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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes
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.
7-1
2. The treasury stock approach is popular in practice because of its simplicity and is now
required by the FASB Codification.
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 realized.
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 realized 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 unrealized 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 market value on the date the combination is created).
B. If additional taxes will result in future years (for example, it 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).
7-2
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.
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 realized 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 realized income. This realized 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, SFAS 160 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.
7-3
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
8. 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.
9. Several basic advantages are available to combinations that file a consolidated tax return.
First, intra-entity profits are not taxed until realized. For companies with large amounts of intra-
entity transactions, the deferral of unrealized 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.
10. The allocation of income tax expense among the component companies of a business
combination has a direct bearing on realized income totals and, therefore, noncontrolling
interest calculations. Obviously, the more expense that is assigned to a particular company
the less realized 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.
11. 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 realized 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 unrealized intra-entity gain. On a separate tax return, such gains are
reported at the time of transfer while for financial reporting purposes they are appropriately
deferred until realized. Once again, a temporary difference is created which necessitates the
recognition of deferred income taxes.
12. 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,
7-4
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.
13. 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.
14. 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.
Answers to Problems
1. D
2. B
3. D
4. C
5. C
6. C
7. A Damson's accrual-based income:

Operational income ................................................................... $200,000
Defer unrealized gain ................................................................ (40,000)
Damson's accrual-based income ....................................... $160,000
Crimson's accrual-based income:

Investment Income (90% of Damson’s realized income) ....... 144,000
Crimson's accrual-based income ....................................... $344,000
7-5
Bassett's accrual-based income:

Investment income (80% of Crimson's realized income) ....... 275,200
Bassett's accrual-based income ........................................ $575,200
8. C Icede's accrual-based income:

Icede's accrual-based income ............................................ $160,000
Outside ownership .................................................................... 20%
Noncontrolling interest ....................................................... $32,000
Healthstone's accrual-based income:

Investment income (80% of Icede's accrual-based income) . 128,000
Healthstone's accrual-based income ................................. $398,000
Outside ownership .................................................................... 20%
Noncontrolling interest ....................................................... $79,600
Total noncontrolling interest = ($32,000 + $79,600) = $111,600
9. D Juvyn's operational income .......................................................... $50,000

Dividend income ............................................................................. 14,000
Juvyn's income ............................................................................... $64,000
Outside ownership ......................................................................... 10%
Noncontrolling interest .................................................................. $6,400
10. A Equity income (60% of $200,000) .................................................. $120,000

Dividend income (60% of $40,000) ................................................ 24,000
Tax difference ............................................................................ $96,000
Dividend deduction upon eventual distribution (80%) ................ (76,800)
Temporary portion of tax difference ........................................ $19,200
Tax rate .......................................................................................... 30%
Deferred income tax liability .................................................... $5,760
11. C Unrealized Gain:

Total gain ..................................................................................... $30,000
Portion still held .......................................................................... 20%
Unrealized gain .......................................................................... $6,000
Tax rate .......................................................................................... 25%
Deferred tax asset ....................................................................... $1,500
7-6
12. A Recognition of this gain is not required on a consolidated tax return.
13. C Because fair value of the subsidiary's assets exceeds the tax basis by
$100,000 a deferred tax liability of $30,000 (30%) must be recorded. Goodwill
is then computed as follows:
Consideration transferred ....................................... $420,000

Fair value ............................................................... $400,000
Deferred tax liability ................................................. (30,000) 370,000
Goodwill .................................................................... $50,000
14. (35 Minutes) (Series of reporting and consolidation questions pertaining to a

father-son-grandson combination. Includes unrealized inventory gains)
a. Consideration transferred (by Tree) ............................. $252,000
Noncontrolling interest fair value ................................. 108,000
Limb’s business fair value ............................................. 360,000
Book value ............................................................... (300,000)
Trade name ...................................................................... $60,000
Life .................................................................................. 30 years
Annual amortization ...................................................... $2,000
14. (continued)
Consideration transferred for Leaf (by Limb) .............. $91,000
Leaf’s business fair value ............................................. $130,000
Book value ............................................................... (100,000)
Trade name ...................................................................... $30,000
Life .................................................................................. 30 years
Annual amortization ...................................................... $1,000
a. Investment in Limb $252,000

Limb's reported income-2009 $40,000
Amortization expense (2,000)
Accrual-based income $38,000
Limb’s percentage ownership 70%
Equity accrual-2009 $26,600
Dividends received 2009 (7,000)
Limb's reported income-2010 $60,000
Amortization expense (2,000)
Income from Leaf 6,300
Limb’s percentage ownership 70%
Equity accrual-2010 $45,010
7-7
Dividends received 2010 (14,000)

Investment in Limb 12-31-10 $302,610
b. Leaf—2010 income (revenues minus expenses) $10,000

Amortization (1,000)
Limb's ownership percentage 70%
Equity income accrual $6,300
Income recognized ($2,000 dividends × 70%) (1,400)
Retained earnings increase (Limb), 1/1/11 $4,900
Limb—2009 operating income $40,000

Limb—2010 operating income 60,000
Amortization (2 years at $2,000 per year) (4,000)
Equity income from ownership of Leaf (above) 6,300
Total income for previous periods 102,300
Tree's ownership percentage 70%
Equity income accrual 71,610
Income recognized ($10,000 [2009] + $20,000 [2010]
dividends × 70% ownership) (21,000)
Retained earnings increase (Tree), 1/1/11 $50,610
15. (continued)
c. Consolidated sales (total for the companies) $1,260,000

Consolidated expenses (total for the companies) (1,025,000)
Total amortization expense (see a.) (3,000)
Consolidated net income for 2011 $232,000
d. Noncontrolling interest in income of Leaf

Revenues less expenses $30,000
Excess amortization (1,000)
Noncontrolling interest percentage 30%
Noncontrolling interest in income of Leaf $8,700
Noncontrolling interest in income of Limb:

Revenues less expenses $65,000
Equity in Leaf income [(30,000-1,000) × 70%] 20,300
Realized income of Limb—2011 $83,300
Outside ownership 30% $24,990
NCI share of consolidated income $33,690
7-8
e. 2010 Realized income of Limb (prior to accounting

for unrealized gains) (see a) $64,300
2009 Transfer-gain recognized in 2010 10,000
2010 Transfer-gain to be recognized in 2011 (16,000)
2010 Realized income Limb $58,300
2011 Realized income of Limb (prior to accounting

for unrealized gains) (see d.) $83,300
2010 Transfer-gain recognized in 2011 16,000
2011 Transfer-gain to be recognized in 2012 (25,000)
2011 Realized income—Limb $74,300
f. In b., an adjustment of $50,610 was made to the beginning 2011 retained

earnings. Question e. takes this same question and alters it by including
unrealized gains. The $10,000 gain does not affect the answer because the 2010
and 2011 effects cancel each other.
Thus, only the $16,000 gain must be taken into consideration on January 1,
2011. Limb’s realized income in 2010 is reduced by $16,000 because of the
deferred gain. The parent's equity accrual would be reduced by $11,200 or 70%
of that figure. The adjustment as of January 1, 2011 is $39,410 ($50,610 –
$11,200).
16. (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
Income reported by Nephew—2011 .............................. $50,000

Amortization expense (above) ...................................... (2,500)
Accrual-based income.................................................... 47,500
Uncle's ownership percentage ..................................... 80%
Income of subsidiary recognized by Uncle ................. $38,000
b. To the outside owners, the $6,000 intra-entity dividends ($20,000 × 30%) paid by
Uncle are viewed as income because the book value of Nephew is increasing.
Thus, the noncontrolling interest's share of income is $10,700 or 20% of
[$47,500 income ($50,000 operational income less $2,500 excess amortization)
7-9
plus the $6,000 in dividends].
17. (35 Minutes) (Consolidated income for a father-son-grandson combination.)
a. Mesa's operating income $250,000

Butte's operating income 98,000
Valley's operating income 140,000
Amortization expense–Mesa's investment in Butte (22,500)
Amortization expense–Butte's investment in Valley (8,000)
Consolidated net income $457,500
b. Valley's operating income $140,000

Amortization expense (on Butte's investment) (8,000)
Valley's accrual-based income $132,000
Outside ownership 45%
Noncontrolling interest in Valley's income $59,400
Butte's operating income $ 98,000
Amortization expense (on Mesa's investment) (22,500)
Equity accrual from ownership of Valley
($132,000 × 55%) 72,600
Butte's accrual-based income $148,100
Noncontrolling interest in Butte's income $29,620
Total noncontrolling interest in income of subsidiaries $89,020
16. (Continued)
Mesa’s operating income $250,000

