To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 10 Test Bank SUBSIDIARY PREFERRED STOCK, COSOLIDATED EARNINGS PER SHARE, AND CONSOLIDATED INCOME TAXATION Multiple Choice Questions Use the following information for Questions and Parminter Corporation owns an 80% interest in the common stock of Sanchez Corporation and 20% of Sanchez’s preferred stock on December 31, 2005 Sanchez had 2005 net income of $30,000 Sanchez’s equity was as follows: 10% preferred stock $ 50,000 Common stock 350,000 LO1 How much should the Parminter’s Investment in Sanchez change during 2005? a b c d LO1 $ 5,000 $20,000 $25,000 $30,000 What should be the noncontrolling interest expense consolidated financial statements of Parminter? in the a $ 5,000 b $20,000 c $25,000 d $30,000 Use the following information for Questions 3, 4, and On January 1, 2005, Pardy Corporation acquired a 70% interest in the common stock of Salter Corporation for $7,000,000 when Salter’s stockholders’ equity was as follows: 10% cumulative, nonparticipating preferred stock, $100 par, with a $105 liquidation preference callable at $110 Common stock, $10 par value Additional paid-in capital Retained earnings Total stockholders’ equity $ 1,000,000 6,000,000 1,500,000 2,500,000 $11,000,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 10-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO1 There were no dividends in arrears on the date of the business combination The goodwill from Pardy’s investment in Salter on January 1, 2005 is a b c d LO1 Salter has a 2005 net Salter’s net loss is a b c d LO1 $ $ 35,000 $ 70,000 $105,000 loss of $200,000 Pardy’s share of $ 50,000 $ 70,000 $140,000 $210,000 If Salter’s net income is $220,000, what is Pardy’s share of Salter’s net income? a b c d $ 84,000 $119,000 $154,000 $189,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 10-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO1 Pamplin Corporation stockholders’ equity consisted of $1,000,000 of $10 par value Common Stock, $750,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings on January 1, 2005 On this date, Pamplin purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000 with all excess purchase cost assigned to goodwill The stockholders’ equity of Sage on this date consisted of $800,000 of $100 par value, 8% non-cumulative, preferred stock callable at $105, $900,000 of $10 par value common stock and $500,000 of Retained Earnings Sage’s net income for 2005 was $100,000 In a separate transaction on January 1, 2005, Pamplin purchased 70% of Sage’s preferred stock for $600,000 At the end of 2005, the amount of Pamplin’s income from Sage (excluding dividends from preferred stock) and the balance in its Additional Paid-in Capital account, respectively, are a b c d LO1 $62,400 $62,400 $32,400 $32,400 and and and and $710,000 $750,000 $710,000 $750,000 Pan Corporation has total stockholders’ equity of $5,000,000 consisting of $1,000,000 of $10 par value Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings Pan owns 80% of Sailor Corporation’s common stock purchased at book value Sailor has $900,000 of 10% cumulative preferred stock outstanding Pan acquired 60% of the preferred stock of Sailor for $500,000 After this transaction the balances in Pan’s Retained Earnings and Additional Paid-in Capital accounts, respectively, are a b c d $2,960,000 $3,000,000 $3,000,000 $3,040,000 and and and and $1,000,000 $960,000 $1,040,000 $1,000,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 10-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO1 If a company’s preferred stock is cumulative with a call provision and has dividends in arrears, the amount of total preferred stockholders’ equity would be calculated as the number of shares outstanding times the a sum of the par value per share plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared b sum of the par value per share, plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared c call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared d call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared LO1 When a parent acquires the preferred stock of a subsidiary, there will be a constructive retirement that eliminates the equity related to the preferred stock held by the parent and a any difference paid above the par value first reduces additional paid-in capital and then retained earnings b any difference paid above