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Chapter 07 - Consolidated Financial Statements—Ownership Patterns and Income Taxes – Hoyle, Schaefer,
Doupnik, 13e
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 being 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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Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Doupnik, 13e
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
from the previous two years (a carryback) or for the future 20 years (a carryforward).
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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Doupnik, 13e
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 being 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
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Doupnik, 13e
consumed within the consolidated group. For companies with large amounts of intra-entity
transactions, 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 being received in the form of dividends (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.
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Doupnik, 13e
12. A net operating loss carryforward allows the company to reduce taxable income for up to 20
years into the future. Thus, a benefit may possibly be derived from the carryforward but that
benefit is based on Wilson (the subsidiary) being able to generate taxable income to be
decreased by 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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Doupnik, 13e
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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Doupnik, 13e
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 $415,000) .................................................. $311,250

Dividend income (75% of $110,000) .............................................. 82,500
Tax difference ............................................................................ $228,750
Dividends received deduction upon eventual distribution (80%) (183,000)
Temporary portion of tax difference ........................................ $ 45,750
Tax rate .......................................................................................... 40%
Deferred income tax liability .................................................... $ 18,300
11. C Intra-Entity Gross Profit:

Total gross profit ........................................................................ $30,000
Portion still held .......................................................................... 20%
Intra-entity gross profit in inventory ....................................... $ 6,000
Tax rate .......................................................................................... 25%
Deferred tax asset ....................................................................... $ 1,500
12. A Recognition of this gross profit is not required on a consolidated tax return.
13. A Because fair value of the subsidiary's assets exceeds the tax basis by
$144,000, a deferred tax liability of $57,600 (40%) must be recorded. Goodwill
is then computed as follows:
Consideration transferred ....................................... $450,000

Fair value ............................................................... $454,000
Deferred tax liability ................................................. (57,600) 396,400
Goodwill .................................................................... $ 53,600
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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Doupnik, 13e
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-2016 $40,000
Amortization expense (2,000)
Accrual-based income $38,000
Aspen’s percentage ownership 80%
Equity accrual-2016 $30,400
Dividends received 2016 (8,000)
Birch's reported income-2017 $60,000
Amortization expense (2,000)
Income from Cedar [80% x ($10,000 - $1,000)] 7,200
Aspen’s percentage ownership 80%
Equity accrual-2017 $52,160
Dividends received from Birch 2017 (16,000)
Investment in Birch, December 31, 2017 $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 2018 $ 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—2018 $86,200
Outside ownership 20% $17,240
NCI share of 2018 consolidated income $23,040
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Doupnik, 13e
14. (continued)
d. 2017 Adjusted net income of Birch (prior to accounting

for intra-entity gross profit) (see a) $65,200
2016 Transfer-gross profit recognized in 2017 10,000
2017 Transfer-gross profit to be recognized in 2018 (16,000)
2017 Accrual-based net income - Birch $59,200
2018 Adjusted net income of Birch (prior to accounting

for intra-entity gross profit) (see c.) $86,200
2017 Transfer-gross profit recognized in 2018 16,000
2018 Transfer-gross profit to be recognized in 2019 (25,000)
2018 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—2018 ........................ $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
7-9
Education.
Doupnik, 13e
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
7-10
Education.
Doupnik, 13e
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)
7-11
Education.
Doupnik, 13e
18. (12 Minutes) (Acquisition accounting for a subsidiary’s operating loss

carryforward)
a. Consideration transferred 1/1/18 $1,080,000

Fair value of identifiable assets acquired:
Software licensing agreements $830,000
Deferred tax asset from NOL (.35 × $155,000) 54,250
Fair value of net identifiable assets acquired 884,250
Goodwill $195,750
b. Consideration transferred 1/1/18 $1,080,000

Fair value of identifiable assets acquired:
Software licensing agreements $830,000
Deferred tax asset from NOL (.35 × $155,000) 54,250
Valuation allowance for NOL (54,250)
Fair value of net identifiable assets acquired 830,000
Goodwill $250,000
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
2018, and defer [add] $40,000 intra-entity gross profit into 2019)
 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 2018
less $40,000 gross profit deferred into 2019)
 Net income attributable to Up Company = $198,000
b. On separate returns, the intra-entity gross profits in inventories are reported as

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

UP:
Income (without dividend income) ............................... $126,000
Tax rate .......................................................................... 30%
Currently payable to government ........................... $ 37,800
7-12
Education.
Doupnik, 13e
19. (continued)
DOWN:
Reported income ............................................................ $100,000
Tax rate .......................................................................... 30%
Currently payable to government ........................... $ 30,000
Total income tax payable: Current = $67,800 ($37,800 + $30,000)

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 $3,000 ($10,000 x 30%).
CONSOLIDATED INCOME TAX EXPENSE:
Income tax liability ($37,800 + $30,000 = $67,800) less deferred tax asset ($3,000)
= income tax expense $64,800.
Otherwise stated as: Up has a tax expense of $37,800 and Down has a tax
expense of $27,000 ($30,000 payable - $3,000 deferred tax asset). Income tax
expense on the consolidated income statement is $64,800.
20. (45 Minutes) (Computation of income tax expense and the related payable
balances)
a. $260,000 ($650,000 × 40%)

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
since a consolidated return is filed.
b. $260,000 ($650,000 × 40%)

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. $296,000 ($96,000 + $200,000)

Rogers would pay $96,000 or 40% of its $240,000 operating income. Clarke
would pay $200,000 or 40% 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 separate returns are being filed. Answer (c.) differs from (a.) and (b.)
because tax on the $90,000 intra-entity gross profit in inventory (40% or $36,000)
is paid immediately.
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Doupnik, 13e
20. (continued)
d. Clarke’s operating income $500,000