Mesa’s share of Butte’s operating income (80% × $98,000) 78,400
Mesa’s share of Valley’s operating income (80% × 55% × $140,000) 61,600
Mesa’s share of Butte’s excess amortization (80% × $22,500) (18,000)
Mesa’s share of Valley’s excess amortization (80% × 55% × $8,000) (3,520)
Controlling interest in consolidated net income $368,480
Noncontrolling interest in consolidated net income 89,020
Consolidated net income $457,500
17. (30 Minutes) (Consolidated income figures for a connecting affiliation)
UNREALIZED GAINS:
Cleveland ($12,000 remaining inventory × 25% markup) = $3,000
Wisconsin ($40,000 remaining inventory × 30% markup) = $12,000
NONCONTROLLING INTERESTS:
CLEVELAND:
7-10
Operational income (sales minus cost of goods sold and

expenses) .................................................................. $60,000
Defer unrealized gain (above) ....................................... (3,000)
Realized income—Cleveland ................................... $57,000
Outside ownership ......................................................... 20%
Noncontrolling interest in Cleveland's income ...... $11,400
WISCONSIN:
Operational income (sales minus cost of goods sold and
expenses) .................................................................. $110,000
Defer unrealized gain (above) ....................................... (12,000)
Investment income (60% of Cleveland's realized income of
$57,000) .................................................................... 34,200
Realized income—Wisconsin .................................. $132,200
Noncontrolling interest in Wisconsin's 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] unrealized gains of
$3,000 and $12,000)
17. (continued)
▪ 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)
▪ Noncontrolling interests in subsidiaries' income = $24,620 (computed above)
▪ Controlling interest in consolidated net income = $350,380 (consolidated net
income less noncontrolling interest share)
18. (12 Minutes) (Acquisition accounting for a subsidiary’s operating loss

carryforward)
a. Consideration transferred 1/1/11 $900,000

Fair value of identifiable assets acquired:
7-11
Software licensing agreements $750,000

Deferred tax asset from NOL (.35 × $120,000) 42,000
Fair value of net identifiable assets acquired 792,000
Goodwill $108,000
b. Consideration transferred 1/1/11 $900,000

Fair value of identifiable assets acquired:
Software licensing agreements $750,000
Deferred tax asset from NOL (.35 × $120,000) 42,000
Valuation allowance for NOL (42,000)
Fair value of net identifiable assets acquired 750,000
Goodwill $150,000
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 gain from 2011,
and defer [add] $40,000 intra-entity gain into 2012)
▪ Operating expenses = $234,000 (add the two book values)
▪ Dividend income = -0- (eliminated for consolidation purposes)
▪ Consolidated net income = $216,000 (Revenues less expenses)
▪ Noncontrolling interest in Down's Income = $18,000 (20 percent of reported
Income of $100,000 plus $30,000 gain deferred from 2011 less $40,000 gain
deferred into 2012)
▪ Controlling interest in consolidated net income = $198,000
19. (continued)
b. On separate returns, the unrealized gains 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
DOWN:
Reported income ............................................................ $100,000
Tax rate .......................................................................... 30%
7-12
Currently payable to government ........................... $30,000
Total income tax payable: Current = $67,800 ($37,800 + $30,000)
CURRENT EXPENSE:
Consolidated net income (part a.) ........................... $198,000
Eliminate noncontrolling interest ............................ +18,000
Income to be taxed .............................................. $216,000
Tax rate .................................................................. 30%
Income tax expense ................................................. $64,800
The $3,000 difference between the liability and the expense is an increase in the
Deferred Income Tax Asset account. It is created by the tax effect (30%) on the
net unrealized gain for the period ($10,000 or $40,000 – $30,000).
20. (45 Minutes) (Series of questions requires computation of income tax expense
and the related payable balance)
a. $260,000 ($650,000 × 40%)

The affiliated group would be taxed on its operating income of $650,000 (the
net unrealized gain 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%)

net unrealized gain is deferred on a consolidated return). The intra-entity
income and dividends are not relevant because a consolidated return is filed.
The percentage ownership does not affect the figures on a consolidated
return.
20. (continued)
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 unrealized
gain 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 unrealized gain (40% or $36,000) is paid immediately.
d. $268,064
Rogers would record income tax expense of $96,000 or 40% of its $240,000
operating income.
7-13
Clarke must record its expense based on the revenue recognized during the
period. Thus, the tax expense is based on operating income of $410,000 (the net
unrealized gain is not being recognized in this period) plus equity income
accruing from Rogers of $100,800 (70% of that company's after-tax income).
Clarke will record an income tax expense of $164,000 in connection with the
operating income ($410,000 × 40%). The expense recognized in connection with
the equity accrual is affected by the dividends-received deduction:
Equity income of subsidiary .......................................... $100,800

Dividends-received deduction (when received) (80%) 80,640
Income subject to taxation ............................................ $20,160
Tax rate .......................................................................... 40%
Income tax expense—equity income (Clarke) ............. $8,064
Income tax expense—operating income (Clarke)
(above) ....................................................................... 164,000 $172,064
Income tax expense—operating income (Rogers)
(above) ....................................................................... 96,000
Income tax expense ....................................................... $268,064
e. $204,480
Clarke will pay $200,000 in connection with its operating income ($500,000 ×
40%) because the unrealized gain cannot be deferred. Clarke also receives
$56,000 in dividends from Rogers ($80,000 × 70%). Tax payment on these
dividends is $4,480 ($56,000 × 20% × 40%). The difference between the payment
by Clarke ($204,480) and the company's expense in (d.) ($172,064) is created by
the premature payment of the tax (a deferred tax asset) on the unrealized gain
($90,000) less the deferred tax liability on the parent's equity accrual ($100,800)
in excess of dividends received ($56,000).
21. (20 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns.)
a. Consolidated Return—2011
Piranto income 2011 (sales less expenses) ...................................... $300,000

Slinton income 2011 (sales less expenses) ....................................... 100,000
2010 gain realized in 2011 .................................................................... 120,000
2011 deferred gain ................................................................................ (150,000)
Taxable income ............................................................................... $370,000
Tax rate ................................................................................................ 40%
Income tax payable—current ......................................................... $148,000
7-14
Because no temporary differences exist in this problem, the income tax expense
would also be $148,000. The unrealized gain is not taxed until realized. Dividend
income is not important because a consolidated return is being filed.
b. Separate Returns—2011
On its separate tax return, Piranto will report taxable income of $300,000—the
unrealized gains cannot be deferred. The dividends would not be taxable
because Slinton 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 Piranto would be $120,000 ($300,000 × 40%).
To determine the income tax expense for Piranto, the two temporary differences
must be taken into account:
Taxable income .............................................................. $300,000

Gain taxed in 2010 although realized
in 2011 ....................................................................... 120,000
Gain taxed in 2011 although not yet realized ............... (150,000)
2011 realized income subject to taxation .................... $270,000
Tax rate ........................................................................... 40%
The $12,000 difference between the expense and the payable is the tax effect on
the net unrealized gain ($30,000 × 40%).
Slinton will have an expense and payable of $40,000 ($100,000 × 40%).
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. Unrealized gains are taxed immediately as are
intra-entity dividends.
Because the unrealized gains are deferred on the consolidated financial

statements, Boxwood's expense would be $34,400 or 40% of $86,000 in realized
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:
7-15
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
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 .............................................................. 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
22. (continued)
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 unrealized gain
($32,000 – $18,000 = $14,000 × 40%) ........................................... 5,600
Net decrease in expense ................................................................... $3,603
c. Because a consolidated tax return is filed, unrealized gains are deferred in the
same manner as for external reporting purposes. Dividend income is not
taxable.
Lake's operating income ............................................... $300,000

Boxwood's operating income ....................................... $100,000
Prior year unrealized gain ............................................. 18,000
Current year unrealized gain ......................................... (32,000) 86,000
Income subject to taxation (and currently taxable) ..... $386,000
Tax rate ........................................................................... 40%
7-16
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
$50,000 unrealized 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 unrealized 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.
23. (continued)
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 unrealized 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).
24. (10 Minutes) (Impact on goodwill of assets with a different tax vs. book value.)
7-17
The assets and liabilities of Kew (the subsidiary) will be consolidated at their
individual fair values (netting to $500,000). 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 ........................................ $140,000 $180,000 $40,000
Equipment ...................................... 150,000 200,000 50,000
Total temporary difference ...... $90,000
Tax rate ...................................... 30%
Deferred tax liability ................. $27,000
Consequently, Kew's accounts will be consolidated as follows: (parentheses

indicate a credit balance)
Accounts receivable ...................................................... $110,000

Inventory ......................................................................... 130,000
Land ............................................................................... 100,000
Buildings ........................................................................ 180,000
Equipment ....................................................................... 200,000
24. (continued)
Liabilities ......................................................................... (220,000)

Deferred tax liability ....................................................... (27,000)
Assigned to specific accounts ..................................... 473,000
Purchase price ............................................................... 650,000
Excess assigned to goodwill ........................................ $177,000
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 gains in beginning and ending inventory.
Beginning Unrealized Gain (Wilson)

