Beams Aa13e TB 10

Advanced Accounting, 13e, Global Edition (Beams et al.
)
Chapter 10 Subsidiary Preferred Stock, Consolidated Earnings Per Share, and
Consolidated Income Taxation
10.1 Multiple Choice Questions
Use the following information to answer the question(s) below.
On December 31, 2013, Parminter Corporation owns an 80% interest in the common stock of Sanchez
Corporation and an 80% interest in Sanchez's preferred stock. On December 31, 2013, Sanchez's
stockholders' equity was as follows:
10% preferred stock, cumulative, $10 par value $50,000

Common stock 350,000
Retained earnings 100,000
Total stockholders' equity $500,000
On December 31, 2013, preferred dividends are not in arrears. Sanchez had 2014 net income of $30,000
and only preferred dividends are declared and paid in 2014. There are no book value/fair value
differentials associated with Parminter's investments.
1) How much should the Parminter's Investment in Sanchez—Common Stock, change during 2014?
A) $5,000
B) $20,000
C) $25,000
D) $30,000
Answer: B
Explanation: B) ($30,000 - $5,000) × 80%
Objective: LO10.1 Modify consolidation procedures for subsidiaries with outstanding preferred stock.
Difficulty: Moderate
AACSB: Application of knowledge
2) What should be the noncontrolling interest share, common in the consolidated financial statements of
Parminter for the year ending December 31, 2014?
A) $5,000
B) $20,000
C) $25,000
D) $30,000
Answer: A
Explanation: A) ($25,000 × 20%)
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3) What should be the noncontrolling interest share, preferred in the consolidated financial statements of
Parminter for the year ending December 31, 2014?
A) $1,000
B) $2,000
C) $4,000
D) $5,000
Answer: A
Explanation: A) ($5,000 × 20%)
4) A subsidiary has dilutive securities outstanding that include convertible bonds payable. The bonds are
convertible into the parent's common stock. When calculating consolidated diluted earnings per share,
the convertible bonds will affect
A) the numerator of consolidated diluted EPS only.
B) the denominator of consolidated diluted EPS only.
C) the numerator and denominator of consolidated diluted EPS.
D) the numerator and denominator of the parent diluted EPS only.
Answer: C
Objective: LO10.2 Calculate basic and diluted earnings per share for a consolidated entity.
AACSB: Analytical thinking
2
On January 1, 2014, Pardy Corporation acquired a 70% interest in the common stock of Salter Corporation
for $7,000,000 when Salter's stockholders' equity was as follows:
10% cumulative, nonparticipating preferred stock,

$100 par, with a $105 liquidation preference,
callable at $110 $ 1,000,000
Common stock, $10 par value 6,000,000
Additional paid-in capital 1,500,000
Retained earnings 2,500,000
Total stockholders' equity $11,000,000
There were no preferred dividends in arrears on January 1, 2014. There are no book value/fair value
differentials.
5) What is the implied goodwill for Salter based on Pardy's purchase price for Salter on January 1, 2014?
A) $0
B) $35,000
C) $70,000
D) $100,000
Answer: D
Explanation: D)
Stockholders' equity $11,000,000
Less: Preferred stockholders' equity (10,000 × $110) (1,100,000)
Common stockholders' equity 9,900,000
Cost of 70% interest acquired $7,000,000

Implied fair value of investment ($7,000,000/0.7) 10,000,000
Common stockholders' equity (9,900,000)
Goodwill $100,000
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6) Salter has a 2014 net loss of $200,000. No dividends are declared or paid in 2014. What is the change in
Pardy's Investment in Salter for the year ending December 31, 2014?
A) $50,000
B) $70,000
C) $140,000
D) $210,000
Answer: D
Explanation: D)
Salter's net loss $(200,000)
Preferred dividend 10% × $1,000,000 (100,000)
Total Loss to common stockholders (300,000)
Pardy's ownership percentage 70%
Pardy's share of the loss on investment $(210,000)
7) Assume Salter's net income for 2014 is $220,000. No dividends are declared or paid in 2014. What is the
change in Pardy's Investment in Salter for the year ending December 31, 2014?
A) $84,000
B) $119,000
C) $154,000
D) $189,000
Answer: A
Explanation: A)
Salter's net income $220,000
Less: Income to the preferred stockholders (100,000)
Income to the common stockholders 120,000
Pardy's ownership percentage 70%
Pardy's share of the income $84,000
4
On January 1, 2014, Pamplin Corporation's 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, 2014, Pamplin purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000
with all excess purchase cost assigned to goodwill. The stockholders' equity of Sage on this date consisted
of $800,000 of $100 par value, 8% cumulative, preferred stock callable at $105, $900,000 of $10 par value
common stock and $500,000 of Retained Earnings. Sage's net income for 2014 was $100,000.
On January 1, 2014, no preferred dividends are in arrears. No dividends are declared or paid in 2014. In a
separate transaction on January 1, 2014, Pamplin purchased 70% of Sage's preferred stock for $600,000.
8) For the year ending December 31, 2014, the amount of Pamplin's income from Sage (associated with
the common stock investment in Sage) is
A) $32,400.
B) $36,000.
C) $60,000.
D) $90,000.
Answer: A
Explanation: A)
Preliminary computations:
Total stockholders' equity (Sage) $2,200,000
Less: Preferred stockholders' equity
($800,000 × 1.05) (840,000)
Equals: Common stockholders' equity $1,360,000
Net income as given $100,000