the par value first reduces retained earnings and then additional paid-in capital c any difference paid above the par value increases additional paid-in capital d any difference paid above the par value increases retained earnings LO1 10 When a parent acquires subsidiary preferred stock, no subsequent working paper entry is necessary to adjust additional paid-in capital under which of the following methods? I The constructive retirement method II The cost method a b c d I only II only I and II I or II if no redemption feature is present ©2009 Pearson Education, Inc publishing as Prentice Hall 10-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 11 In a company with minority interest preferred stock call premium addressed? a It is recorded capital b It is recorded as c It is recorded as d It is recorded as LO2 12 as an increase equity, in how additional is the paid-in a decrease in additional paid-in capital an increase in retained earnings a decrease in retained earnings If a parent company has controlling interest in a subsidiary which has no potentially dilutive securities, then in the calculation of consolidated EPS, it will be necessary to a only make an adjustment of subsidiary’s basic earnings b replace the parent’s equity in subsidiary earnings with the parent’s equity in subsidiary’s diluted EPS c make a replacement calculation in the parent's basic earnings for the EPS d only use the parent's common shares and common share equivalents LO2 13 A subsidiary has some outstanding options that permit holders to purchase the company’s common stock How will the options affect consolidated EPS? a If the exercise price per share is greater market price then the basic consolidated decreased b If the exercise price per share is greater market price then the basic consolidated increased c If the exercise price per share is greater market price then the diluted consolidated increased d If the exercise price per share is greater market price then the diluted consolidated decreased than average EPS will be than average EPS will be than average EPS will be than average EPS will be ©2009 Pearson Education, Inc publishing as Prentice Hall 10-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 14 Parnaby has 25,000 common stock shares outstanding and its 100%-owned subsidiary Sandal has 5,000 common stock shares outstanding The separate income for Parnaby and Sandal is $150,000 and $75,000 respectively EPS for the consolidated company is a b c d LO2 15 In computing the diluted EPS of the parent, any replacement computation of subsidiary income may be affected by a b c d LO2 16 $5.00 $6.00 $7.50 $9.00 the the the the constructive gain from purchase of parent bonds constructive loss from purchase of parent bonds current amortization from investment in the subsidiary parent’s equity in subsidiary realized income An 80%-owned subsidiary has outstanding bonds payable that are convertible into the subsidiary’s common stock No bonds are held by the parent corporation In calculating the subsidiary’s diluted EPS, the amount of bond interest expense that will be added back to the subsidiary’s income to the common stockholders will be a the face amount of the convertible bonds times the bond coupon rate times the subsidiary’s marginal tax rate b the face amount of the convertible bonds times the effective rate of interest on the bonds times the subsidiary’s marginal tax rate c the face amount of the convertible bonds times the bond coupon rate times (100% minus the subsidiary’s marginal tax rate) d the face amount of the convertible bonds times the effective rate of interest on the bonds times (100% minus the subsidiary’s marginal tax rate) ©2009 Pearson Education, Inc publishing as Prentice Hall 10-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 17 When a subsidiary has outstanding options to purchase common stock, the number of shares added to the denominator of the subsidiary’s EPS calculation is equal to the number of a shares that can be purchased with the current market value of the options b shares into which the options can be converted minus the number of shares purchased at the average market price that are assumed to be repurchased from the money received from the option shares c shares into which the options can be converted d shares into which the options can be converted minus the number of shares purchased at the exercise price