Advanced Accounting 12th Edition Test Bank – Floyd A. Beams - Joseph H. Anthony

Advanced Accounting 12th Edition Test Bank – Floyd A. Beams – Joseph H. Anthony

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Title : Advanced Accounting

Author : Floyd A. Beams

Edition : 12th Edition

Type : Test Bank

Product Description

Advanced Accounting 12th Edition Test Bank – Floyd A. Beams – Joseph H. Anthony

Advanced Accounting 12th Edition Test Bank – Floyd A. Beams – Joseph H. Anthony

Advanced Accounting, 12e (Beams et al.)

Chapter 10   Subsidiary Preferred Stock, Consolidated Earnings Per Share, and Consolidated Income Taxation

 

10.1   Multiple Choice Questions

 

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

 

On December 31, 2013, Parminter Corporation owns an 80% interest in the common stock of Sanchez Corporation and an 80% interest in Sanchez’s preferred stock. On December 31, 2013, Sanchez’s stockholders’ equity was as follows:

 

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

Common stock                                                                                                    350,000

Retained earnings                                                                                              100,000

Total stockholders’ equity                                                                             $500,000

 

On December 31, 2013, preferred dividends are not in arrears. Sanchez had 2014 net income of $30,000 and only preferred dividends are declared and paid in 2014. There are no book value/fair value differentials associated with Parminter’s investments.

 

1) How much should the Parminter’s Investment in Sanchez—Common Stock, change during 2014?

  1. A) $5,000
  2. B) $20,000
  3. C) $25,000
  4. D) $30,000

Answer:  B

Explanation:  B) ($30,000 – $5,000) × 80%

Objective:  LO1

Difficulty:  Moderate

 

2) What should be the noncontrolling interest share, common in the consolidated financial statements of Parminter for the year ending December 31, 2014?

  1. A) $ 5,000
  2. B) $20,000
  3. C) $25,000
  4. D) $30,000

Answer:  A

Explanation:  A) ($25,000 × 20%)

Objective:  LO1

Difficulty:  Moderate

 

3) What should be the noncontrolling interest share, preferred in the consolidated financial statements of Parminter for the year ending December 31, 2014?

  1. A) $1,000
  2. B) $2,000
  3. C) $4,000
  4. D) $5,000

Answer:  A

Explanation:  A) ($5,000 × 20%)

Objective:  LO1

Difficulty:  Moderate

 

4) A subsidiary has dilutive securities outstanding that include convertible bonds payable. The bonds are convertible into the parent’s common stock. When calculating consolidated diluted earnings per share, the convertible bonds will affect

  1. A) the numerator of consolidated diluted EPS only.
  2. B) the denominator of consolidated diluted EPS only.
  3. C) the numerator and denominator of consolidated diluted EPS.
  4. D) None of the above will be affected.

Answer:  C

Objective:  LO2

Difficulty:  Moderate


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

 

On January 1, 2014, Pardy Corporation acquired a 70% interest in the common stock of Salter Corporation for $7,000,000 when Salter’s stockholders’ equity was as follows:

 

10% cumulative, nonparticipating preferred stock,

$100 par, with a $105 liquidation preference,

callable at $110                                                                             $ 1,000,000

Common stock, $10 par value                                                            6,000,000

Additional paid-in capital                                                                   1,500,000

Retained earnings                                                                                  2,500,000

Total stockholders’ equity                                                               $11,000,000

 

There were no preferred dividends in arrears on January 1, 2014. There are no book value/fair value differentials.

 

5) What is the implied goodwill for Salter based on Pardy’s purchase price for Salter on January 1, 2014?

  1. A) $ 0
  2. B) $ 35,000
  3. C) $ 70,000
  4. D) $100,000

Answer:  D

Explanation:  D) Stockholders’ equity                                                         $11,000,000

Less: Preferred stockholders’ equity (10,000 × $110)                                  (1,100,000)

Common stockholders’ equity                                                                           9,900,000

 

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

Implied fair value of investment ($7,000,000/0.7)                                      10,000,000

Common stockholders’ equity                                                                          (9,900,000)

Goodwill                                                                                                                    $100,000

Objective:  LO1

Difficulty:  Moderate

 

6) Salter has a 2014 net loss of $200,000. No dividends are declared or paid in 2014. What is the change in Pardy’s Investment in Salter for the year ending December 31, 2014?

  1. A) $ 50,000
  2. B) $ 70,000
  3. C) $140,000
  4. D) $210,000

Answer:  D

Explanation:  D) Salter’s net loss                                              $(200,000)

Preferred dividend 10% × $1,000,000                                        (100,000)

Total Loss to common stockholders                                          (300,000)

Pardy’s ownership percentage                                                             70%

Pardy’s share of the loss on investment                                 $(210,000)

Objective:  LO1

Difficulty:  Moderate

 

7) Assume Salter’s net income for 2014 is $220,000. No dividends are declared or paid in 2014. What is the change in Pardy’s Investment in Salter for the year ending December 31, 2014?