Less: Preferred dividends ($800,000 × 8%) (64,000)
Income available to the common stockholders $36,000
Ownership percentage 90%
Income from Sage $32,400
9) What is the goodwill on the consolidated balance sheet for Pamplin and Subsidiaries on December 31,
2014 based on Pamplin's purchase of Sage's common stock?
A) $140,000
B) $240,000
C) $290,000
D) $306,667
Answer: D
Explanation: D)
Implied fair value ($1,500,000/0.90) $1,666,667
Less: Common stockholders' equity (1,360,000)
Goodwill $306,667
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10) Pan Corporation has total stockholders' equity of $5,000,000 consisting of $1,000,000 of $10 par value
Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. Pan owns
80% of Sailor Corporation's common stock purchased at book value, which equals fair value. Sailor has
$900,000 of 10% cumulative preferred stock outstanding, with no preferred dividends in arrears. The
preferred stock has no call price, redemption price or liquidation price. Pan acquired 60% of the preferred
stock of Sailor for $500,000. After this transaction the balances in Pan's Retained Earnings and Additional
Paid-in Capital accounts, respectively, are
A) $2,960,000 and $1,000,000.
B) $3,000,000 and $960,000.
C) $3,000,000 and $1,040,000.
D) $3,040,000 and $1,000,000.
Answer: C
Explanation: C) If the book value ($900,000 × 60%) of preferred stock is greater than the price paid
($500,000) for the preferred stock, then the difference is added to the parent's additional paid-in capital.
11) Assume a company's preferred stock is cumulative with a call provision and has dividends in arrears.
The amount of stockholders' equity allocated to preferred stockholders is equal to the number of shares
outstanding times 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.
Answer: D
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12) When a parent acquires the preferred stock of a subsidiary, there will be a constructive retirement and
A) any difference paid above the book value of the preferred stock reduces the parent's additional paid-in
capital.
B) any difference paid above the book value of the preferred stock reduces the subsidiary's retained
earnings.
C) any difference paid above the book value of the preferred stock increases the parent's additional paid-
in capital.
D) any difference paid above the book value of the preferred stock increases the parent's retained
earnings.
Answer: A
13) If a parent company has controlling interest in a subsidiary which has no potentially dilutive
securities outstanding, then in the calculation of consolidated diluted EPS, it will be necessary 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 shares represented by the parent's potentially dilutive
securities.
Answer: D
14) Parnaby has 25,000 common stock shares outstanding and its 100%-owned subsidiary Sandal has
5,000 common stock shares outstanding. Parnaby and Sandal do not have any potentially dilutive
securities outstanding. The separate net incomes for Parnaby and Sandal are $150,000 and $75,000,
respectively. Diluted EPS for the consolidated company is
A) $5.00.
B) $6.00.
C) $7.50.
D) $9.00.
Answer: D
Explanation: D) ($150,000 + $75,000)/25,000
15) In computing consolidated diluted EPS, the replacement calculation replaces the parent's equity in
subsidiary earnings with the
A) parent's share of basic EPS of the subsidiary.
B) subsidiary's share of basic EPS of the parent.
C) parent's share of diluted EPS of the subsidiary.
D) subsidiary's share of diluted EPS of the parent.
Answer: C
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16) When a subsidiary has preferred stock that is convertible into subsidiary common stock, the parent's
equity in the subsidiary's diluted earnings is calculated by the number 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 common shares held by the parent times the subsidiary's diluted EPS figure.
D) parent shares into which the subsidiary's dilutive securities can be converted times the subsidiary's
basic EPS figure.
Answer: C
17) Palm owns a 70% interest in Sable, a domestic subsidiary. Sable is not part of Palm's affiliated group.
Palm will pay taxes on
A) none of the dividends it receives from Sable.
B) 20% of the dividends it receives from Sable.
C) 66% of the dividends it receives from Sable.
D) 80% of the dividends it receives from Sable.
Answer: B
Objective: LO10.3 Understand the complexities of accounting for income taxes by consolidated entities.
18) Palmer Company owns a 25% interest in Sad, Incorporated, a domestic company. Sad had net income
of $60,000 and paid dividends of $20,000. Palmer's tax rate is 35%. For simplicity, assume that Sad's
undistributed earnings are Palmer's only temporary timing difference. Assume Sad qualifies for the 80%
dividend received deduction. Which of the following statements is correct?
A) The current tax liability is $700.
B) The current tax liability is $1,050.
C) Under GAAP, Palmer provides for income taxes on Sad's undistributed earnings with a credit to
deferred tax liability of $700.
D) Under GAAP, Palmer provides for income taxes on Sad's undistributed earnings with a credit to
deferred tax liability of $1,050.
Answer: C
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19) Palmquist Corporation and its 80%-owned subsidiary, Sadler Corporation, are members of an
affiliated group. They do not file consolidated tax returns. Sadler had $3,000,000 of income and paid
$1,000,000 dividends in 2014. Palmquist and Sadler had 35% income tax rates. What amount of Sadler's
dividends is taxable to Palmquist in 2014?
A) $0
B) $70,000
C) $160,000
D) $200,000
Answer: A
20) Palomba Corporation allocates consolidated income taxes to its 90%-owned subsidiary using the
percentage allocation method. Under this method, consolidated income tax expense will be allocated to a
subsidiary
A) on the basis of the agreement between the parent and subsidiary.
B) on the basis of the subsidiary's pretax income as a percentage of consolidated pretax income.
C) on the basis of the income taxes remitted to the IRS.
D) at the rate of 90%.
Answer: B
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10.2 Exercises
1) Saito Corporation's stockholders' equity on December 31, 2014 was as follows:
10% cumulative preferred stock, $100 par value,