Dividends received net of 80% deduction
($80,000 x 70% x 20%) 11,200
Taxable income $511,200
Tax rate 40%
Clarke’s income tax payable $204,480
Clarke’s deferred taxes:

Intra-entity gain in ending inventory $90,000
Tax rate 40%
Clarke’s deferred tax asset $36,000
Rogers’ income before income tax $240,000

Less: income tax (40%) 96,000
Rogers net income $144,000
Less: dividends paid 80,000
Undistributed income $ 64,000
Clarke’s ownership percentage 70%
Clarke’s share of undistributed income $ 44,800
Less: dividends-received deduction (80%) 35,840
Income eventually taxable to Clarke $ 8,960
Tax rate 40%
Clarke’s deferred tax liability $ 3,584
Entry on Clarke’s books:

Deferred Tax Asset 36,000
Income Tax Expense 172,064
Deferred Tax Liability 3,584
Tax Payable 204,480
Entry on Rogers’ books:

Income Tax Expense (40% x $240,000) 96,000
Tax Payable 96,000
Consolidated tax expense = $172,064 + $96,000 = $268,064
e. $204,480 (see part d. above) Clarke owes $200,000 on its operating income
($500,000 × 40%) because the intra-entity gross profit in ending inventory cannot
be deferred. Clarke also owes $4,480 from the dividends received ($56,000 × 20% ×
40%). The difference between the Clarke’s $204,480 payment and the $172,064 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 equity accrual ($100,800) in excess of dividends received
($56,000).
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Education.
Doupnik, 13e
21. (20 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns.)
a. Consolidated Return—2018
Abbey income 2018 (sales less expenses) ........................................ $300,000

Benjamin income 2018 (sales less expenses) ................................... 100,000
2017 deferred intra-entity gross profit ................................................ 120,000
2018 deferred intra-entity gross profit ................................................ (150,000)
Taxable income ............................................................................... $370,000
Tax rate ................................................................................................ 35%
Income tax payable—current ......................................................... $129,500
Because no temporary differences exist in this problem, the income tax expense
would also be $129,500. 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 a consolidated return is being filed.
b. Separate Returns—2018
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 $105,000
($300,000 × 35%).
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 2017
although recognized in 2018 ................................... 120,000
Intra-entity gross profit in inventory taxed in 2018 ...... (150,000)
2018 net income subject to taxation ............................ $270,000
Tax rate ........................................................................... 35%
Income tax expense ....................................................... $94,500
The $10,500 difference between the expense and the payable is the tax effect on
the net intra-entity gross profit ($30,000 × 35%).
Benjamin will have an expense and payable of $35,000 ($100,000 × 35%).
Consolidated income tax expense is $129,500 ($94,500 + $35,000).
Consolidated income tax payable is $140,000 ($105,000 + $35,000).
7-15
Education.
Doupnik, 13e
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 $156,877. 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 $34,400 or 40% 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 $30,960 in income accruing from its investment in Boxwood (60% of the
after-tax income of $51,600 [$86,000 – $34,400]). Income tax expense for Lake is
computed as follows:
Operating income .......................................................... $300,000

Equity income ................................................................ $30,960
Taxable portion .............................................................. 20% 6,192
Income eventually subject to taxation ......................... $306,192
Tax rate ............................................................................ 40%
Income tax expense Lake (rounded) ............................. $122,477
Income tax expense Boxwood (above) ......................... 34,400
Total income tax expense ............................................. $156,877
-OR-
Lake’s operating income ................................................ $300,000
Dividends received net of 80% deduction
($10,000 x 60% x 20%) .................................................. 1,200
Taxable income ............................................................... $301,200
Tax rate 40%
Lake’s income tax payable ........................................ $120,480
Boxwood’s income before income tax.......................... $ 86,000
Less: income tax (40%) .................................................. 34,400
Boxwood’s net income ................................................... $ 51,600
Less: dividends paid ...................................................... 10,000
Undistributed income ..................................................... $ 41,600
Lake’s ownership percentage ........................................ 60%
Lake’s share of undistributed income .......................... $ 24,960
Less: dividends-received deduction (80%) .................. 19,998
Income eventually taxable to Lake ................................ $ 4,992
Tax rate ............................................................................ 40%
Lake’s deferred tax liability (rounded) ..................... $ 1,997
Income tax expense Lake ......................................... $122,477
Income tax expense Boxwood (above) .................... 34,400
Total income tax expense ............................................. $156,877
7-16
Education.
Doupnik, 13e
22. (continued)
Entry on Lake’s books:

Deferred Tax Liability 1,997
Tax Payable 120,480
Entry on Boxwood’s books:

Deferred Tax Asset 5,600
Tax Payable 40,000
b. Boxwood will pay $40,000 ($100,000 × 40%) 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 80% dividends received deduction) 20% 1,200
Income currently taxable ............................................... $301,200
Tax rate .......................................................................... 40%
Income tax payable—Lake ............................................ $120,480
Income tax payable—Boxwood (above) ...................... 40,000
Total income tax payable current ................................. $160,480
The $3,603 difference between the expense 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
($30,960 – $6,000 = $24,960 × 20% × 40%) .................................. $1,997
Deferred income tax asset on net intra-entity gross profit
($32,000 – $18,000 = $14,000 × 40%) ........................................... 5,600
Net decrease in expense ................................................................... $3,603
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 ................................................................................... 40%
Income tax expense ............................................................... $154,400
7-17
Education.
Doupnik, 13e
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 .......................................................................... 40%
Taxes to be paid ............................................................. $180,000
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 $200,000. Robertson would have to pay $80,000 or
40% of its $200,000 operating income. Garrison would pay $120,000 or 40% of
its $300,000 operating income. The intra-entity gain is not deferred because
separate returns are being filed. Intra-entity dividends are not taxable because
the parties still qualify as an affiliated group even though separate returns are
being filed.
c. Robertson must report an income tax expense of $80,000 or 40% 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 $84,000 (70% of that company's $120,000 after-tax income).
Garrison will record an income tax expense of $100,000 in connection with the
operating income ($250,000 × 40%) and $6,720 resulting from its equity income
($84,000 × 20% × 40%). Total expense to be reported amounts to $186,720 for
Garrison and Robertson ($80,000 + $100,000 + $6,720).
d. Garrison will pay $120,000 in connection with its operating income ($300,000 ×
40%) and $2,400 because of the dividends received from Robertson. Garrison
will receive $30,000 in dividends based on its 60% ownership. Of this total, only
$6,000 (20%) is taxable. Thus, at a 40% rate, the tax on the dividends would
amount to $2,400 ($6,000 × 40%). The total income taxes payable by Garrison is
$122,400 ($120,000 + $2,400).
7-18
Education.
Doupnik, 13e
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 ...................................... 40%
Deferred tax liability ................. $ 51,200
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 ................................................. (51,200)
Assigned to specific accounts ................................ 606,800
Acquisition consideration ........................................ 850,000
c. Excess assigned to goodwill ................................... $243,200
7-19
Education.
Doupnik, 13e
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, 2018 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, 2018 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, 1/1/18 (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, 1/1/18 (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 2016–2017. 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, 1/1/18 (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, 13e
25. (continued)
Entry S2
Common Stock (Wilson) ............................................... 310,000
Retained Earnings, 1/1/18 (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 2016 and 2017 has been taken into account in
determining the January 1, 2018 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, 13e
25. (continued)
Entry E
Operating Expenses ................................................. 2,000
Equipment ............................................................... 5,000
Franchise Contracts ........................................... 4,000
Buildings ............................................................... 3,000
(To record 2018 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 2017 gross profit (Entry *G) 12,000
Deferral of 2018 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, 13e
25. (continued)
HOUSE CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidation Worksheet
December 31, 2018
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, 1/1/18:
—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, 12/31/18 (969,000) (652,000) (170,000) (971,800)
7-23
Copyright © 2017 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, 13e
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, 1/1/18 (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, 1/1/18 (Lowly) ........................... 500,000
Investment in Lowly (60%) ................................. 480,000
Noncontrolling Interest in Lowly 1/1/18 (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 1/1/18 (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 2018.)
Net income attributable to noncontrolling interest = $14,000

[40% × ($40,000 - $5,000)]
7-25
Education.
Doupnik, 13e
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, 2017 book values are determined by removing the 2017 income
from the January 1, 2018 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, 1/1/18 (Stookey) ....................... 7,680
(To give effect to intra-entity gross profit deferral from 2017. 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, 1/1/18 (Yarrow) ................... 85,856
(To recognize equity income accruing from Yarrow's investment in Stookey
during 2017. Because the initial value method is applied and no dividends
declared, no income has been recognized in connection with the 2017
ownership of Stookey. Reported income of $120,000 [2017] 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, 13e
27. (continued)
Entry *C2
Investment in Yarrow ............................................... 217,670
Retained Earnings, 1/1/18 (Travers) .................. 217,670
(To recognize equity income accruing from Travers' investment in Yarrow
during 2017. Because the initial method is applied and no dividends
declared, income has not been recognized in connection with the 2017
ownership of Yarrow. Income of $245,856 is calculated based on reported
income of $160,000 [2017] 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 2017.)
Entry S1
Common Stock (Stookey) ........................................ 200,000
Retained Earnings, 1/1/18 (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, 1/1/18 (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, 2018 unamortized portion of acquisition price

assigned to Stookey’s copyright.)
7-27
Education.
Doupnik, 13e
27. (continued)
Entry A2
Customer List ............................................................ 56,000
Investment in Yarrow . ......................................... 50,400
Noncontrolling Interest in Yarrow ...................... 5,600
(To recognize January 1, 2018 unamortized portion of acquisition price
assigned to customer list.)
Entry E
Copyright .............................................................. 5,000
Customer List ....................................................... 4,000
(To recognize amortization expense for 2018—$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 2018.)
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

2018 Reported net income ............................................ $100,000
Copyright amortization .................................................. (5,000)
Recognition of 2017 deferred gross profit (*G) ........... 7,680
Deferral of 2018 intra-entity gross profit (G) ................ (9,600)
Accrual-based net income 2018 ................................... $93,080
Outside ownership ......................................................... 20%
Noncontrolling interest in Stookey's net income ........ $18,616
Noncontrolling Interest in Yarrow's Net Income

2018 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—2018 ................................. $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, 2018
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, 1/1/18:
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, 12/31/18 (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, 12/31/18 (above) (892,000) (800,000) (400,000) (S1) 98,464 (1,353,088)
NCI interest in Stookey, 1/1/18 (A1) 9,000 (107,464)
(S2) 98,586
Noncontrolling interest in Yarrow, 1/1/18 (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, 13e
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 ................................................................................................. 45%
Income tax payable .............................................................................. $229,950
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 ................................................................................................. 45%
Income tax payable .............................................................................. $45,000
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:
2018 Intra-entity gross profit taxed in 2018 ........................................ $9,600