  1. A) $ 84,000
  2. B) $119,000
  3. C) $154,000
  4. D) $189,000

Answer:  A

Explanation:  A) Salter’s net income                                          $220,000

Less: Income to the preferred stockholders                               (100,000)

Income to the common stockholders                                           120,000

Pardy’s ownership percentage                                                             70%

Pardy’s share of the income                                                            $84,000

Objective:  LO1

Difficulty:  Moderate

 

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

 

On January 1, 2014, Pamplin Corporation’s stockholders’ equity consisted of $1,000,000 of $10 par value Common Stock, $750,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. On January 1, 2014, Pamplin purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000 with all excess purchase cost assigned to goodwill. The stockholders’ equity of Sage on this date consisted of $800,000 of $100 par value, 8% cumulative, preferred stock callable at $105, $900,000 of $10 par value common stock and $500,000 of Retained Earnings. Sage’s net income for 2014 was $100,000.

 

On January 1, 2014, no preferred dividends are in arrears. No dividends are declared or paid in 2014. In a separate transaction on January 1, 2014, Pamplin purchased 70% of Sage’s preferred stock for $600,000.

 

8) For the year ending December 31, 2014, the amount of Pamplin’s income from Sage (associated with the common stock investment in Sage) is

  1. A) $32,400.
  2. B) $36,000.
  3. C) $60,000.
  4. D) $90,000.

Answer:  A

Explanation:  A) Preliminary computations:

Total stockholders’ equity (Sage)                                                             $2,200,000

Less: Preferred stockholders’ equity

($800,000 × 1.05)                                                                                               (840,000)

Equals: Common stockholders’ equity                                                  $1,360,000

 

Net income as given                                                                                        $100,000

Less: Preferred dividends ($800,000 × 8%)                                                   (64,000)

Income available to the common stockholders                                         $36,000

Ownership percentage                                                                                            90%

Income from Sage                                                                                               $32,400

Objective:  LO1

Difficulty:  Moderate

 

9) What is the goodwill on the consolidated balance sheet for Pamplin and Subsidiaries on December 31, 2014 based on Pamplin’s purchase of Sage’s common stock?

  1. A) $140,000
  2. B) $240,000
  3. C) $290,000
  4. D) $306,667

Answer:  D

Explanation:  D) Implied fair value ($1,500,000/0.90) $1,666,667

Less: Common stockholders’ equity                               (1,360,000)

Goodwill                                                                                   $306,667

Objective:  LO1

Difficulty:  Moderate

 

10) Pan Corporation has total stockholders’ equity of $5,000,000 consisting of $1,000,000 of $10 par value Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. Pan owns 80% of Sailor Corporation’s common stock purchased at book value, which equals fair value. Sailor has $900,000 of 10% cumulative preferred stock outstanding, with no preferred dividends in arrears. The preferred stock has no call price, redemption price or liquidation price. Pan acquired 60% of the preferred stock of Sailor for $500,000. After this transaction the balances in Pan’s Retained Earnings and Additional Paid-in Capital accounts, respectively, are

  1. A) $2,960,000 and $1,000,000.
  2. B) $3,000,000 and $960,000.
  3. C) $3,000,000 and $1,040,000.
  4. D) $3,040,000 and $1,000,000.

Answer:  C

Explanation:  C) If the book value ($900,000 × 60%) of preferred stock is greater than the price paid ($500,000) for the preferred stock, then the difference is added to the parent’s additional paid-in capital.

Objective:  LO1

Difficulty:  Moderate

 

11) Assume a company’s preferred stock is cumulative with a call provision and has dividends in arrears. The amount of stockholders’ equity allocated to preferred stockholders is equal to the number of shares outstanding times the

  1. A) sum of the par value per share plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared.
  2. B) sum of the par value per share, plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared.
  3. C) call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared.
  4. D) call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared.

Answer:  D

Objective:  LO1

Difficulty:  Moderate

 

12) When a parent acquires the preferred stock of a subsidiary, there will be a constructive retirement and

  1. A) any difference paid above the book value of the preferred stock reduces the parent’s additional paid-in capital.
  2. B) any difference paid above the book value of the preferred stock reduces the subsidiary’s retained earnings.
  3. C) any difference paid above the book value of the preferred stock increases the parent’s additional paid-in capital.
  4. D) any difference paid above the book value of the preferred stock increases the parent’s retained earnings.

Answer:  A

Objective:  LO1

Difficulty:  Moderate

 

13) If a parent company has controlling interest in a subsidiary which has no potentially dilutive securities outstanding, then in the calculation of consolidated diluted EPS, it will be necessary to

  1. A) only make an adjustment of subsidiary’s basic earnings.
  2. B) replace the parent’s equity in subsidiary earnings with the parent’s equity in subsidiary’s diluted EPS.
  3. C) make a replacement calculation in the parent’s basic earnings for the EPS.
  4. D) only use the parent’s common shares and shares represented by the parent’s potentially dilutive securities.

Answer:  D

Objective:  LO2

Difficulty:  Moderate

 

14) Parnaby has 25,000 common stock shares outstanding and its 100%-owned subsidiary Sandal has 5,000 common stock shares outstanding. Parnaby and Sandal do not have any potentially dilutive securities outstanding. The separate net incomes for Parnaby and Sandal are $150,000 and $75,000, respectively. Diluted EPS for the consolidated company is

  1. A) $5.00.
  2. B) $6.00.
  3. C) $7.50.
  4. D) $9.00.

Answer:  D

Explanation:  D) ($150,000 + $75,000)/25,000

Objective:  LO2

Difficulty:  Moderate

 

15) In computing consolidated diluted EPS, the replacement calculation replaces the parent’s equity in subsidiary earnings with the

  1. A) parent’s share of basic EPS of the subsidiary.
  2. B) subsidiary’s share of basic EPS of the parent.
  3. C) parent’s share of diluted EPS of the subsidiary.
  4. D) subsidiary’s share of diluted EPS of the parent.

