Solution Manual For Advanced Accounting 14th Edition Joe Ben Hoyle Thomas Schaefer Timothy Doupnik

Solution Manual for Advanced Accounting, 14th
Edition, Joe Ben Hoyle Thomas Schaefer Timothy

Doupnik
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Solution Manual for Advanced Accounting, 14th Edition, Joe Ben Hoyle Thomas Schaefer Timothy
Chapter 07 - Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 14e
CHAPTER 7
CONSOLIDATED FINANCIAL STATEMENTS—OWNERSHIP
PATTERNS AND INCOME TAXES
Chapter Outline
I. Indirect subsidiary control
A. Control of subsidiary companies within a business combination is often of an indirect
nature; one subsidiary possesses the stock of another rather than the parent having direct
ownership.
1. These ownership patterns may be developed specifically to enhance control or for
organizational purposes.
2. Such ownership patterns may also result from the parent company's acquisition of a
company that already possesses subsidiaries.
B. One of the most common corporate structures is the father-son-grandson configuration
where each subsidiary in turn owns one or more subsidiaries.
C. The consolidation process is altered somewhat when indirect control is present.
1. The worksheet entries are effectively doubled by each corporate ownership layer but
the concepts underlying the consolidation process are not changed.
2. Calculation of the accrual-based income of a subsidiary recognizing the consolidated
relationships is an important step in an indirect ownership structure.
a. The determination of accrual-based income figures is needed for equity income
accruals as well as for the computation of noncontrolling interest balances.
b. Any company within the business combination that is in both a parent and a
subsidiary position must recognize the equity income accruing from its subsidiary
before computing its own income.
II. Indirect subsidiary control-connecting affiliation

A. A connecting affiliation exists whenever two or more companies within a business
combination hold an equity interest in another member of that organization.
B. Despite this variation in the standard ownership pattern, the consolidation process is
essentially the same for a connecting affiliation as for a father-son-grandson organization.
C. Once again, any company in both a parent and a subsidiary position must recognize an
appropriate equity accrual in computing its own income.
III. Mutual ownership

A. A mutual affiliation exists whenever a subsidiary owns shares of its parent company.
B. Parent shares held by a subsidiary are accounted for by the treasury stock approach.
1. The cost paid to acquire the parent's stock is reclassified within the consolidation
process to a treasury stock account and no income is accrued.
2. The treasury stock approach is popular in practice because of its simplicity and is now
required by the FASB Codification.
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Doupnik, 14e
IV. Income tax accounting for a business combination—consolidated tax returns

A. A consolidated tax return can be prepared for all companies comprising an affiliated group.
Any other companies within the business combination file separate tax returns.
B. A domestic corporation may be included in an affiliated group if the parent company (either
directly or indirectly) owns at least 80 percent of the voting stock of the subsidiary as well
as 80 percent of each class of its nonvoting stock.
C. The filing of a consolidated tax return provides several potential advantages to the members
of an affiliated group.
1. Intra-entity profits are not taxed until goods are sold to outsiders or consumed within the
consolidated group.
2. Intra-entity dividends are not taxed (although these distributions are nontaxable for all
members of an affiliated group whether a consolidated return or a separate return is
filed).
3. Losses of one affiliate can be used to reduce the taxable income earned by other
members of the group.
D. Income tax expense—effect on noncontrolling interest valuation
1. If a consolidated tax return is filed, an allocation of the total expense must be made to
each of the component companies to arrive at the adjusted income figures that serve as
a basis for noncontrolling interest computations.
2. Income tax expense is frequently assigned to each subsidiary based on the amounts
that would have been paid on separate returns.
V. Income tax accounting for a business combination—separate tax returns

A. Members of a business combination that are foreign companies or that do not meet the 80
percent ownership rule (as described above) must file separate income tax returns.
B. Companies in an affiliated group can elect to file separate tax returns. Deferred income
taxes are often recognized when separate returns are filed due to temporary differences
stemming from intra-entity gains and losses as well as intra-entity dividends.
VI. Temporary tax differences can stem from the creation of a business combination
A. The tax basis of a subsidiary's assets and liabilities may differ from their consolidated values
(which is based on the fair value on the date the combination is created).
B. If additional taxes will result in future years (for example, if the tax basis of an asset is lower
than its consolidated value so that future depreciation expense for tax purposes will be less),
a deferred tax liability is created by a combination.
C. The deferred tax liability is then written off (creating a reduction in tax expense) in future
years so that the net expense recognized (a lower number) matches the combination's book
income (a lower number due to the extra depreciation of the consolidated value).
Vll. Operating loss carryforwards

A. Net operating losses recognized by a company can be used to reduce taxable income
indefinitely (a carryforward) subject to 80 percent of any future year’s taxable income.
B. If one company in a newly created combination has a tax carryforward, the future tax
benefits are recognized as a deferred income tax asset.
C. However, a valuation allowance must also be recorded to reduce the deferred tax asset to
the amount that is more likely than not to be realized.
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Answers to Questions
1. A father-son-grandson relationship is a specific type of ownership configuration often

encountered in business combinations. The parent possesses the stock of one or more
companies. At least one of these subsidiaries holds a majority of the voting stock of its own
subsidiary. Each subsidiary controls other subsidiaries with the chain of ownership going on
indefinitely. The parent actually holds control over all of the companies within the business
combination despite having direct ownership in only its own subsidiaries.
2. In a business combination having an indirect ownership pattern, at least one company is in both
a parent and a subsidiary position. To calculate the accrual-based income earned by that
company, a proper recognition of the equity income accruing from its own subsidiary must
initially be made. Structuring the income calculation in this manner is necessary to ensure that
all earnings are properly included by each company.
3. Able—100% of income accrues to the consolidated entity (as parent company).

Baker—70% (percentage of stock owned by Able).
Carter—56% (80% of stock owned by Baker multiplied by the 70% of Baker controlled by Able).
Dexter—33.6% (60% of stock owned by Carter multiplied by the 80% of Carter controlled by
Baker multiplied by the 70% of Baker owned by Able).
4. When an indirect ownership is present, the quantity of consolidation entries will increase,
perhaps significantly. An additional set of entries is included on the worksheet for each separate
investment. Furthermore, the determination of accrual-based net income figures for each
subsidiary must be computed in a precise manner. For any company in both a parent and a
subsidiary position, equity income accruals are recognized prior to the calculation of that
company's accrual-based net income. The accrual-based net income total is significant because
it serves as the basis for noncontrolling interest calculations as well as the equity accruals to be
recognized by that company's parent.
5. In a connecting affiliation, two (or more) companies within a business combination own shares
in a third member. A mutual ownership, in contrast, exists whenever a subsidiary possesses an
equity interest in its own parent.
6. In accounting for a mutual ownership, U.S. GAAP requires the treasury stock approach. The
treasury stock approach presumes that the cost of the parent shares should be reclassified as
treasury stock within the consolidation process. The subsidiary is viewed, under this method,
as an agent of the parent. Thus, the shares are accounted for as if the parent had actually made
the acquisition.
7. According to present tax laws, an affiliated group can be comprised of all domestic corporations
in which a parent holds 80 percent ownership. More specifically, the parent must own (directly
or indirectly) 80 percent of the voting stock of the corporation as well as at least 80 percent of
each class of nonvoting stock.
8. Several basic advantages are available to combinations that file a consolidated tax return. First,
intra-entity profits are not taxed until the goods are sold to outside customers or consumed
within the consolidated group. For companies with large amounts of intra-entity transactions,
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the deferral of intra-entity gains causes a delay in the making of significant tax payments.
Second, losses incurred by one company can be used to reduce or offset taxable income earned
by other members of the affiliated group. In addition, intra-entity dividends are not taxable but
that exclusion applies to the members of an affiliated group regardless of whether a
consolidated or separate tax return is filed.
Members of a business combination may be forced to file separate tax returns. Foreign
corporations, for example, must always file separately. Domestic companies that do not meet
the 80 percent ownership rule are also required to file in this manner. Furthermore, companies
that are in an affiliated group may still elect to file separately. If all companies within the
combination are profitable and few intra-entity transactions are carried out, little advantage may
accrue from preparing a consolidated return. With a separate filing, a subsidiary has more
flexibility as to accounting methods as well as its choice of a fiscal year-end.
9. The allocation of income tax expense among the component companies of a business
combination has a direct bearing on adjusted income totals and, therefore, noncontrolling
interest calculations. Obviously, the more expense that is assigned to a particular company the
less income is attributed to that concern. Income tax expense can be allocated based on the
income totals that would have been reported by various companies if separate tax returns had
been filed or on the portion of taxable income derived from each company.
10. In filing a separate tax return (assuming that the two companies do not qualify as members of
an affiliated group), the parent must include as income the dividends received from the
subsidiary. For financial reporting purposes, however, income is accrued based on the
ownership percentage of the adjusted income of the subsidiary. Because income is frequently
recognized by the parent prior to when it receives a dividend (when it is subject to taxation),
deferred income taxes must be recognized.
Either the parent or the subsidiary might also have to record deferred income taxes in
connection with any intra-entity gain on assets that remain within the consolidated entity. On a
separate tax return, such gains are reported at the time of transfer while for financial reporting
purposes they are appropriately deferred until the goods are sold to outside customers or
consumed within the consolidated group. Once again, a temporary difference is created which
necessitates the recognition of deferred income taxes.
11. If the consolidated value of a subsidiary’s assets exceeds their tax basis, depreciation expense
in the future will be less on the tax return than is shown for external reporting purposes. The
reduced expense creates higher taxable income and, thus, increases taxes. Therefore, the
difference in values dictates an anticipated increase in future tax payments. This deferred
liability is recognized at the time the combination is created. Subsequently, when actual tax
payments do arise, the deferred liability is written off rather than recognizing expense based
solely on the current liability. In this manner, the expense is shown at a lower figure, one that is
matched with reported income (which is also a lower balance because of the extra depreciation).
Recognition of this deferred liability at date of acquisition also reduces the net amount attributed
to the subsidiary's assets and liabilities in the initial allocation process. Therefore, the residual
asset (goodwill) is increased by the amount of any liability that must be recognized.
12. A net operating loss carryforward allows the company to reduce future taxable income subject
to 80 percent of any future year’s taxable income. Thus, a benefit may possibly be derived from
the carryforward but that benefit is based on Wilson’s (the subsidiary) ability to generate future
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taxable income for offset against the carryforward. To reflect the potential tax reduction, a
deferred income tax asset is recorded for the total amount of anticipated benefit. However,
because of the uncertainty, unless the receipt of this benefit is more likely than not to be
received, a valuation allowance must also be recorded as a contra account to the asset. The
valuation allowance may be for the entire amount or just for a portion of the asset.
13. At the date of acquisition, the valuation allowance was $150,000. As a contra asset account,
recognition of this amount reduced the net assets attributed to the subsidiary and, hence,
increased the recording of goodwill (assuming that the price did not indicate a bargain
purchase). If the valuation allowance is subsequently reduced to $110,000, the net assets have
increased by $40,000. This change is reflected by a decrease in income tax expense.
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Answers to Problems
1. D
2. B
3. A
4. C
5. C
6. C
7. D Sapphire's accrual-based income:

Operating income ...................................................................... $210,000
Defer intra-entity gain ............................................................... (50,000)
Sapphire's accrual-based income ...................................... $160,000
Emerald's accrual-based income:

Investment Income (90% of Sapphire’s accrual income) ....... 144,000
Emerald's accrual-based income ....................................... $372,000
Diamond's accrual-based income:

Investment income (80% of Emerald's accrual income) ........ 297,600
Diamond's accrual-based income ...................................... $645,600
8. C Stang's accrual-based income:

Stang's accrual-based income ........................................... $190,000
Outside ownership .................................................................... 30%
Net income attributable to noncontrolling interest ............ $ 57,000
Belvista's accrual-based income:

Investment income (70% of Stang's accrual-based income) ...... 133,000
Beltran's accrual-based income ......................................... $420,000
Outside ownership .................................................................... 30%
Net income attributable to noncontrolling interest ........... $ 126,000
Total net income attributable to noncontrolling interest =

($57,000 + $126,000) = $183,000
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9. A Stark's operating income................................................................ $78,000

Dividend income from Arryn .......................................................... 18,000
Stark's income ................................................................................ $96,000
Outside ownership ......................................................................... 5%
Noncontrolling interest .................................................................. $ 4,800
10. B Equity income (75% of $425,000) .................................................. $318,750

Dividend income (75% of $105,000) .............................................. 78,750
Tax difference ............................................................................ $240,000
Dividends received deduction upon eventual distribution (65%) (156,000)
Temporary portion of tax difference ........................................ $ 84,000
Tax rate .......................................................................................... 21%
Deferred income tax liability .................................................... $ 17,640
11. C Intra-Entity Gross Profit:

Total gross profit ........................................................................ $50,000
Portion still held .......................................................................... 20%
Intra-entity gross profit in inventory ....................................... $ 10,000
Tax rate .......................................................................................... 21%
Deferred tax asset ....................................................................... $ 2,100
12. A Recognition of this gross profit is not required on a consolidated tax return.
13. B Because fair value of the subsidiary's assets exceeds the tax basis by
$40,000, a deferred tax liability of $8,400 (21%) must be recorded. Goodwill is
then computed as follows:
Consideration transferred ....................................... $401,600

Fair value ................................................................... $355,000
Deferred tax liability ................................................. (8,400) 346,600
Goodwill .................................................................... $ 55,000
14. (30 Minutes) (Series of reporting and consolidation questions pertaining to a

father-son-grandson combination. Includes intra-entity inventory gains)
a. Consideration transferred (by Aspen) ......................... $288,000
Noncontrolling interest fair value ................................. 72,000
Birch’s business fair value ............................................ 360,000
Book value .................................................................... (300,000)
Trade name ...................................................................... $ 60,000
Life .................................................................................. 30 years
Annual amortization ...................................................... $ 2,000
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14. (continued)
Consideration transferred for Cedar (by Birch) .......... $104,000

Cedar’s business fair value .......................................... $130,000
Book value ............................................................... (100,000)
Trade name ...................................................................... $30,000
Life .................................................................................. 30 years
Investment in Birch $288,000

Birch's reported income-2019 $40,000
Amortization expense (2,000)
Accrual-based income $38,000
Aspen’s percentage ownership 80%
Equity accrual-2019 $30,400
Dividends received 2019 (8,000)
Birch's reported income-2020 $60,000
Amortization expense (2,000)
Income from Cedar [80% x ($10,000 - $1,000)] 7,200
Aspen’s percentage ownership 80%
Equity accrual-2020 $52,160
Dividends received from Birch 2020 (16,000)
Investment in Birch, December 31, 2020 $346,560
Note: Dividends declared by Cedar (payable to Birch) do not affect Aspen’s
Investment account.
b. Consolidated sales (total for the companies) $1,298,000

Consolidated expenses (total for the companies) (1,025,000)
Total amortization expense (see a.) (3,000)
Consolidated net income for 2021 $ 270,000
c. Noncontrolling interest in income of Cedar

Revenues less expenses $30,000
Excess amortization (1,000)
Noncontrolling interest percentage 20%
Noncontrolling interest in income of Cedar $5,800
Noncontrolling interest in income of Birch:

Revenues less expenses $65,000
Equity in Cedar income [(30,000-1,000) × 80%] 23,200
Accrual-based net income of Birch—2021 $86,200
Outside ownership 20% $17,240
NCI share of 2021 consolidated income $23,040
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14. (continued)
d. 2020 Adjusted net income of Birch (prior to accounting

for intra-entity gross profit) (see a) $65,200
2019 Transfer-gross profit recognized in 2020 10,000
2020 Transfer-gross profit to be recognized in 2021 (16,000)
2020 Accrual-based net income - Birch $59,200
2021 Adjusted net income of Birch (prior to accounting

for intra-entity gross profit) (see c.) $86,200
2020 Transfer-gross profit recognized in 2021 16,000
2021 Transfer-gross profit to be recognized in 2022 (25,000)
2021 Accrual-based net income—Birch $77,200
15. (15 minutes) (Income and noncontrolling interest with mutual ownership.)
a. Consideration transferred by Uncle ............................. $500,000

Nephew’s business fair value ....................................... $625,000
Book value ...................................................................... 600,000
Intangible assets ............................................................ $25,000
Life .................................................................................. 10 years
Amortization expense (annual) ..................................... $2,500
Net income reported by Nephew—2021 ........................ $50,000

Amortization expense (above) ...................................... (2,500)
Accrual-based income.................................................... 47,500
Uncle's ownership percentage ..................................... 80%
Net income of subsidiary recognized by Uncle ........... $38,000
b. To the outside owners, the $6,000 intra-entity dividends ($20,000 × 30%)

declared by Uncle are viewed as income because the book value of Nephew
increases. Thus, the noncontrolling interest's share of income is computed as
follows:
Nephew’s accrual-based income (above) $47,500

Dividends declared by Uncle to Nephew 6,000
Income to outside owners $53,500
Noncontrolling interest percentage 20%
Noncontrolling interest share of Nephew’s net income $10,700
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16. (35 Minutes) (Consolidated net income for a father-son-grandson combination.)
a. Boulder's operating income $245,000

Rock's operating income 85,000
Stone's operating income 150,000
Amortization expense–Boulder's investment in Rock (22,000)
Amortization expense–Rock's investment in Stone (8,000)
Consolidated net income $450,000
b. Stone's operating income $150,000

