Chapter 10 SUBSIDIARY PREFERRED STOCK CONSOLIDATED EARNINGS PER SHARE, AND CONSOLIDATED INCOME TAXATION Comprehensive Chapter Outline

SUBSIDIARIES A ITH PREFERRED STOCK OUTSTANDING !I""#$trat%&' 10(1)

The stockholders equity of a subsidiary with preferred stock outstanding is allocated to the preferred stockholders, based on the preferred contract, and the remainder is common stockholders equity. 1 * + The preferred stockholders equity is based on the call or redemption price. If the preferred stock has no redemption provision, the preferred equity is based on par value plus any liquidation premium. If the preferred stock is cumulative, the preferred stockholders equity includes any dividends in arrears.

Net income of an investee or subsidiary with preferred stock outstanding is allocated to the preferred stockholders, based on the preferred contract, and the remainder is allocated to common stockholders. 1 * If the preferred stock is nonparticipating, income is assigned to preferred stockholders based on the preference rate or amount. If the preferred stock is cumulative and nonparticipating, the current year dividend requirement is assigned to preferred stock, regardless of whether the directors declare the current year dividend, the current year plus dividends in arrears from a prior year, or no dividend. If the preferred stock is noncumulative and nonparticipating, only dividends declared and in the amount declared are assigned to preferred stockholders.

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A parent company buys common stock of a subsidiary with cumulative, nonparticipating preferred stock in its capital structure 1 !referred equity is deducted from total stockholders equity to determine common stockholders equity.

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The price paid for the investment in common equity is compared to the fair value the common equity interest acquired to determine goodwill. The parents share of subsidiary reported income is its ownership interest times the subsidiarys income allocated to the common. "inority interest that appears in the consolidated balance sheet consists of the preferred stockholders equity plus the minority interest in the subsidiarys common stockholders equity. "inority interest income in the consolidated income statement consists of the income to preferred stockholders plus the minority interests share of the subsidiarys income to common. #Income to preferred is the same whether or not dividends are declared.$ In the consolidation working papers, an entry is necessary to reclassify the preferred stock as minority interest. This is done by a debit to the subsidiarys preferred stock %for par value of the stock& and a debit to the subsidiarys retained earnings for any difference between par value and the preferred stockholders equity %for call premiums, dividends in arrears, etc.& at the beginning of the period.

A parent company acquires the preferred stock of a subsidiary 1 'rom the viewpoint of the consolidated entity, the preferred stock is retired and no longer a minority interest. a The retirement of the preferred stock is really a constructive retirement because the stock will be reported as outstanding in the separate financial statements of the subsidiary. / The constructive retirement is reported as an actual retirement in the consolidated financial statements. In the consolidation working papers, the equity related to the preferred stock held by the parent and the investment in preferred stock are eliminated( any difference is charged or credited to additional paid)in capital. If additional paid) in capital is insufficient to absorb the e*cess of purchase price over book value, the parents retained earnings is charged. In the parent companys separate books, the investment in subsidiary preferred stock is ad+usted to its book value at acquisition and the parents additional paid) in capital is charged or credited for the difference between the cost of the investment and its underlying book value. a The investment in preferred stock %$ a00&#'te1 2&r &' the /a$%$ &2 %t$ /&&3 4a"#e, and not on the basis of the cost or equity methods.

,ithout this ad+ustment on the parent company books, parent company net income and stockholders equity would not equal consolidated net income and stockholders equity. If the constructive retirement is not recorded on the parents books, the investment is maintained on a cost basis. In this case, a working paper ad+ustment to additional paid)in capital is required for each year the statements are consolidated. The consolidated financial statements are not affected by the parent companys accounting for its investment.

PARENT COMPANY AND CONSOLIDATED EARNINGS PER SHARE !I""#$trat%&' 10(*) A !arent company and consolidated earnings per share are %1e't%0a"5 -asic earnings per share are always identical when the parent company uses the complete equity method. 1 * ,hen a subsidiary has '& potentially dilutive securities, the procedures for computing consolidated .!/ are the same as for separate entities. ,hen a subsidiary ha$ potentially dilutive securities, the potential dilution must be considered in computing the parents diluted .!/. a If the subsidiarys potentially dilutive securities are convertible into subsidiary common stock, the potential dilution is reflected in subsidiary .!/ computations, which are then used in determining parent company .!/. If the subsidiarys potentially dilutive securities are convertible into parent company common stock, they are treated as parent company dilutive securities and are included directly in computing the parent company0s .!/. In this case subsidiary .!/ computations are not used in parent company .!/ computations.

