income ta* differences are not temporary differences. the ta* liability is allocated among the affiliated companies. The ta* effect of the temporary difference from the unreali3ed gain or loss is included in measuring the income ta* e*pense of the selling affiliate. when generated from a non)ta*able combination or prior to the 7DDE change in the ta* rules.received from an affiliate that is not a member of the affiliated group is ta*able.hen consolidated ta* returns are filed. the investee’s net income less dividends&.
. /ince the ta* basis and the book basis are the same./tatement 7F?. B .+ .hen assets and liabilities are revalued for ta* purposes. BUSINESS COMBINATIONS !I""#$trat%&' 10(. + . the assets and liabilities of the acquired corporation are revalued to reflect the acquisition values for both accounting and ta* purposes. Coodwill is not ta* deductible. but are revalued for accounting purposes. Coodwill is e*cludedGno deferred ta* liability is set up for goodwill. In a ta* free purchase business combination. The amorti3ation period for ta* purposes is 78 years. . Any of the following combinations is possible. Accounting for a ta*able purchase business combination 1 * + Assets and liabilities acquired are recorded at their gross amount.) A -usiness combinations may be ta*able or ta* free under the I:. no deferred ta* assets or liabilities are recorded. The difference between the ta* basis %book values& and the assigned values of assets and liabilities acquired times the ta* rate is recorded as a deferred ta* liability or deferred ta* asset. the seller recogni3es gain or loss equal to the fair value of the consideration received minus the ta* bases of the assets or stock sold. the assets and liabilities are carried forward at their book values for ta* purposes. Coodwill is not amorti3ed for financial reporting purposes under 'A/. Coodwill is ta* deductible for purchases after August 7DDE based on the :evenue :econciliation Act of 7DDE %section 7D@&.ith)or)without method ) the income ta* provision is computed for the group with and without the preta* income of the subsidiary and the subsidiary’s income ta* e*pense is the difference !ercentage allocation method ) the consolidated income ta* e*pense is allocated to a subsidiary on the basis of its preta* income as a percentage of consolidated preta* income This method is used in the textbook. C D Accounting for a ta*)free purchase business combination 1 * Assets and liabilities are recorded at their gross amount. 1 * In a ta*able purchase business combination.
79)@ . discontinued operations.79)J .79)7? . and the investment balance from the parent’s investment in common stock %subsidiary has preferred stock& P2 #!en3ance5/andalwood$ 1etermine investment cost. and warrants& EPS #!utman5/heridan$ . 8 ". or in the notes to the financial statements. cumulative effect type items.79)7 . a current and a non)current amount based on the related asset or liability.!/ with minority?8 interest. problem)type questions %asset allocation in business ?9 ?9 ?8 ?9 ?8 ?9 79 ?9 ?9 7? ?8 . net income. B /ignificant components of income ta* e*pense or benefit should be disclosed on the income statement.!/ with goodwill.!/ %minority interest. problem)type questions %consolidated .omputations for investment in common stock %subsidiary has preferred stock with 7 year’s dividends in arrears& P2 #!arnell5/ommerfeld$ .79)< .79)7E %7@& %7@& AICPA#"oss51ubro$ . investment income for ? years.79)77 .79)79 .79)? .*ercises . general questions Ta. F ". goodwill. 7 year’s dividends are in arrears& P2 #!erry5/ketch$ 1etermine cost)book value differentials for preferred and common stock and describe the accounting treatment EPS E ". general questions EPS #!alor5/olaid$ F ". De$0r%pt%&' &2 A$$%:'9e't Mater%a" M%'#te$ Huestions . e*traordinary items. minority interest.79)8 . and subsidiary warrants& EPS #!oway5/cony$ .omputations %subsidiary .onsolidated basic and diluted .FINANCIAL STATEMENT DISCLOSURES FOR INCOME TAXES A 1eferred ta* assets or liabilities are disclosed on the balance sheet in two categories. Amounts allocated to continuing operations. its classification depends on the reversal date of the temporary difference.79)D . minority interest income and underlying book value of investment in common stock %subsidiary has preferred stock& P2 #!imlico5/hoshone$ Iournal entries and computations %parent invests in both common and preferred stock of subsidiary.!/ with goodwill and warrants& Ta.ompute goodwill. 1 If the deferred item is not related to a specific item. ".79)E . problem type questions %preferred stock and ta*& P2 #!ortland5/tar$ .!/ and consolidated?8 . and prior)period ad+ustments should be separately disclosed. parent with preferred stock. unreali3ed profit from upstream sale. warrants convertible into subsidiary shares& EPS #!rince5/tanley$ .omputations %consolidated .79) F .