that are assumed to be purchased from the money received from the option shares LO2 18 When a subsidiary has preferred stock that is convertible into common stock, the parent’s equity in the subsidiary’s diluted earnings is calculated by the number of a subsidiary shares into which the subsidiary’s dilutive securities can be converted times the subsidiary’s basic EPS figure b parent shares into which the subsidiary’s dilutive securities can be converted times the parent’s basic EPS figure c subsidiary shares held by the parent times the subsidiary’s diluted EPS figure d parent shares into which the subsidiary’s dilutive securities can be converted times the subsidiary’s basic EPS figure LO3 19 Palm owns a 70% interest in Sable, a domestic subsidiary Palm will pay taxes on a b c d none of the dividends it receives from Sable 20% of the dividends it receives from Sable 66% of the dividends it receives from Sable 80% of the dividends it receives from Sable ©2009 Pearson Education, Inc publishing as Prentice Hall 10-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 20 Palmer Company owns a 25% interest in Sad, Incorporated, a domestic company Sad had income of $60,000 and paid dividends of $20,000 Palmer’s tax rate is 35% For simplicity, assume that Sad’s undistributed earnings are Palmer’s only temporary timing difference Which of the following statements is correct? a Under the Internal revenue Code, Palmer pays current taxes of $700 b Under the Internal revenue Code, Palmer pays current taxes of $1,050 c Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred income taxes of $700 d Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred income taxes of $1,050 LO3 21 Palmquist Corporation and its 80%-owned subsidiary, Sadler Corporation, are members of an affiliated group Sadler had $3,000,000 of income and paid $1,000,000 dividends in 19X6 Palmquist and Sadler had 35% income tax rates Palmquist’s provision for income taxes on Sadler’s undistributed earnings was a b c d LO3 22 $ $ 56,000 $112,000 $168,000 Palomba Corporation allocates income tax expense to its 90%owned subsidiary using the percentage allocation method Under this method, consolidated income tax expense will be allocated a on the basis of the tax provisions recorded by both companies b on the basis of the subsidiary’s pretax income included in consolidated pretax income c on the basis of the income taxes remitted to the IRS d 90% to the subsidiary ©2009 Pearson Education, Inc publishing as Prentice Hall 10-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 23 Which statement best describes the effect of an inter-company transaction on income tax expense when corporate affiliates file separate tax returns, but prepare consolidated financial statements? a The selling entity excludes the unrealized gain on its separate return and the unrealized gain is eliminated on the consolidated financial statements b The selling entity includes the unrealized gain on its separate return and the unrealized gain is included on the consolidated financial statements as part of consolidated net income c The selling entity includes the unrealized gain on its separate return and the unrealized gain is eliminated on the consolidated financial statements d The selling entity excludes the unrealized gain on its separate return and the unrealized gain is included on the consolidated financial statements Use the following information for questions 24 and 25 Paltridge Company owns 60% of Saga Corporation At the beginning of the current year no timing differences exist Saga has $50,000 of net income on its separate return, all of which is subject to tax Paltridge sells a machine to Saga for $30,000 that has a net book value of $10,000 and a 4-year remaining useful life Saga has a 40% dividend payout ratio, and the marginal tax rate for both companies is 35% LO3 24 Saga's provision for current income taxes will be calculated as a 35% x ($50,000 net income) b 35% x ($50,000 net income + $5,000 piecemeal recognition of gain) c 35% x ($50,000 net income - $20,000 gain on sale + $5,000 piecemeal recognition of gain) d 35% x ($50,000 net income - $20,000 gain on sale) LO3 25 The amount of income taxes that Paltridge will have to provide for the undistributed earnings of Saga will be calculated as a b c d 35% 35% 35% 35% x x x x $50,000 $50,000 $30,000 $30,000 x x x x 60% 60% 60% 60% x x x x 20% 30% 20% 