Answer:  C

Objective:  LO2

Difficulty:  Moderate

 

16) When a subsidiary has preferred stock that is convertible into subsidiary common stock, the parent’s equity in the subsidiary’s diluted earnings is calculated by the number of

  1. A) subsidiary shares into which the subsidiary’s dilutive securities can be converted times the subsidiary’s basic EPS figure.
  2. B) parent shares into which the subsidiary’s dilutive securities can be converted times the parent’s basic EPS figure.
  3. C) subsidiary common shares held by the parent times the subsidiary’s diluted EPS figure.
  4. D) parent shares into which the subsidiary’s dilutive securities can be converted times the subsidiary’s basic EPS figure.

Answer:  C

Objective:  LO2

Difficulty:  Moderate

 

17) Palm owns a 70% interest in Sable, a domestic subsidiary. Sable is not part of Palm’s affiliated group. Palm will pay taxes on

  1. A) none of the dividends it receives from Sable.
  2. B) 20% of the dividends it receives from Sable.
  3. C) 66% of the dividends it receives from Sable.
  4. D) 80% of the dividends it receives from Sable.

Answer:  B

Objective:  LO3

Difficulty:  Moderate

 

18) Palmer Company owns a 25% interest in Sad, Incorporated, a domestic company. Sad had net income of $60,000 and paid dividends of $20,000. Palmer’s tax rate is 35%. For simplicity, assume that Sad’s undistributed earnings are Palmer’s only temporary timing difference. Assume Sad qualifies for the 80% dividend received deduction. Which of the following statements is correct?

  1. A) The current tax liability is $700.
  2. B) The current tax liability is $1,050.
  3. C) Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred tax liability of $700.
  4. D) Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred tax liability of $1,050.

Answer:  C

Objective:  LO3

Difficulty:  Moderate

 

19) Palmquist Corporation and its 80%-owned subsidiary, Sadler Corporation, are members of an affiliated group. They do not file consolidated tax returns. Sadler had $3,000,000 of income and paid $1,000,000 dividends in 2014. Palmquist and Sadler had 35% income tax rates. What amount of Sadler’s dividends is taxable to Palmquist in 2014?

  1. A) $0
  2. B) $ 70,000
  3. C) $160,000
  4. D) $200,000

Answer:  A

Objective:  LO3

Difficulty:  Moderate

20) Palomba Corporation allocates consolidated income taxes to its 90%-owned subsidiary using the percentage allocation method. Under this method, consolidated income tax expense will be allocated to a subsidiary

  1. A) on the basis of the agreement between the parent and subsidiary.
  2. B) on the basis of the subsidiary’s pretax income as a percentage of consolidated pretax income.
  3. C) on the basis of the income taxes remitted to the IRS.
  4. D) 90% to the subsidiary.

Answer:  B

Objective:  LO3

Difficulty:  Moderate

10.2   Exercises

 

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

 

10% cumulative preferred stock, $100 par value,

callable at $105, with one year dividends in arrears                               $10,000

Common stock, $1 par value                                                                                    50,000

Additional paid-in capital                                                                                      150,000

Retained earnings                                                                                                      160,000

Total stockholders’ equity                                                                                     $370,000

 

On January 1, 2015, Panata Corporation paid $300,000 for a 70% interest in Saito’s common stock. On January 1, 2015, the book values of Saito’s assets and liabilities were equal to fair values.

 

Required:

  1. Determine the book value of the common stockholders’ equity for Saito Corporation on January 1, 2015.

 

  1. What is the amount of goodwill reported on the consolidated balance sheet for Panata Corporation (and Subsidiary) at January 2, 2015?

 

  1. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panata Corporation (and Subsidiary) on January 2, 2015?

Answer:

Requirement 1:

Total stockholders’ equity at December 31, 2014                                           $370,000

Less: Preferred stockholders’ equity 100 shares ×

($105 call price + $10 dividend per share in arrears)                                       (11,500)

Common stockholders’ equity                                                                             $358,500

 

Requirement 2:

Implied fair value of investment ($300,000/0.7)                                             $428,571

Book value of common stockholders’ equity                                                     (358,500)

Goodwill                                                                                                                       $70,071

 


Requirement 3

Noncontrolling interest at January 2, 2015:

Noncontrolling portion of Goodwill ($70,071 × 30%)                                    $21,021

Noncontrolling interest: Preferred (100 shares × $115)                                    11,500

Noncontrolling interest: Common ($358,500 × 30%)                                      107,550

Total noncontrolling interest                                                                               $140,071

Objective:  LO1

Difficulty:  Moderate

2) Sally Corporation’s stockholders’ equity on December 31, 2014 was as follows:

 

10% cumulative preferred stock, $100 par value,

callable at $105, with one year dividends in arrears                              $10,000

Common stock, $1 par value                                                                                    50,000

Additional paid-in capital                                                                                      150,000

Retained earnings                                                                                                      160,000

Total stockholders’ equity                                                                                     $370,000

 

On January 1, 2015, Panera Corporation paid $500,000 for a 70% interest in Sally’s common stock. On January 1, 2015, the book values of Sally’s assets and liabilities were equal to fair values.