Amortization expense (on Rock's investment) (8,000)
Stone's accrual-based net income $142,000
Outside ownership 25%
Noncontrolling interest in Stone's income $35,500
Rock's operating income $ 85,000
Amortization expense (on Boulder's investment) (22,000)
Equity accrual from ownership of Stone
($142,000 × 75%) 106,500
Rock's accrual-based net income $169,500
Noncontrolling interest in Rock's net income $16,950
Total net income attributable to noncontrolling interests $52,450
Reconciliation:
Boulder’s operating income $245,000
Boulder’s share of Rock’s operating income (90% × $85,000) 76,500
Boulder’s share of Stone’s operating income (90% × 75% × $150,000) 101,250
Boulder’s share of Rock’s excess amortization (90% × $22,000) (19,800)
Boulder’s share of Stone’s excess amortization (90% × 75% × $8,000) (5,400)
Controlling interest in consolidated net income $397,550
Net income attributable to noncontrolling interest 52,450
Consolidated net income $450,000
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17. (30 Minutes) (Consolidated net income figures for a connecting affiliation)
INTRA-ENTITY GROSS PROFIT:

Cleveland ($12,000 remaining inventory × 25% markup) = $3,000
Wisconsin ($40,000 remaining inventory × 30% markup) = $12,000
NONCONTROLLING INTERESTS:
CLEVELAND:
Operating income (sales minus cost of goods sold and
expenses) ........................................................................ $60,000
Defer intra-entity gross profit (above) ................................ (3,000)
Accrual-based net income—Cleveland ........................ $57,000
Outside ownership ............................................................... 20%
Noncontrolling interest in Cleveland's net income ..... $11,400
WISCONSIN:
Operating income (sales minus cost of goods sold and
expenses) ...................................................................... $110,000
Defer intra-entity gross profit (above) .............................. (12,000)
Investment income (60% of Cleveland's accrual-based
income of $57,000) ....................................................... 34,200
Accrual-based net income—Wisconsin ..................... $132,200
Outside ownership ............................................................. 10%
Noncontrolling interest in Wisconsin's net income .. $ 13,220
TOTAL NONCONTROLLING INTERESTS: $24,620 ($11,400 + $13,220)
CONSOLIDATION TOTALS
▪ Sales = $1,590,000 (add the three book values and eliminate intra-entity
transfers of $40,000 and $100,000)
▪ Cost of goods sold = $1,015,000 (add the three book values, eliminate intra-
entity transfers of $40,000 and $100,000, and defer [add] intra-entity gains of
$3,000 and $12,000)
▪ Expenses = $200,000 (add the three book values)
▪ Dividend income = -0- (eliminated for consolidation purposes)
▪ Consolidated net income = $375,000 (consolidated revenues less
consolidated cost of goods sold and expenses)
▪ Net income attributable to noncontrolling interest = $24,620 (above)
▪ Net income attributable to Baxter Company = $350,380 (consolidated net
income less noncontrolling interest share)
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18. (12 Minutes) (Acquisition accounting for a subsidiary’s operating loss

carryforward)
a. Consideration transferred 1/1/21 $1,120,000

Fair value of identifiable assets acquired:
Software licensing agreements $900,000
Deferred tax asset from NOL (21% × $155,000) 32,550
Fair value of net identifiable assets acquired 932,550
Goodwill $187,450
b. Consideration transferred 1/1/21 $1,120,000

Fair value of identifiable assets acquired:
Software licensing agreements $900,000
Deferred tax asset from NOL (.21 × $155,000) 32,550
Valuation allowance for NOL (32,550)
Fair value of net identifiable assets acquired 900,000
Goodwill $220,000
19. (25 Minutes) (Tax expense with separate tax returns for a combination.)
a. CONSOLIDATED TOTALS
▪ Sales = $790,000 (add the two book values and eliminate the $110,000 intra-
entity transfer)
▪ Cost of goods sold = $340,000 (add the book values, eliminate intra-entity
transfers of $110,000, recognize [subtract] $30,000 deferred gross profit from
2021, and defer [add] $40,000 intra-entity gross profit into 2022)
▪ Operating expenses = $234,000 (add the two book values)
▪ Dividend income = -0- (eliminated for consolidation purposes)
▪ Consolidated net income = $216,000 (Revenues less expenses)
▪ Net income attributable to noncontrolling interest = $18,000 (20 percent of
reported Income of $100,000 plus $30,000 gross profit deferred from 2021
less $40,000 gross profit deferred into 2022)
▪ Net income attributable to Abajo Company = $198,000
b. On separate returns, the intra-entity gross profits in inventories are reported as

taxable income. Because Arriba owns 80 percent of Abajo's stock, the dividends
are tax-free and no deferred tax liability is necessary on the undistributed
income.
DUE TO GOVERNMENT: (separate returns)

ARRIBA:
Income (without dividend income) ............................... $126,000
Tax rate .......................................................................... 21%
Currently payable to government ........................... $ 26,460
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19. (continued)
ABAJO:
Reported income ............................................................ $100,000
Tax rate .......................................................................... 21%
Currently payable to government ........................... $ 21,000
Total income tax payable: Current = $47,460 ($26,460 + $21,000).

Taxable income is not reduced by the intra-entity gross profit. Therefore, the
gross profit is recognized for tax purposes but not for book purposes and this
temporary difference results in a deferred tax asset of $2,100 ($10,000 x 21%).
CONSOLIDATED INCOME TAX EXPENSE:
Income tax liability ($26,460 + $21,000) = $47,460 less deferred tax asset ($2,100)
= income tax expense $45,360.
Otherwise stated as: Arriba has a tax expense of $26,460 and Abajo has a tax
expense of $18,900 ($21,000 payable - $2,100 deferred tax asset). Income tax
expense on the consolidated income statement is $45,360.
20. (45 Minutes) (Computation of income tax expense and the related payable
balances)
a. $136,500 ($650,000 × 21%)

The affiliated group is taxed on its operating income of $650,000 ($500,000 –
$90,000 + $240,000; the net intra-entity gross profit is deferred on a
consolidated return). The intra-entity income and dividends are not relevant
because the entity files a consolidated return.
b. $136,500 ($650,000 × 21%)

The affiliated group is taxed on its operating income of $650,000 (the net intra-
entity gross profit is deferred on a consolidated return). The intra-entity
income and dividends are not relevant if a consolidated return is filed. The
percentage ownership does not affect the figures on a consolidated return.
c. $155,400 ($50,400 + $105,000)

Rowen would pay $50,400 or 21% of its $240,000 operating income. Martin
would pay $105,000 or 21% of its $500,000 operating income. The intra-entity
gross profit is not deferred when separate returns are filed. Intra-entity
dividends are not taxable because the parties qualify as an affiliated group even
though the affiliates file separate returns. Answer (c.) differs from (a.) and (b.)
because tax on the $90,000 intra-entity gross profit in inventory (21% or $18,900)
is paid immediately.
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20. (continued)
d. Martin’s operating income ............................................. $500,000

Dividends received net of 65% deduction
($80,000 x 70% x 35%) .................................................. 19,600
Taxable income ............................................................... $519,600
Tax rate .......................................................................... 21%
Martin’s income tax payable ..................................... $109,116
Martin’s deferred taxes: .................................................

Intra-entity gross profit in ending inventory ................ $90,000
Tax rate ............................................................................ 21%
Martin’s deferred tax asset........................................ $18,900
Rowen’ income before income tax ................................ $240,000

Less: income tax (21%) .................................................. 50,400
Rowen net income .......................................................... $189,600
Less: dividends paid ...................................................... 80,000
Undistributed income ..................................................... $109,600
Martin’s ownership percentage ..................................... 70%
Martin’s share of undistributed income ........................ $ 76,720
Less: dividends-received deduction (65%) .................. 49,868
Income eventually taxable to Martin ............................. $ 26,852
Tax rate ............................................................................ 21%
Martin’s deferred tax liability .................................... $ 5,639
Entry on Martin’s books:

Deferred Tax Asset 18,900
Income Tax Expense 95,855
Deferred Tax Liability 5,639
Tax Payable 109,116
Entry on Rowen’ books:

Income Tax Expense (21% x $240,000) 50,400
Tax Payable 50,400
Consolidated tax expense = $95,855 + $50,400 = $146,255
e. $109,116 (see part d. above) Martin owes $105,000 on its operating income
($500,000 × 21%) because the intra-entity gross profit in ending inventory cannot
be deferred. Martin also owes $4,116 from the dividends received ($56,000 × 35% ×
21%). The difference between Martin’s $109,116 payment and the $95,855 tax
expense in (d.) is created by the premature payment of the tax (a deferred tax
asset) on the intra-entity inventory gross profit ($90,000) less the deferred tax
liability on the parent's net equity accrual ($76,720) in excess of dividends received
($49,868).
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21. (20 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns.)
a. Consolidated Return—2021
Abbey income 2021 (sales less expenses) ........................................ $300,000