(January 1, 2011 Inventory Transfer Price (goods remaining) =
Balance) Cost + .25 Cost
$60,000 = 1.25 Cost
$48,000 = Cost
7-18
$12,000 is Unrealized gain

Ending Unrealized Gain (Wilson)
(December 31, 2011 Inventory Transfer Price (goods remaining) =
Balance) Cost + .25 Cost
$90,000 = 1.25 Cost
$72,000 = Cost
$18,000 is Unrealized gain
CONSOLIDATION ENTRIES
Entry *G
Retained earnings, 1/1/11 (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, 1/1/11 (House) ................................ 11,200
Investment in Wilson .......................................... 11,200
(To convert investment account from partial equity method to equity method.
Unrealized gain shown in Entry *G is not properly reflected by parent under
partial equity method [12,000 × 70% = $8,400 income decrease] nor would the
$2,800 in amortization expense for 2009–2010. 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.)
25. (continued)
Entry S1
Common stock (Cuddy) ................................................ 150,000
Retained earnings, 1/1/11 (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 on common stock.)
Entry S2
Common stock (Wilson) ................................................ 310,000
Retained earnings, 1/1/11 (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
7-19
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 2009 and 2010 has been taken into account in
determining the January 1, 2011 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 paid (80%) (Cuddy) ............................ 40,000
(To eliminate effects of intra-entity dividend payments.)
25. (continued)
Entry D2
Investment in Wilson ............................................... 67,200
Dividends paid (70%) (Wilson) ........................... 67,200
(To eliminate effects of intra-entity dividend payments.)
Entry E
Operating expenses ................................................. 2,000
Equipment ............................................................... 5,000
Franchise contracts ............................................ 4,000
Buildings ............................................................... 3,000
(To record 2011 amortization on 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.)
7-20
Entry G
Cost of goods sold ................................................... 18,000
Inventory ...............................................................
18,000
(To defer unrealized gain in ending inventory.)
Noncontrolling Interest in Net Income of Cuddy:
Reported net income $70,000

Noncontrolling interest in Cuddy income—common ............... $14,000
Noncontrolling Interest in net income of Wilson:
Reported operational income $130,000

Equity income of Cuddy ($70,000 × 40%) ................................... 28,000
Excess amortization ..................................................................... (2,000)
Recognition of 2010 gain (Entry *G) 12,000
Deferral of 2011 unrealized gain (Entry G) (18,000)
Realized income $150,000
Noncontrolling interest in net income of Wilson $ 45,000
7-21
25. (continued)
HOUSE CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidation Worksheet
December 31, 2011
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)
Noncontrolling interest in
Wilson net income (45,000) 45,000
Noncontrolling interest in
Cuddy net income (14,000) 14,000
To House Corporation (263,000)
Retained earnings, 1/1/11:
—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 paid
—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, 12/31/11 (969,000) (652,000) (170,000) (971,800)
7-22
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.
7-23
26. (20 Minutes) (Consolidation entries for a mutual holding business combination)
a. Acquisition Price Allocation and Amortization Mighty's Purchase of Lowly

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, 1/1/11 (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, 1/1/11 (Lowly) ........................... 500,000
Investment in Lowly (60%) ................................. 480,000
Noncontrolling interest in Lowly 1/1/11 (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 1/1/11 (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 2011.)
Noncontrolling interest in subsidiary income = 40% × ($40,000 - $5,000) = $14,000
7-24
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, 2010 book values are determined by removing the 2010 income
from the January 1, 2011 book values (based on equity accounts).
Consideration transferred for Stookey ......................... $344,000

Stookey business fair value .......................................... $430,000
Stookey book value ....................................................... (380,000)
Customer List .................................................................. $ 50,000
Life .................................................................................. 10 Years
Annual amortization ...................................................... $ 5,000
Consideration transferred for Yarrow ........................... $720,000

Yarrow business fair value ........................................... $800,000
Yarrow book value .......................................................... 740,000
Copyright ........................................................................ $ 60,000
Life .................................................................................. 15 Years
Annual amortization ...................................................... $ 4,000
Entry *G
Retained earnings, 1/1/11 (Stookey) ....................... 7,680
(To give effect to unrealized gain from 2010. 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, 1/1/11 (Yarrow) .................... 85,856
(To recognize equity income accruing from Yarrow's investment in Stookey
during 2010. Because the initial value method is applied and no dividends
paid, no income has been recognized in connection with the 2010 ownership
of Stookey. Reported income of $120,000 [2010] less unrealized gain 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.
7-25
27. (continued)
Entry *C2
Investment in Yarrow ............................................... 217,670
Retained earnings, 1/1/11 (Travers) ................... 217,670
(To recognize equity income accruing from Travers' investment in Yarrow
during 2010. Because the initial method is applied and no dividends paid,
income has not been recognized in connection with the 2010 ownership of
Yarrow. Income of $245,856 is calculated based on reported income of
$160,000 [2010] 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 2010.)
Entry S1
Common stock (Stookey) ........................................ 200,000
Retained earnings, 1/1/11 (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, 1/1/11 (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
Customer list.............................................................. 45,000
Investment in Stookey ........................................ 36,000
Noncontrolling interest in Stookey (20%) ......... 9,000
(To recognize January 1, 2011 unamortized portion of acquisition price

assigned to Stookey’s customer list.)
27. (continued)
Entry A2
7-26
Copyright ................................................................... 56,000

Investment in Yarrow . ......................................... 50,400
Noncontrolling interest in Yarrow ...................... 5,600
(To recognize January 1, 2011 unamortized portion of acquisition price
assigned to copyright.)
Entry E
Operating expenses .................................................. 9,000
Customer list ........................................................ 5,000
Copyright .............................................................. 4,000
(To recognize amortization expense for 2011—$5,000 in connection with
Travers' investment and $3,000 in connection with Yarrow's investment.)
Entry Tl
Sales .......................................................................... 100,000
(To eliminate intra-entity inventory transfers made during 2011.)
Entry G
Inventory (current assets) .................................. 9,600
(To defer unrealized gain on ending inventory—$20,000 × 48% markup.)
Noncontrolling Interest in Stookey's Net Income

2011 Reported net income ............................................ $100,000
Customer list amortization ............................................ (5,000)
Realization of 2010 deferred income (*G) .................... 7,680
Deferral of 2011 unrealized gain (G) ............................. (9,600)
Realized income 2011 .................................................... $93,080
Noncontrolling interest in Stookey's net income ........ $18,616
Noncontrolling Interest in Yarrow's Net Income

2011 Reported net income ............................................ $200,000
Copyright amortization .................................................. (4,000)
Accrual of Stookey's income (80% of $93,080
realized income [computed above]) ........................ 74,464
Realized income—2011 ................................................. $270,464
Noncontrolling interest in Yarrow's net income .......... $27,046
7-27
27. (continued) TRAVERS COMPANY AND CONSOLIDATED SUBSIDIARIES

Consolidation Worksheet
December 31, 2011
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)
NCI in Yarrow's net income (27,046) 27,046
NCI in Stookey's net income (18,616) 18,616
To controlling interest (563,418)
Retained earnings, 1/1/11:
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 paid 128,000 128,000
Retained earnings, 12/31/11 (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
Customer list (A1) 45,000 (E) 5,000 40,000
Copyright (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, 12/31/11 (above) (892,000) (800,000) (400,000) (S1) 98,464 (1,353,088)
NCI interest in Stookey, 1/1/11 (A1) 9,000 (107,464)
(S2) 98,586
Noncontrolling interest in Yarrow, 1/1/11 (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)
7-28
27. (continued)
b. Travers' reported income .................................................................... $320,000

Yarrow's reported 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 income ................................................................. $100,000

(Unrealized gains are not deferred on a separate
tax return.)
Tax rate ................................................................................................. 45%
Income tax payable .............................................................................. $45,000
d. (1) Because 80% of Stookey's stock is owned by Yarrow, intra-entity dividends

would be nontaxable. Consequently, no temporary difference is created by
Stookey's failure to pay a dividend.
(2) Stookey's unrealized gains are recognized in one time period for financial
reporting purposes and in a different time period for tax purposes. A
temporary difference is created. The net effect is an increase in taxable
income by $1,920 over reported income:
2011 Unrealized gain taxed in 2011 ..................................................... $9,600

2010 Unrealized gain taxed previously in 2010 .................................. (7,680)
Increase in taxable income ................................................................. $1,920
Tax rate ................................................................................................. 45%
Deterred 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—2011 .......................................................... $274,950
Prepayment (asset) (above) ........................................................... (864)
Income tax expense 2011................................................................ $274,086
27. d. (continued)
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.
7-29
Income tax expense—current ....................................... 274,086

Deferred income tax—asset .......................................... 864
Income tax payable .................................................. 274,950
28. (40 Minutes) (Series of questions about a business combination and its income
tax reporting)
a. Partial equity method. "Income of Soludan" is 80% of Soludan's reported total.
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. "Noncontrolling interest in Soludan Company's income" is $18,700.