callable at $105, with one year dividends in arrears $10,000
Common stock, $1 par value 50,000
Additional paid-in capital 150,000
On January 1, 2015, Panata Corporation paid $300,000 for a 70% interest in Saito's common stock. On
January 1, 2015, the book values of Saito's assets and liabilities were equal to fair values.
Required:
1. Determine the book value of the common stockholders' equity for Saito Corporation on January 1, 2015.
2. What is the amount of goodwill reported on the consolidated balance sheet for Panata Corporation
(and Subsidiary) at January 2, 2015?
3. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panata
Corporation (and Subsidiary) on January 2, 2015?
Answer:
Requirement 1
Total stockholders' equity at December 31, 2014 $370,000
Less: Preferred stockholders' equity 100 shares ×
($105 call price + $10 dividend per share in arrears) (11,500)
Common stockholders' equity $358,500
Requirement 2
Implied fair value of investment ($300,000/0.7) $428,571
Book value of common stockholders' equity (358,500)
Goodwill $70,071
Requirement 3
Noncontrolling interest at January 2, 2015:
Noncontrolling portion of Goodwill ($70,071 × 30%) $21,021
Noncontrolling interest: Preferred (100 shares × $115) 11,500
Noncontrolling interest: Common ($358,500 × 30%) 107,550
Total noncontrolling interest $140,071
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2) Sally Corporation's stockholders' equity on December 31, 2014 was as follows:

On January 1, 2015, Panera Corporation paid $500,000 for a 70% interest in Sally's common stock. On
January 1, 2015, the book values of Sally's assets and liabilities were equal to fair values.
Required:
1. Determine the book value of the common stockholders' equity for Sally Corporation on January 1, 2015.
2. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and
Subsidiary at January 2, 2015?
3. On January 2, 2015, Panera purchased 70% of Sally's preferred stock for $5,000. Prepare the journal
entry(ies) for Panera for this purchase on January 2, 2015.
4. Prepare the elimination entry on the consolidating work papers for the Investment in Sally, Preferred
Stock and Sally's Preferred Stock on January 2, 2015.
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Answer:
Requirement 1
Total stockholders' equity at December 31, 2014 $370,000
($105 call price + $10 dividend per share in arrears) (11,500)
Common stockholders' equity $358,500
Requirement 2
Implied fair value of investment ($500,000/0.7) $714,286
Book value of common stockholders' equity (358,500)
Goodwill $355,786
Requirement 3
Investment in Sally, Preferred Stock 5,000
Cash 5,000