Benjamin income 2021 (sales less expenses) ................................... 100,000
2020 deferred intra-entity gross profit ................................................ 120,000
2021 deferred intra-entity gross profit ................................................ (150,000)
Taxable income ............................................................................... $370,000
Tax rate ................................................................................................ 21%
Income tax payable ......................................................................... $ 77,700
Because no temporary differences exist in this problem, the income tax expense
would also be $77,700. The intra-entity gross profit is not taxed until the goods
are sold to an outside customer or consumed within the consolidated group.
Dividend income is not important because the group files a consolidated return.
b. Separate Returns—2021
On its separate tax return, Abbey will report taxable income of $300,000—the
intra-entity inventory gross profits cannot be deferred. The dividends would not
be taxable because Benjamin still meets the criteria to be a member of an
affiliated group. A consolidated return is not a requirement for these dividends
to be excluded. Thus, income taxes payable by Abbey would be $63,000
($300,000 × 21%).
To determine the income tax expense for Abbey, the two temporary differences
must be taken into account:
Taxable income .............................................................. $300,000

Intra-entity gross profit taxed in 2020
although recognized in 2021 ................................... 120,000
Intra-entity gross profit in inventory taxed in 2021 ...... (150,000)
2021 net income subject to taxation ............................ $270,000
Tax rate ........................................................................... 21%
Income tax expense ....................................................... $ 56,700
The $6,300 difference between the expense and the payable is the tax effect on
the net intra-entity gross profit ($30,000 × 21%).
Benjamin will have an expense and payable of $21,000 ($100,000 × 21%).
Consolidated income tax expense is $77,700 ($56,700 + $21,000).
Consolidated income tax payable is $84,000 ($63,000 + $21,000).
7-15
Education.
Doupnik, 14e
22. (45 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns. Includes question on mutual ownership and the
conventional approach.)
a. Total income tax expense is $84,056. Because of the level of ownership,

separate returns must be filed. Intra-entity gross profits are taxed immediately
as are intra-entity dividends. Because the intra-entity inventory gross profits are
deferred on the consolidated financial statements, Boxwood's expense would
be $18,060 or 21% of $86,000 in net income ($100,000 + $18,000 – $32,000).
Lake's income subject to taxation includes its $300,000 in operating income

plus $40,764 in income accruing from its investment in Boxwood (60% of the
after-tax income of $67,940 [$86,000 – $18,060]). Income tax expense for Lake is
computed as follows:
Operating income .......................................................... $300,000

Equity income ................................................................ $40,764
Taxable portion .............................................................. 35% 14,267
Income eventually subject to taxation ......................... $314,267
Tax rate ............................................................................ 21%
Income tax expense Lake (rounded) ............................. $ 65,996
Income tax expense Boxwood (above) ......................... 18,060
Total income tax expense ............................................. $ 84,056
-OR-
Lake’s operating income ................................................ $300,000
Dividends received net of 65% deduction
($10,000 x 60% x 35%) .................................................. 2,100
Taxable income ............................................................... $302,100
Tax rate 21%
Lake’s income tax payable ........................................ $63,441
Boxwood’s income before income tax .......................... $ 86,000
Less: income tax (21%) .................................................. (18,060)
Boxwood’s net income ................................................... $ 67,940
Less: dividends paid ...................................................... (10,000)
Undistributed income ..................................................... $ 57,940
Lake’s ownership percentage ........................................ 60%
Lake’s share of undistributed income .......................... $ 34,764
Less: dividends-received deduction (65%) .................. (22,597)
Income eventually taxable to Lake ................................ $ 12,167
Tax rate ............................................................................ 21%
Lake’s deferred tax liability (rounded) ..................... $ 2,555
Income tax expense Lake ......................................... $ 65,996
Income tax expense Boxwood (above) .................... 18,060
Total income tax expense ............................................. $ 84,056
7-16
Education.
Doupnik, 14e
22. (continued)
Entry on Lake’s books:

Deferred Tax Liability 2,555
Tax Payable 63,441
Entry on Boxwood’s books:

Deferred Tax Asset 2,940
Tax Payable 21,000
b. Boxwood will pay $21,000 ($100,000 × 21%) because separate returns are filed.
Lake, however, will pay its taxes based on dividends received rather than on the
equity accrual. A deferred income tax liability would be established for the
difference. Lake's payment for the current year is computed as follows:
Operating income ........................................................... $300,000

Dividend income (60% × $10,000) ................................. $6,000
Taxable portion (net of 65% dividends received deduction) 35% 2,100
Income currently taxable ............................................... $302,100
Tax rate .......................................................................... 21%
Income tax payable—Lake ............................................ $ 63,441
Income tax payable—Boxwood (above) ...................... 21,000
Total income tax payable .............................................. $ 84,441
The $385 difference ($84,441 – $84,056) between the expenses in a. and the
payable in b. is created by the following two effects:
Deferred income tax liability on equity income accrual not yet taxed
($67,940 – $10,000) x 60% = $34,764 × 35% × 21%) ................... $2,555
Deferred income tax asset on net intra-entity gross profit
($32,000 – $18,000 = $14,000 × 21%) ........................................... 2,940
Net decrease in expense ................................................................... $ 385
c. Because a consolidated tax return is filed, intra-entity gross profits in ending

inventory are deferred as for external reporting purposes. Dividend income is
not taxable.
Lake's operating income ....................................................... $300,000

Boxwood's operating income ............................................... 100,000
Prior year intra-entity gross profit in ending inventory ....... 18,000
Current year intra-entity gross profit in ending inventory .. (32,000)
Income subject to taxation (and currently taxable) ............. $386,000
Tax rate ................................................................................... 21%
Income tax expense ............................................................... $ 81,060
7-17
Education.
Doupnik, 14e
23. (30 Minutes) (Computation of income tax expense and income tax payable on
consolidated and separate tax returns.)
a. Operating income .......................................................... $450,000

Tax rate .......................................................................... 21%
Taxes to be paid ............................................................. $ 94,500
The affiliated group would be taxed on its operating income of $450,000 (the
$50,000 intra-entity gain is deferred). Intra-entity income and dividends are not
relevant because a consolidated return is filed.
b. Total taxes to be paid are $105,000. Robertson would have to pay $42,000 or
21% of its $200,000 operating income. Garrison would pay $63,000 or 21% of its
$300,000 operating income. The intra-entity gain is not deferred because
separate returns are filed. Intra-entity dividends are not taxable because the
parties still qualify as an affiliated group even though separate returns are filed.
c. Robertson must report an income tax expense of $42,000 or 21% of its $200,000
operating income.
Garrison records its expense based on the revenue recognized during the
period. Thus, the expense is computed on an operating income of $250,000 (the
net intra-entity gain is not recognized in this period) along with equity income
from Robertson of $110,600 (70% of that company's $158,000 after-tax income).
Garrison will record an income tax expense of $52,500 in connection with the
operating income ($250,000 × 21%) and $8,129 resulting from its equity income
($110,600 × 35% × 21%). Total expense to be reported amounts to $102,629 for
Garrison and Robertson ($42,000 + $52,500 + $8,129).
d. Garrison will pay $63,000 in connection with its operating income ($300,000 ×
21%) and $2,205 because of the dividends received from Robertson. Garrison
will receive $30,000 in dividends based on its 60% ownership. Of this total, only
$10,500 (35%) is taxable. Thus, at a 21% rate, the tax on the dividends would
amount to $2,205 ($10,500 × 21%). The total income taxes payable by Garrison is
$65,205 ($63,000 + $2,205).
7-18
Education.
Doupnik, 14e
24. (10 Minutes) (Impact on goodwill of assets with a different tax vs. book value.)
a. The assets and liabilities of Oxford (the subsidiary) will be consolidated at

their individual net fair values ($658,000). However, both the buildings and
equipment have a tax basis that is lower than fair value. Thus, for tax
purposes, future depreciation expense will be lower on the tax return so that
taxable income will exceed book income. The higher taxable income
(anticipated in the future) creates a deferred tax liability at the time the
combination is created.
Tax Fair Temporary

Basis Value Difference
Buildings ................................... $221,000 $276,000 $ 55,000
Equipment ................................. 160,000 233,000 73,000
Total temporary difference ...... $128,000
Tax rate ...................................... 21%
Deferred tax liability ................. $ 26,880
b. Consequently, Oxford's accounts will be consolidated as follows:

(parentheses indicate a credit balance)
Accounts receivable ................................................. $153,000

Inventory ................................................................... 141,000
Land ........................................................................... 136,000
Buildings ................................................................... 276,000
Equipment .................................................................. 233,000
Liabilities .................................................................... (281,000)
Deferred tax liability ................................................. (26,880)
Assigned to specific accounts ................................ 631,120
Acquisition consideration ........................................ 850,000
c. Excess assigned to goodwill ................................... $218,880
7-19
Education.
Doupnik, 14e
25. (55 Minutes) (Consolidation worksheet for a father-son-grandson combination.