Because this amount is not equal to 20% of Soludan's reported income less
excess amortization ($100,000 – $2,500), realized income must have been
adjusted for unrealized gains. Subsidiary 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
unrealized gain (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 unrealized gain must have been deferred from the previous year.
28. (continued)
h. Because the trademarks balance now stands at $32,500, amortization expense

of $2,500 has been recognized, $2,500 in the previous year. In addition, an
$8,000 unrealized gain from the prior year (see part g.) is recognized.
Amortization expense—prior year × 80% ..................... $2,000

Unrealized gain—upstream effect on
parent's retained earnings is $8,000 × 80% ............. 6,400
Adjustment to parent’s beginning retained earnings .. $8,400
7-30
i. This figure is computed as follows:

Book value of subsidiary—1/1 ...................................... $370,000
Unrealized gain in beginning inventory (see above) .. (8,000)
Realized 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 Soludan's income
(as reported) .............................................................. 18,700
Noncontrolling interest in Soludan's dividends
($20,000 × 20%) ......................................................... (4,000)
Ending noncontrolling interest ..................................... $94,100
j. For a consolidated return, unrealized gains 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
k. On a separate return, Politan 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

28. k. (continued)
On a separate return, Soludan would report $100,000 operating income for a

payable of $40,000. The unrealized gains are accounted for in different time
periods in the financial statements, thus, a temporary difference is created. The
beginning gain of $8,000 was taxed in the previous year rather than currently.
The current gain 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
7-31
Deferred income tax - asset .......................................... 1,600

Soludan's entry can also be computed as follows:

Reported income ............................................................................ $100,000
Unrealized gain from previous period realized currently ............ 8,000
Deferral of current unrealized gain ............................................... (12,000)
Realized 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, 1/1/11 (Delta) ............................ 15,000
(To recognize gain that was unrealized in 2010 [amount provided].)
Entry *C1
Retained earnings, 1/1/11 (Delta) ............................ 7,000
Investment in Omega Company ......................... 7,000
(To recognize amortization expense from Delta’s acquisition for 2010.)
29. (continued)
Entry *C2
Retained earnings, 1/1/11 (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 1/1/11 (80% × $15,000) . 12,000
*C2 adjustment .......................................................... $27,600
Entry S1
Common stock (Omega) .......................................... 100,000
Retained earnings, 1/1/11 (Omega) ......................... 100,000
Investment in Omega (70%) ................................ 140,000
7-32
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, 1/1/11 (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, 2011 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.)
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 paid (Delta) ......................................... 32,000
(To eliminate intra-entity dividend payments, 80% of Delta's payment.)
Entry D2
Investment in Omega ............................................... 35,000
Dividends paid (Omega) ..................................... 35,000
(To eliminate intra-entity dividend payments, 70% of Omega's payment.)
7-33
Entry E
Operating expenses ................................................. 16,250
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 unrealized gain 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
Noncontrolling interest in Omega’s income ................ $18,000
29. (continued)
Noncontrolling Interest in Delta's Income:

Reported operating income .......................................... $131,000
Equity income investment in Omega (70% × $60,000) 42,000
Amortization expense .................................................... (6,250)
2010 Unrealized income realized in 2011 ...................... 15,000
2011 Unrealized income realized in 2011 ..................... (22,000)
Accrual-based income—Delta (2011) ........................... $159,750
Noncontrolling interest in Delta's income (2011) ........ $31,950
Noncontrolling interest in Delta Company ...................

Noncontrolling interest, 1/01/11 (Entry S2) ............. $99,600
Noncontrolling interest, 1/01/11 (Entry A) ............... 22,500
Noncontrolling interest in Delta’s income (above) . 31,950
Dividends paid to noncontrolling interest
($40,000 × 20%) ....................................................... (8,000)
7-34
Noncontrolling interest in Delta, 12/31/11 .......... $146,050
Noncontrolling interest in Omega Company ................

Noncontrolling interest, 1/01/11 (Entry S1) ............. $60,000
Noncontrolling interest in Omega’s income (above) 18,000
Noncontrolling interest, 1/01/11 (Entry A) ............... 33,000
Dividends paid to noncontrolling interest ($50,000 × 30%) (15,000)
Noncontrolling interest in Omega, 12/31/11....... $96,000
Chapter 7 Excel Case Solution
Operating Dividends Excess

income paid amortizations
Summit $345,000 $150,000
Treeline $280,000 $100,000 $20,000
Basecamp $175,000 $40,000 $25,000
Ownership percentages
Summit-->Treeline 90%
Treeline-->Basecamp 70%
Treeline's share of Basecamp income:

Basecamp operating income $175,000
Accrual based income $150,000
Treeline ownership percentage 70%
Equity income from Basecamp $105,000
Summit's share of Treeline income:

Treeline operating income $280,000
Equity income from Basecamp 105,000
Treeline adjusted income $365,000
Summit ownership percentage 90%
Summit's share of reported income $328,500
Controlling interest in net income

Summit's operating income $345,000
Equity earnings in Treeline and Basecamp 328,500
Summit’s net income $673,500
Comparison
Consolidated net income (operating incomes less
7-35
amortizations) $755,000
Noncontrolling interest in consolidated net income
(30% × $150,000 plus 10% × $365,000) $81,500
Controlling interest in consolidated net income $673,500
Difference between Summit’s net income and controlling interest in

consolidated net income = -0-
RESEARCH CASE: CONSOLIDATED TAX EXPENSE
At www.thecoca-colacompany.com the annual financial statements and 10-K

provide an excellent set of statements and footnotes to review disclosures for
consolidated income tax issues.
In particular Note 17 provides details of the consolidated tax expense in Coca-