1ilutive securities of the subsidiary convertible into subsidiary shares 1 The diluted earnings of the parent company are ad+usted to replace the parents e6#%t7 %' $#/$%1%ar7 rea"%8e1 %'0&9e with the parents share of the diluted earnings of the subsidiary. a The 2parents equity in subsidiary reali3ed income4 is the parents percentage interest in the reported income of the subsidiary ad+usted for the effects of intercompany profits from upstream sales and constructive gains or losses of the subsidiary. !1) The amorti3ation of cost5book value differentials, unreali3ed profits for downstream sales, and constructive gains and losses

assigned to the parent company that are e*cluded from the computation of income from subsidiary are '&t considered in the computation of the parents equity in subsidiary reali3ed income. This is because these items do not affect the subsidiarys equity. / This computation of the subsidiarys .!/ is made only for the purpose of calculating the parents .!/ and it may not be the same as one prepared by the subsidiary for its own e*ternal reporting. !1) /ubsidiary .!/ computations are based on subsidiary reali3ed income. 'or this purpose, unreali3ed profits of the subsidiary are eliminated and constructive gains and losses of the subsidiary are included.

The 2parents equity in the subsidiarys diluted earnings4 is computed by multiplying the subsidiary shares owned by the parent by the subsidiarys diluted .!/.

1ilutive securities of a subsidiary convertible into parent company shares 1 * The parent company common shares are ad+usted when potentially dilutive securities of the subsidiary are convertible into parent company stock. Income attributable to the potentially dilutive securities of the subsidiary under the 2if converted4 method is added to the parents earnings in calculating the parents diluted earnings.

ACCOUNTING FOR INCOME TAXES OF CONSOLIDATED ENTITIES A A consolidated entity may elect to file a consolidated ta* return if it is classified as an a22%"%ate1 :r&#p under 6 7897 through 7898 of the I:;. 1 An affiliated group e*ists when a common parent corporation owns at least <9= of the voting power of all classes of stock and <9= or more of the total value of all outstanding stock of each of the includable corporations. The common parent must meet the <9= requirements directly for at least one includable corporation. All consolidated entities that are not an affiliated group must file separate returns for each affiliated company.

* B

;onsolidated ta* returns of consolidated entities 1 Intercompany dividends are e*cluded from ta*able income. This 799= e*clusion of dividends from members of the affiliated group applies even if the companies file separate ta* returns.

>osses of one affiliate can be offset against income of other affiliates. >oss carryforwards e*isting at the time an affiliate is acquired can be offset only against ta*able income of that affiliate. Intercompany profits and losses are deferred until reali3ed. .ach subsidiary included in the consolidated ta* return must use the parents ta* year.

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/eparate ta* returns of consolidated entities 1 * 1ividends from members of the same affiliated group are 799= e*cludable from income even when separate returns are filed. <9= of the dividends received from domestic corporations that are ?9= to <9= owned are e*cludable and @9= of the dividends received from domestic corporations that are less than ?9= owned are e*cludable from ta*able income. Income ta*es are payable on unreali3ed intercompany profits, but ta*es otherwise payable are reduced for unreali3ed intercompany losses.

INCOME TAX ALLOCATION !I""#$trat%&' 10(+) A Ander FAS 109, the ob+ectives of accounting for income ta*es are 1 * B To recogni3e the amount of ta*es payable or refundable for the current year and To recogni3e deferred ta* liabilities and assets for the future ta* consequences of events that have been recogni3ed in the financial statements or ta* returns.

.vents that have future ta* consequences are te9p&rar7 1%22ere'0e$5 1 /ome accounting5income ta* differences are temporary differences when separate ta* returns are filed, but not when consolidated ta* returns are filled. a Anreali3ed and constructive gains and losses from intercompany transactions are temporary differences when separate ta* returns are filed. This is because the gains and losses are not included in accounting income until reali3ed( but the individual companies are ta*ed on the income included in their separate statements. Anreali3ed and constructive gains and losses from intercompany transactions are '&t temporary differences when consolidated returns are filed. This is because the gains and losses are deferred until reali3ed in both the consolidation working papers and the consolidated ta* return.

Bther accounting5income ta* differences are temporary differences when either separate or consolidated ta* returns are filed. /ince ?9= of the dividends

received from an affiliate that is not a member of the affiliated group is ta*able, undistributed income, future dividends, creates a temporary difference in both separate and consolidated ta* returns. + /ome accounting5income ta* differences are not temporary differences. Coodwill amorti3ation, when generated from a non)ta*able combination or prior to the 7DDE change in the ta* rules, is not deductible for ta* purposes in either separate or consolidated ta* returns.