Includes intra-entity inventory transfers.)
The following computations are needed before the consolidation worksheet is

prepared: calculation of the deferred gross profits in beginning and ending
inventory.
Beginning Intra-entity Gross Profit (Wilson)

(January 1, 2021 Inventory Transfer Price (goods remaining) =
Balance) Cost + .25 Cost
$60,000 = 1.25 Cost
$48,000 = Cost
$12,000 is intra-entity gross profit
Ending Intra-entity Gross Profit (Wilson)
(December 31, 2021 Inventory Transfer Price (goods remaining) =
Balance) Cost + .25 Cost
$90,000 = 1.25 Cost
$72,000 = Cost
$18,000 is intra-entity gross profit
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/21 (Wilson) ......................... 12,000
Cost of Goods Sold .............................................. 12,000
(To recognize income on intra-entity inventory transfers made in previous
year but not resold until current year as per above computation.)
Entry *C
Retained Earnings, 1/1/21 (House) ............................... 11,200
Investment in Wilson .......................................... 11,200
(To convert investment account from partial equity method to equity method.
Intra-entity gross profit shown in Entry *G is not properly reflected by parent
under partial equity method [12,000 × 70% = $8,400 income decrease] nor would
be the $2,800 in amortization expense for 2019–2020. Thus, a reduction of
$11,200 is required. Because Cuddy is a current year acquisition, no prior
conversion to equity method is required for the investment.)
Entry S1
Common Stock (Cuddy) ................................................ 150,000
Retained Earnings, 1/1/21 (Cuddy) ............................... 150,000
Investment in Cuddy (80%) ....................................... 240,000
Noncontrolling Interest in Cuddy Common Stock (20%) 60,000
(To eliminate Cuddy's stockholders' equity against the corresponding
investment balance and to recognize noncontrolling interest in common stock.)
7-20
Education.
Doupnik, 14e
25. (continued)
Entry S2
Common Stock (Wilson) ............................................... 310,000
Retained Earnings, 1/1/21 (Wilson)
(adjusted by Entry *G) .............................................. 578,000
Investment in Wilson (70%) ................................ 621,600
Noncontrolling Interest in Wilson (30%) ........... 266,400
(To eliminate Wilson's stockholders' equity against corresponding investment
balance and to recognize noncontrolling interest.)
Entry A
Buildings ......................................................................... 54,000
Franchise Contracts ...................................................... 32,000
Goodwill ........................................................................... 140,000
Equipment ................................................................. 10,000
Investment in Wilson ................................................ 151,200
Noncontrolling Interest in Wilson ............................ 64,800
(To allocate excess payment made in connection with purchase of Wilson
shown above. Amortization for 2019 and 2020 has been taken into account in
determining the January 1, 2021 value for each account.)
Entry I1
Income of Cuddy ...................................................... 56,000
Investment in Cuddy ........................................... 56,000
(To eliminate intra-entity income accrued by both House and Wilson during
the year.)
Entry I2
Income of Wilson ...................................................... 91,000
Investment in Wilson .......................................... 91,000
(To eliminate intra-entity income accrued by House during the year.)
Entry D1
Investment in Cuddy ............................................... 40,000
Dividends declared (80%) (Cuddy) .................... 40,000
(To eliminate effects of intra-entity dividend payments.)
Entry D2
Investment in Wilson ............................................... 67,200
Dividends declared (70%) (Wilson) .................... 67,200
(To eliminate effects of intra-entity dividend payments.)
7-21
Education.
Doupnik, 14e
25. (continued)
Entry E
Operating Expenses ................................................. 2,000
Equipment ............................................................... 5,000
Franchise Contracts ........................................... 4,000
Buildings ............................................................... 3,000
(To record 2021 amortization of excess payment made in connection with
acquisition of Wilson Company.)
Entry TI
Sales and Other Revenues ...................................... 200,000
(To eliminate intra-entity inventory sales for the current year.)
Entry G
Cost of Goods Sold ................................................... 18,000
Inventory ............................................................... 18,000
(To defer intra-entity gross profit in ending inventory.)
Noncontrolling Interest in Net Income of Cuddy:
Reported net income $70,000

Noncontrolling interest in Cuddy net income ............................ $14,000
Noncontrolling Interest in Net Income of Wilson:
Reported operating income $130,000

Equity income of Cuddy ($70,000 × 40%) ................................... 28,000
Excess amortization ..................................................................... (2,000)
Recognition of 2020 gross profit (Entry *G) 12,000
Deferral of 2021 intra-entity gross profit (Entry G) (18,000)
Accrual-based net income $150,000
Noncontrolling interest in net income of Wilson $ 45,000
7-22
Education.
Chapter 07 - Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer, Doupnik, 14e
25. (continued)
HOUSE CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidation Worksheet
December 31, 2021
Accounts House Wilson Cuddy Consolidation EntriesNoncontrollingConsolidated

Corp. Company Company Debit Credit Interest Balance
Sales and other revenue (900,000) (700,000) (300,000) (TI) 200,000 (1,700,000)
Cost of goods sold 551,000 300,000 140,000 (G) 18,000 (*G) 12,000 797,000
(TI) 200,000
Operating expenses 219,000 270,000 90,000 (E) 2,000 581,000
Income of Wilson Company (91,000) (I2) 91,000 -0-
Income of Cuddy Company (28,000) (28,000) (I1) 56,000 -0-
Net income (249,000) (158,000) (70,000)
Consolidated net income (322,000)
Net income attributable to
noncontrolling interest (Wilson) (45,000) 45,000
Net income attributable to
noncontrolling interest (Cuddy) (14,000) 14,000
Net income attributable to House Corporation (263,000)
Retained earnings, 1/1/21:
—House Corporation (820,000) (*C) 11,200 (808,800)
—Wilson Company (590,000) (*G) 12,000 -0-
(S2)578,000
—Cuddy Company (150,000) (S1)150,000 -0-
Net Income (249,000) (158,000) (70,000) (263,000)
Dividends declared
—House Corporation 100,000 100,000
—Wilson Company 96,000 (D2) 67,200 28,800 -0-
—Cuddy Company 50,000 (D1) 40,000 10,000 -0-
Retained earnings, 12/31/21 (969,000) (652,000) (170,000) (971,800)
7-23
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
25. (continued)
Accounts House Wilson Cuddy Consolidation EntriesNoncontrollingConsolidated

Corp. Company Company Debit Credit Interest Balance
Cash and receivables 220,000 334,000 67,000 621,000
Inventory 390,200 320,000 103,000 (G) 18,000 795,200
Investment in Wilson Company 807,800 (D2) 67,200 (*C) 11,200 -0-
(S2) 621,600
(I2) 91,000
(A) 151,200
Investment in Cuddy Company 128,000 128,000 (D1) 40,000 (S1) 240,000 -0-
(I1) 56,000
Buildings 385,000 320,000 144,000 (A) 54,000 (E) 3,000 900,000
Equipment 310,000 130,000 88,000 (E) 5,000 (A) 10,000 523,000
Land 180,000 300,000 16,000 496,000
Goodwill (A) 140,000 140,000
Franchise Contracts (A) 32,000 (E) 4,000 28,000
Total assets 2,421,000 1,532,000 418,000 3,503,200
Liabilities (632,000) (570,000) (98,000) (1,300,000)

Noncontrolling interest in Cuddy (S1) 60,000 (60,000)
Noncontrolling interest in Wilson (S2) 266,400
Noncontrolling interest in (A) 64,800 (331,200)
subsidiary companies (411,400) (411,400)
Common stock (820,000) (310,000) (150,000) (S1) 150,000 (820,000)
(S2) 310,000
Retained earnings (above) (969,000) (652,000) (170,000) (971,800)
Total liabilities and equities (2,421,000) (1,532,000) (418,000) 1,916,400 1,916,400 (3,503,200)
Parentheses indicate a credit balance.
7-24
Doupnik, 14e
26. (20 Minutes) (Consolidation entries for a mutual holding business combination)
a. Acquisition Allocation and Amortization

Consideration transferred ............................................ $420,000
Lowly’s business fair value ........................................... 700,000
Book value acquired ....................................................... (600,000)
Trademarks ..................................................................... $100,000
Annual amortization (20-year life) ................................. $ 5,000
Entry *C
Investment in Lowly ................................................. 117,000
Retained Earnings, 1/1/21 (Mighty) .................... 117,000
(To accrue income to parent during the previous years as measured by
increase in book value [$200,000 × 60%] and amortization expense of $3,000
[$5,000 × 60%] for the previous year.)
Entry S1
Common Stock (Lowly) ............................................ 300,000
Retained Earnings, 1/1/21 (Lowly) ........................... 500,000
Investment in Lowly (60%) ................................. 480,000
Noncontrolling Interest in Lowly 1/1/21 (40%) .. 320,000
(To eliminate subsidiary stockholders' equity accounts against investment
account and to recognize noncontrolling interest ownership.)
Entry S2
Treasury Stock .......................................................... 240,000
Investment in Mighty ........................................... 240,000
(To reclassify cost of parent shares as treasury stock.)
Entry A
Trademarks ............................................................... 95,000
Investment in Lowly ............................................ 57,000
Noncontrolling Interest in Lowly 1/1/21 (40%) .. 38,000
(To recognize unamortized portion of acquisition-date excess fair value.)
Entry E
Amortization Expense .............................................. 5,000
Trademarks .......................................................... 5,000
(To record trademarks amortization expense for 2021.)
Net income attributable to noncontrolling interest = $14,000