Cola’s 2006 annual report. The excerpt below shows the portion of the
footnote relating to components of deferred tax assets and liabilities and
carryforwards.
7-36
7-37
Another random document with
no related content on Scribd:
The bibliography of this subject is extensive, but in the main
unilluminating. It consists chiefly in a magnanimous waving aside of
what is, and an optimistic dream of what is to be. Into this category
fall most, if not all, of the many volumes written by the college
professors and such of their students as have, upon graduation,
carried with them into the world the college-professor manner of
looking at things. Nevertheless, Professor William Lyon Phelps’ “The
Twentieth Century Theatre,” for all its deviations from fact, and
Professor Thomas H. Dickinson’s “The Case of American Drama,”
may be looked into by the more curious. Mr. Arthur Ruhl’s “Second
Nights,” with its penetrating humour, contains several excellent
pictures of certain phases of the native theatre. Section IV of Mr.
Walter Prichard Eaton’s “Plays and Players,” Mr. George Bronson-
Howard’s searching series of papers entitled, “What’s Wrong with the
Theatre,” and perhaps even Mr. George Jean Nathan’s “The Popular
Theatre,” “The Theatre, The Drama, The Girls,” “Comedians All,” and
“Mr. George Jean Nathan Presents” may throw some light upon the
subject. Miss Akins’ “Papa” and all of Mr. O’Neill’s plays are available
in book form. The bulk of inferior native dramaturgy is similarly
available to the curious-minded: there are hundreds of these lowly
specimens on view in the nearest book store.
G. J. N.
ECONOMIC OPINION
The literature of economic opinion in America is almost as
voluminous as the printed word. It ranges from the ponderous
treatises of professed economists, wherein “economic laws” are
printed in italics, to the sophisticated novels of the self-elect, in which
economic opinion is a by-product of clever conversation. Not only
can one find economic opinion to his taste, but he can have it in any
form he likes. Perhaps the most human and reasonable application
of the philosophy of laissez-faire to the problems of industrial society
is to be found in the pages of W. G. Sumner. Of particular interest
are the essays contained in the volumes entitled “Earth Hunger,”
“The Challenge of Facts,” and “The Forgotten Man.” The most subtle
and articulate account of the economic order as an automatic, self-
regulating mechanism is J. B. Clark, “The Distribution of Wealth.” An
able and readable treatise, characterized alike by a modified
classical approach and by a recognition of the facts of modern
industrial society, is F. W. Taussig, “The Principles of Economics.”
The “case for capitalism” has never been set forth as an articulate
whole. The theoretical framework of the defence is to be found in
any of the older treatises upon economic theory. A formal apologia is
to be found in the last chapter of almost every text upon economics
under some such title as “A Critique of the Existing Order,” “Wealth
and Welfare,” or “Economic Progress.” A defence of “what is,”
whatever it may chance to be, characterized alike by brilliancy and
ignorance, is P. E. More’s “Aristocracy and Justice.” Contemporary
opinion favourable to capitalism may be found, in any requisite
quantity and detail, in The Wall Street Journal, The Commercial and
Financial Chronicle, and the publications of the National Association
of Manufacturers. The Congressional Record, a veritable treasure
house of economic fallacy, presents fervent pleas both for an
unqualified capitalism and for capitalism with endless modifications.
The literature of the economics of “control” is beginning to be large.
The essay by H. C. Adams, “The Relation of the State to Industrial
Activity,” elaborating the thesis that the function of the state is to
regulate “the plane of competition,” has become a classic. The best
account of the economic opinion of organized labour is to be found in
R. F. Hoxie, “Trade Unionism in the United States.” Typical examples
of excellent work done by men who do not profess to be economists
are W. Lippmann, “Drift and Mastery,” the opinions (often dissenting)
delivered by Mr. Justice Holmes and Mr. Justice Brandeis, of the
United States Supreme Court, and the articles frequently contributed
to periodicals by T. R. Powell upon the constitutional aspects of
economic questions. The appearance of such studies as the brief for
the shorter working day in the case of Bunting v. Oregon, prepared
by F. Frankfurter and J. Goldmark, and of the “Report on the Steel
Strike of 1919,” by the Commission of Inquiry of the Interchurch
World Movement indicates that we are beginning to base our
opinions and our policies upon “the facts.” Among significant
contributions are the articles appearing regularly in such periodicals
as The New Republic and The Nation. At last the newer economics
of the schools is beginning to assume the form of an articulate body
of doctrine. The books of T. B. Veblen, particularly “The Theory of
Business Enterprise,” and “The Instinct of Workmanship,” contain
valuable pioneer studies. In “Personal Competition” and in the
chapters upon “Valuation” in “Social Process,” C. H. Cooley has
shown how economic institutions are to be treated. The newer
economics, however, begins with the publication in 1913 of W. C.
Mitchell, “Business Cycles.” This substitutes an economics of
process for one of statics and successfully merges theoretical and
statistical inquiry. It marks the beginning of a new era in the study of
economics. The work in general economic theory has followed the
leads blazed by Veblen, Cooley, and Mitchell. W. H. Hamilton, in
“Current Economic Problems,” elaborates a theory of the control of
industrial development, interspersed with readings from many
authors. L. C. Marshal, in “Readings in Industrial Society,” attempts,
through selections drawn from many sources, an appraisal of the
institutions which together make up the economic order. D. Friday, in
“Profits, Wages, and Prices,” shows how much meaning a few
handfuls of figures contain and how much violence they can do to
established principles. The National Bureau of Economic Research
is soon to publish the results of a careful and thorough statistical
inquiry into the division of income in the United States. Upon
particular subjects such as trusts, tariffs, railroads, labour unions,
etc., the literature is far too large to be catalogued here. There is no
satisfactory history of economic opinion in the United States. T. B.
Veblen’s “The Place of Science in Modern Civilization” contains a
series of essays which constitute the most convincing attack upon
the classical system and which point the way to an institutional
economics. Many articles dealing with the development of economic
doctrines are to be found in the files of The Quarterly Journal of
Economics and of The Journal of Political Economy. An excellent
statement of the present situation in economics is an unpublished
essay by W. C. Mitchell, “The Promise of Economic Science.”
W. H. H.
RADICALISM
For exposition of the leading radical theories the reader is urged
to go, not to second-hand authorities, but to their foremost
advocates. “Capital” by Karl Marx (Charles H. Kerr) is of course the
chief basis of Socialism. There is nothing better on Anarchism than
the article in the “Encyclopedia Britannica” by Prince Kropotkin. For
revolutionary industrial unionism it is important to know “Speeches
and Editorials” by Daniel de Leon (New York Labor News Co.). De
Leon was one of the founders of the I.W.W., and his ideas not only
influenced the separatist labour movements in the United States but
the shop-steward movement in England and the Soviets of Russia.
“Guild Socialism” by G. D. H. Cole is the best statement of this
recent theory, while “The State and Revolution” by Nikolai Lenin
(George Allen and Unwin) explains the principles and tactics of
modern Communism. To these should be added another classic,
“Progress and Poverty” by Henry George (Doubleday Page).
On the origins of the American government it is important to read
“Economic Origins of Jeffersonian Democracy” and “Economic
Interpretation of the Constitution” by Charles A. Beard (Macmillan).
The “History of Trade Unionism” by Sidney and Beatrice Webb
(Longmans, Green), is an invaluable account of the growth of the
British labour movement, which has many similarities to our own.
“Industrial Democracy” by the same authors, issued by the same
publisher, is the best statement of the theories of trade unionism.
The “History of Labor in the United States” by John R. Commons
and associates (Macmillan), is a scholarly work, while “Trade
Unionism in the United States” by Robert F. Hoxie (Appleton), is a
more analytical treatment. “The I. W. W.” by Paul F. Brissenden
(Longmans, Green), is a full documentary history. Significant recent
tendencies are recorded in “The New Unionism in the Clothing
Industry” by Budish and Soule (Harcourt, Brace). The last chapters
of “The Great Steel Strike” by William Z. Foster (B. W. Huebsch),
expound his interesting interpretation of the trade unions.
For a statement of the functional attitude toward public problems
one should read “Authority, Liberty and Function” by Ramiro de
Maeztu (Geo. Allen and Unwin). For a brief and readable application
of this attitude to economics, “The Acquisitive Society” by R. H.
Tawney (Harcourt, Brace), is to be recommended.
“Modern Social Movements” by Savel Zimand (H. W. Wilson), is
an authoritative guidebook to present radical movements throughout
the world, and contains an excellent bibliography. And we must not
forget the voluminous Report of the New York State Legislative
Committee on Radicalism (the Lusk Committee), which not only
collects a wealth of current radical literature, but offers an
entertaining and instructive example of the current American attitude
toward such matters.
G. S.
THE SMALL TOWN