2017 Intra-entity gross profit taxed previously in 2017 ..................... (7,680)
Increase in taxable income ................................................................. $1,920
Tax rate ................................................................................................. 45%
Deferred income tax asset .................................................................. $ 864
Income Tax Expense:

Travers and Yarrow—payable (part b) .......................................... $229,950
Stookey—payable (part c) .............................................................. 45,000
Total taxes to be paid—2018 .......................................................... $274,950
Prepayment (asset) (above) ........................................................... (864)
Income tax expense 2018................................................................ $274,086
Because a single rate is used, income tax expense can also be computed by
taking consolidated net income (prior to noncontrolling interest reduction) of
$609,080 (part a.) and multiplying by the 45% tax rate to obtain $274,086.
Income tax expense—current ....................................... 274,086

Deferred income tax—asset .......................................... 864
Income tax payable .................................................. 274,950
7-30
Education.
Doupnik, 13e
28. (40 Minutes) (Series of questions about a business combination and its income
tax reporting)
a. Partial equity method. "Income of Syber" is 80% of Syber's reported total,

suggesting neither amortization nor intra-entity profit adjustments. Also,
Parson’s recognition of “Income of Syber” does not equal its share of
consolidated net income and Parson’s retained earnings does not 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, 13e
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 40% rate, both the expense and
payable would be $117,400.
Income tax expense ....................................................... 117,400

Income tax payable .................................................. 117,400
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 $80,000. Because of the level of
ownership, intra-entity dividend (or investment) income is omitted.
Income Tax Expense ..................................................... 80,000

Income Tax Payable ................................................. 80,000
7-32
Education.
Doupnik, 13e
28. k. (continued)
On a separate return, Syber would report $100,000 operating income for a

payable of $40,000. 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 ($1,600) is a prepayment.
Income Tax Expense ..................................................... 38,400

Deferred Income Tax Asset ............................................ 1,600
Income Tax Payable ................................................. 40,000
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 ..................................................................................... 40%
Income tax expense .......................................................................... $38,400
Taxes payable ..................................................................................... 40,000
Deferred tax asset ................................................................................ $ 1,600
29. (45 Minutes) Develop worksheet entries that were used to consolidate the
financial statements of a father-son-grandson combination.
Entry *G
Retained Earnings, 1/1/18 (Delta) ............................ 15,000
(To recognize intra-entity gross profit in inventory in 2017 [amount
provided].)
Entry *C1
Retained Earnings, 1/1/18 (Delta) ............................ 7,000
Investment in Omega Company ......................... 7,000
(To recognize amortization expense from Delta’s acquisition for 2017.)
7-33
Education.
Doupnik, 13e
29. (continued)
Entry *C2
Retained Earnings, 1/1/18 (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 1/1/18 (80% × $15,000) . 12,000
*C2 adjustment .......................................................... $27,600
Entry S1
Common Stock (Omega) .......................................... 100,000
Retained Earnings, 1/1/18 (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, 1/1/18 (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, 2018 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, 13e
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, 13e
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)
2017 intra-entity inventory gross profit deferral .......... 15,000
2018 intra-entity inventory gross profit deferral ......... (22,000)
Accrual-based income—Delta (2018) ........................... $159,750
Net income attributable to noncontrolling interest ...... $ 31,950
Noncontrolling interest in Delta Company ...................

Noncontrolling interest, 1/01/18 (Entry S2) ............. $99,600
Noncontrolling interest, 1/01/18 (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, 12/31/18 .......... $146,050
Noncontrolling interest in Omega Company ................

Noncontrolling interest, 1/01/18 (Entry S1) ............. $60,000
Noncontrolling interest in Omega’s income (above) 18,000
Noncontrolling interest, 1/01/18 (Entry A) ............... 33,000
Dividends declared to NCI ($50,000 × 30%)............. (15,000)
Noncontrolling interest in Omega, 12/31/18....... $96,000
7-36
Education.
Doupnik, 13e
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.
Doupnik, 13e
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, 2015 2014
Deferred tax assets:
Property, plant and equipment $ 192 $ 96
Trademarks and other intangible assets 68 68
Equity method investments (including translation adjustment) 694 462
Derivative financial instruments 161 134
Other liabilities 1,056 1,082
Benefit plans 1,541 1,673
Net operating/capital loss carryforwards 413 729
Other 175 196
Gross deferred tax assets 4,300 4,440
Valuation allowances (477) (649)
Total deferred tax assets 1,2 $ 3,823 $ 3,791
Deferred tax liabilities:
Property, plant and equipment $ (1,887) $ (2,342)
Trademarks and other intangible assets (3,422) (4,020)
Equity method investments (including translation adjustment)(1,441) (1,038)
Derivative financial instruments (687) (457)
Other liabilities (216) (110)
Benefit plans (367) (487)
Other (726) (944)
Total deferred tax liabilities3 $ (8,746) $ (9,398)
Net deferred tax liabilities $ (4,923) $ (5,607)
1 Noncurrent deferred tax assets of $360 million and $319 million were included in the line item
other assets in our consolidated balance sheets as of December 31, 2015 and 2014, respectively.
2Current deferred tax assets of $151 million and $160 million were included in the line item
prepaid expenses and other assets in our consolidated balance sheets as of December 31, 2015
and 2014, respectively.
3Current deferred tax liabilities of $743 million and $450 million were included in the line item
accounts payable and accrued expenses in our consolidated balance sheets as of December 31,
2015 and 2014, respectively.
As of December 31, 2015 and 2014, we had $62 million of net deferred tax assets and
$643 million of net deferred tax liabilities, respectively, located in countries outside the
United States.
As of December 31, 2015, we had $4,419 million of loss carryforwards available to reduce
future taxable income. Loss carryforwards of $356 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.
Another random document with
no related content on Scribd:
sail area, 125;
heavy armament, 126;
peculiar gun mountings, 126;
burnt by Federals, 127;
raised, altered and refitted by Confederates, 127;
railway-iron armoured casemate, 127;
her destructive trial trip, 128;
duel with Monitor and gunboats, 128, 131, 132, 133, 137;
scuttled by commander, 133
Military mast, 166
Millwall Ironworks, 122
Modern guns and ships in war, 236
Modern heavy artillery construction, 282
Monitor:
Ericsson’s tender, 128;
officials’ interference with plans, 129;
derision and abuse, 129;
change in naval construction inaugurated by, 129;
as ram, 129;
Admiral Porter’s advocacy, 130;
peculiar shape, 131;
narrow escape, 131;
why name chosen, 131;
armament and armour, 131;
duel with Merrimac, 128, 131-3;
steering gear and anchor
out of reach of hostile fire, 133;
lost in rough weather, 133
Monitor:
in Prussian-Danish War, 151;
coast defence, 182;
double turreted, 151, 153;
craze for, 144
Mortar boats, 114
Napier, Sir C., 90
Napoleon I., proposed rescue from St. Helena, 293
Naval artillery: Later developments, 273
Naval corruption, 221
Necessity of armour protection, 146
New Georgia canoes, 31
New Guinea Lakatoi, 29
New Zealand (Maori) war canoes, 25 et seq.
Noble, Sir A., 281
Nordenfeldt, Dr., 299
(see Submarines)
Number of rowers in banked ships, 9
Oblong iron forts on steam rafts, 199