($11,500 × 70%) = $8,050 - $5,000 = $3,050
Requirement 4
Preferred stock 10,000
Noncontrolling interest share
In Sally, Preferred Stock 3,450
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3) Samford Corporation's stockholders' equity on December 31, 2014 was as follows:

callable at $109, with two years of dividends
in arrears $100,000
On January 1, 2015, Panera Corporation purchased a 70% interest in Samford's common stock for
$1,400,000. On this date the book values of Samford's assets and liabilities are equal to their fair values.
Required:
1. Determine the book value of the common stockholders' equity for Samford Corporation on January 1,
2015.
2. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and
3. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panera
Corporation and Subsidiary on January 2, 2015?
Answer:
Requirement 1
Total stockholders' equity at December 31, 2014 $1,450,000
[$109 call price + ($8 dividend per share in arrears × 2 years)] (125,000)
Common stockholders' equity $1,325,000
Requirement 2
Implied fair value of investment ($1,400,000/0.70) $2,000,000
Goodwill $675,000
Requirement 3
Noncontrolling interest, January 2, 2015:
Preferred stockholders' equity $125,000
Common stockholders' equity (30% × $1,325,000) 397,500
Goodwill (30% × $675,000) 202,500
Total $725,000
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4) Savy Corporation's stockholders' equity on December 31, 2014 was as follows:

callable at $109, with two years of dividends
in arrears $100,000
On January 1, 2015, Paul Corporation purchased a 70% interest in Savy's common stock for $2,100,000. On
this date the book values of Savy's assets and liabilities are equal to their fair values.
Required:
1. Determine the book value of the common stockholders' equity for Savy Corporation on January 1, 2015.
2. What is the amount of goodwill reported on the consolidated balance sheet for Paul Corporation and
3. On January 2, 2015, Paul purchased 70% of Savy's preferred stock for $50,000. Prepare the journal
entry(ies) for Paul for this purchase on January 2, 2015.
4. Prepare the elimination entry on the consolidating work papers for the Investment in Savy, Preferred
Stock and Savy's Preferred Stock on January 2, 2015.
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Answer:
Requirement 1
Total stockholders' equity at December 31, 2014 $1,450,000
[$109 call price + ($8 dividend per share in arrears × 2 years)] (125,000)
Common stockholders' equity $1,325,000
Requirement 2
Implied fair value of investment ($2,100,000/0.70) $3,000,000
Goodwill $1,675,000
Requirement 3
Investment in Savy, Preferred Stock 50,000
Cash 50,000

($125,000 × 70%) - $50,000 = $37,500
Requirement 4
Preferred Stock 100,000
Noncontrolling interest 37,500
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5) Pancino Corporation owns a 90% interest in Sakal Corporation's common stock. Throughout 2014,
Sakal had 20,000 shares of common stock outstanding and Pancino had 50,000 shares of common stock
outstanding. Sakal's only dilutive security consists of 2,500 stock options, with an exercise price of $20 per
share. The average price of Sakal's stock is $50 per share in 2014. The options are exercisable for one share
of Sakal's common stock. Pancino's and Sakal's separate net incomes for the year are $100,000 and
$80,000, respectively.
Required:
Compute the amount of basic and diluted earnings per share for Pancino (Consolidated) and Sakal
Corporations.
Answer: Basic Diluted
Sakal's Basic and Diluted EPS:
Sakal's income to common shareholders $80,000 $80,000
Common shares outstanding 20,000 20,000

Options:
Diluted EPS:
($50 - $20)/$50 × 2,500 _______ 1,500
Common shares and common equivalents 20,000 21,500
Earnings per share $4.00 $3.72
Basic Diluted
Pancino's Basic and Diluted EPS:
Pancino's separate income $100,000 $100,000
Pancino's income from Sakal 72,000 72,000
Replacement computation: (72,000)
18,000 shares × $3.72 ________ 66,960

Income to common $172,000 $166,960
Earnings per share 3.44 3.34

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6) Pandy Corporation owns a 90% interest in Sakaj Corporation's common stock. Throughout 2014, Sakaj
had 20,000 shares of common stock outstanding and Pandy had 50,000 shares of common stock
outstanding. Sakaj's only dilutive security consists of 10,000 stock options, with an exercise price of $20
per share. The average price of Sakaj's stock is $50 per share in 2014. The options are exercisable for one
share of Sakaj's common stock. Pandy's and Sakaj's separate net incomes for the year are $200,000 and
$180,000, respectively.
Required:
Compute the amount of basic and diluted earnings per share for Pandy (Consolidated) and Sakaj
Corporations.
Sakaj's Basic and Diluted EPS:
Sakaj's income to common shareholders $180,000 $180,000

Options:
Diluted EPS:
($50-$20)/$50 × 10,000 _______ 6,000
Basic Diluted
Pandy's Basic and Diluted EPS:
Pandy's separate income $200,000 $200,000
Pandy's income from Sakaj ($180,000 × 90%) 162,000 162,000
Replacement computation:
(162,000)
18,000 shares × $6.92 ________ 124,560
Income to common $362,000 324,560

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7) Parker Corporation owns an 80% interest in Sample Corporation's common stock. Throughout 2014,
Sample had 10,000 shares of common stock outstanding and Parker had 100,000 shares of common stock
outstanding. Sample's only dilutive security consists of $50,000 face amount of 8% bonds payable. Each
$1,000 bond is convertible into 20 shares of Sample stock. Parker and Sample's separate incomes for the
year are $100,000 and $75,000, respectively. Assume a 34% flat income tax rate.
Required:
Compute the amount of basic and diluted earnings per share for Parker (Consolidated) and Sample
Corporations.