Temporary differences 1 Temporary differences from undistributed earnings of a subsidiary %or equity investee& a / Investors pay income ta*es on dividends currently received %distributed income& from equity investees and subsidiaries that are not members of the affiliated group. The investor provides for deferred income ta*es on its share of the investees undistributed income %i.e., the investees net income less dividends&.

Temporary differences from unreali3ed gains and losses from intercompany transactions in separate ta* returns a The selling entity includes the gain or loss from the intercompany sale in its separate ta* return and pays the ta* or receives the ta* benefit currently. The ta* effect of the temporary difference from the unreali3ed gain or loss is included in measuring the income ta* e*pense of the selling affiliate. Ander this approach !1) !*) Intercompany profits are eliminated on a gross basis. ;onsolidated income ta* e*pense is equal to the combined income ta* e*pense of the consolidated entities.

,hen consolidated ta* returns are filed, the ta* liability is allocated among the affiliated companies. The four methods currently used to allocate income ta*es among affiliates are 1 * /eparate return method ) each subsidiary computes its income ta*es as if it were filing a separate return Agreement method ) the ta* e*pense is allocated by agreement between the parent and subsidiaries

,ith)or)without method ) the income ta* provision is computed for the group with and without the preta* income of the subsidiary and the subsidiarys income ta* e*pense is the difference !ercentage allocation method ) the consolidated income ta* e*pense is allocated to a subsidiary on the basis of its preta* income as a percentage of consolidated preta* income This method is used in the textbook.

BUSINESS COMBINATIONS !I""#$trat%&' 10(,) A -usiness combinations may be ta*able or ta* free under the I:;. Any of the following combinations is possible. 1 * In a ta*able purchase business combination, the assets and liabilities of the acquired corporation are revalued to reflect the acquisition values for both accounting and ta* purposes. In a ta* free purchase business combination, the assets and liabilities are carried forward at their book values for ta* purposes, but are revalued for accounting purposes.

,hen assets and liabilities are revalued for ta* purposes, the seller recogni3es gain or loss equal to the fair value of the consideration received minus the ta* bases of the assets or stock sold. Accounting for a ta*able purchase business combination 1 * + Assets and liabilities acquired are recorded at their gross amount. /ince the ta* basis and the book basis are the same, no deferred ta* assets or liabilities are recorded. Coodwill is ta* deductible for purchases after August 7DDE based on the :evenue :econciliation Act of 7DDE %section 7D@&. The amorti3ation period for ta* purposes is 78 years. Coodwill is not amorti3ed for financial reporting purposes under 'A/- /tatement 7F?.

Accounting for a ta*)free purchase business combination 1 * Assets and liabilities are recorded at their gross amount. The difference between the ta* basis %book values& and the assigned values of assets and liabilities acquired times the ta* rate is recorded as a deferred ta* liability or deferred ta* asset. Coodwill is e*cludedGno deferred ta* liability is set up for goodwill. Coodwill is not ta* deductible.

FINANCIAL STATEMENT DISCLOSURES FOR INCOME TAXES A 1eferred ta* assets or liabilities are disclosed on the balance sheet in two categories, a current and a non)current amount based on the related asset or liability. 1 If the deferred item is not related to a specific item, its classification depends on the reversal date of the temporary difference.