Old ships re-armed, 243
“One-ass power,” 15
Oscillating paddles, 81
Outriggers, 24, 25
Paddles:
Boxes and wheels, objection to, 81, 97;
frigates with, 96, 97, 106;
gunboats in action, 113;
trials against screws, 98;
war steamers with, 95;
war junks with, 35;
sponsons extended to carry cannon, 97
Palliser, Major, 274
Palmer’s, 306
Parodus, 6
Passengers called on to fight, 77
Penn, John, and Sons, 103, 178
Pett, Phineas, 54, 57
Phœnicians’ connection with Britain, 15;
war galleys, 6
Pickled human heads, 49
Pioneer of modern battleship, 244
Portholes, invention of, 42, 49;
plated ports, 120;
reduced size, 120;
diagonal plates, 125
Privateers, 140
Projectiles:
Armour-piercing, 265, 273;
Bessemer steel, 267;
Dutch cheeses, 76;
flat-headed, 268;
human heads, 73;
anti-war shell, 268;
Palliser, 164, 269, 274;
Whitworth, pointed and cylindrical, 274;
studded, 277;
steel, 268;
stone cannon balls, 40;
solid and hollow shot, 126;
resistance of armour to, 322-3;
lead-coated, 274;
velocity, 272;
weight, 274;
elongated shell, 85, 86
Propellers:
Adjustable, 123;
advantages, 148;
Dudgeon’s, 148;
Ericsson’s screw, 92;
Griffiths’, 125, 147;
Smith’s, 92;
Mangin, 122;
twin screws, 138, 148, 173;
adoption by Admiralty, 150;
first British twin screw ironclad, 150;
twin screw in United States of America, 125
Proposal to subject Cerberus to gunfire with crew on board, 184,
185
Protected ships (Japanese), 37
Queen Elizabeth and Navy, 50, 51;

second embassy to Turkey, 53
Rafts, 21
Railway locomotives as marine engines, 106
Raleigh, Sir Walter, as critic, 55
Ram, 5, 6, 7, 10, 119, 172, 190, 205
Ramberges, 44
Range-finding tower, 259
Rapid building, 192, 247
Ratings, 57, 59
Recessed ports, 150, 172
Reed, Mr., afterwards Sir E., 195
Remarkable French ironclads, 190-1
Rennie, J. and G., 94
Report on Royal Navy (1552), 50
Resistance of armour to projectiles, 322-3
Robinson and Russell, 98, 113
Russell, Scott, 90, 120
Russo-Japanese War:
Russian fleet’s departure for the Far East, 236;
British trawlers or Japanese torpedo boats, 236;
Russian fleet’s slow speed, 236;
going to destruction, 236;
Japan’s ships’ superior speed, 237;
Russians reach Japanese waters, 236;
sudden Japanese attack, 237;
Russian ships overloaded and filthy, 237;
Japanese gunnery superior, 237;
Russians defeated in two hours, 237;
Admiral Togo’s objects, incidents of the battle, 239-40
Russo-Turkish War:
Value of torpedo to Russians, 200;
powerful Turkish fleet, 212;
Turkish ships torpedoed, 212-3;
naval encounter, 214
Ruthven’s hydraulic propulsion, 186;
experiments, 187-8
Sailers converted into steamships, 105