Sample's Basic and Diluted EPS:
Sample's income to common shareholders $75,000 $75,000
Add: Net of tax interest expense
$50,000 × 8% × 66% 0 2,640
Adjusted subsidiary earnings $75,000 $77,640

Incremental shares:
Diluted EPS:
50 bonds × 20 shares ______ 1,000
Basic Diluted
Parker's Basic and Diluted EPS:
Parker's separate income $100,000 $100,000
Parker's income from Sample 60,000 60,000
Parker's income from Sample (60,000)
8,000 shares × $7.06 ________ 56,480

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8) Peyton Corporation owns an 80% interest in Sampe Corporation's common stock. Throughout 2014,
Sampe had 10,000 shares of common stock outstanding and Peyton had 100,000 shares of common stock
outstanding. Sampe's only dilutive security consists of $100,000 face amount of 8% bonds payable. Each
$1,000 bond is convertible into 20 shares of Sampe stock. Peyton and Sampe's separate net incomes for the
year are $200,000 and $150,000, respectively. Assume a 34% flat income tax rate.
Required:
Compute the amount of basic and diluted earnings per share for Peyton (consolidated) and Sampe
Corporations.
Sampe's Basic and Diluted EPS:
Sampe's income to common shareholders $150,000 $150,000
Add: Net of tax interest expense
$100,000 × 8% × 66% 0 5,280
Adjusted subsidiary earnings $150,000 $155,280

Incremental shares:
Diluted EPS:
100 bonds × 20 shares _______ 2,000
Basic Diluted
Peyton's Basic and Diluted EPS:
Peyton's separate income $200,000 $200,000
Peyton's income from Sampe
(80% × $150,000) 120,000 120,000
Peyton's income from Sampe (120,000)
8,000 shares × $12.94 _______ 103,520

Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting
perspectives.
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9) Pane Corporation owns 100% of Alder Corporation, 85% of Ball Corporation, 70% of Cake Corporation,
40% of Dash Corporation, and 10% of Eager Corporation. All of these corporations are domestic
corporations. Pane, Alder and Ball belong to an affiliated group. Pane's marginal income tax rate is 35%.
All investees have paid out all their net income in the form of dividends. During 2014, Pane Corporation
received the following cash dividends:
From Alder: $180,000

From Ball: $170,000
From Cake: $160,000
From Dash: $100,000
From Eager: $ 60,000
Required:
1. Compute the amount of the dividend income that would be excluded from taxation under the current
Internal Revenue Code.
2. Compute Pane's current income tax liability for the dividend income received in 2014.
Answer:
Requirement 1
Excluded dividend income:
From Alder: $180,000 × 100% $180,000
From Ball: $170,000 × 100% 170,000
From Cake: $160,000 × 80% 128,000
From Dash: $100,000 × 80% 80,000
From Eager: $60,000 × 70% 42,000
Total excluded dividend income $600,000
Requirement 2
Total dividend income received $670,000
Total excluded dividend income 600,000
Included dividend income $70,000
Current Income Tax Liability:
$70,000 × 35% = $24,500
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10) Paradise Corporation owns 100% of Aldred Corporation, 90% of Balme Corporation, 80% of Calder
Corporation, 75% of Dale Corporation, 20% of East Corporation, and 8% of Faber Corporation. Paradise,
Aldred, Balme and Calder belong to an affiliated group. All of these corporations are domestic
corporations. During 2014, Paradise Corporation reports net income of $1,500,000. This net income
includes the full amount of dividends received from Aldred and Faber, but does not include the
dividends received from Balme, Calder, Dale, and East Corporations. All investees have paid out all of
their net income in the form of dividends. Paradise's share of the various dividend distributions is as
follows:
From Aldred: $90,000