upstream sales& !79)7? Ta. and upstream land sale& Internet assignment ?9 F9 J9 @9 E8 E9 F9 ?9 F9 ?8 E9 ?9 F9 F9 . goodwill amorti3ation.omparative income statements %consolidated and separate ta* returns& !79)77 Ta. midyear purchase of common& !79)F P2 #!ari5/ak$ .onsolidation working papers %investment in common stock.onsolidated income statement %@9= owned subsidiary with goodwill and downstream gain on equipment& Ta. #!ruit5/olo$ .omputations %subsidiary with preferred stock and warrants& !79)79 Ta.. #!hoeni*5/elica$ . subsidiary has preferred stock.omputations for investment in common stock %subsidiary has preferred stock with 7 year’s dividends in arrears& !79)? P2 #!ulsen5/tarky$ . #!eddicord5/ullivan$ Iournal entries %unreali3ed profit with separate and consolidated ta* returns& Ta.omputations %separate ta* returns with goodwill.79)7J . downstream inventory sales. subsidiary has preferred stock. upstream sale of land.omputations %. income ta* effect from equity investees& Ta.!/ %minority interest( options( preferred stock& !79)@ EPS #!rotein5/tarch$ .!/ given %convertible bonds.79)7F . #!arson5/tudio$ Allocate cost5book value differentials in a ?9 ta*able purchase business combination and compute investment income !79)78 Ta. upstream and downstream sales& !79)D EPS #!ike5/im$ .omputations and consolidation working paper entries for investments in preferred and common stock %midyear purchases& !79)E P2 #!at5/al$ . goodwill.79)78 . #!ulaski5/tewart$ .omputations and income statement %@9= interest.ompute consolidated . parent acquires all of subsidiary’s bonds& !79)8 EPS #!alace5/kinner$ .!/ with convertible debentures& !79)J EPS #!ensacola5/heridan$ .!/( subsidiary diluted .omputations and consolidated income statement %separate income ta* returns with intercompany sale of equipment& !79)7J Ta. #!ioneer5/weeney$ Iournal entries %unreali3ed profit from upstream sale and separate ta* returns& 78 E9 ?9 ?9 !roblems !79)7 P2 #!arrella5/tanley$ . equity method.onsolidated income statement working papers F9 %@9= owned subsidiary. downstream sales& !79)7E Ta.79)7@ combination.ompare separate and consolidated ta* filings %799= owned subsidiary with gain on land& Ta.onsolidation working papers %investment in common stock. equity method. #!actor5/hram$ . #!anama5/ilky$ . #!ommer5/ooner$ .ompute basic and diluted .omputations %convertible preferred stock and amorti3ation of e*cess& !79)< EPS #!remble5/mithfield$ . #!a*ton5/utter$ . #!en5/oo$ :econstruct working paper entries %separate and consolidated income statements given& !79)7F Ta. downstream inventory sales.
/hipments to branch is a contra purchases account on the home office books.liminate unreali3ed profits from transfers between home office and branch . HOME OFFICE AND BRANCH ACCOUNTS A B H&9e &22%0e /&&3$ ( The home office accounts for its investment in the branch through an asset account entitled 2investment in branch. prepare a summary of ma+or topics discussed in the chapter. BUT NOT SEPARATE LEGAL ENTITIES A B C -ranch financial statements are used only for internal reporting purposes.Asing the Ceneral "otors . A decrease in the branch account on the home office books should be accompanied by a decrease in the home office account on the branch books.orporation ?999 annual report from the Ceneral "otors website.4 Bra'0h /&&3$ ( The branch has a reciprocal equity account entitled 2home office4 which replaces the usual equity accounts. ELECTRONIC SUPPLEMENT ACCOUNTING FOR BRANCH OPERATIONS BRANCHES ARE SEPARATE ACCOUNTING ENTITIES.stablish reciprocity between home office and branch accounts .liminate reciprocal accounts . /ales agencies are not separate accounting or business entities. 'inancial statements of the business entity are prepared by combining branch statements with the home office statements. HOME OFFICE AND BRANCH ACCOUNTS ARE COMBINED IN PREPARING FINANCIAL STATEMENTS AS FOLLO S< A B C D .ombine nonreciprocal accounts MERCHANDISE TRANSFERS FROM THE HOME OFFICE TO THE BRANCH< A H&9e &22%0e /&&3$ ( "erchandise transferred to the branch represents an additional investment in the branch and the branch account is debited. The related credit is to 2shipments to branch4 account.4 or simply 2branch. .