30% ©2009 Pearson Education, Inc publishing as Prentice Hall 10-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO1 Exercise Saito Corporation’s stockholders’ equity on December 31, 2004 was as follows: 10% cumulative preferred stock, $100 par value, callable at $105, with one year dividends in arrears $ Common stock, $1 par value Additional paid-in capital Retained earnings Total stockholders’ equity $ On January 1, 2005, Panata Corporation interest in Saito’s underlying equity paid $300,000 10,000 50,000 150,000 160,000 370,000 for a 70% Required: Determine the excess purchase cost in excess of book value that was paid by Panata for its investment in Saito Determine the January 1, 2005 balance for the minority interest that appeared on a consolidated balance sheet ©2009 Pearson Education, Inc publishing as Prentice Hall 10-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 Exercise Pretax operating incomes of Pang Corporation and its 70%-owned subsidiary, Sala Corporation, for the year 2005, are shown below Sala pays total dividends of $60,000 for the year There are no unamortized cost-book differentials relating to Pang’s investment in Sala During the year, Pang sold land to Sala for a gain of $35,000 and Sala holds this land at the end of the year The marginal corporate tax rate for both corporations is 34% Sales revenue Gain on sale of land Cost of sales Other expenses Pretax operating income (does not include investment income) ( ( Pang $ 900,000 35,000 480,000 ) ( 192,000 ) ( Sala $ 600,000 $ $ 263,000 325,000 ) 78,000 ) 197,000 Required: Determine the separate amounts of income tax expense for Pang and Sala as if they had filed separate tax returns Determine Pang’s net income from Sala ©2009 Pearson Education, Inc publishing as Prentice Hall 10-13 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 Exercise Pretax operating incomes of Panitz Corporation and its 80%-owned subsidiary, Salazar Corporation, for the year 2005, are shown below Salazar pays total dividends of $65,000 for the year There are no unamortized cost-book differentials relating to Panitz’s investment in Salazar During the year, Panitz sold land to Hamilton at a total loss of $15,000 which is included in its pretax operating income Salazar still holds this land at the end of the year Also included in its pretax operating income are $40,000 of dividends received from Shaw Corporation of which Panitz owns 8% and $50,000 of dividends from Sunny Corporation of which Salazar owns 6% The marginal corporate tax rate for both corporations is 34% Sales revenue Loss on sale of land Dividend income from Shaw and Sunny Cost of sales Other expenses Depreciation expense Pretax operating income (does not include Salazar investment income) $ ( Panitz 890,000 15,000 ) $ 90,000 400,000 ) ( 350,000 ) ( 50,000 ) ( ( ( ( $ 165,000 Salazar 700,000 250,000 ) 350,000 ) 35,000 ) $ 65,000 Required: Determine the separate amounts of income tax expense for Panitz and Salazar as if they had filed separate tax returns Determine Panitz’s net income from Salazar ©2009 Pearson Education, Inc publishing as Prentice Hall 10-14 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 Exercise On January 1, 2005, Panos Corporation acquired all of the outstanding voting common stock of Saley Corporation in an acquisition The total purchase price for the stock was $1,300,000 Saley’s net assets on this date were as follows: Cash Inventories Land Building-net Total assets Liabilities Common stock Retained earnings Total equities $ $ $ $ Saley’s Book Values 20,000 210,000 200,000 600,000 1,030,000 230,000 400,000 400,000 1,030,000 $ Saley’s Fair Values 20,000 240,000 250,000 900,000 1,410,000 $ 230,000 $ Assume that for federal income tax purposes, the book values of Saley’s assets and liabilities will be carried over for tax purposes but that the fair values will be recorded for GAAP purposes The remaining useful life for the building is 20 years and goodwill will be amortized over the 15-year time period allowed for tax purposes All depreciation and amortization is done on the straight-line basis and the federal tax rate is 34% Half of the inventory to which the excess of cost over book value applies is sold in 2005 Ignore any tax effect on Saley’s undistributed earnings Required: Calculate the amount of deferred income taxes that result from the acquisition transaction that are attributable to