From Balme: $92,000
From Calder: $88,000
From Dale: $66,000
From East: $50,000
From Faber: $40,000
Required:
Calculate the correct amount of taxable income for Paradise Corporation if a consolidated tax return is
filed.
Answer: Net income as reported: $1,500,000
Excludable amount of dividends included in net income:
Exclude 100% of Aldred dividends (90,000)
Exclude 70% of Faber dividends (28,000)
Includable amount of dividends not yet added to net income:
Include 20% of Dale dividends 13,200
Include 20% of East dividends 10,000
Taxable income $1,405,200
The dividends from Balme and Calder are excluded in full. This problem also emphasizes the dividend
exclusion ratio applicable when the percentage of stock held is right on the dividing line between the
different exclusion percentages. The 70% exclusion ratio applies for stock holdings less than 20% and the
80% exclusion ratio applies for holdings less than 80% but at least 20%.
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11) Peter Corporation owns 90% of the common stock of Subsidiary Subway. The following data is
available:
Peter Subway
Net income for 2014 $150,000 $50,000
Preferred dividends for 2014 $10,000
Common dividends for 2014 $15,000
Number of common shares outstanding 200,000 20,000
10% Preferred Stock, $100 par $100,000
The preferred stock is cumulative and convertible. The annual preferred dividends are $10,000.
Required:
1. Subway's preferred stock is convertible into 12,000 shares of Subway's common stock. Peter and
Subway do not have any other potentially dilutive securities outstanding.
a. What is Subway's basic EPS and diluted EPS?
b. What is consolidated basic EPS and diluted EPS?
2. Subway's preferred stock is convertible into 12,000 shares of Peter's common stock. Peter and Subway
do not have any other potentially dilutive securities outstanding. What is consolidated basic EPS and
diluted EPS?
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Answer:
Requirement 1
Subway Basic EPS:
= $2.00
Subway Diluted EPS:
= $1.56
Consolidated Basic EPS:
= $0.93
Consolidated Diluted EPS:
= $0.89
Requirement 2
= $0.93
= $0.92
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12) Jeff Corporation owns 90% of the common stock of Subsidiary Jordan. The following data is available:
Jeff Jordan
Net income for 2014 $250,000 $150,000
Preferred dividends for 2014 $20,000
Common dividends for 2014 $25,000
Number of common shares outstanding 200,000 20,000
10% Preferred Stock, $100 par $200,000
The preferred stock is cumulative and convertible. The annual preferred dividends are $20,000.
Required:
1. Jordan's preferred stock is convertible into 20,000 shares of Jordan's common stock. Jeff and Jordan do
not have any other potentially dilutive securities outstanding.
a. What is Jordan's basic EPS and diluted EPS?
b. What is consolidated basic EPS and diluted EPS?
2. Jordan's preferred stock is convertible into 20,000 shares of Jeff's common stock. Jeff and Jordan do not
have any other potentially dilutive securities outstanding. What is consolidated basic EPS and diluted
EPS?
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Answer:
Requirement 1
Jordan Basic EPS:
= $6.50
Jordan Diluted EPS:
= $3.75
= $1.84
= $1.59
Requirement 2
= $1.84
= $1.75
25
13) Sandy Corporation's stockholders' equity on December 31, 2014 was as follows:

On January 1, 2015, Bombard Corporation paid $200,000 for a 90% interest in Sandy's common stock. On
January 1, 2015, the book values of Sandy's assets and liabilities were equal to fair values. On January 2,
2015, Bombard Corporation paid $120,000 for a 90% interest in Sandy's preferred stock.
Required:
1. Determine the book value of the common stockholders' equity for Sandy Corporation on January 1,
2015.
2. Prepare the journal entry(ies) on January 1, 2015 for Bombard Corporation.
3. Prepare the journal entry(ies) on January 2, 2015 for Bombard Corporation.
4. For the year ending December 31, 2015, Sandy Corporation reported net income of $50,000. Sandy
Corporation declared and paid dividends of $20,000 to preferred stockholders and $10,000 to common
stockholders. Prepare the journal entries for Bombard Corporation relating to this information.
26
Answer:
Requirement 1
($105 call price + $10 dividend) × 1,000 (115,000)
Book value of common stockholders' equity $385,000
Requirement 2
Investment in Sandy Corp.—common stock 200,000
Cash 200,000
Requirement 3
Investment in Sandy Corp.—pref. stock 120,000
Cash 120,000

Investment in Sandy Corp.—pref. stock 16,500
($120,000 - $103,500)
($115,000 × 90%) = $103,500
Requirement 4
Cash ($20,000 × 90%) 18,000
Investment Income in Sandy Corp.—pref. stock 18,000
Cash ($10,000 × 90%) 9,000