 

Required:

  1. Determine the book value of the common stockholders’ equity for Sally Corporation on January 1, 2015.

 

  1. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and Subsidiary at January 2, 2015?

 

  1. On January 2, 2015, Panera purchased 70% of Sally’s preferred stock for $5,000. Prepare the journal entry(ies) for Panera for this purchase on January 2, 2015.

 

  1. Prepare the elimination entry on the consolidating work papers for the Investment in Sally, Preferred Stock and Sally’s Preferred Stock on January 2, 2015.

Answer:

Requirement 1

Total stockholders’ equity at December 31, 2014                                           $370,000

Less: Preferred stockholders’ equity 100 shares ×

($105 call price + $10 dividend per share in arrears)                                        (11,500)

Common stockholders’ equity                                                                             $358,500

 

Requirement 2

Implied fair value of investment ($500,000/0.7)                                             $714,286

Book value of common stockholders’ equity                                                     (358,500)

Goodwill                                                                                                                     $355,786

 

 

Requirement 3

Investment in Sally, Preferred Stock                         5,000

Cash                                                                                                    5,000

 

Investment in Sally, Preferred Stock                         3,050

Additional paid-in capital                                                           3,050

($11,500 × 70%) = $8,050 – $5,000 = $3,050

 

Requirement 4

Preferred stock                                                              10,000

Retained earnings                                                          1,500

Investment in Sally, Preferred Stock                                          8,050

Noncontrolling interest share

In Sally, Preferred Stock                                                                3,450

Objective:  LO1

Difficulty:  Moderate

 

3) Samford Corporation’s stockholders’ equity on December 31, 2014 was as follows:

 

8% cumulative preferred stock, $100 par value,

callable at $109, with two years of dividends

in arrears                                                                                                    $100,000

Common stock, $25 par value                                                                       700,000

Additional paid-in capital                                                                              250,000

Retained earnings                                                                                             400,000

Total stockholders’ equity                                                                         $1,450,000

 

On January 1, 2015, Panera Corporation purchased a 70% interest in Samford’s common stock for $1,400,000. On this date the book values of Samford’s assets and liabilities are equal to their fair values.

 

Required:

  1. Determine the book value of the common stockholders’ equity for Samford Corporation on January 1, 2015.

 

  1. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and Subsidiary at January 2, 2015?

 

  1. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panera Corporation and Subsidiary on January 2, 2015?

Answer:

Requirement 1

Total stockholders’ equity at December 31, 2014                                                $1,450,000

Less: Preferred stockholders’ equity 1000 shares ×

[$109 call price + ($8 dividend per share in arrears × 2 years)]                          (125,000)

Common stockholders’ equity                                                                                 $1,325,000

 

Requirement 2

Implied fair value of investment($1,400,000/0.70)                                             $2,000,000

Less: Common stockholders’ equity                                                                         (1,325,000)

Goodwill                                                                                                                            $675,000

 

Requirement 3

Noncontrolling interest, January 2, 2015:

Preferred stockholders’ equity                                                                                     $125,000

Common stockholders’ equity (30% × $1,325,000)                                                  397,500

Goodwill (30% × $675,000)                                                                                             202,500

Total                                                                                                                                     $725,000

Objective:  LO1

Difficulty:  Moderate

 

4) Savy Corporation’s stockholders’ equity on December 31, 2014 was as follows:

 

8% cumulative preferred stock, $100 par value,

callable at $109, with two years of dividends

in arrears                                                                                                            $100,000

Common stock, $25 par value                                                                               700,000

Additional paid-in capital                                                                                      250,000

Retained earnings                                                                                                      400,000

Total stockholders’ equity                                                                                  $1,450,000

 

On January 1, 2015, Paul Corporation purchased a 70% interest in Savy’s common stock for $2,100,000. On this date the book values of Savy’s assets and liabilities are equal to their fair values.

 

Required:

  1. Determine the book value of the common stockholders’ equity for Savy Corporation on January 1, 2015.

 

  1. What is the amount of goodwill reported on the consolidated balance sheet for Paul Corporation and Subsidiary at January 2, 2015?

 

  1. On January 2, 2015, Paul purchased 70% of Savy’s preferred stock for $50,000. Prepare the journal entry(ies) for Paul for this purchase on January 2, 2015.

 

  1. Prepare the elimination entry on the consolidating work papers for the Investment in Savy, Preferred Stock and Savy’s Preferred Stock on January 2, 2015.

Answer:

Requirement 1

Total stockholders’ equity at December 31, 2014                                                $1,450,000

Less: Preferred stockholders’ equity 1000 shares ×

[$109 call price + ($8 dividend per share in arrears × 2 years)]                          (125,000)

Common stockholders’ equity                                                                                  $1,325,000

 

Requirement 2

Implied fair value of investment ($2,100,000/0.70)                                            $3,000,000

Less: Common stockholders’ equity                                                                         (1,325,000)

Goodwill                                                                                                                         $1,675,000

 

Requirement 3

Investment in Savy, Preferred Stock                           50,000

Cash                                                                                                  50,000

 

Investment in Savy, Preferred Stock                           37,500

Additional paid-in capital                                                         37,500

($125,000 × 70%) – $50,000 = $37,500

 


Requirement 4

Preferred Stock                                                                100,000

Retained earnings                                                            25,000

Investment in Savy, Preferred Stock                                        87,500

Noncontrolling interest                                                               37,500

Objective:  LO1

Difficulty:  Moderate

5) Pancino Corporation owns a 90% interest in Sakal Corporation’s common stock. Throughout 2014, Sakal had 20,000 shares of common stock outstanding and Pancino had 50,000 shares of common stock outstanding. Sakal’s only dilutive security consists of 2,500 stock options, with an exercise price of $20 per share. The average price of Sakal’s stock is $50 per share in 2014. The options are exercisable for one share of Sakal’s common stock. Pancino’s and Sakal’s separate net incomes for the year are $100,000 and $80,000, respectively.