)7E #Arnimal$ Kome office and branch +ournal entries %transfers at cost& . the home office should allocate the e*pense between home office and branch.)78 #"edina$ 1etermine cost of goods sold with outside purchases . . The home office makes no entry relating to the freight.B Bra'0h /&&3$ ( The branch debits 2shipments from home office.)?9 #"anning$ !repare a cost of sales schedule and comparative home office. EXPENSE ALLOCATION A B If the home office pays for services that will benefit the branch.)7D #-ristol$ Iournal entries and computations %e*cessive freight charges& . it debits the branch account and credits a payable or cash. it records the payment in the usual way and increases %credits& the home office account.)7@ #1ia3o$ Kome office and branch ad+usting entries %transfers above cost& . the e*pense should be allocated proportionately between the two. The branch debits freight in and credits the home office account. and credits the related home office account. branch.*cessive freight charges should be charged to 2loss on e*cessive freight charges4 on the home office books.4 an inventory account.)7J #>iberty$ !repare a reconciliation of home office and branch accounts . If the branch pays for services that will benefit both the branch and the home office.0e$$%4e 2re%:ht 0har:e$ ( .)7F #Lak$ Ad+usting entries on home office books to eliminate unreali3ed profits . and combined income statements ?8 7? 78 7? 7< ?9 ?9 F9 . If the branch pays the freight.)7< #.osts incurred to transport merchandise back and forth between the home office and branch or between branches because of shortages in some locations or because defective merchandise is returned is not an inventoriable cost for the branch. De$0r%pt%&' &2 a$$%:'9e't 9ater%a" Huestions %7?& M%'#te$ !roblems %?E& . problem)type questions %freight charges& .astland$ F ". 1 If the home office pays the freight. * B E. FREIGHT COSTS A The cost of transporting merchandise to its final sale location is an inventoriable cost that is included in the branch inventory and cost of goods sold computations.
)?D .omputations. and closing entries #Anselmo$ !repare a schedule of cost of sales and combining working papers #-ear$ Trial balance working papers to combine home office and ? branches #. reconciliation of home office and branch accounts.losing entries.)?F . year)end entries.)EF .)?E .ontrol !roducts$ !repare trial balance working papers to combine home office and branch operations and develop a home office)branch reconciliation #Komer$ Lear)end entries and combined income statement and balance sheet #Toller$ .)?@ .astman$ .arler$ Iournal entries.)?< .)E7 .)?F . and income statement #1alton$ !repare a home office income statement %trial balances are given( includes loading account& #Isaac$ Iournal entries and combined income statement %transfers in e*cess of cost& #'ast)/top$ Kome office year)end entries and combined financial statements #Tiller$ 'inancial statement working papers to combine home office and branch operations %cost of goods sold summary account required& #.erty$ .omputations and separate income statements for home office and branch #.)EE .)?J ..losing and ad+usting entries and combined income statement #"ichael$ Kome office)branch account reconciliation and correcting entries #Tanker$ . working papers. ledger accounts. separate income statement.)E? .omputations.)E9 . and combined balance sheet E8 ?9 ?8 ?9 89 89 D9 89 J9 F9 J9 88 88 J9 .)E8 #Naylor$ .)?? .)?7 . combined balance sheet. and combined income statement and balance sheet #.