Investment income in Sandy Corp.—
common stock 27,000
($50,000 - $20,000) × 90%
27
14) Stello Corporation's stockholders' equity on December 31, 2014 was as follows:

callable at $110, with no dividends in arrears $100,000
On January 1, 2015, Kaprelian Corporation paid $300,000 for a 90% interest in Stello's common stock. On
January 1, 2015, the book values of Stello's assets and liabilities were equal to fair values. On January 2,
2015, Kaprelian Corporation paid $100,000 for a 90% interest in Stello's preferred stock.
Required:
1. Determine the book value of the common stockholders' equity for Stello Corporation on January 1,
2015.
2. Prepare the journal entry(ies) on January 1, 2015 for Kaprelian Corporation.
3. Prepare the journal entry(ies) on January 2, 2015 for Kaprelian Corporation.
4. For the year ending December 31, 2015, Stello Corporation reported net income of $50,000. Stello
Corporation declared and paid dividends of $10,000 to preferred stockholders and $10,000 to common
stockholders. Prepare the journal entries for Kaprelian Corporation relating to this information.
28
Answer:
Requirement 1
$110 call price × 1,000 (110,000)
Book value of common stockholders' equity $490,000
Requirement 2
Investment in Stello Corp.—common stock 300,000
Cash 300,000
Requirement 3
Investment in Stello Corp.—pref. stock 100,000
Cash 100,000

Investment in Stello Corp.—pref. stock 1,000
($100,000 - $99,000) = $1,000
($110,000 × 90%) = $99,000
Requirement 4
Cash ($10,000 × 90%) 9,000
Investment Income in Stello Corp.—
pref. stock 9,000
Cash ($10,000 × 90%) 9,000

Investment in Stello Corp.—common
stock 9,000
Investment in Stello Corp.—common stock 36,000

Investment income in Stello Corp.—
common stock 36,000
($50,000 - $10,000) × 90%
29
15) Pretax operating incomes of Pang Corporation and its 70%-owned subsidiary, Sala Corporation, for
the year 2014, are shown below. Sala pays total dividends of $60,000 for the year. There are no
unamortized book value/fair value differentials relating to Pang's investment in Sala. During the year,
Pang sold land to Sala for a gain of $35,000 and Sala holds this land at the end of the year. The marginal
corporate tax rate for both corporations is 34%.
Pang Sala
Sales revenue $900,000 $600,000
Gain on sale of land 35,000
Cost of sales (480,000) (325,000)
Other expenses (192,000) (78,000)
Pretax operating income (does not include investment income) $263,000 $197,000
Required:
1. Determine the separate amounts of income tax expense for Pang and Sala as if they had filed separate
tax returns.
2. Determine Pang's net income from Sala.
30
Answer:
Requirement 1 Pang Sala
Income taxes currently payable:
Taxes on operating income
$263,000 × 34% $89,420
$197,000 × 34% $66,980
Taxes on dividends received:
$60,000 × 70% × 20% × 34% 2,856 ________
Income taxes currently payable 92,276 66,980
Add: Tax on undistributed income:

($197,000 - $66,980 - $60,000) ×
70% × 20% × 34% 3,333
Less: Deferred tax on gain on sale of land ($35,000 × 34%) (11,900) ________
Income tax expense $83,709 $66,980
Requirement 2
Pre-tax income from Sala $197,000
Less: income tax expense (66,980)
Net Income 130,020
Ownership Percentage × 70%
Subtotal $91,014
Less: Unrealized gain on sale of land (35,000)
Income from Sala $56,014
31
16) Pretax operating incomes of Panitz Corporation and its 80%-owned subsidiary, Salazar Corporation,
for the year 2014, are shown below.
Panitz and Salazar belong to an affiliated group. Salazar pays total dividends of $35,000 for the year.
There are no unamortized book value/fair value differentials relating to Panitz's investment in Salazar.
During the year, Panitz sold land to Salazar at a total loss of $15,000 which is included in its pretax
operating income. Salazar still holds this land at the end of the year. The marginal corporate tax rate for
both corporations is 34%.
Panitz Salazar
Sales revenue $890,000 $700,000
Loss on sale of land (15,000)
Cost of sales (400,000) (250,000)
Other expenses (350,000) (350,000)
Depreciation expense (50,000) (35,000)
Pretax operating income
(does not include Salazar investment income) $75,000 $65,000
Required:
1. Determine the separate amounts of income tax expense for Panitz and Salazar as if they had filed
separate tax returns.
2. Determine Panitz's net income from Salazar.