Sailing warships with attendant steamers, 95, 107
Sakers, 74
Samoan war canoe, 26
Samuda, 194, 233
“Sappy timbers and rotten planking,” 241
Scouts, combination of gunboat, cruiser and destroyer, 311;
English and American, 311
Sea-fights of the Crusades, 14
Sea-going turret ship, 193
Secondary armaments, 251, 252, 303
Semmes, Capt. R., 140
Seppings, Sir R., 65
Serpentines, 45
Seventeenth century cannon, 74
Screws (see Propellers)
Shark’s-mouth rudders, 149
Shields of basket work, 6, 15
Ships Mentioned:
Aaron Manby, 90
Abyssinia, 183
Achilles, 172
Acorn, 310
Actinaut, 288
Active (1822), 89
Admiral Popoff, 180
Adventure, 60
Adventure (scout), 311
Affondatore, 153
Agamemnon (1853), 105
Agamemnon (1906), 252, 317
Agincourt (1865), 122, 167
Alabama, 141
Albatross, 185
Albatross (1899), 306
Albemarle (Confederate), 134, 286
Alecto, 98
Alexander III. (Russian), 238
Alexandra, 174, 216
Almirante Cochrane, 203, 296
Almirante Condell, 209, 210
Almirante Lynch, 209, 210
Amethyst, 201
Amphion (1895), 253
Antelope (Queen Elizabeth), 52
Archimedes, 92
Arethusa (1895), 253
Ark Royal, 52
Arrogant, 103
Arminius, 194
Ascension (Queen Elizabeth), 53
Assar-i-Chevket, 214
Assar-i-Tewfik, 212
Ataka Maru, 37
Atlanta (Confederate), 133
Atlanta (United States), 222
Audacious, 173
Avni-Illah, 212
Azazieh, 212
Bacchante, 256
Baltimore (United States), 224, 225, 227
Bangor (United States), 123
Barfleur, 260
Basilisk, 99
Battle Animal, 5
Beacon, 216
Beagle, 310
Bellerophon (1865), 148, 163, 172
Bellerophon (1907), 317
Belier, 163
Beloved of Amon, 5
Benbow, 245
Berenguela (Spanish, 1865), 198
Birkenhead, 99, 100
Bittern, 216
Black Eagle, 102
Black Galley, 51
Black Prince (1860), 129, 158
Black Prince (1904), 261
Blanco Encalada, 203, 296 et seq.
Bolivar (Venezuelan), 173
Bombe (1885), 305
Bonaventure, 52
Borodino (Russian), 238, 239
Boston (United States), 222, 227
Boxer, 306
Brilliant (36-gun frigate), 60
Brooklyn (United States, 1862), 140
Brooklyn (United States, 1895), 233
Buenos Ayres (Argentine), 263
Cabral (Brazil), 199
Caledonia (1794), 64
Caledonian, 172
Calliope, 257
Camperdown, 245
Canopus, 250, 260
Captain, 160, 161, 183
Caracon, 46
Castilla (Spanish), 227
Centurion (1897), 248
Cerberus, 183, 184, 185, 243
Charleston (United States), 223
Chesapeake (United States), 60, 61
Chicago (United States, 1883), 222
Christopher Spayne, 43
Collingwood, 317
Colombo (Brazil), 199
Colossus (1882), 244
Colossus (1911), 318, 320
Columbia (United States), 225
Comet (1821), 89
Commerce de Marseilles (French), 63
Comus, 257
Concord (Spanish), 228
Condor, 216
Congreve (French), 109
Conqueror (1882), 244
Conqueror (1911), 262, 318, 319
Constant Warwick, 57
Constellation (United States), 60
Constitution (United States), 60, 61
Courageux, 58
Covadonga (Chilian), 197, 205, 206
Cressy, 261
Cristobal Colon (Spanish), 232
Cushing (United States), 224
Cygnet, 216
Dandolo (Italian), 152, 177
Danton (French), 325
Dantzig (Prussian), 98
Daring, 306
Dartford, 261
David (Confederate), 136, 294
Decoy, 216
Delaware (United States), 325
Demologos, 82
Desperate, 306
De Tygre (Dutch), 193
Devastation (1869), 161 et seq., 176, 243
Dévastation (French, 1854), 109
Devonshire, 260
Diamond (1874), 256
Dictator, 138
Dolphin (United States), 222
Don Antonio de Ulloa (Spain), 229
Doncaster, 81
Don Juan (Austrian), 153
Dover, 93
Drache (Austrian), 153
Drake (1902), 260
Dreadnought (Caledonia), 64
Dreadnought (Queen Elizabeth), 52
Dreadnought (turret), 244, 240, 171, 176
Dreadnought (1906), 240, 313-321
Druid, 185
Duilio (Italian), 152, 177
Duncan, 250, 261
Dunderberg, 189
Duke of Wellington, 105
Dupuy de Lôme, 259
Dwarf, 94
“E,” 304
Edinburgh, 244
Edward, 47
Elburkah, 90
Elizabeth Jones, 52
Encounter, 103
Esmeralda (1865), 197
Esmeralda (1883), 258
Erebus (1854), 112
Ernest Renan, 263
Essex, 60
Faid Gihaad, 97
Far East, 150
Ferdinand Maximilian, 153, 155
Fingal, 133
Flora, 148
Foo-So (Japanese), 233
Formidabile (Italian), 153
Formidable, 250
Foudroyant (French), 109
Fulton the First, 82
Furor (Spanish), 232
Fury, 171
Gabriel Royal, 49
Garry Owen, 91
Gem of the Ocean, 225
George, 51
Glatton (1854), 111
Glatton (1869), 161, 182
Gibraltar (ex Sumter), 141
Gloire (French), 117-20
Glorious in Memphis, 5
Gorgon, 95
Goubet, 300
Grappler, 76
Grace de Dieu, 44
Great Britain, 93
Great Dragon, 17
Great Eastern, 93
Great Harry, 44, 45, 46, 47, 50
Greenock, 101
Guadeloupe, 91
Guerriere, 61
Gymnote, 300
Habsburg, 153
Handig Vlug, 241