B /ignificant components of income ta* e*pense or benefit should be disclosed on the income statement, or in the notes to the financial statements. Amounts allocated to continuing operations, discontinued operations, e*traordinary items, cumulative effect type items, and prior)period ad+ustments should be separately disclosed. De$0r%pt%&' &2 A$$%:'9e't Mater%a" M%'#te$ Huestions .*ercises .79)7 .79)? .79)E .79) F .79)8 .79)J .79)@ .79)< .79)D .79)79 .79)77 .79)7? .79)7E %7@& %7@& AICPA#"oss51ubro$ , "; problem type questions %preferred stock and ta*& P2 #!ortland5/tar$ ;omputations for investment in common stock %subsidiary has preferred stock with 7 years dividends in arrears& P2 #!arnell5/ommerfeld$ ;ompute goodwill, investment income for ? years, and the investment balance from the parents investment in common stock %subsidiary has preferred stock& P2 #!en3ance5/andalwood$ 1etermine investment cost, net income, minority interest income and underlying book value of investment in common stock %subsidiary has preferred stock& P2 #!imlico5/hoshone$ Iournal entries and computations %parent invests in both common and preferred stock of subsidiary, 7 years dividends are in arrears& P2 #!erry5/ketch$ 1etermine cost)book value differentials for preferred and common stock and describe the accounting treatment EPS E "; general questions EPS #!alor5/olaid$ F "; problem)type questions %consolidated .!/ with goodwill, minority interest, and warrants& EPS #!utman5/heridan$ ;onsolidated basic and diluted .!/ %minority interest, warrants convertible into subsidiary shares& EPS #!rince5/tanley$ ;omputations %consolidated .!/ with minority?8 interest, goodwill, unreali3ed profit from upstream sale, parent with preferred stock, and subsidiary warrants& EPS #!oway5/cony$ ;omputations %subsidiary .!/ and consolidated?8 .!/ with goodwill and warrants& Ta; F "; general questions Ta; 8 "; problem)type questions %asset allocation in business

?9 ?9 ?8 ?9 ?8 ?9 79 ?9 ?9

7? ?8

.79)7F .79)78 .79)7J .79)7@

combination, income ta* effect from equity investees& Ta; #!ruit5/olo$ ;ompare separate and consolidated ta* filings %799= owned subsidiary with gain on land& Ta; #!a*ton5/utter$ ;onsolidated income statement %@9= owned subsidiary with goodwill and downstream gain on equipment& Ta; #!eddicord5/ullivan$ Iournal entries %unreali3ed profit with separate and consolidated ta* returns& Ta; #!ioneer5/weeney$ Iournal entries %unreali3ed profit from upstream sale and separate ta* returns&

78 E9 ?9 ?9

!roblems !79)7

P2 #!arrella5/tanley$ ;omputations for investment in common stock %subsidiary has preferred stock with 7 years dividends in arrears& !79)? P2 #!ulsen5/tarky$ ;omputations and consolidation working paper entries for investments in preferred and common stock %midyear purchases& !79)E P2 #!at5/al$ ;onsolidation working papers %investment in common stock, subsidiary has preferred stock, equity method, midyear purchase of common& !79)F P2 #!ari5/ak$ ;onsolidation working papers %investment in common stock, subsidiary has preferred stock, equity method, downstream inventory sales, upstream sale of land, parent acquires all of subsidiarys bonds& !79)8 EPS #!alace5/kinner$ ;omputations %.!/ with convertible debentures& !79)J EPS #!ensacola5/heridan$ ;ompute basic and diluted .!/ %minority interest( options( preferred stock& !79)@ EPS #!rotein5/tarch$ ;omputations %convertible preferred stock and amorti3ation of e*cess& !79)< EPS #!remble5/mithfield$ ;ompute consolidated .!/( subsidiary diluted .!/ given %convertible bonds, goodwill amorti3ation, upstream and downstream sales& !79)D EPS #!ike5/im$ ;omputations %subsidiary with preferred stock and warrants& !79)79 Ta; #!actor5/hram$ ;omparative income statements %consolidated and separate ta* returns& !79)77 Ta; #!anama5/ilky$ ;omputations and income statement %@9= interest, goodwill, upstream sales& !79)7? Ta; #!ulaski5/tewart$ ;onsolidated income statement working papers F9 %@9= owned subsidiary, downstream sales& !79)7E Ta; #!en5/oo$ :econstruct working paper entries %separate and consolidated income statements given& !79)7F Ta; #!arson5/tudio$ Allocate cost5book value differentials in a ?9 ta*able purchase business combination and compute investment income !79)78 Ta; #!ommer5/ooner$ ;omputations and consolidated income statement %separate income ta* returns with intercompany sale of equipment& !79)7J Ta; #!hoeni*5/elica$ ;omputations %separate ta* returns with goodwill, downstream inventory sales, and upstream land sale& Internet assignment

?9 F9 J9 @9 E8 E9 F9 ?9 F9 ?8 E9

?9

F9 F9

Asing the Ceneral "otors ;orporation ?999 annual report from the Ceneral "otors website, prepare a summary of ma+or topics discussed in the chapter. ELECTRONIC SUPPLEMENT ACCOUNTING FOR BRANCH OPERATIONS BRANCHES ARE SEPARATE ACCOUNTING ENTITIES, BUT NOT SEPARATE LEGAL ENTITIES A B C -ranch financial statements are used only for internal reporting purposes. 'inancial statements of the business entity are prepared by combining branch statements with the home office statements. /ales agencies are not separate accounting or business entities.