 

Required:

Compute the amount of basic and diluted earnings per share for Pancino (Consolidated) and Sakal Corporations.

Answer:                                                                                              Basic                         Diluted

Sakal’s Basic and Diluted EPS:

Sakal’s income to common shareholders                           $80,000                         $80,000

 

Common shares outstanding                                                   20,000                           20,000

Options:

Diluted EPS:

($50 – $20)/$50 × 2,500                                                             _______                             1,500

Common shares and common equivalents                         20,000                           21,500

Earnings per share                                                                         $4.00                             $3.72

 

Basic                         Diluted

Pancino’s Basic and Diluted EPS:

Pancino’s separate income                                                   $100,000                      $100,000

Pancino’s income from Sakal                                                   72,000                           72,000

 

Replacement computation:                                                                                              (72,000)

 

18,000 shares × $3.72                                                             ________                           66,960

Income to common                                                                  $172,000                      $166,960

 

Common shares outstanding                                                   50,000                           50,000

 

Earnings per share                                                                            3.44                                3.34

Objective:  LO2

Difficulty:  Moderate

 

6) Pandy Corporation owns a 90% interest in Sakaj Corporation’s common stock. Throughout 2014, Sakaj had 20,000 shares of common stock outstanding and Pandy had 50,000 shares of common stock outstanding. Sakaj’s only dilutive security consists of 10,000 stock options, with an exercise price of $20 per share. The average price of Sakaj’s stock is $50 per share in 2014. The options are exercisable for one share of Sakaj’s common stock. Pandy’s and Sakaj’s separate net incomes for the year are $200,000 and $180,000, respectively.

 

Required:

Compute the amount of basic and diluted earnings per share for Pandy (Consolidated) and Sakaj Corporations.

Answer:                                                                                             Basic                          Diluted

Sakaj’s Basic and Diluted EPS:

Sakaj’s income to common shareholders                         $180,000                        $180,000

 

Common shares outstanding                                                   20,000                            20,000

Options:

Diluted EPS:

($50-$20)/$50 × 10,000                                                            _______                               6,000

Common shares and common equivalents                         20,000                            26,000

Earnings per share                                                                         $9.00                               $6.92

 

Basic                          Diluted

Pandy’s Basic and Diluted EPS:

Pandy’s separate income                                                      $200,000                        $200,000

Pandy’s income from Sakaj ($180,000 × 90%)                   162,000                          162,000

 

Replacement computation:

(162,000)

18,000 shares × $6.92                                                            ________                          124,560

Income to common                                                                 $362,000                          324,560

 

Common shares outstanding                                                   50,000                            50,000

 

Earnings per share                                                                         $7.24                               $6.49

Objective:  LO2

Difficulty:  Moderate

 

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

 

Required:

Compute the amount of basic and diluted earnings per share for Parker (Consolidated) and Sample Corporations.

Answer:                                                                                            Basic                           Diluted

Sample’s Basic and Diluted EPS:

Sample’s income to common shareholders                       $75,000                         $75,000

Add: Net of tax interest expense

$50,000 × 8% × 66%                                                                        0                              2,640

Adjusted subsidiary earnings                                                $75,000                         $77,640

 

Common shares outstanding                                                   10,000                            10,000

Incremental shares:

Diluted EPS:

50 bonds × 20 shares                                                                  ______                              1,000

Common shares and common equivalents                         10,000                            11,000

Earnings per share                                                                         $7.50                              $7.06

 

Basic                          Diluted

Parker’s Basic and Diluted EPS:

Parker’s separate income                                                      $100,000                       $100,000

Parker’s income from Sample                                                  60,000                            60,000

 

Replacement computation:

Parker’s income from Sample                                                                                         (60,000)

8,000 shares × $7.06                                                       ________                            56,480

Income to common                                                                 $160,000                       $156,480

 

Common shares outstanding                                                100,000                         100,000

 

Earnings per share                                                                         $1.60                              $1.56

Objective:  LO2

Difficulty:  Moderate

 

8) Peyton Corporation owns an 80% interest in Sampe Corporation’s common stock. Throughout 2014, Sampe had 10,000 shares of common stock outstanding and Peyton had 100,000 shares of common stock outstanding. Sampe’s only dilutive security consists of $100,000 face amount of 8% bonds payable. Each $1,000 bond is convertible into 20 shares of Sampe stock. Peyton and Sampe’s separate net incomes for the year are $200,000 and $150,000, respectively. Assume a 34% flat income tax rate.

 

Required:

Compute the amount of basic and diluted earnings per share for Peyton (consolidated) and Sampe Corporations.