Bibliography: “A Hoosier Holiday,” by Theodore Dreiser.
“Winesburg, Ohio,” by Sherwood Anderson. “Main Street,” by
Sinclair Lewis.
L. R. R.
HISTORY
The late Henry Adams had much in common with Samuel Butler,
that other seeker after an education. He knew that he had written a
very good book (his studies on American history were quite as
excellent in their way as “Erewhon” was in a somewhat different
genre) and he was equally aware of the sad fact that his work was
not being read. In view of the general public indifference towards
history it is surprising how much excellent work has been done.
Three names suggest themselves when history in America is
mentioned, Robinson, Beard, and Breasted. Their works for the
elementary schools have not been surpassed in any country and
their histories (covering the entire period from ancient Egypt down to
the present time) will undoubtedly help to overcome the old and
firmly established prejudice that “history is dull” and will help to
create a new generation which shall prefer a good biography or
history to the literature of our current periodicals.
The group of essays published last year by Professor Robinson
—the pioneer of our modern historical world—under the title of “The
New History” contains several papers of a pleasantly suggestive
nature and we especially recommend “History for the Common Man”
for those who want to investigate the subject in greater detail, and
“The New Allies of History” for those who want to get an idea of the
struggle that goes on between the New and the Old Movements in
our contemporary historical world.
But it is impossible to suggest a three- four- or five-foot
bookshelf for those who desire to understand the issues of the battle
that is taking place. The warfare between the forces of the official
School and University History and those who have a vision of
something quite different is merely a part of the great social and
economic and spiritual struggle that has been going on ever since
the days of the Encyclopedists. The scene is changing constantly.
The leaders hardly know what is happening. The soldiers who do the
actual fighting are too busy with the work at hand to waste time upon
academic discussions of the Higher Strategy. And the public will
have to do what the public did during the great war—study the
reports from all sides (the relevant and the irrelevant—the news from
Helsingfors-by-way-of-Geneva and from Copenhagen-by-way-of
Constantinople) and use its own judgment as to the probable
outcome of the conflict.
H. W. V. L.
SEX
As might be supposed, there has been little writing on sex in this
country—such discussion, more or less superficial, of the social
aspects as may be found in books on the family, on marriage or
prostitution, some quasi-medical treatises and of late a few books
along the lines of Freudian psychology, that is all. Among all the
organizations of the country there is no society corresponding to the
British Society for the Study of Sex. I doubt if such a society or its
publications would be tolerated, since even novelists who, like
Dreiser, express an interest in sex comparatively directly, run afoul of
public opinion, and a book such as “Women in Love” by D. H.
Lawrence, its publisher felt called upon to print without his name.
It is not surprising, therefore, that in English the most adequate
discussions of sex have been made by an Englishman, Havelock
Ellis—“Studies in the Psychology of Sex.” Among less well known
writing on the subject by Ellis I would note in particular an
illuminating page or two in his essay on Casanova (“Affirmations”).
Discussion of the theories of distinguishing between mating and
parenthood and of crisis psychology may be found in articles by the
writer in the International Journal of Ethics, July, 1915, January,
1916, October, 1917, and in The American Anthropologist, March,
1916, and The Journal of Philosophy, Psychology and Scientific
Methods, March, 1918.
“The Behaviour of Crowds” by E. D. Martin, and “French Ways
and Their Meaning” by Edith Wharton are recent books that the
reader of a comparative turn of mind will find of interest, and if he is
not already familiar with the writings of the Early Christian Fathers I
commend to him some browsing in the “Ante-Nicene Christian
Library” and the “Nicene and Post-Nicene Fathers.”
E. C. P.
THE FAMILY
For statistical facts which have a bearing on the tendencies of
the family in the United States, the following group of sources has
been consulted:
“Abstract of the Census, 1910;” the preliminary sheets of the
“Census of 1920;” Report on “Marriage and Divorce in 1916,”
published by the Bureau of the Census; Bulletin of the Woman’s
Bureau, U. S. Department of Labour on “What Became of Women
Who Went Into War Industries;” Bulletin of the U. S. Department of
Agriculture on “The Farm Woman;” Bulletin of the U. S. Children’s
Bureau on “Standards of Child Welfare.” Economic aspects of the
family and income data were acquired from “Conditions of Labour in
American Industries,” by Edgar Sydenstricker, and “The Wealth and
Income of the People of the United States,” by Willford I. King. For
facts concerning longevity, the aid of the Census was supplemented
by “The Trend of Longevity in the United States,” by C. H. Forsyth, in
the Journal of the American Statistical Association, Vol. 128. For the
long biological perspective to counteract the near-sighted view of the
Census, “The New Stone Age in Northern Europe,” by John M. Tyler
may be commended. Psychological aspects of family relationships
are discussed in a scientific and stimulating way in the published
“Proceedings of the International Women Physicians’ Conference,
1919.”
K. A.
RACIAL MINORITIES
No author or group of authors has yet attempted to treat in any
systematic and comprehensive way the position and the problem of
the several racial minorities in the United States. A perfect
bibliography of existing materials on the subject would be most
helpful, but it could not make good the existing shortage of fact, and
of thoughtful interpretation.
The anthropological phase of the subject is discussed with
authority by Franz Boas in “The Mind of Primitive Man” (Macmillan,
1913), and by Robert H. Lowie in “Culture and Ethnology”
(McMurtrie, 1917). Some information on racial inter-marriage is to be
found in Drachsler’s “Democracy and Assimilation—The Blending of
Immigrant Heritages in America” (Macmillan, 1920). Among recent
reports of psychological tests of race-difference, the following are of
special interest: “A Study of Race Differences in New York City,” by
Katherine Murdock, (School and Society, vol. XI, no. 266, p. 147, 31
January, 1920); “Racial Differences in Mental Fatigue,” by Thomas
R. Garth (Journal of Applied Psychology, vol. IV, nos. 2 and 3, p.
235, June-Sept. 1920); “A Comparative Study in the Intelligence of
White and Colored Children,” by R. A. Schwegler and Edith Winn
(Journal of Educational Research, vol. II, no. 5, p. 838, December,
1920); “The Intelligence of Negro Recruits,” by M. R. Trabue (Natural
History, vol. XIX, no. 6, p. 680, 1919); “The Intelligence of Negroes
at Camp Lee, Virginia,” by George Oscar Ferguson, Jr. (School and
Society, vol. IX, no. 233, p. 721, 14 June, 1919); and the
Government’s official report of all the psychological tests given in the
cantonments (“Memoirs of the National Academy of Science,” vol.
XV, Washington, Government Printing Office, 1921).
The most important single source of information on the present
status of the coloured race in the United States is “The Negro Year
Book,” edited by Monroe N. Work (Negro Year Book Pub. Co.,
Tuskegee Institute, Alabama); the edition for 1918–19 contains an
extensive bibliography. Brawley’s “Short History of the American
Negro” (Macmillan, rev. ed., 1919) presents in text-book form a
general narrative, together with supplementary chapters on such
topics as religion and education among the Negroes. The
Government report on “Negro Population, 1790–1915” (Washington,
Bureau of the Census, Government Printing Office, 1918), is
invaluable. Important recent developments are treated in “Negro
Migration in 1916–17” and “The Negro at Work During the World War
and During Reconstruction” (Washington, Dep’t of Labour, 1919 and
1920 respectively). Some notion of the various manifestations of
prejudice against the Negro may be gathered from the following
sources: “Negro Education” (U. S. Bureau of Education Bulletin,
1916, nos. 38 and 39); “The White and the Colored Schools of
Virginia as Measured by the Ayres Index,” by George Oscar
Ferguson, Jr. (School and Society, vol. XII, no. 297, p. 170, 4 Sept.,
1920); “Thirty Years of Lynching in the United States, 1889–1918,”
and “Disfranchisement of Colored Americans in the Presidential
Election of 1920” (New York, National Association for the
Advancement of Coloured People, 1919 and 1921 respectively). A