[40% × ($40,000 - $5,000)]
7-25
Education.
Doupnik, 14e
27. (80 Minutes) (Prepare consolidation worksheet for a father-son-grandson

combination. Also asks about income taxes paid on both a separate and a
consolidated return)
a. Acquisition-Date Allocation and Amortization

The January 1, 2020 book values are determined by removing the 2020 income
from the January 1, 2021 book values (based on equity accounts).
Consideration transferred for Stookey ......................... $344,000

Stookey business fair value .......................................... $430,000
Stookey book value ....................................................... (380,000)
Copyright ......................................................................... $ 50,000
Life .................................................................................. 10 Years
Consideration transferred for Yarrow ........................... $720,000

Yarrow business fair value ........................................... $800,000
Yarrow book value .......................................................... 740,000
Customer List ................................................................. $ 60,000
Life .................................................................................. 15 Years
Entry *G
Retained Earnings, 1/1/21 (Stookey) ....................... 7,680
(To give effect to intra-entity gross profit deferral from 2020. Amount is
calculated based on normal 48% markup [found from Income Statement]
multiplied by $16,000 retained inventory [20% of $80,000])
Entry *C1
Investment in Stookey ............................................. 85,856
Retained Earnings, 1/1/21 (Yarrow) ................... 85,856
(To recognize equity income accruing from Yarrow's investment in Stookey
during 2020. Because the initial value method is applied and no dividends
declared, no income has been recognized in connection with the 2020
ownership of Stookey. Reported income of $120,000 [2020] less intra-entity
gross profit of $7,680 deferred above indicates income of $112,320. Based on
80% ownership, an $89,856 accrual is needed, which is reduced by the
$4,000 amortization (80% × $5,000) for that year.
7-26
Education.
Doupnik, 14e
27. (continued)
Entry *C2
Investment in Yarrow ............................................... 217,670
Retained Earnings, 1/1/21 (Travers) .................. 217,670
(To recognize equity income accruing from Travers' investment in Yarrow
during 2020. Because the initial method is applied and no dividends
declared, income has not been recognized in connection with the 2020
ownership of Yarrow. Income of $245,856 is calculated based on reported
income of $160,000 [2020] plus the $85,856 accrual recognized in Entry *C1.
Ownership of 90% dictates a $221,270 accrual that is then reduced to
$217,670 by the $3,600 [90% × $4,000] amortization applicable to 2020.)
Entry S1
Common Stock (Stookey) ........................................ 200,000
Retained Earnings, 1/1/21 (Stookey, as adjusted
by Entry *G) ......................................................... 292,320
Investment in Stookey (80%) ........................ 393,856
Noncontrolling Interest in Stookey (20%) .... 98,464
(To eliminate stockholders' equity accounts of subsidiary [Stookey] against
corresponding balance in investment account and to recognize
noncontrolling interest ownership.)
Entry S2
Common Stock (Yarrow) .......................................... 300,000
Retained Earnings, 1/1/21 (Yarrow, as adjusted
by Entry *C1) ........................................................ 685,856
Investment in Yarrow (90%) .......................... 887,270
Noncontrolling Interest in Yarrow (10%) ...... 98,586
(To eliminate stockholders’ equity accounts of subsidiary Yarrow against
corresponding balance in investment account and to recognize
noncontrolling interest ownership.)
Entry A1
Copyright.................................................................... 45,000
Investment in Stookey ........................................ 36,000
Noncontrolling Interest in Stookey (20%) ......... 9,000
(To recognize January 1, 2021 unamortized portion of acquisition price

assigned to Stookey’s copyright.)
7-27
Education.
Doupnik, 14e
27. (continued)
Entry A2
Customer List ............................................................ 56,000
Investment in Yarrow . ......................................... 50,400
Noncontrolling Interest in Yarrow ...................... 5,600
(To recognize January 1, 2021 unamortized portion of acquisition price
assigned to customer list.)
Entry E
Copyright .............................................................. 5,000
Customer List ....................................................... 4,000
(To recognize amortization expense for 2021—$5,000 in connection with
Yarrow's investment and $4,000 in connection with Travers’ investment.)
Entry Tl
Sales .......................................................................... 100,000
(To eliminate intra-entity inventory transfers made during 2021.)
Entry G
Inventory (current assets) .................................. 9,600
(To defer intra-entity gross profit on ending inventory—$20,000 × 48%
markup.)
Noncontrolling Interest in Stookey's Net Income

2021 Reported net income ............................................ $100,000
Copyright amortization .................................................. (5,000)
Recognition of 2020 deferred gross profit (*G) ........... 7,680
Deferral of 2021 intra-entity gross profit (G) ................ (9,600)
Accrual-based net income 2021 ................................... $93,080
Outside ownership ......................................................... 20%
Noncontrolling interest in Stookey's net income ........ $18,616
Noncontrolling Interest in Yarrow's Net Income

2021 Reported net income ............................................ $200,000
Customer list amortization ............................................ (4,000)
Accrual of Stookey's income (80% of $93,080
net income [computed above]) ................................ 74,464
Accrual-based net income—2021 ................................. $270,464
Noncontrolling interest in Yarrow's net income .......... $ 27,046
7-28
Education.
27. (continued) TRAVERS COMPANY AND CONSOLIDATED SUBSIDIARIES

Consolidation Worksheet
December 31, 2021
Travers Yarrow Stookey Consolidation EntriesNoncontrollingConsolidated
Accounts Company Company Company Debit Credit Interest Balances
Sales and other revenues (900,000) (600,000) (500,000) (Tl) 100,000 (1,900,000)
Cost of goods sold 480,000 320,000 260,000 (G) 9,600 (*G) 7,680 961,920
(TI) 100,000
Operating expenses 100,000 80,000 140,000 (E) 9,000 329,000
Separate company net income (320,000) (200,000) (100,000)
Consolidated net income (609,080)
Net income attributable to NCI (Yarrow) (27,046) 27,046
Net income attributable to NCI (Stookey) (18,616) 18,616
Net income attributable to Travers Company (563,418)
Retained earnings, 1/1/21:
Travers Company (700,000) (*C2) 217,670 (917,670)
Yarrow Company (600,000) (S2) 685,856 (*C1) 85,856 -0-
Stookey Company (300,000) (*G) 7,680 -0-
(S1) 292,320
Net Income (above) (320,000) (200,000) (100,000) (563,418)
Dividends declared 128,000 128,000
Retained earnings, 12/31/21 (892,000) (800,000) (400,000) (1,353,088)
Current assets 444,000 380,000 280,000 (G) 9,600 1,094,400

Investment in Yarrow Company 720,000 (*C2) 217,670 (S2) 887,270 -0-
(A2) 50,400
Investment in Stookey Company 344,000 (*C1) 85,856 (S1) 393,856 -0-
(A1) 36,000
Land, buildings, & equipment (net) 949,000 836,000 520,000 2,305,000
Copyright (A1) 45,000 (E) 5,000 40,000
Customer list (A2) 56,000 (E) 4,000 52,000
Total assets 2,113,000 1,560,000 800,000 3,491,400
Liabilities (721,000) (460,000) (200,000) (1,381,000)

Common stock (500,000) (300,000) (200,000) (S1) 200,000
(S2) 300,000 (500,000)
Retained earnings, 12/31/21 (above) (892,000) (800,000) (400,000) (S1) 98,464 (1,353,088)
NCI interest in Stookey, 1/1/21 (A1) 9,000 (107,464)
(S2) 98,586
Noncontrolling interest in Yarrow, 1/1/21 (A2) 5,600 (104,186)
Noncontrolling interests in subsidiaries (257,312) (257,312)
Total liabilities and equities (2,113,000) (1,560,000) (800,000) 2,008,982 2,008,982 (3,491,400)
7-29
Doupnik, 14e
27. (continued)
b. Travers' reported pre-tax income ....................................................... $320,000

Yarrow's reported pre-tax income ...................................................... 200,000
Dividend income (none collected) ...................................................... -0-
Intra-entity gains (no transfers) .......................................................... -0-
Amortization expense .......................................................................... (9,000)
Taxable income .................................................................................... $511,000
Tax rate ................................................................................................. 21%
Income tax payable .............................................................................. $107,310
c. Stookey's reported pre-tax income .................................................... $100,000