Answer:                                                                                             Basic                         Diluted

Sampe’s Basic and Diluted EPS:

Sampe’s income to common shareholders                      $150,000                       $150,000

Add: Net of tax interest expense

$100,000 × 8% × 66%                                                                      0                              5,280

Adjusted subsidiary earnings                                             $150,000                       $155,280

 

Common shares outstanding                                                   10,000                           10,000

Incremental shares:

Diluted EPS:

100 bonds × 20 shares                                                             _______                              2,000

Common shares and common equivalents                         10,000                           12,000

Earnings per share                                                                       $15.00                           $12.94

 

Basic                         Diluted

Peyton’s Basic and Diluted EPS:

Peyton’s separate income                                                      $200,000                       $200,000

Peyton’s income from Sampe

(80% × $150,000)                                                                        120,000                         120,000

 

Replacement computation:

Peyton’s income from Sampe                                                                                        (120,000)

8,000 shares × $12.94                                                               _______                         103,520

Income to common                                                                 $320,000                       $303,520

 

Common shares outstanding                                                100,000                         100,000

 

Earnings per share                                                                         $3.20                              $3.04

Objective:  LO2

Difficulty:  Moderate

 

9) Pane Corporation owns 100% of Alder Corporation, 85% of Ball Corporation, 70% of Cake Corporation, 40% of Dash Corporation, and 10% of Eager Corporation. All of these corporations are domestic corporations. Pane, Alder and Ball belong to an affiliated group. Pane’s marginal income tax rate is 35%. All investees have paid out all their net income in the form of dividends. During 2014, Pane Corporation received the following cash dividends:

 

From Alder:      $180,000

From Ball:         $170,000

From Cake:       $160,000

From Dash:      $100,000

From Eager:      $ 60,000

 

Required:

  1. Compute the amount of the dividend income that would be excluded from taxation under the current Internal Revenue Code.

 

  1. Compute Pane’s current income tax liability for the dividend income received in 2014.

Answer:  Requirement 1

Excluded dividend income:

From Alder: $180,000 × 100%                                             $180,000

From Ball: $170,000 × 100%                                                   170,000

From Cake: $160,000 × 80%                                                   128,000

From Dash: $100,000 × 80%                                                     80,000

From Eager: $60,000 × 70%                                                      42,000

Total excluded dividend income                                       $600,000

 

Requirement 2

Total dividend income received                                         $670,000

Total excluded dividend income                                         600,000

Included dividend income                                                     $70,000

Current Income Tax Liability:

$70,000 × 35% =                                                                         $24,500

Objective:  LO3

Difficulty:  Moderate

 

10) Paradise Corporation owns 100% of Aldred Corporation, 90% of Balme Corporation, 80% of Calder Corporation, 75% of Dale Corporation, 20% of East Corporation, and 8% of Faber Corporation. Paradise, Aldred, Balme and Calder belong to an affiliated group. All of these corporations are domestic corporations. During 2014, Paradise Corporation reports net income of $1,500,000. This net income includes the full amount of dividends received from Aldred and Faber, but does not include the dividends received from Balme, Calder, Dale, and East Corporations. All investees have paid out all of their net income in the form of dividends. Paradise’s share of the various dividend distributions is as follows:

 

From Aldred:            $90,000

From Balme:              $92,000

From Calder:             $88,000

From Dale:                 $66,000

From East:                  $50,000

From Faber:               $40,000

 

Required:

Calculate the correct amount of taxable income for Paradise Corporation if a consolidated tax return is filed.

Answer:  Net income as reported:                                                                           $1,500,000

Excludable amount of dividends included in net income:

Exclude 100% of Aldred dividends                                                                       (90,000)

Exclude 70% of Faber dividends                                                                            (28,000)

Includable amount of dividends not yet added to net income:

Include 20% of Dale dividends                                                                                13,200

Include 20% of East dividends                                                                                 10,000

Taxable income                                                                                                             $1,405,200

 

The dividends from Balme and Calder are excluded in full. This problem also emphasizes the dividend exclusion ratio applicable when the percentage of stock held is right on the dividing line between the different exclusion percentages. The 70% exclusion ratio applies for stock holdings less than 20% and the 80% exclusion ratio applies for holdings less than 80% but at least 20%.

Objective:  LO3

Difficulty:  Moderate

 

11) Peter Corporation owns 90% of the common stock of Subsidiary Subway. The following data is available:

Peter                    Subway

Net income for 2014                                                                                   $150,000                 $50,000

Preferred dividends for 2014                                                                                                      $10,000

Common dividends for 2014                                                                                                     $15,000

Number of common shares outstanding 200,000                                                                 20,000

10% Preferred Stock, $100 par                                                                                                 $100,000

 

The preferred stock is cumulative and convertible. The annual preferred dividends are $10,000.

 

Required:

  1. Subway’s preferred stock is convertible into 12,000 shares of Subway’s common stock. Peter and Subway do not have any other potentially dilutive securities outstanding.
  2. What is Subway’s basic EPS and diluted EPS?
  3. What is consolidated basic EPS and diluted EPS?

 

  1. Subway’s preferred stock is convertible into 12,000 shares of Peter’s common stock. Peter and Subway do not have any other potentially dilutive securities outstanding. What is consolidated basic EPS and diluted EPS?