the net assets being recorded at book values for tax purposes, but at fair values for financial accounting purposes Identify and calculate the dollar amount of any timing differences that accrue or reverse by the end of the first year after the acquisition ©2009 Pearson Education, Inc publishing as Prentice Hall 10-15 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 Exercise Paradise Corporation owns 100% of Aldred Corporation, 90% of Balme Corporation, 80% of Calder Corporation, 75% of Dale Corporation, 20% of East Corporation, and 8% of Faber Corporation All of these corporations are domestic corporations During 2005, Paradise Corporation reports net income of $1,500,000 This net income includes the full amount of dividends received from Aldred and Faber, but does not include the dividends received from Balme, Calder, Dale, and East Corporations All investees have paid out all of their net income in the form of dividends Paradise’s share of the various dividend distributions is as follows: From From From From From From Aldred: Balme: Calder: Dale: East: Faber: $90,000 $92,000 $88,000 $66,000 $50,000 $40,000 Required: Calculate the correct amount of taxable income for Pal Corporation if a consolidated tax return is filed ©2009 Pearson Education, Inc publishing as Prentice Hall 10-16 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 Exercise 10 On January 1, 2005, Parcel Corporation acquired all of the outstanding voting common stock of Salmon Corporation in an acquisition The total purchase price for the stock was $1,020,000 Salmons’s net assets on this date were as follows: Cash Inventories Land Building-net Total assets Liabilities Common stock Retained earnings Total equities $ $ $ $ Salmon’s Book Values 20,000 210,000 200,000 600,000 1,030,000 230,000 400,000 400,000 1,030,000 $ Salmon’s Fair Values 20,000 240,000 320,000 500,000 1,080,000 $ 210,000 $ Assume that for federal income tax purposes, the book values of Salmon’s assets and liabilities will be carried over for tax purposes but that the fair values will be recorded for GAAP purposes The remaining useful life for the building is 20 years and goodwill will be amortized over the 15-year time period allowed for tax purposes The liabilities are amortized over a 5-year period All depreciation and amortization is done on the straight-line basis and the federal tax rate is 34% All inventories to which the excess of cost over book value applies were sold in 2005 Ignore any tax effect on Salmon’s undistributed earnings Required: Calculate the amount of deferred income taxes that resulted from the acquisition transaction that were attributable to the net assets being recorded at book values for tax purposes but at fair values for financial accounting purposes Identify and calculate the dollar amount of any timing differences that accrued or reversed by the end of the first year after the acquisition ©2009 Pearson Education, Inc publishing as Prentice Hall 10-17 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS Multiple Choice Questions b d c Of the $30,000, 5,000 is preferred dividends and in the remainder 25,000 has 80% go to Parminter for $20,000 Stockholders’ equity Less: Preferred stockholders’ equity Common stockholders’ equity $ 11,000,000 1,100,000 9,900,000 Cost of 70% interest acquired Book value of 70% interest ($9,900,000) x (70%) Goodwill $ 7,000,000 6,930,000 70,000 b Salter’s net loss Income to the preferred stockholders Loss to common stockholders Pardy’s ownership percentage Pardy’s share of the loss on investment $ ( $ 200,000 ) 100,000 100,000 70% 70,000 a Salter’s net income Income to the preferred stockholders Income to the common stockholders Pardy’s ownership percentage Pardy’s share of the income to shareholders $ the $ 220,000 100,000 120,000 70% $ 84,000 common c ©2009 Pearson Education, Inc publishing as Prentice Hall 10-18 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Preliminary computations: Total stockholders’ equity Less: Preferred stockholders’ equity Equals: Common stockholders’ equity $ $ Price paid by Pamplin Book value acquired ($1,360,000 x 90%) Goodwill $ Net income as given Less: Preferred dividends ($800,000 x 8%) Income available to the common stockholders Majority percentage Income from Sage $ $ 2,200,000 840,000 1,360,000 1,500,000 1,224,000 276,000 $ 100,000 64,000 36,000 90% 32,400 Reduction in paid-in capital due to