Hardy, 274
Hartford (United States), 136
Hatteras, 141
Hebe, 149
Hebe (French frigate), 96
Hecate, 90
Hecla, 90
Hector (1860), 147, 172
Heiligerlee (Dutch), 192
Helicon, 172
Henry, 57
Henry Grace de Dieu, 44
Hercules (1866), 158, 173, 195, 243
Hercules (1911), 318
Hibernia (1790), 62
Holigost, 43
Holland, 295 et seq.
Holy Ghost, 44
Hood (1897), 247, 248, 321
Hornet, 306
Housatonic, 294
Huascar, 200 et seq.
Imperieuse (1881), 258
Inconstant (1869), 181, 257
Indiana, 232
Independencia (Peru), 202-206
Infanta Maria Teresa, 230, 232
Inflexible (1876), 175-8, 216, 241
Inflexible (1907), 261
Invincible, 58
Invincible (1876), 216
Invincible (1907), 253
Iowa, 233
Iris (1878), 253
Iron Duke, 173
Ironsides, 136
Janus, 306
Jesus, 43
Kaifu, 310
Kaiser (Austrian), 153
Kaiser Maximilian, 153
Katahdin, 222
Katherine, 57
Katherine Forteless, 50
Kearsarge, 141
Kearsarge (second), 225
Kentucky, 225
Key-ing, 35
King Edward VII., 251
King George (Greek), 194, 212
Kniaz Suvaroff, 238, 239
Krokodil, 192
Kron Prim, 194
Lady Nancy, 114
Lave (French), 109
Leander, 257
Leicester (galleon), 53
Leviathan, 58
Lightning (1823), 89
Lion (Queen Elizabeth), 52
Lion (15th century), 49
Liverpool, 261
Long Serpent, 18
Lord Clyde, 147
Lord Nelson, 314, 317
Lutfi-Djelil, 213
Magdala, 183
Magenta (French), 191
Magnificent, 248-50, 261
Mahmoudieh, 212
Maine (1886), 224, 226, 255
Majestic, 248-50, 262, 314, 322
Maori, 310
Marie de la Cordeliere, 45
Mary, 173
Mary Florence, 207, 208
Mary Rose, 49, 50, 52
Mastiff, 274
Megæra, 99
Merchant Royal, 53
Mercury (1878), 253
Mermaid (1842), 94
Merrimac, 124 et seq.
Messoudiye, 175, 212
Miantonomoh, 189
Minos Geraes, 324
Minin, 179
Minneapolis, 225
Minotaur (1865), 122, 147, 148, 158
Minotaur (1906), 261
Mohawk, 308
Moltke, 326
Monarch (1868), 159-61, 183, 216, 244
Monarch (1911), 318-20
Monitor, 92 (see Index)
Monkey, 89
Mouette (French), 113
Mrs. Grand, 50
Mute, 292
Nahant, 133
Naugatuck, 137
Nautilus, 291
Nemesis, 91
Neptune, 103
Neptune (1911), 318-20
Niger, 99
Nile, 244, 246, 321
Nix (Prussian), 113
Nonpareil, 52
Northumberland (1865), 122, 147, 148, 243
Novelty, 92
Novgorod, 180
Numancia (1864), 192, 197, 230
Ocean, 172
O’Higgins, 208
Old Ironsides, 61, 136
Olympia, 227
Onondaga, 190
Oquendo, 230
Oregon, 226, 233
Orel, 238, 239
Orion, 317, 318, 321
Orkanieh, 212
Osliabya, 239
Osmanieh, 212
Pallas (armour plate), 172
Pallas (36-gun frigate), 60
Pelayo, 230
Penelope (1843), 96
Penelope (1867), 150, 216
Peter the Great, 179
Phæton (1897), 254
Phœnix (British), 95
Phœnix (Stevens’), 82
Plongeur, 294
Pluton, 232
Powerful, 259
President (United States), 60
Prince (Prince Royal), 54
Princess Royal, 262
Princeton, 92
Prinz Eugen, 153
Quail, 306
Queen Mary, 262
Rainbow, 52
Raleigh, 227
Ramillies, 292
Rattler, 98
Rattlesnake, 305
Recruit, 113
Re d’Italia, 152
Re de Portogallo, 152
Regent, 45, 49
Reina Cristina, 227
Renown (1897), 248, 260
Research, 172
Resurgam, 295
Retribution, 106
Rhadamanthus, 90
Rio de Janeiro, 262
Rising Star, 88
Roccafortis, 20
Rochambeau, 189
Rolf Kraake, 151
Rossia (1896), 259
Royal Louis, 58
Royal Sovereign (1783), 63
Royal Sovereign (1861), 146, 243
Royal Sovereign (1897), 247, 248, 321
Royal William, 94
Rupert, 244
Rurik (1894), 259
Rurik (1906), 259
Salamander (Austrian), 153
Salamander (Prussian), 113
Salamander (1832), 89
Salem, 311
Sans Pareil, 245
Sapphire (1874), 256
Scorpion, 172
Scourge (United States), 124
Sea Devil (Russian), 294
Seraing, 186
Shah, 201
Shannon, 61
Shannon (1853), 105
Shenandoah (Confederate), 140, 143
Ship of Pharaoh, 5
Simoom, 99
Skeered-o’-Nothing (United States), 324
Southfield, 164
Sovereign, 45, 49
Sovereign of the Seas, 55
Speedwell, 51
Star, 306
Stromboli, 95, 114
St. Vincent (1909), 317
Submarine A1, 296
Success, 76
Sultan, 103, 167, 173
Sumter (Confederate), 140
Superb (1875), 175, 212, 216, 243
Superb (1908), 317
Superbe (French), 58
Swift, 309
Swiftsure (Queen Elizabeth), 52
Tartar, 309
Taureau, 163, 190
Temeraire (1876), 174, 216, 244
Temeraire (1907), 317
Tennessee (Confederate), 134
Terribile (Italian), 153
Terrible (steam frigate), 97
Terrible (1895), 259
Terror (1854), 110
Texas, 224, 225, 233
The Pitt, 76
Thetis, 113
Thunderbolt, 233
Thunderer (1869), 162, 171, 176
Thunderer (1911), 318, 319
Tonnante, 109
Trafalgar (1886), 246, 321
Transporter, 298
Trident, 99
Trinity, 44
Trinity Royal, 43
Triumph (1578), 51, 52
Triumph (1903), 251
Trusty (1854), 111
Tryeright, 51
Tsushima, 263
Turbinia, 306