(Intra-entity gross profits in ending inventory
are not deferred on a separate tax return.)
Tax rate ................................................................................................. 21%
Income tax payable .............................................................................. $21,000
d. (1) Because Yarrow owns 80% of Stookey's stock, intra-entity dividends are
nontaxable. Thus, no temporary difference is created by Stookey's failure to
pay a dividend.
(2) Stookey's intra-entity gross profits in ending inventory are recognized in one
time period for financial reporting purposes and in a different time period for
tax purposes. This temporary increases taxable income by $1,920 over
reported income:
2021 Intra-entity gross profit taxed in 2021 ........................................ $9,600

2020 Intra-entity gross profit taxed previously in 2020 ..................... (7,680)
Increase in taxable income ................................................................. $1,920
Tax rate ................................................................................................. 21%
Deferred income tax asset .................................................................. $ 403
Income Tax Expense:

Travers and Yarrow—payable (part b) .......................................... $107,310
Stookey—payable (part c) .............................................................. 21,000
Total taxes to be paid—2021 .......................................................... $128,310
Prepayment (asset) (above) ........................................................... (403)
Income tax expense 2021................................................................ $127,907
Because a single 21% tax rate is used, income tax expense can also be
computed by multiplying consolidated net income (prior to noncontrolling
interest reduction) of $609,080 (part a.) by the 21% tax rate to obtain $127,907.
Income tax expense ........................................................ 127,907

Deferred tax asset ........................................................... 403
Income tax payable .................................................. 128,310
7-30
Education.
Doupnik, 14e
28. (40 Minutes) (Series of questions about a business combination and its income
tax reporting)
a. Equity method. "Income of Syber" is 80% of Syber's reported total, adjusted for
excess acquisition-date fair value amortization and intra-entity profit
adjustments. Also, Parson’s recognition of “Income of Syber” equals its share
of consolidated net income and Parson’s retained earnings equal consolidated
retained earnings.
b. $12,000. Reduction is evidenced by a $338,000 figure reported for consolidated

inventory rather than the $350,000 total for the two companies.
c. $37,500. Consolidated operating expenses have increased by $2,500, evidently

the annual amortization. Because a 15-year life is assumed by the combination,
the amount originally allocated to trademarks must have been $37,500.
d. $120,000. Decrease shown in consolidated sales account.
e. Upstream. “Net income attributable to the noncontrolling interest" is $18,700.

Because this amount is not equal to 20% of Syber's reported net income less
excess amortization ($100,000 – $2,500), accrual-based net income must have
been adjusted for intra-entity gross profits in inventories. Subsidiary net income
is only adjusted to show the effects of upstream transfers.
f. $20,000. For both receivables and liabilities, the consolidated total is $20,000
less than the sum of the two companies.
g. $8,000. Consolidated cost of goods sold is decreased by $120,000 (to $780,000)

in eliminating intra-entity sales. The increase of $12,000 created by the ending
intra-entity gross profit (see part b.) would then leave a $792,000 balance.
Because $784,000 is the ending balance reported for consolidated cost of goods
sold, an $8,000 intra-entity gross profit must have been deferred from the
previous year.
7-31
Education.
Doupnik, 14e
28. (continued)
h. This figure is computed as follows:

Book value of subsidiary—1/1 ...................................... $370,000
Intra-entity gross profit in beg. inventory (see above) . (8,000)
Adjusted book value .................................................... $362,000
Excess allocation at 1/1.................................................. 35,000
Subsidiary valuation basis 1/1 ...................................... 397,000
Noncontrolling interest percentage .............................. 20%
Noncontrolling interest 1/1 ........................................... $79,400
Noncontrolling interest in Syber's income
(as reported) .............................................................. 18,700
Noncontrolling interest in Syber's dividends
($30,000 × 20%) ......................................................... (6,000)
Ending noncontrolling interest ..................................... $92,100
i. For a consolidated return, intra-entity gross profits in ending inventory are

deferred as in the consolidated statements. At a 21% rate, both the expense and
payable would be $61,635.
Income tax expense ....................................................... 61,635

Income tax payable .................................................. 61,635
Consolidated Taxable Income:

Sales .............................................................................................. $1,280,000
Cost of goods sold ........................................................................ (784,000)
Operating expenses ..................................................................... (202,500)
Taxable income ....................................................................... $ 293,500
j. On a separate return, Parson would report its operating income of $200,000

leading to a tax expense and payable of $42,000. Because of the level of
ownership, intra-entity dividend (or investment) income is omitted.
Income Tax Expense ..................................................... 42,000

Income Tax Payable ................................................. 42,000
7-32
Education.
Doupnik, 14e
28. k. (continued)
On a separate return, Syber would report $100,000 operating income for a

payable of $21,000. The intra-entity gross profits in inventory are accounted for
in different time periods in the financial statements, thus, a temporary difference
is created. The beginning inventory gross profit of $8,000 was taxed in the
previous year rather than currently. The current intra-entity inventory gross
profit of $12,000 is taxed now rather than next year; the tax paid this year on the
net $4,000 ($840) is a prepayment.
Income Tax Expense ..................................................... 20,160

Deferred Income Tax Asset ............................................ 840
Income Tax Payable ................................................. 21,000
Syber's entry can also be computed as follows:

Reported income ............................................................................... $100,000
Intra-entity gross profit from previous year recognized currently 8,000
Deferral of current intra-entity gross profit in inventory ................ (12,000)
Accrual-based net income ................................................................ $96,000
Tax rate ..................................................................................... 21%
Income tax expense .......................................................................... $20,160
Taxes payable..................................................................................... 21,000
Deferred tax asset ................................................................................ $ 840
29. (45 Minutes) Develop worksheet entries that were used to consolidate the
financial statements of a father-son-grandson combination.
Entry *G
Retained Earnings, 1/1/21 (Delta) ............................ 15,000
(To recognize intra-entity gross profit in inventory in 2020 [amount
provided].)
Entry *C1
Retained Earnings, 1/1/21 (Delta) ............................ 7,000
Investment in Omega Company ......................... 7,000
(To recognize amortization expense from Delta’s acquisition for 2020.)
7-33
Education.
Doupnik, 14e
29. (continued)
Entry *C2
Retained Earnings, 1/1/21 (Alpha) ........................... 27,600
Investment in Delta Company ............................ 27,600
To recognize accrual adjustments for excess amortization
and inventory deferral as follows:
Excess amortization from Delta acquisition
(80% × $6,250 × 2 years)........................................ $10,000
Deltas’ share of excess amortization from Omega acquisition
(80% × [70% × $10,000] × 1 year) .......................... 5,600
Inventory profit deferral at 1/1/21 (80% × $15,000) . 12,000
*C2 adjustment .......................................................... $27,600
Entry S1
Common Stock (Omega) .......................................... 100,000
Retained Earnings, 1/1/21 (Omega) ......................... 100,000
Investment in Omega (70%) ................................ 140,000
Noncontrolling Interest in Omega (30%) ........... 60,000
(To eliminate stockholders' equity accounts of Omega against parent's
Investment account and to recognize outside ownership.)
Entry S2
Common Stock (Delta) ............................................. 120,000
Retained Earnings, 1/1/21 (Delta, as adjusted) ...... 378,000
Investment in Delta (80%) ................................... 398,400
Noncontrolling Interest in Delta (20%) .............. 99,600
(To eliminate stockholders' equity accounts of Delta [as adjusted as Entry *G
and Entry *C1] against corresponding balance in Investment account and to
recognize outside ownership.)
Entry A
Copyrights ................................................................. 222,500
Investment in Delta ............................................. 90,000
Investment in Omega .......................................... 77,000
Noncontrolling Interest in Delta .......................... 22,500
Noncontrolling Interest in Omega ...................... 33,000
(To recognize January 1, 2021 unamortized copyrights, 2 years amortization
recorded on first investment but only one year for second.)
Entry I1
Income of Subsidiary ............................................... 144,000
Investment in Delta ............................................. 144,000
(To eliminate intra-entity income accrual found on Alpha's records.)
7-34
Education.
Doupnik, 14e
29. (continued)
Entry I2
Income of Subsidiary ............................................... 49,000
Investment in Omega .......................................... 49,000
(To eliminate intra-entity income accrual found on Delta's records.)
Entry D1
Investment in Delta ................................................... 32,000
Dividends Declared (Delta) ................................. 32,000
(To eliminate intra-entity dividends.)
Entry D2
Investment in Omega ............................................... 35,000
Dividends Declared (Omega) ............................. 35,000
(To eliminate intra-entity dividends.)
Entry E
Copyrights ........................................................... 16,250
(Current year amortization, $6,250 on first acquisition and $10,000 on
second.)
Entry Tl
Sales .......................................................................... 200,000
(To eliminate intra-entity inventory transfer.)
Entry G
Inventory ............................................................... 22,000
(To defer ending intra-entity gross profit on intra-entity transfers.)
Noncontrolling Interest in Omega's Income:

Reported income ............................................................ $70,000
Excess fair value amortization ...................................... (10,000)
Accrual-based income.................................................... 60,000
Net income attributable to noncontrolling interest ..... $18,000
7-35
Education.
Doupnik, 14e
29. (continued)
Noncontrolling Interest in Delta's Net Income:

Reported operating income .......................................... $131,000
Equity income investment in Omega (70% × $60,000) 42,000
Amortization expense .................................................... (6,250)
2020 intra-entity inventory gross profit deferral .......... 15,000
2021 intra-entity inventory gross profit deferral ......... (22,000)
Accrual-based income—Delta (2021) ........................... $159,750
Net income attributable to noncontrolling interest ...... $ 31,950
Noncontrolling interest in Delta Company ...................