999 !0s net income C&'$&"%1ate1 'et %'0&9e 2&r *0XI .999 M7?@.999 Ml?@.999 ) M79.999 @. / has M799.ommon 79= * %MF9.999& !referred @9= * M79.999 par of cumulative 79= preferred stock outstanding.999 E9= * M79.999 E.999 ! Kolds E9= of /’s !referred /tock ITH PREFERRED STOCK OUTSTANDING /ince the preferred stock of / is cumulative.Illustration 10-1 Preferred Stoc SUBSIDIARY A$$#9pt%&'$ 1 * + .999 M799.999& Income from / )) preferred E9= * M79. !’s separate income for ?9Nl is M 799.999 . Butside /tockholders Kold All of /’s !referred /tock P=$ 'et %'0&9e 2&r *0XI !0s separate income !0s income from / Income from / )) common D9= * %MF9.999 M7E9. ! owns D9= of /’s outstanding common stock.999.999 M799. .999 E.999. /’s separate income for ?9Nl is MF9.999 E.999 M7E9.999 ?@. !0s net income and consolidated net income are the same regardless of whether / declares dividends during the year.onsolidated net income Note M7F9.999 ?@.999 ) M79.999 @.999 M7F9.999 E.ombined separate incomes of ! and / >ess "inority interest income .
!/ P !arent’s income to common O parent’s ad+ustment for !1/ O replacement calculation for subsidiary’s !1/ !arent’s common shares outstanding O shares represented by parent’s !1/ * + /ubsidiary has potentially dilutive securities !PDS) outstanding and convertible into parent common stock !arent’s income to common O parent’s ad+ustment for its !1/ O ad+ustment for subsidiary’s !1/ convertible into parent common stockQQQQQQQQQQ !arent’s common shares outstanding O shares represented by parent’s !1/ and subsidiary’s !1/ .!/ P .!/ P /ubsidiary has no potentially dilutive securities !PDS) outstanding !arent’s income to common O parent’s ad+ustment for !1/ QQQQQQQQQQQQQQQQQQQQ !arent’s common shares outstanding O shares represented by parent’s !1/ /ubsidiary has potentially dilutive securities !PDS) outstanding convertible into subsidiary common stock .Illustration 10-! "arnin#s per Share BASIC COMPUTATIONS FOR CONSOLIDATED EARNINGS PER SHARE 1 .
7?9 MJ9.9<9 MJ.999 dividends !0s ta* liability on the MD9.999 dividends received MD9.999 dividends.999 M F.999 dividends * ?9= ta*able * EF= ta* rate !0s share of /0s undistributed income %M?89.999 M J.999 * ?9= ta*able * EF= ta* rate Income ta*es currently payable 1eferred income ta*es Income ta* e*pense . / reports net income of M?89. MD9.999 ) M789.999& * J9= ! provides for income ta*es on undistributed earnings MJ9.Illustration 10-$ Accountin# for Income %a&es ACCOUNTING FOR DISTRIBUTED AND UNDISTRIBUTED INCOME A$$#9pt%&'$ 1 * + ! owns J9= of /. a domestic corporation. A flat EF= ta* rate is applicable.9<9 M79.?99 !0s share of /0s distributed income J9= * M789.999 and pays M789.7?9 F.
! owns a J9= interest in /.<<9 %7?9.ost of sales Bperating e*penses Income ta* e*pense Net Income M?99.999 dividends& * J9= * ?9= ta*able P M7.999& %J9.J9<& M ?F.999 J.999 8.JF9& M@. ! sells land that cost M7?.999 * EF=& Ta* on dividends received %M79.?F< %7. / pays M79.999 operating e*pense& * EF= Ta* on gain from sale of land %MJ.999 unreali3ed gain from sale of land !0s share of /0s undistributed income %M7D.999& %E9.?@? / M789.999 less the M7.<99 * J9= owned ) MJ. Income statements for ! and / are as follows ! /ales Cain on sale of land Income from / .999 dividends during the year.Illustration 10-' SEPARATE TAX RETURNS AND INTERCOMPANY GAIN A$$#9pt%&'$ 1 * + .7@J ta*able share of /0s undistributed earnings& * EF= Income ta* e*pense MJ.999& %79.J9< ! will increase a deferred ta* asset or decrease a deferred ta* liability by M7.7@J !0s income ta* e*pense is computed as follows Ta* on operating income %M?99.999.999 * J9= * ?9= ta*able * EF=& Ta*es currently payable >ess .JF9.999 cost of sales ) MJ9.999 %D9.999& %@. A EF= ta* rate is applicable.<99 !0s income from / M7D.9F9 F9< D.?99& M 7D.<99 ?. .999 to / for M7<.<99 income ) M79.hange in deferred income ta*es %Anreali3ed gain on land MJ.999 sales ) M7?9.