United States, 60
Valorous, 97
Vanguard (1512), 52
Vanguard (1871), 173
Vanguard (1909), 317
Vesta, 214
Vesuvius, 95
Vesuvius (United States), 224
Victoria (Peruvian), 198
Victoria (Spanish), 230
Victoria (1859), 116
Victoria (1887), 245, 246
Victory, 52
Ville de Madrid, 198
Ville de Paris, 62
Viper, 188
Virginia, 124
Vixen, 188
Vizcaya, 230
Vladimir, 106
Von der Tann, 253
Vulcan, 303
Wampanoag, 256
Warrior, 118, 147, 243
Warspite (1881), 258
Waterwitch, 186
Weehawken, 134
Weser, 113
Whang-Ho, 35
Wyvern, 172
Yarra, 310
Yorktown, 223
Ysabel Segunda, 96
Shortland Island Canoes, 31
Simms, Lieut.-Commander W. S., U.S.N., 237, 312, 314
Slaves as rowers, 11
Sloops, 59
Solomon Island Canoes, 30, 31
Ship of 1486-50, 41
Ship construction:
Longitudinal, 120;
transverse, 120;
longitudinal watertight bulkheads, 171;
brass stern and rudder post, 182;
bracketed frames, 163;
sunk forecastle, 163
(see Freeboard)
“Ship of the Future,” 193
Ships with banks of oars, 7
Siamese native warships, 38
Soft-ended barbette ships, 244
Spanish-American War, 227 et seq.:
American Pacific fleet, 227;
Spanish naval force at Manila, 227;
American and Spanish fleets compared, 228;
Battle of Manila Bay, 228-9;
destruction of Spanish fleet, 229;
American Atlantic fleet, 230;
Spanish fleet, 230;
Admiral Cervera’s complaints, 230;
Spanish dash from Santiago; destruction of Spanish fleet, 230-
3;
Admiral Sampson’s 4th July present to the nation, 231
Spanish Armada, 51
Spur gearing, 98, 101, 103
Sponsons as gun platforms, 97
Speed, 202, 236, 237, 238, 239, 253, 302;
rapid firing guns and increased speed, 304;
of destroyers, 306;
with turbines, 308;
objections to high speed, 308;
Invincible and Von der Tann, 254;
former’s speed, how obtained, 255;
speed retarded by marine growths, 257;
importance of, in armoured cruisers, 260;
turbine engines, 262;
length, beam, and speed, 263, 264
Stanhope, Lord, 87
Steam rotated circular fort, 86
Steel:
adopted by United States of America, 222;
protective deck, 146;
supplanting iron, 179, 181;
gradual adoption in warships, 241;
early steel warship, 241;
advantages over iron, 243;
heavy armoured steel ship, 244;
first battleships for British Navy, 244;
single-turreted battleships, 246;
armour 20 inches thick, 246;
Harveyised steel armour introduced in British Navy, 248;
Renown 10-inch armour stronger than Royal Sovereign’s 18-
inch armour, 248;
hulls, wood sheathed, 259;
nickel steel armoured deck, 261;
chrome, 276
Steering gear:
protection, 133, 159;
lack of protection, 153;
first warship with steam steering gear, 123
Stevens’ floating battery, 83, 84;
ironclad ram, 138
Stitched canoes, 30;
planks, 21, 28
Stockton, Commodore R. F., 84, 128
Superiority of Dreadnoughts over pre-Dreadnoughts, 262
Swivel guns on paddle steamers, 126
Symonds, Captain, 173

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II. Indirect subsidiary control-connecting affiliation

III. Mutual ownership

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

2. In a business combination having an indirect ownership pattern, at least one company is in

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 $415,000) .................................................. $311,250

11. C Intra-Entity Gross Profit:

Consideration transferred ....................................... $450,000

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. 2017 Adjusted net income of Birch (prior to accounting

2018 Adjusted net income of Birch (prior to accounting

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

Net income reported by Nephew—2018 ........................ $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 1/1/18 $1,080,000

b. Consideration transferred 1/1/18 $1,080,000

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

DUE TO GOVERNMENT: (separate returns)

Total income tax payable: Current = $67,800 ($37,800 + $30,000)

CONSOLIDATED INCOME TAX EXPENSE:

a. $260,000 ($650,000 × 40%)

b. $260,000 ($650,000 × 40%)

c. $296,000 ($96,000 + $200,000)

d. Clarke’s operating income $500,000

Clarke’s deferred taxes:

Rogers’ income before income tax $240,000

Entry on Clarke’s books:

Entry on Rogers’ books:

Consolidated tax expense = $172,064 + $96,000 = $268,064

Abbey income 2018 (sales less expenses) ........................................ $300,000

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

Benjamin will have an expense and payable of $35,000 ($100,000 × 35%).