Pamplin’s purchase of preferred stock Par value of acquired preferred stock $ Purchase price Reduction in Pamplin’s additional paid-in capital $ 560,000 600,000 40,000 Ending balance in the paid-in capital account 710,000 $ $ c When preferred stock of the subsidiary is acquired at an amount above or below the par value of the preferred stock, the excess cost over par value is subtracted from the parent’s additional paid-in capital and any excess par value over cost is added to the parent’s additional paid-in capital The $40,000 by which the cost of the preferred stock is less than the par value is added to the parent’s additional paid-in capital b a 10 a 11 d ©2009 Pearson Education, Inc publishing as Prentice Hall 10-19 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12 d 13 d 14 d 15 d 16 d 17 b 17 a 18 c 19 b 20 c 21 a 22 b 23 c 24 a 25 c (150,000+75,000)/25,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 10-20 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Requirement 1: Total stockholders’ equity at December 31, 2004 Less: Preferred stockholders’ equity 100 shares x ($105 call price + $10 dividend per share in arrears) Common stockholders’ equity Price paid for common stock investment Book value of 70% interest ($358,500 x 70%) Excess of cost over book value $ ( $ $ $ Requirement Minority interest at January 1, 2005: Minority interest: Preferred (100 shares x $115) Minority interest: Common ($358,500 x 30%) Total minority interest 370,000 $ $ 11,500 ) 358,500 300,000 250,950 49,050 11,500 107,550 119,050 Exercise Requirement 1: Book value available to common stockholders: Total stockholders’ equity at December 31, 2004 $ Less: Preferred stockholders’ equity 1000 shares x ($109 call price + $8 dividend per share in arrears x years) ( Common stockholders’ equity $ Book value of the common stockholders’ equity Percentage acquired 80% of book value Purchase cost Equals: Goodwill $ $ $ 1,450,000 125,000 ) 1,325,000 1,325,000 70% 927,500 850,000 77,500 ©2009 Pearson Education, Inc publishing as Prentice Hall 10-21 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Basic Sakal’s Basic and Diluted EPS: Sakal’s income to common shareholders $ 80,000 Common shares outstanding Incremental shares: Diluted EPS: 2,500 shares – ($50,000 proceeds/$40 average price per share) Common shares and common equivalents Earnings per share $ Diluted $ 20,000 20,000 20,000 1,250 21,250 4.00 $ Basic Pancino’s Basic and Diluted EPS: Pancino’s separate income Pancino’s income from Sakal Replacement computation: Reverse: Pancino’s income from Sakal 18,000 shares x $4.00 18,000 shares x $3.76 Income to common $ $ Common shares outstanding Earnings per share 100,000 72,000 ( $ 72,000 ) ( 72,000 172,000 3.44 3.76 Diluted $ 50,000 $ 80,000 100,000 72,000 72,000 ) 67,680 167,680 50,000 $ 3.35 Exercise Basic Sample’s Sample’s Add: Net $50,000 Adjusted Basic and Diluted EPS: income to common shareholders of tax interest expense x 8% x 66% subsidiary earnings $ 75,000 $ 75,000 Common shares outstanding Incremental shares: Diluted EPS: 100 bonds x 20 shares Common shares and common equivalents Earnings per share $ Diluted $ 75,000 $ 2,640 77,640 10,000 10,000 10,000 2,000 12,000 7.50 $ ©2009 Pearson Education, Inc publishing as Prentice Hall 10-22 6.47 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Basic Parker’s Basic and Diluted EPS: Parker’s separate income Parker’s income from Sample Replacement computation: Reverse: Parker’s income from Sample 8,000 shares x $7.50 8,000 shares x $6.47 Income to common $ ( $ Common shares outstanding Earnings per share 100,000 60,000 Diluted $ 60,000 ) ( 60,000 160,000 $ 100,000 $ 1.60 100,000 60,000 60,000 ) 51,760 211,760 100,000 $ 1.52 $ 180,000 170,000 128,000 80,000 42,000 600,000 Exercise Requirement 1: Excluded dividend income: From Alder: $180,000 x 100% From Ball: $170,000 x 100% From Cake: $160,000 x 80% From Dash: $100,000 x 80% From Eager: $60,000 x 70% Total excluded dividend income Requirement 2: Total dividend income received Total excluded dividend income Included dividend income $ $ $ 670,000 600,000 70,000 Current Income Tax Liability: $70,000 x 35% = $24,500 ©2009 Pearson Education, Inc publishing as Prentice Hall 10-23 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Requirement Income taxes currently payable: Taxes on operating income $263,000 x 34% $197,000 x 34% Taxes on dividends