HOME OFFICE AND BRANCH ACCOUNTS A B H&9e &22%0e /&&3$ ( The home office accounts for its investment in the branch through an asset account entitled 2investment in branch,4 or simply 2branch.4 Bra'0h /&&3$ ( The branch has a reciprocal equity account entitled 2home office4 which replaces the usual equity accounts. A decrease in the branch account on the home office books should be accompanied by a decrease in the home office account on the branch books.

HOME OFFICE AND BRANCH ACCOUNTS ARE COMBINED IN PREPARING FINANCIAL STATEMENTS AS FOLLO S< A B C D .stablish reciprocity between home office and branch accounts .liminate unreali3ed profits from transfers between home office and branch .liminate reciprocal accounts ;ombine nonreciprocal accounts

MERCHANDISE TRANSFERS FROM THE HOME OFFICE TO THE BRANCH< A H&9e &22%0e /&&3$ ( "erchandise transferred to the branch represents an additional investment in the branch and the branch account is debited. The related credit is to 2shipments to branch4 account. /hipments to branch is a contra purchases account on the home office books.

Bra'0h /&&3$ ( The branch debits 2shipments from home office,4 an inventory account, and credits the related home office account.

FREIGHT COSTS A The cost of transporting merchandise to its final sale location is an inventoriable cost that is included in the branch inventory and cost of goods sold computations. 1 If the home office pays the freight, it debits the branch account and credits a payable or cash. The branch debits freight in and credits the home office account. If the branch pays the freight, it records the payment in the usual way and increases %credits& the home office account. The home office makes no entry relating to the freight.

E;0e$$%4e 2re%:ht 0har:e$ ( ;osts incurred to transport merchandise back and forth between the home office and branch or between branches because of shortages in some locations or because defective merchandise is returned is not an inventoriable cost for the branch. .*cessive freight charges should be charged to 2loss on e*cessive freight charges4 on the home office books.

EXPENSE ALLOCATION A B If the home office pays for services that will benefit the branch, the home office should allocate the e*pense between home office and branch. If the branch pays for services that will benefit both the branch and the home office, the e*pense should be allocated proportionately between the two.

De$0r%pt%&' &2 a$$%:'9e't 9ater%a" Huestions %7?&

M%'#te$

!roblems %?E& ,)7E #Arnimal$ Kome office and branch +ournal entries %transfers at cost& ,)7F #Lak$ Ad+usting entries on home office books to eliminate unreali3ed profits ,)78 #"edina$ 1etermine cost of goods sold with outside purchases ,)7J #>iberty$ !repare a reconciliation of home office and branch accounts ,)7@ #1ia3o$ Kome office and branch ad+usting entries %transfers above cost& ,)7< #.astland$ F "; problem)type questions %freight charges& ,)7D #-ristol$ Iournal entries and computations %e*cessive freight charges& ,)?9 #"anning$ !repare a cost of sales schedule and comparative home office, branch, and combined income statements

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#Naylor$ ;losing and ad+usting entries and combined income statement #"ichael$ Kome office)branch account reconciliation and correcting entries #Tanker$ ;losing entries, combined balance sheet, and income statement #1alton$ !repare a home office income statement %trial balances are given( includes loading account& #Isaac$ Iournal entries and combined income statement %transfers in e*cess of cost& #'ast)/top$ Kome office year)end entries and combined financial statements #Tiller$ 'inancial statement working papers to combine home office and branch operations %cost of goods sold summary account required& #;arler$ Iournal entries, ledger accounts, working papers, and closing entries #Anselmo$ !repare a schedule of cost of sales and combining working papers #-ear$ Trial balance working papers to combine home office and ? branches #;erty$ ;omputations and separate income statements for home office and branch #.astman$ ;omputations, reconciliation of home office and branch accounts, and combined income statement and balance sheet #;ontrol !roducts$ !repare trial balance working papers to combine home office and branch operations and develop a home office)branch reconciliation #Komer$ Lear)end entries and combined income statement and balance sheet #Toller$ ;omputations, year)end entries, separate income statement, and combined balance sheet

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89 89 D9 89 J9 F9 J9 88 88 J9