few representative expressions from the Negroes themselves are:
“Up from Slavery, an Autobiography,” by Booker T. Washington
(Doubleday, 1901); “Darkwater,” by W. E. Burghardt Du Bois
(Harcourt, 1920); The Messenger (a Negro Socialist-syndicalist
magazine, 2305 Seventh Avenue, New York); and the “Universal
Negro Catechism” (Universal Negro Improvement Association, 56
West 135th Street, New York).
A great body of valuable information on the Indians is collected
in two publications of the Government, the second of which contains
a very extensive bibliography; “Indian Population in the United States
and Alaska, 1910” (Washington, Bureau of the Census, Government
Printing Office, 1915), and the “Handbook of American Indians North
of Mexico,” edited by Frederick Webb Hodge (Washington, Bureau of
Ethnology, Government Printing Office, 1907–10, 2 vols.). An annual
report containing current data on the status of the Indian is published
by the Commissioner of Indian Affairs. Francis Ellington Leupp, who
held this title from 1905 to 1909, was the author of a volume which
presents in popular form the results of official experience (“The
Indian and His Problem,” Scribner, 1910).
The “American Jewish Year Book” (Philadelphia, Jewish
Publication Society of America) is an extremely useful volume, and
particularly so because one must refer to it for statistical information
which in the case of the other racial minorities is available in the
reports of the national census. In the American Magazine for April,
1921, Harry Schneiderman, the editor of the “Year Book,” assembles
a great many facts bearing upon the relation of the Jews to the
economic, social, political, and intellectual life of the country (“The
Jews of the United States,” p. 24). Of special interest to students of
the Semitic problem is Berkson’s “Theories of Americanization; a
Critical Study with Special Reference to the Jewish Group”
(Teachers’ College, Columbia University, 1920).
The standard works on the Oriental question are Coolidge’s
“Chinese Immigration” (Holt, 1909), and Millis’s “Japanese Problem
in the United States” (Macmillan, 1915). The Japanese problem in
California is treated statistically in a booklet prepared recently by the
State Board of Control (“California and the Oriental,” Sacramento,
State Printing Office, 1920), and in a symposium which appeared in
The Pacific Review for December, 1920 (Seattle, University of
Washington).
G. T. R.
ADVERTISING
Expect from me no recommendation of the “scientific” treatises
on advertising or of the professional psychological analyses of the
instincts. Books, books in tons, have been written about advertising,
and as far as I am concerned, every single one of them is right.
Read these, if you have the hardihood, and remain mute. Read
them, I should say, and be eternally damned. Read them and retire
rapidly to a small room comfortably padded and securely locked.
J. T. S.
BUSINESS
Within the limits of this space anything like an adequate
reference to the source books of fact and thought is impossible. All
that may be attempted is to suggest an arbitrary way through the
whole of the subject—a thoroughfare from which the reader may
take off where he will as his own interests develop. For the
foundations of an economic understanding one needs only to read
“Principles of Political Economy,” by Simon Newcomb, the American
astronomer, who in a mood of intellectual irritation inclined his mind
to this mundane matter and produced the finest book of its kind in
the world. For the rough physiognomy of American economic
phenomena there is “A Century of Population Growth,” Bureau of the
Census, 1909, a splendid document prepared under the direction of
S. N. D. North. Katharine Coman’s “Industrial History of the United
States” is an important work in itself and contains, besides, an
excellent and full bibliography. “Crises and Depressions” and
“Corporations and the State,” by Theodore E. Burton; “Forty Years of
American Finance,” by Alexander D. Noyes; “Railroad
Transportation, Its History and Its Laws,” by A. T. Hadley; “Trusts,
Pools and Corporations,” by Wm. Z. Ripley; and “The Book of
Wheat,” by Peter Tracy Dondlinger, are books in which the separate
phases indicated by title are essentially treated. For dissertation,
interpretation, and universal thought every student will find himself
deeply indebted to “Trade Morals, Their Origin, Growth and
Province,” by Edward D. Page; “The Economic Interpretation of
History,” by James E. Thorold Rogers; “History of the New World
Called America,” by E. J. Payne; “Economic Studies,” by Walter
Bagehot; “Essays in Finance,” by R. Giffen; “Recent Economic
Changes,” by David A. Wells, and “The Challenge of Facts and
Other Essays,” by William Graham Sumner.
G. G.
ENGINEERING
Literature covering the function of the engineer in society,
especially in America, is very limited compared with books of
information on most subjects. Engineering activities such as are
usually described cover the technical achievements of the
profession. Useful material, however, will be found scattered
throughout the technical literature and engineering society
proceedings especially among the addresses and articles of leading
engineers prepared for special occasions. A comprehensive history
of engineering has never been written, although there are many
treatises dealing with particular developments in this field. Among
these may be mentioned Bright’s “Engineering Science, 1837–1897”;
Matschoss’s “Beiträge zur Geschichte der Technik und Industrie”
(“Jahrbuch des Vereines deutscher Ingenieure”); and Smiles’s “Lives
of the Engineers.” On engineering education, the “Proceedings of the
Society for the Promotion of Engineering Education” and Bulletin No.
11 of the Carnegie Foundation for the Advancement of Teaching, “A
Study of Engineering Education,” by Charles R. Mann, offer useful
information. Concerning the status of the engineer in the economic
order, Taussig’s “Inventors and Money Makers,” Veblen’s “The
Engineers and the Price System,” together with Frank Watts’s “An
Introduction to the Psychological Factors of Industry,” will be found of
value. On the relation between labour and the engineer, much can
be found in The Annals of the American Academy of Political and
Social Science for September, 1920, on “Labor, Management and
Production.”
O. S. B., Jr.
NERVES
Complete works of Cotton Mather; also of Jonathan Edwards.
Complete works of Dr. George M. Beard, notably his “American
Nervousness,” Putnam, 1881. Medical publications of Dr. S. Weir
Mitchell. Dr. George M. Parker: “The Discard Heap—Neurasthenia,”
N. Y. Medical Journal, October 22, 1910. Dr. William Browning: “Is
there such a thing as Neurasthenia?” N. Y. State Medical Journal,
January, 1911. Dr. Morton Prince: “The Unconscious,” Macmillan,
1914. Professor Edwin B. Holt: “The Freudian Wish.” Dr. Edward J.
Kempf: “The Autonomic Function and the Personality.” Complete
works of Professor Freud, in translation and in the original.
Files of Journal of Abnormal Psychology, to date. Files of
Psychoanalytic Review, to date. Files of Imago, to date. Files of
Internationale Zeitschrift fuer Aerztliche Psychoanalyse, to date. Dr.
A. A. Brill, “Psychoanalysis,” third edition. “Character and Opinion in
the United States,” by George Santayana. “Studies in American
Intolerance,” by Alfred B. Kuttner, The Dial, March 14 and 28, 1918.
A. B. K.
MEDICINE
No attempt is here made to give any exhaustive, or even
suggestive, bibliography. Only specific references in the text itself
are here given in full, so that the reader may find them for himself, if
he so desires. But on the general subject of “Professionalism,”
although it deals more with the profession of law than of medicine,
some valuable and stimulating observations can be found in the
chapter of that name in “Our Social Heritage,” by Graham Wallas
(Yale University Press, 1921).
Bezzola: Quoted from “Preventive Medicine and Hygiene,”
Rosenau, 1920, p. 340.
Clouston: “The Hygiene of the Mind,” 1909.
Cole: “The University Department of Medicine,” Science, N. S.,
vol. LI, No. 1318, p. 329.
Elderton and Pearson: “A First Study of the Influence of Parental
Alcoholism on the Physique and Ability of the Offspring,” Francis
Galton Eugenics Laboratory Memoirs, 1910, No. 10.
Pearl: “The Effect of Parental Alcoholism upon the Progeny in
the Domestic Fowl,” Proc. Nat. Acad. Sci., 1916, vol. II, p. 380.
Peterson: “Credulity and Cures,” Jour. Amer. Med. Assn., 1919,
vol. LXXIII, p. 1737.
Rosenau: “Preventive Medicine and Hygiene,” 1920.
Stockard: Interstate Medical Jour., 1916, vol. XXIII, No. 6.
Vaughan: “The Service of Medicine to Civilization,” Jour. Amer.
Med. Assn., 1914, vol. LXII, p. 2003.
Vincent: “Ideals and Their Function in Medical Education,” Jour.
Amer. Med. Assn., 1920, vol. LXXIV, p. 1065.
ANON.
SPORT AND PLAY