Answer:
Requirement 1 Panitz Salazar
Taxable Income Calculation:
Sales Revenue $890,000 $700,000
Loss on sale of land (15,000)
Cost of sales (400,000) (250,000)
Other expenses (350,000) (350,000)
Depreciation expense (50,000) (35,000)
Taxable income $75,000 $65,000
Tax rate 34% 34%
Income taxes currently payable $25,500 $22,100
Add: Deferred taxes on loss on sale of land ($15,000 × 34%) 5,100 _______
Income tax expense $30,600 $22,100
Requirement 2
Panitz's income from Salazar:
Assuming taxable income is the same as GAAP income $65,000
Less: Current income taxes expense 22,100
Net income 42,900
Panitz's ownership percentage 80%
Subtotal 34,320
Add: Unrealized loss on sale of land 15,000
Income from Salazar $49,320
32
10.3 True/False
1) Net income of an investee with preferred stock outstanding is first allocated to preferred stockholders
based on the preferred stock contract.
Answer: TRUE
Difficulty: Easy
2) The call or redemption price of preferred stock is used to allocate the investee's equity to preferred
stockholders.
Answer: TRUE
Difficulty: Easy
3) If no redemption provision is provided on preferred stock, the equity allocation base is based on par
value of the stock less any liquidation premium.
Answer: FALSE
4) All dividends in arrears on cumulative preferred stock are included in the equity allocated to preferred
stockholders.
Answer: TRUE
Difficulty: Easy
5) Income is assigned to noncumulative, nonparticipating preferred stock only if dividends are declared
and paid.
Answer: FALSE
6) From the viewpoint of a consolidated entity, the parent's purchase of the outstanding subsidiary
preferred stock results in the retirement of the stock purchased.
Answer: TRUE
7) The constructive retirement of subsidiary preferred stock through the purchase by the parent is
reported as an actual retirement in the consolidated statements.
Answer: TRUE
33
8) The investment in preferred stock of a subsidiary by the parent is accounted for under the equity
method.
Answer: FALSE
9) The parent company's retained earnings are reduced when additional paid-in capital is insufficient to
absorb an excess of purchase price over book value of the subsidiary's preferred stock.
Answer: TRUE
10) The GAAP requires that corporations report both basic and diluted earnings per share.
Answer: TRUE
Difficulty: Easy
11) The calculation of parent EPS and consolidated basic EPS are identical.
Answer: TRUE
Difficulty: Easy
12) A parent's net income and the controlling share of the consolidated net income are equal under the
equity method.
Answer: TRUE
13) The consolidated entity must file a consolidated income tax return.
Answer: FALSE
Difficulty: Easy
14) A disadvantage of filing a consolidated return is intercompany dividends are included in taxable
income.
Answer: FALSE
Difficulty: Easy
34

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Advanced Accounting, 13e, Global Edition (Beams et al.

10.1 Multiple Choice Questions

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

10% preferred stock, cumulative, $10 par value $50,000

10% cumulative, nonparticipating preferred stock,

Cost of 70% interest acquired $7,000,000

Net income as given $100,000

1) Saito Corporation's stockholders' equity on December 31, 2014 was as follows:

10% cumulative preferred stock, $100 par value,

10% cumulative preferred stock, $100 par value,

Investment in Sally, Preferred Stock 3,050

8% cumulative preferred stock, $100 par value,

8% cumulative preferred stock, $100 par value,

Investment in Savy, Preferred Stock 37,500

Common shares outstanding 20,000 20,000

Replacement computation: (72,000)

18,000 shares × $3.72 ________ 66,960

Common shares outstanding 50,000 50,000

Earnings per share 3.44 3.34

Common shares outstanding 20,000 20,000

Common shares outstanding 50,000 50,000

Earnings per share $7.24 $6.49

Answer: Basic Diluted

Common shares outstanding 10,000 10,000

Common shares outstanding 100,000 100,000

Earnings per share $1.60 $1.56

Common shares outstanding 10,000 10,000

Common shares outstanding 100,000 100,000

Earnings per share $3.20 $3.04

From Alder: $180,000

From Aldred: $90,000

Subway Basic EPS:

Subway Diluted EPS:

Consolidated Basic EPS:

Consolidated Diluted EPS:

Consolidated Basic EPS:

Consolidated Diluted EPS:

Jordan Basic EPS:

Jordan Diluted EPS:

Consolidated Basic EPS:

Consolidated Diluted EPS:

Consolidated Basic EPS:

Consolidated Diluted EPS:

10% cumulative preferred stock, $100 par value,

2. Prepare the journal entry(ies) on January 1, 2015 for Bombard Corporation.

3. Prepare the journal entry(ies) on January 2, 2015 for Bombard Corporation.

Additional paid-in capital 16,500

Cash ($10,000 × 90%) 9,000

Investment in Sandy Corp.—common stock 27,000

10% cumulative preferred stock, $100 par value,

2. Prepare the journal entry(ies) on January 1, 2015 for Kaprelian Corporation.

3. Prepare the journal entry(ies) on January 2, 2015 for Kaprelian Corporation.

Additional paid-in capital 1,000

Cash ($10,000 × 90%) 9,000

Investment in Stello Corp.—common stock 36,000

2. Determine Pang's net income from Sala.

Add: Tax on undistributed income:

2. Determine Panitz's net income from Salazar.