Answer:  Requirement 1

 

Subway Basic EPS:

= $2.00

 

Subway Diluted EPS:

= $1.56

 

Consolidated Basic EPS:

= $0.93

 

Consolidated Diluted EPS:

= $0.89

Requirement 2

 

Consolidated Basic EPS:

= $0.93

 

Consolidated Diluted EPS:

= $0.92

Objective:  LO2

Difficulty:  Moderate

12) Jeff Corporation owns 90% of the common stock of Subsidiary Jordan. The following data is available:

Jeff                           Jordan

Net income for 2014                                                                                $250,000                  $150,000

Preferred dividends for 2014                                                                                                      $20,000

Common dividends for 2014                                                                                                     $25,000

Number of common shares outstanding 200,000                                                                 20,000

10% Preferred Stock, $100 par                                                                                                 $200,000

 

The preferred stock is cumulative and convertible. The annual preferred dividends are $20,000.

 

Required:

  1. Jordan’s preferred stock is convertible into 20,000 shares of Jordan’s common stock. Jeff and Jordan do not have any other potentially dilutive securities outstanding.
  2. What is Jordan’s basic EPS and diluted EPS?
  3. What is consolidated basic EPS and diluted EPS?
  4. Jordan’s preferred stock is convertible into 20,000 shares of Jeff’s common stock. Jeff and Jordan do not have any other potentially dilutive securities outstanding. What is consolidated basic EPS and diluted EPS?

Answer:

Requirement 1

 

Jordan Basic EPS:

= $6.50

 

Jordan Diluted EPS:

= $3.75

 

Consolidated Basic EPS:

= $1.84

 

Consolidated Diluted EPS:

= $1.59

 

Requirement 2

 

Consolidated Basic EPS:

= $1.84

 

Consolidated Diluted EPS:

= $1.75

Objective:  LO2

Difficulty:  Moderate

13) Sandy Corporation’s stockholders’ equity on December 31, 2014 was as follows:

 

10% cumulative preferred stock, $100 par value,

callable at $105, with one year dividends in arrears                    $100,000

Common stock, $1 par value                                                                          200,000

Additional paid-in capital                                                                                40,000

Retained earnings                                                                                              160,000

Total stockholders’ equity                                                                             $500,000

 

On January 1, 2015, Bombard Corporation paid $200,000 for a 90% interest in Sandy’s common stock. On January 1, 2015, the book values of Sandy’s assets and liabilities were equal to fair values. On January 2, 2015, Bombard Corporation paid $120,000 for a 90% interest in Sandy’s preferred stock.

 

Required:

  1. Determine the book value of the common stockholders’ equity for Sandy Corporation on January 1, 2015.

 

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

 

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

 

  1. For the year ending December 31, 2015, Sandy Corporation reported net income of $50,000. Sandy Corporation declared and paid dividends of $20,000 to preferred stockholders and $10,000 to common stockholders. Prepare the journal entries for Bombard Corporation relating to this information.

Answer:

Requirement 1

Total stockholders’ equity                                                                                                     $500,000

Less: Preferred stockholders’ equity

($105 call price + $10 dividend) × 1,000                                                                             (115,000)

Book value of common stockholders’ equity                                                                   $385,000

 

Requirement 2

Investment in Sandy Corp.—common stock                             200,000

Cash                                                                                                                                       200,000

 

Requirement 3

Investment in Sandy Corp.—pref. stock                                     120,000

Cash                                                                                                                                       120,000

 

Additional paid-in capital                                                                16,500

Investment in Sandy Corp.—pref. stock                                                                        16,500

($120,000 – $103,500)

($115,000 × 90%) = $103,500

 


Requirement 4

Cash ($20,000 × 90%)                                                                          18,000

Investment Income in Sandy Corp.—pref. stock                                                        18,000

 

Cash ($10,000 × 90%)                                                                             9,000

Investment in Sandy Corp.—common stock                                                                 9,000

 

Investment in Sandy Corp.—common stock                               27,000

Investment income in Sandy Corp.—

common stock                                                                                                                       27,000

($50,000 – $20,000) × 90%

Objective:  LO1

Difficulty:  Moderate

14) Stello Corporation’s stockholders’ equity on December 31, 2014 was as follows:

 

10% cumulative preferred stock, $100 par value,

callable at $110, with no dividends in arrears                                $100,000

Common stock, $1 par value                                                                          300,000

Additional paid-in capital                                                                                40,000

Retained earnings                                                                                              160,000

Total stockholders’ equity                                                                             $600,000

 

On January 1, 2015, Kaprelian Corporation paid $300,000 for a 90% interest in Stello’s common stock. On January 1, 2015, the book values of Stello’s assets and liabilities were equal to fair values. On January 2, 2015, Kaprelian Corporation paid $100,000 for a 90% interest in Stello’s preferred stock.

 

Required:

  1. Determine the book value of the common stockholders’ equity for Stello Corporation on January 1, 2015.

 

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

 

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

 

  1. For the year ending December 31, 2015, Stello Corporation reported net income of $50,000. Stello Corporation declared and paid dividends of $10,000 to preferred stockholders and $10,000 to common stockholders. Prepare the journal entries for Kaprelian Corporation relating to this information.