Mr. Spalding, the well-known sporting goods manufacturer, is
also the publisher of the Spalding Athletic Library, which contains,
besides rule books and record books of various sports, a series of
text-books, at ten cents the copy, bearing such titles as “How to Play
the Outfield,” “How to Catch,” “How to Play Soccer,” “How to Learn
Golf,” etc. Authorship of these works is credited to famous
outfielders, catchers, soccer players, and golfers, but as the latter
can field, catch, play soccer, and golf much better than they can
write, the actual writing of the volumes was wisely left to persons
who make their living by the pen. The books are recommended, as a
cure for insomnia at least. The best sporting fiction we know of,
practically the only sporting fiction an adult may read without fear of
stomach trouble, is contained in the collected works of the late
Charles E. Van Loan.
R. W. L.
AMERICAN CIVILIZATION FROM THE FOREIGN

1
POINT OF VIEW
Frances Milton Trollope: “The Domestic Manners of the
Americans,” London, 1832.
The rest is silence ... or repetition.
E. B.
1
The views of foreign travellers in the United
States are summarized in John Graham Brooks’s
“As Others See Us,” New York, 1908.—The
Editor.
WHO’S WHO
OF THE CONTRIBUTORS TO
THIS VOLUME
Conrad Aiken was born in Savannah, Georgia, in 1889, and was graduated
from Harvard in 1912. His books include several volumes of poems, “Earth
Triumphant,” “Turns and Movies,” “The Jig of Forslin,” “Nocturne of Remembered
Spring,” “The Charnel Rose,” “The House of Dust,” and “Punch: The Immortal
Liar,” and one volume of critical essays, “Scepticisms: Notes on Contemporary
Poetry.”
Anonymous, the author of the essay on “Medicine,” is an American physician
who has gained distinction in the field of medical research, but who for obvious
reasons desires to have his name withheld.
Katharine Anthony was born in Arkansas, and was educated at the
Universities of Tennessee, Chicago, and Heidelberg. She has done research and
editorial work for the Russell Sage Foundation, National Consumers’ League, The
National Board, Y. W. C. A., and other national reform organizations, and is the
author of “Feminism in Germany and Scandinavia,” “Margaret Fuller: A
Psychological Biography,” and other books.
O. S. Beyer, Jr., was graduated from the Stevens Institute of Technology as a
mechanical engineer in 1907, and did graduate work in railway and industrial
economics in the Universities of Pennsylvania and New York. After some
experience as an engineering assistant and general foreman on various railways,
and as research engineer in the University of Illinois, he helped organize the U. S.
Army School of Military Aeronautics during the War, and later took charge of the
Department of Airplanes. He was subsequently requested by the U. S. Army
Ordnance Department to organize and operate schools for training ordnance
specialists and officers, and in order to conduct this work, he was commissioned
Captain. After the termination of the War, he helped promote, and subsequently
assumed charge in the capacity of Chief, Arsenal Orders Section, of the significant
industrial developments carried forward in the Army arsenals. He has contributed
numerous articles to technical periodicals and proceedings of engineering and
other societies.
Ernest Boyd is an Irish critic and journalist, who has lived in this country for
some years, and is now on the staff of the New York Evening Post. He was
educated in France, Germany, and Switzerland for the British Consular Service,
which he entered in 1913. After having served in the United States, Spain, and
Denmark, he resigned from official life in order to take up the more congenial work
of literature and journalism. He has edited Standish O’Grady’s “Selected Essays”
for Every Irishman’s Library and translated Heinrich Mann’s “Der Untertan” for the
European Library, and is the author of three volumes dealing with modern Anglo-
Irish Literature: “Ireland’s Literary Renaissance,” “The Contemporary Drama of
Ireland,” and “Appreciations and Depreciations.”
Clarence Britten was born in Pella, Iowa, in 1887, and was graduated from
Harvard in 1912 as of 1910. He was Instructor of English in the Agricultural and
Mechanical College of Texas, in the Department of University Extension, State of
Massachusetts, and in the University of Wisconsin. He has been editor of the
Canadian Journal of Music, and from 1918 to 1920 was an editor of the Dial.
Van Wyck Brooks was born in Plainfield, New Jersey, in 1886, and was
graduated from Harvard in 1907, as of 1908. He was instructor in English in Leland
Stanford University from 1911 to 1913, and is now associate editor of the
Freeman. Among his books are “America’s Coming-of-Age,” “Letters and
Leadership,” and “The Ordeal of Mark Twain.”
Harold Chapman Brown was born in Springfield, Mass., in 1879, and was
educated at Williams and Harvard, from which he received the degree of Ph.D. in
1905. He was instructor in philosophy in Columbia University until 1914, and since
then has been an instructor in Leland Stanford University. During the War he was
with the American Red Cross, Home Service, at Camp Fremont. He has
contributed numerous articles on philosophy to technical journals, and is co-author
of “Creative Intelligence.”
Zechariah Chafee, Jr., was born in Providence, R. I., in 1885, and was
educated at Brown University and the Harvard Law School. After several years’
practice of the law in Providence, and executive work in connection with various
manufacturing industries, he became Assistant Professor of Law in Harvard
University in 1916, and Professor of Law in 1919. He is the author of “Cases on
Negotiable Instruments,” “Freedom of Speech,” and various articles in law reviews
and other periodicals.
Frank M. Colby was born in Washington, D. C., in 1865, and was graduated
from Columbia in 1888. He was Professor of Economics in New York University
from 1895 to 1900, and has been editor of the “New International Encyclopedia”
since 1900, and of the “New International Year Book” since 1907. He is the author
of “Outlines of General History,” “Imaginary Obligations,” “Constrained Attitudes,”
and “The Margin of Hesitation.”
Garet Garrett was born in Pana, Ill., in 1878, and from 1900 to 1912 was a
financial writer on the New York Sun, the Wall Street Journal, the New York
Evening Post, and the New York Times. He was the first editor of the New York
Times Annalist in 1913–1914, and was executive editor of the New York Tribune
from 1916 to 1919. He is the author of “The Driver,” “The Blue Wound,” “An Empire
Beleaguered,” “The Mad Dollar,” and various economic and political essays.
Walton H. Hamilton was born in Tennessee in 1881, was graduated from the
University of Texas in 1907, and received the degree of Ph.D. from the University
of Michigan in 1913. After teaching at the Universities of Michigan and Chicago, he
became Olds Professor of Economics in Amherst College in 1915. He was
formerly associate editor of the Journal of Political Economy, and is associate
editor of the series, “Materials for the Study of Economics,” published by the
University of Chicago Press. During the War he was on the staff of the War Labour
Policies Board. He is co-editor with J. M. Clark and H. G. Moulton of “Readings in
the Economics of War,” and the author of “Current Economic Problems” and of
various articles in economic journals.
Frederic C. Howe was born in Meadville, Pa., in 1867, and was educated at
Allegheny College and Johns Hopkins University, from the latter receiving the
degree of Ph.D. in 1892. After studying in the University of Maryland Law School
and the New York Law School, he was admitted to the bar in 1894, and practised
in Cleveland until 1909. He was director of the People’s Institute of New York from
1911 to 1914, and Commissioner of Immigration in the Port of New York from 1914
to 1920. He has been a member of the Ohio State Senate, special U. S.
commissioner to investigate municipal ownership in Great Britain, Professor of
Law in the Cleveland College of Law, and lecturer on municipal administration and
politics in the University of Wisconsin. Among his books are “The City, the Hope of
Democracy,” “The British City,” “Privilege and Democracy in America,” “Wisconsin:
An Experiment in Democracy,” “European Cities at Work,” “Socialized Germany,”
“Why War?” “The High Cost of Living,” and “The Land and the Soldier.”
Alfred Booth Kuttner was born in 1886, and was graduated from Harvard in
1908. He was for two years dramatic critic of the International Magazine, and is a
contributor to the New Republic, Seven Arts, Dial, etc. He has pursued special
studies in psychology, and has translated several of the books of Sigmund Freud.
Ring W. Lardner was born in Niles, Michigan, in 1885, and was educated in
the Niles High School and the Armour Institute of Technology at Chicago. He has
been sporting writer on the Boston American, Chicago American, Chicago
Examiner, and the Chicago Tribune, and writer for the Bell Syndicate since 1919.
Among his books are “You Know Me Al,” “Symptoms of Thirty-five,” “Treat ’Em
Rough,” and “The Big Town.”
Robert Morss Lovett was born in Boston in 1870, and was graduated from
Harvard in 1892. He has been a teacher in the English Departments of Harvard
and the University of Chicago, and dean of the Junior Colleges of the latter
institution from 1907 to 1920. He was formerly editor of the Dial, and is at present
on the staff of the New Republic. He is a member of the National Institute of Arts
and Letters, and is the author of two novels, “Richard Gresham” and “A Winged
Victory,” of a play, “Cowards,” and with William Vaughn Moody of “A History of
English Literature.”
Robert H. Lowie was born in Vienna in 1883, and came to New York at the
age of ten. He was educated at the College of the City of New York and Columbia
University, from which he received the degree of Ph.D. in 1908. He has made
many ethnological field trips, especially to the Crow and other Plains Indians. He
was associate curator of Anthropology in the American Museum of Natural History,
New York, until 1921, and since then has become Associate Professor of
Anthropology in the University of California. He is associate editor of the American
Anthropologist, and was secretary of the American Ethnological Society from 1910
to 1919, and president, 1920–1921. He is the author of “Culture and Ethnology”
and “Primitive Society,” as well as many technical monographs dealing mainly with
the sociology and mythology of North American aborigines.
John Macy was born in Detroit in 1877, and was educated at Harvard, from
which he received the degree of A.B. in 1899, and A.M. in 1900. After a year as
assistant in English at Harvard, he became associate editor of Youth’s Companion,
and later literary editor of the Boston Herald. Among his books are “Life of Poe”
(Beacon Biographies), “Guide to Reading,” “The Spirit of American Literature,”
“Socialism in America,” and “Walter James Dodd: a Biography.”
H. L. Mencken was born in Baltimore in 1880, and was educated in private
schools and at the Baltimore Polytechnic. He was engaged in journalism until
1916, and is now editor and part owner with George Jean Nathan of the Smart Set
Magazine, and a contributing editor of the Nation. His books include “The
Philosophy of Friedrich Nietzsche,” “A Book of Burlesques,” “A Book of Prefaces,”
“The American Language,” and two volumes of “Prejudices.” In collaboration with
George Jean Nathan he has published “The American Credo,” and “Heliogabalus,”
a play.
Lewis Mumford was born in Flushing, Long Island, in 1895. He was associate
editor of the Dial in 1919, acting editor of the Sociological Review (London), a
lecturer at the Summer School of Civics, High Wycombe, England, and has
contributed to the Scientific Monthly, the Athenaeum, the Nation, the Freeman, the
Journal of the American institute of Architects, and other periodicals. He was a
radio operator in the United States Navy during the War.
George Jean Nathan was born in Fort Wayne, Indiana, in 1882, and was
graduated from Cornell University in 1904. He has been dramatic critic of various
newspapers and periodicals, and is at present editor and part owner with H. L.
Mencken of the Smart Set Magazine. Among his books are “The Popular Theatre,”

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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. A Damson's accrual-based income:

Crimson's accrual-based income:

Bassett's accrual-based income:

8. C Icede's accrual-based income:

Healthstone's accrual-based income:

Total noncontrolling interest = ($32,000 + $79,600) = $111,600

9. D Juvyn's operational income .......................................................... $50,000

10. A Equity income (60% of $200,000) .................................................. $120,000

11. C Unrealized Gain:

12. A Recognition of this gain is not required on a consolidated tax return.

Consideration transferred ....................................... $420,000

14. (35 Minutes) (Series of reporting and consolidation questions pertaining to a

a. Investment in Limb $252,000

Dividends received 2010 (14,000)

b. Leaf—2010 income (revenues minus expenses) $10,000

Limb—2009 operating income $40,000

c. Consolidated sales (total for the companies) $1,260,000

d. Noncontrolling interest in income of Leaf

Noncontrolling interest in income of Limb:

e. 2010 Realized income of Limb (prior to accounting

2011 Realized income of Limb (prior to accounting

f. In b., an adjustment of $50,610 was made to the beginning 2011 retained

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

Income reported by Nephew—2011 .............................. $50,000

plus the $6,000 in dividends].

17. (35 Minutes) (Consolidated income for a father-son-grandson combination.)

a. Mesa's operating income $250,000

b. Valley's operating income $140,000

Mesa’s operating income $250,000

17. (30 Minutes) (Consolidated income figures for a connecting affiliation)

Operational income (sales minus cost of goods sold and

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

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

a. Consideration transferred 1/1/11 $900,000

Software licensing agreements $750,000

b. Consideration transferred 1/1/11 $900,000

b. On separate returns, the unrealized gains are reported as taxable income.

DUE TO GOVERNMENT: (separate returns)

Currently payable to government ........................... $30,000

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

a. $260,000 ($650,000 × 40%)

b. $260,000 ($650,000 × 40%)

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

Equity income of subsidiary .......................................... $100,800

Piranto income 2011 (sales less expenses) ...................................... $300,000

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