Illustration 10-1 Preferred Stoc SUBSIDIARY A$$#9pt%&'$ 1 * + , ! owns D9= of /s outstanding common stock. / has M799,999 par of cumulative 79= preferred stock outstanding. !s separate income for ?9Nl is M 799,999. /s separate income for ?9Nl is MF9,999. Butside /tockholders Kold All of /s !referred /tock P=$ 'et %'0&9e 2&r *0XI !0s separate income !0s income from / Income from / )) common D9= * %MF9,999 ) M79,999& Income from / )) preferred E9= * M79,999 !0s net income C&'$&"%1ate1 'et %'0&9e 2&r *0XI ;ombined separate incomes of ! and / >ess "inority interest income ;ommon 79= * %MF9,999 ) M79,999& !referred @9= * M79,999 E9= * M79,999 ;onsolidated net income Note M7F9,999 E,999 @,999 E,999 Ml?@,999 M7F9,999 E,999 @,999 M7E9,999 M799,999 ?@,999 M7?@,999 M799,999 ?@,999 E,999 M7E9,999 ! Kolds E9= of /s !referred /tock ITH PREFERRED STOCK OUTSTANDING

/ince the preferred stock of / is cumulative, !0s net income and consolidated net income are the same regardless of whether / declares dividends during the year.

Illustration 10-! "arnin#s per Share BASIC COMPUTATIONS FOR CONSOLIDATED EARNINGS PER SHARE 1 .!/ P /ubsidiary has no potentially dilutive securities !PDS) outstanding !arents income to common O parents ad+ustment for !1/ QQQQQQQQQQQQQQQQQQQQ !arents common shares outstanding O shares represented by parents !1/ /ubsidiary has potentially dilutive securities !PDS) outstanding convertible into subsidiary common stock .!/ P !arents income to common O parents ad+ustment for !1/ O replacement calculation for subsidiarys !1/ !arents common shares outstanding O shares represented by parents !1/

/ubsidiary has potentially dilutive securities !PDS) outstanding and convertible into parent common stock !arents income to common O parents ad+ustment for its !1/ O ad+ustment for subsidiarys !1/ convertible into parent common stockQQQQQQQQQQ !arents common shares outstanding O shares represented by parents !1/ and subsidiarys !1/

.!/ P

Illustration 10-$ Accountin# for Income %a&es ACCOUNTING FOR DISTRIBUTED AND UNDISTRIBUTED INCOME A$$#9pt%&'$ 1 * + ! owns J9= of /, a domestic corporation. / reports net income of M?89,999 and pays M789,999 dividends. A flat EF= ta* rate is applicable. MD9,999 M J,7?9 MJ9,999 M F,9<9 MJ,7?9 F,9<9 M79,?99

!0s share of /0s distributed income J9= * M789,999 dividends !0s ta* liability on the MD9,999 dividends received MD9,999 dividends * ?9= ta*able * EF= ta* rate !0s share of /0s undistributed income %M?89,999 ) M789,999& * J9= ! provides for income ta*es on undistributed earnings MJ9,999 * ?9= ta*able * EF= ta* rate Income ta*es currently payable 1eferred income ta*es Income ta* e*pense

Illustration 10-' SEPARATE TAX RETURNS AND INTERCOMPANY GAIN A$$#9pt%&'$ 1 * + , ! owns a J9= interest in /. ! sells land that cost M7?,999 to / for M7<,999. A EF= ta* rate is applicable. / pays M79,999 dividends during the year. Income statements for ! and / are as follows ! /ales Cain on sale of land Income from / ;ost of sales Bperating e*penses Income ta* e*pense Net Income M?99,999 J,999 8,<<9 %7?9,999& %J9,999& %@,J9<& M ?F,?@? / M789,999 %D9,999& %E9,999& %79,?99& M 7D,<99

!0s income from / M7D,<99 * J9= owned ) MJ,999 unreali3ed gain from sale of land !0s share of /0s undistributed income %M7D,<99 income ) M79,999 dividends& * J9= * ?9= ta*able P M7,7@J !0s income ta* e*pense is computed as follows Ta* on operating income %M?99,999 sales ) M7?9,999 cost of sales ) MJ9,999 operating e*pense& * EF= Ta* on gain from sale of land %MJ,999 * EF=& Ta* on dividends received %M79,999 * J9= * ?9= ta*able * EF=& Ta*es currently payable >ess ;hange in deferred income ta*es %Anreali3ed gain on land MJ,999 less the M7,7@J ta*able share of /0s undistributed earnings& * EF= Income ta* e*pense MJ,<99 ?,9F9 F9< D,?F<

%7,JF9& M@,J9<

! will increase a deferred ta* asset or decrease a deferred ta* liability by M7,JF9.