Answer:

Requirement 1

Total stockholders’ equity                                                                                             $600,000

Less: Preferred stockholders’ equity

$110 call price × 1,000                                                                                                     (110,000)

Book value of common stockholders’ equity                                                           $490,000

 


Requirement 2

Investment in Stello Corp.—common stock                               300,000

Cash                                                                                                                               300,000

 

Requirement 3

Investment in Stello Corp.—pref. stock                                       100,000

Cash                                                                                                                               100,000

 

Additional paid-in capital                                                                   1,000

Investment in Stello Corp.—pref. stock                                                                    1,000

($100,000 – $99,000) = $1,000

($110,000 × 90%) = $99,000

 

Requirement 4

Cash ($10,000 × 90%)                                                                             9,000

Investment Income in Stello Corp.—

pref. stock                                                                                                                        9,000

 

Cash ($10,000 × 90%)                                                                             9,000

Investment in Stello Corp.—common

stock                                                                                                                                9,000

 

Investment in Stello Corp.—common stock                                 36,000

Investment income in Stello Corp.—

common stock                                                                                                             36,000

($50,000 – $10,000) × 90%

Objective:  LO1

Difficulty:  Moderate

 

 

15) Pretax operating incomes of Pang Corporation and its 70%-owned subsidiary, Sala Corporation, for the year 2014, are shown below. Sala pays total dividends of $60,000 for the year. There are no unamortized book value/fair value differentials relating to Pang’s investment in Sala. During the year, Pang sold land to Sala for a gain of $35,000 and Sala holds this land at the end of the year. The marginal corporate tax rate for both corporations is 34%.

 

Pang                    Sala

Sales revenue                                                                                                        $900,000           $600,000

Gain on sale of land                                                                                                35,000

Cost of sales                                                                                                            (480,000)           (325,000)

Other expenses                                                                                                      (192,000)             (78,000)

Pretax operating income (does not include investment income)         $263,000           $197,000

 

Required:

  1. Determine the separate amounts of income tax expense for Pang and Sala as if they had filed separate tax returns.

 

  1. Determine Pang’s net income from Sala.

Answer:

Requirement 1                                                                                                 Pang                             Sala

Income taxes currently payable:

Taxes on operating income

$263,000 × 34%                                                                                    $89,420

$197,000 × 34%                                                                                                                         $66,980

Taxes on dividends received:

$60,000 × 70% × 20% × 34%                                                                 2,856                   ________

Income taxes currently payable                                                               92,276                         66,980

 

Add: Tax on undistributed income:

($197,000 – $66,980 – $60,000) ×

70% × 20% × 34%                                                                                            3,333

Less: Deferred tax on gain on sale of land ($35,000 × 34%)           (11,900)                 ________

Income tax expense                                                                                   $83,709                      $66,980

 

Requirement 2

Pre-tax income from Sala                                                                                                           $197,000

Less: income tax expense                                                                                                              (66,980)

Net Income                                                                                                                                        130,020

Ownership Percentage                                                                                                                     × 70%

Subtotal                                                                                                                                              $91,014

Less: Unrealized gain on sale of land                                                                                        (35,000)

Income from Sala                                                                                                                            $56,014

Objective:  LO3

Difficulty:  Moderate

 

16) Pretax operating incomes of Panitz Corporation and its 80%-owned subsidiary, Salazar Corporation, for the year 2014, are shown below.

 

Panitz and Salazar belong to an affiliated group. Salazar pays total dividends of $35,000 for the year. There are no unamortized book value/fair value differentials relating to Panitz’s investment in Salazar. During the year, Panitz sold land to Salazar at a total loss of $15,000 which is included in its pretax operating income. Salazar still holds this land at the end of the year. The marginal corporate tax rate for both corporations is 34%.

 

Panitz                           Salazar

Sales revenue                                                                                            $890,000                       $700,000

Loss on sale of land                                                                                     (15,000)

Cost of sales                                                                                                 (400,000)                      (250,000)

Other expenses                                                                                           (350,000)                      (350,000)

Depreciation expense                                                                                 (50,000)                        (35,000)

Pretax operating income

(does not include Salazar investment income)                         $75,000                         $65,000

 

Required:

  1. Determine the separate amounts of income tax expense for Panitz and Salazar as if they had filed separate tax returns.

 

  1. Determine Panitz’s net income from Salazar.

Answer:

Requirement 1                                                                                                Panitz                       Salazar

Taxable Income Calculation:

Sales Revenue                                                                                               $890,000                   $700,000

Loss on sale of land                                                                                        (15,000)

Cost of sales                                                                                                    (400,000)                  (250,000)

Other expenses                                                                                              (350,000)                  (350,000)

Depreciation expense                                                                                     (50,000)                     (35,000)

Taxable income                                                                                              $75,000                     $65,000

Tax rate                                                                                                                    34%                            34%

Income taxes currently payable                                                                 $25,500                     $22,100

Add: Deferred taxes on loss on sale of land ($15,000 × 34%)                5,100                    _______

Income tax expense                                                                                       $30,600                     $22,100

 

Requirement 2

Panitz’s income from Salazar:

Assuming taxable income is the same as GAAP income                                                      $65,000

Less: Current income taxes expense                                                                                               22,100

Net income                                                                                                                                             42,900

Panitz’s ownership percentage                                                                                                            80%

Subtotal                                                                                                                                                    34,320

Add: Unrealized loss on sale of land                                                                                             15,000

Income from Salazar                                                                                                                         $49,320

Objective:  LO3

Difficulty:  Moderate

Advanced Accounting 12th Edition Test Bank – Floyd A. Beams – Joseph H. Anthony

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