received: $60,000 x 70% x 20% x 34% Income taxes currently payable Pang $ Sala 89,420 $ 66,980 2,856 92,276 Tax on undistributed income: $137,000 x 70% x 20% x 34% Deferred tax on gain on land $35,000 x 34% Income tax expense 66,980 6,521 ( 11,900 ) 86,897 $ 66,980 Requirement Pre-tax income from Sala $ 197,000 Less: income tax expense Net Income from Sala ( $ 66,980 ) 130,014 $ Exercise Requirement Taxable Income Calculation: Sales Revenue Loss on sale of land Cost of sales Other expenses Depreciation expense Dividend income: From Shaw $40,000 x 30% From Sunny $50,000 x 30% Taxable income Tax rate Income taxes currently payable Requirement Panitz’s income from Salazar: Assuming taxable income is same as GAAP income Less: Current income taxes Net income Panitz’s ownership percentage Net Income from Salazar Panitz $ ( ( ( ( $ $ Salazar 890,000 15,000 400,000 350,000 50,000 $ ) ) ( ) ( ) ( 12,000 15,000 102,000 34% 34,680 $ 700,000 250,000 ) 350,000 ) 35,000 ) 65,000 34% 22,100 $ the $ $ $ 65,000 22,100 42,900 80% 34,320 ©2009 Pearson Education, Inc publishing as Prentice Hall 10-24 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Preliminary calculations: Goodwill purchased: Total acquisition cost Less: Fair value of net assets: $1,410,000 - $230,000 = Goodwill acquired Requirement 1: Deferred incomes taxes: Excess fair value over book value: Inventories $240,000 - $210,000 Land $250,000 - $200,000 Building-net $900,000 - $600,000 Goodwill (accrue annually - tax) Total deferred items Tax rate Deferred income taxes Requirement Timing differences expiring or accruing during the first year after acquisition: Inventory sold Goodwill amortized - tax Excess building depreciation Total timing differences Tax rate Tax effect $1,300,000 $ $ $ $ $ $ $ 1,180,000 120,000 30,000 50,000 300,000 380,000 34% 129,200 15,000 ( 8,000) 15,000 22,000 34% 7,480 The net deferred income tax liability will be reduced by $7,480 as a result of these timing differences ©2009 Pearson Education, Inc publishing as Prentice Hall 10-25 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Net income as reported: Excludable amount of dividends included in net income: Exclude 100% of Aldred dividends Exclude 70% of Faber dividends Includable amount of dividends not yet added to net income: Include 20% of Dale dividends Include 20% of East dividends Taxable income $ 1,500,000 ( ( $ 90,000 ) 28,000 ) 13,200 10,000 1,405,200 The dividends from Balme and Calder are excluded in full This problem also emphasizes the dividend exclusion ratio applicable when the percentage of stock held is right on the dividing line between the different exclusion percentages The 70% exclusion ratio applies for stock holdings less than 20% and the 80% exclusion ratio applies for holdings less than 80% but at least 20% ©2009 Pearson Education, Inc publishing as Prentice Hall 10-26 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 10 Preliminary calculations: Goodwill purchased: Total acquisition cost Less: Fair value of net assets: $1,080,000 - $210,000 = Goodwill acquired Requirement 1: Deferred incomes taxes: Excess fair value over book value: Inventories $240,000 - $210,000 Land $320,000 - $200,000 Building-net $500,000 - $600,000 Liabilities $210,000 - $230,000 Goodwill (accrue annually - tax) Total deferred items Tax rate Deferred income taxes Requirement Timing differences expiring/ accruing during the first year after acquisition: Inventory sold Liabilities amortized Goodwill amortized (tax only) Excess building depreciation Total timing differences Tax rate Tax effect $ $ $ $ $ $ $ 1,020,000 $ 870,000 150,000 30,000 120,000 (100,000) 20,000 70,000 34% 23,800 30,000 4,000 (10,000) ( 5,000) 19,000 34% 6,460 The net deferred income tax liability will be reduced by $6,460 as a result of these timing differences ©2009 Pearson Education, Inc publishing as Prentice Hall 10-27 ... Prentice Hall 10- 5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 14 Parnaby has 25,000 common stock shares outstanding and its 100 %-owned subsidiary... $800,000 of $100 par value, 8% non-cumulative, preferred stock callable at $105 , $900,000 of $10 par value common stock and $500,000 of Retained Earnings Sage’s net income for 2005 was $100 ,000 In... Prentice Hall 10- 2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO1 Pamplin Corporation stockholders’ equity consisted of $1,000,000 of $10 par value