Noncontrolling interest, 1/01/21 (Entry S2) ............. $99,600
Noncontrolling interest, 1/01/21 (Entry A) ............... 22,500
Noncontrolling interest in Delta’s income (above) . 31,950
Dividends declared to noncontrolling interest
($40,000 × 20%) ....................................................... (8,000)
Noncontrolling interest in Delta, 12/31/21 .......... $146,050
Noncontrolling interest in Omega Company ................

Noncontrolling interest, 1/01/21 (Entry S1) ............. $60,000
Noncontrolling interest in Omega’s income (above) 18,000
Noncontrolling interest, 1/01/21 (Entry A) ............... 33,000
Dividends declared to NCI ($50,000 × 30%)............. (15,000)
Noncontrolling interest in Omega, 12/31/21....... $96,000
7-36
Education.
Doupnik, 14e
Chapter 7 Excel Case Solution
Operating Dividends Excess

income declared amortizations
Highpoint $425,000 $200,000
Middlebury $340,000 $150,000 $20,000
Lowton $250,000 $ 75,000 $25,000
Ownership percentages
Highpoint-->Middlebury 95%
Middlebury-->Lowton 80%
Middlebury's share of Lowton net income:

Lowton operating income $250,000
Accrual based income $225,000
Middlebury ownership percentage 80%
Equity income from Lowton $180,000
Highpoint's share of Middlebury income:

Middlebury operating income $340,000
Equity income from Lowton 180,000
Middlebury accrual-based net income $500,000
Highpoint ownership percentage 95%
Highpoint's share of reported net income $475,000
Controlling interest in net income

Highpoint's operating income $425,000
Equity earnings in Middlebury and Lowton 475,000
Highpoint’s net income $900,000
Comparison
Consolidated net income (operating incomes less
amortizations) $970,000
Net income attributable to noncontrolling interests
(20% × $225,000 plus 5% × $500,000) 70,000
Net income attributable to Highpoint Company $900,000
Difference between Highpoint’s net income and controlling interest in

consolidated net income = -0-
7-37
Education.
Solution Manual for Advanced Accounting, 14th Edition, Joe Ben Hoyle Thomas Schaefer Timothy
Doupnik, 14e
RESEARCH CASE: CONSOLIDATED TAX EXPENSE
At www.thecoca-colacompany.com the annual 10-K Note 14 provides detailed footnote

disclosures for consolidated income tax. The excerpt below shows a portion of the footnote
relating to deferred tax assets, liabilities, and carryforwards.
From Note 14: Income Taxes

The tax effects of temporary differences and carryforwards that give rise to deferred tax assets
and liabilities consist of the following (in millions):
December 31, 2018 2017
Deferred tax assets:
Property, plant and equipment $ 64 $ 99
Trademarks and other intangible assets 2,540 2 98
Equity method investments (including translation adjustment) 315 300
Derivative financial instruments 322 387
Other liabilities 791 861
Benefit plans 881 977
Net operating/capital loss carryforwards 318 520
Other 221 163
Gross deferred tax assets 5,452 3,405
Valuation allowances (399) (501)
Total deferred tax assets1 $ 5,053 $ 2,904
Deferred tax liabilities:
Property, plant and equipment $ (724) $ (819)
Trademarks and other intangible assets (951) (978)
Equity method investments (including translation adjustment) (1,707) (1,835)
Derivative financial instruments (162) (436)
Other liabilities (67) (50)
Benefit plans (255) (289)
Other (453) (688)
Total deferred tax liabilities $ (4,319) $ (5,095)
Net deferred tax liabilities $ (734) $ (2,191)
1
Noncurrent deferred tax assets of $2,667 million and $330 million were included in the line item Deferred
income tax assets in our consolidated balance sheets as of December 31, 2018 and 2017, respectively.
2
The increase was primarily the result of a $2.9 billion cumulative effect adjustment related to our adoption
of ASU 2016-16..
In October 2016, the FASB issued ASU 2016-16, which requires the Company to recognize the
income tax consequences of an intra-entity transfer of an asset other than inventory when the
transfer occurs. ASU 2016-16 was effective for the Company beginning January 1, 2018 and was
adopted using a modified retrospective basis. We recorded a $2.9 billion cumulative effect
adjustment to increase the opening balance of reinvested earnings with the majority of the offset
being recorded as a deferred tax asset. This amount is primarily related to trademarks and other
intangible assets and was recorded in the line item deferred income tax assets in our
consolidated balance sheet.
As of December 31, 2018 , we had net deferred tax assets of $2.0 billion and as of December 31,
2017, we had net deferred tax liabilities of $539 million located in countries outside the United
States.
As of December 31, 2018 , we had $ 2,906 million of loss carryforwards available to reduce future
taxable income. Loss carryforwards of $ 372 million must be utilized within the next five years,
and the remainder can be utilized over a period greater than five years.
7-38
Education.
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II. Indirect subsidiary control-connecting affiliation

III. Mutual ownership

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IV. Income tax accounting for a business combination—consolidated tax returns

V. Income tax accounting for a business combination—separate tax returns

Vll. Operating loss carryforwards

1. A father-son-grandson relationship is a specific type of ownership configuration often

3. Able—100% of income accrues to the consolidated entity (as parent company).

7. D Sapphire's accrual-based income:

Emerald's accrual-based income:

Diamond's accrual-based income:

8. C Stang's accrual-based income:

Belvista's accrual-based income:

Total net income attributable to noncontrolling interest =

9. A Stark's operating income................................................................ $78,000

10. B Equity income (75% of $425,000) .................................................. $318,750

11. C Intra-Entity Gross Profit:

Consideration transferred ....................................... $401,600

14. (30 Minutes) (Series of reporting and consolidation questions pertaining to a

Consideration transferred for Cedar (by Birch) .......... $104,000

Investment in Birch $288,000

b. Consolidated sales (total for the companies) $1,298,000

c. Noncontrolling interest in income of Cedar

Noncontrolling interest in income of Birch:

d. 2020 Adjusted net income of Birch (prior to accounting

2021 Adjusted net income of Birch (prior to accounting

a. Consideration transferred by Uncle ............................. $500,000

Net income reported by Nephew—2021 ........................ $50,000

b. To the outside owners, the $6,000 intra-entity dividends ($20,000 × 30%)

Nephew’s accrual-based income (above) $47,500

16. (35 Minutes) (Consolidated net income for a father-son-grandson combination.)

a. Boulder's operating income $245,000

b. Stone's operating income $150,000

INTRA-ENTITY GROSS PROFIT:

TOTAL NONCONTROLLING INTERESTS: $24,620 ($11,400 + $13,220)

18. (12 Minutes) (Acquisition accounting for a subsidiary’s operating loss

a. Consideration transferred 1/1/21 $1,120,000

b. Consideration transferred 1/1/21 $1,120,000

b. On separate returns, the intra-entity gross profits in inventories are reported as

DUE TO GOVERNMENT: (separate returns)

Total income tax payable: Current = $47,460 ($26,460 + $21,000).

CONSOLIDATED INCOME TAX EXPENSE:

a. $136,500 ($650,000 × 21%)

b. $136,500 ($650,000 × 21%)

c. $155,400 ($50,400 + $105,000)

d. Martin’s operating income ............................................. $500,000

Martin’s deferred taxes: .................................................

Rowen’ income before income tax ................................ $240,000

Entry on Martin’s books:

Entry on Rowen’ books:

Consolidated tax expense = $95,855 + $50,400 = $146,255

Abbey income 2021 (sales less expenses) ........................................ $300,000

Taxable income .............................................................. $300,000

Benjamin will have an expense and payable of $21,000 ($100,000 × 21%).

Consolidated income tax expense is $77,700 ($56,700 + $21,000).

Consolidated income tax payable is $84,000 ($63,000 + $21,000).

a. Total income tax expense is $84,056. Because of the level of ownership,

Lake's income subject to taxation includes its $300,000 in operating income

Operating income .......................................................... $300,000

Entry on Lake’s books: