Chapter 10

Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)
Chapter 10 Subsidiary Preferred Stock, Consolidated Earnings Per Share, and

Consolidated Income Taxation
Multiple Choice Questions
Use the following information to answer the question(s) below.
On December 31, 2010, 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, 2010, Sanchez's
stockholders' equity was as follows:
10% preferred stock, cumulative, $10 par value
Common stock
Retained earnings
Total stockholders' equity
$50,000
350,000
100,000
$500,000
On December 31, 2010, preferred dividends are not in arrears. Sanchez had 2011 net income of $30,000
and only preferred dividends are declared and paid in 2011. There are no book value/fair value
differentials associated with Parminter's investments.
1) How much should the Parminter's Investment in SanchezCommon Stock, change during 2011?
A) $5,000
B) $20,000
C) $25,000
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, 2011?
A) $ 5,000
B) $20,000
C) $25,000
D) $30,000
Answer: A
Explanation: A) ($25,000 20%)
Objective: LO1
1
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3) What should be the noncontrolling interest share, preferred in the consolidated financial statements of
Parminter for the year ending December 31, 2011?
A) $1,000
B) $2,000
C) $4,000
D) $5,000
Answer: A
Explanation: A) ($5,000 20%)
Objective: LO1
4) A subsidiary has dilutive securities outstanding that include convertible bonds payable. The bonds are
convertible into the parent's common stock. When calculating consolidated diluted earnings per share,
the convertible bonds will affect
A) the numerator of consolidated diluted EPS only.
B) the denominator of consolidated diluted EPS only.
C) the numerator and denominator of consolidated diluted EPS.
D) None of the above will be affected.
Answer: C
Objective: LO2
2

On January 1, 2011, 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
Common stock, $10 par value
Additional paid-in capital
Retained earnings
$ 1,000,000
6,000,000
1,500,000
2,500,000
$11,000,000
There were no preferred dividends in arrears on January 1, 2011. 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, 2011?
A) $ 0
B) $ 35,000
C) $ 70,000
D) $100,000
Answer: D
Explanation: D)
Stockholders' equity
$11,000,000
Less: Preferred stockholders' equity (10,000 $110)
1,100,000
Common stockholders' equity
9,900,000
Cost of 70% interest acquired
Implied fair value of investment ($7,000,000/0.7)
Goodwill
$7,000,000
10,000,000
9,900,000
$100,000
Objective: LO1
6) Salter has a 2011 net loss of $200,000. No dividends are declared or paid in 2011. What is the change in
Pardy's Investment in Salter for the year ending December 31, 2011?
A) $ 50,000
B) $ 70,000
C) $140,000
D) $210,000
Answer: D
Explanation: D)
Salter's net loss
$(200,000)
Preferred dividend 10% $1,000,000
(100,000)
Total Loss to common stockholders
(300,000)
Pardy's ownership percentage
70%
Pardy's share of the loss on investment
$(210,000)
Objective: LO1
3
7) Assume Salter's net income for 2011 is $220,000. No dividends are declared or paid in 2011. What is the
change in Pardy's Investment in Salter for the year ending December 31, 2011?
A) $ 84,000
B) $119,000
C) $154,000
D) $189,000
Answer: A
Explanation: A) Salter's net income
$220,000
Less: Income to the preferred stockholders
(100,000)
Income to the common stockholders
120,000
Pardy's ownership percentage
70%
Pardy's share of the income
$84,000
Objective: LO1

On January 1, 2011, Pamplin Corporation 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, 2011, 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 2011 was $100,000.
On January 1, 2011, no preferred dividends are in arrears. No dividends are declared or paid in 2011. In a
separate transaction on January 1, 2011, Pamplin purchased 70% of Sage's preferred stock for $600,000.
8) For the year ending December 31, 2011, the amount of Pamplin's income from Sage (associated with the
common stock investment in Sage) is
A) $32,400.
B) $36,000.
C) $60,000.
D) $90,000.
Answer: A
Explanation: A)
Preliminary computations:
Total stockholders' equity (Sage)
$2,200,000
Less: Preferred stockholders' equity
($800,000 1.05)
840,000
Equals: Common stockholders' equity
$1,360,000
Net income as given
Less: Preferred dividends ($800,000 8%)
Income available to the common stockholders
Ownership percentage
Income from Sage
$100,000
64,000
$36,000
90%
$32,400
4
Objective: LO1
9) What is the goodwill on the consolidated balance sheet for Pamplin and Subsidiaries on December 31,
2011 based on Pamplin's purchase of Sage's common stock?
A) $140,000
B) $240,000
C) $290,000
D) $306,667
Answer: D
Explanation: D)
Implied fair value ($1,500,000/0.90)
$1,666,667
Less: Common stockholders' equity
1,360,000
Goodwill
$306,667
Objective: LO1
10) Pan Corporation has total stockholders' equity of $5,000,000 consisting of $1,000,000 of $10 par value
Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. Pan owns
80% of Sailor Corporation's common stock purchased at book value, which equals fair value. Sailor has
$900,000 of 10% cumulative preferred stock outstanding, with no preferred dividends in arrears. The
preferred stock has no call price, redemption price or liquidation price. Pan acquired 60% of the preferred
stock of Sailor for $500,000. After this transaction the balances in Pan's Retained Earnings and Additional
Paid-in Capital accounts, respectively, are
A) $2,960,000 and $1,000,000.
B) $3,000,000 and $960,000.
C) $3,000,000 and $1,040,000.
D) $3,040,000 and $1,000,000.
Answer: C
Explanation: C) If the book value ($900,000 60%) of preferred stock is greater than the price paid
($500,000) for the preferred stock, then the difference is added to the parent's additional paid-in capital.
Objective: LO1
11) Assume a company's preferred stock is cumulative with a call provision and has dividends in arrears.
The amount of stockholders' equity allocated to preferred stockholders is equal to the number of shares
outstanding times the
A) sum of the par value per share plus any liquidation premium per share, plus the sum of any preferred
dividends in arrears, plus the current year's dividend requirement, but only if dividends have been
declared.
B) sum of the par value per share, plus any liquidation premium per share, plus the sum of any preferred
dividends in arrears, plus the current year's dividend requirement, regardless of whether dividends have
been declared.
C) call price plus the sum of any preferred dividends in arrears, plus the current year's dividend
requirement, but only if dividends have been declared.
D) call price plus the sum of any preferred dividends in arrears, plus the current year's dividend
requirement, regardless of whether dividends have been declared.
Answer: D
5
Objective: LO1
6
12) When a parent acquires the preferred stock of a subsidiary, there will be a constructive retirement and
A) any difference paid above the book value of the preferred stock reduces the parent's additional paid-in
capital.
B) any difference paid above the book value of the preferred stock reduces the subsidiary's retained
earnings.
C) any difference paid above the book value of the preferred stock increases the parent's additional paidin capital.
D) any difference paid above the book value of the preferred stock increases the parent's retained
earnings.
Answer: A
Objective: LO1
13) If a parent company has controlling interest in a subsidiary which has no potentially dilutive
securities outstanding, then in the calculation of consolidated diluted EPS, it will be necessary to
A) only make an adjustment of subsidiary's basic earnings.
B) replace the parent's equity in subsidiary earnings with the parent's equity in subsidiary's diluted EPS.
C) make a replacement calculation in the parent's basic earnings for the EPS.
D) only use the parent's common shares and shares represented by the parent's potentially dilutive
securities.
Answer: D
Objective: LO2
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 is $150,000 and $75,000
respectively. Diluted EPS for the consolidated company is
A) $5.00.
B) $6.00.
C) $7.50.
D) $9.00.
Answer: D
Explanation: D) ($150,000 + $75,000)/25,000
Objective: LO2
15) In computing consolidated diluted EPS, the replacement calculation replaces the parent's equity in
subsidiary earnings with the
A) parent's share of basic EPS of the subsidiary.
B) subsidiary's share of basic EPS of the parent.
C) parent's share of diluted EPS of the subsidiary.
D) subsidiary's share of diluted EPS of the parent.
Answer: C
Objective: LO2
7
16) When a subsidiary has preferred stock that is convertible into subsidiary common stock, the parent's
equity in the subsidiary's diluted earnings is calculated by the number of
A) subsidiary shares into which the subsidiary's dilutive securities can be converted times the
subsidiary's basic EPS figure.
B) parent shares into which the subsidiary's dilutive securities can be converted times the parent's basic
EPS figure.
C) subsidiary common shares held by the parent times the subsidiary's diluted EPS figure.
D) parent shares into which the subsidiary's dilutive securities can be converted times the subsidiary's
basic EPS figure.
Answer: C
Objective: LO2
17) Palm owns a 70% interest in Sable, a domestic subsidiary. Sable is not part of Palm's affiliated group.
Palm will pay taxes on
A) none of the dividends it receives from Sable.
B) 20% of the dividends it receives from Sable.
C) 66% of the dividends it receives from Sable.
D) 80% of the dividends it receives from Sable.
Answer: B
Objective: LO3
18) Palmer Company owns a 25% interest in Sad, Incorporated, a domestic company. Sad had net income
of $60,000 and paid dividends of $20,000. Palmer's tax rate is 35%. For simplicity, assume that Sad's
undistributed earnings are Palmer's only temporary timing difference. Assume Sad qualifies for the 80%
dividend received deduction. Which of the following statements is correct?
A) The current tax liability is $700.
B) The current tax liability is $1,050.
C) Under GAAP, Palmer provides for income taxes on Sad's undistributed earnings with a credit to
deferred tax liability of $700.
D) Under GAAP, Palmer provides for income taxes on Sad's undistributed earnings with a credit to
deferred tax liability of $1,050.
Answer: C
Objective: LO3
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 2010. Palmquist and Sadler had 35% income tax rates. What amount of Sadler's
dividends is taxable to Palmquist in 2010?
A) $0
B) $ 70,000
C) $160,000
D) $200,000
Answer: A
Objective: LO3
8
20) Palomba Corporation allocates consolidated income taxes to its 90%-owned subsidiary using the
percentage allocation method. Under this method, consolidated income tax expense will be allocated to a
subsidiary
A) on the basis of the agreement between the parent and subsidiary.
B) on the basis of the subsidiary's pretax income as a percentage of consolidated pretax income.
C) on the basis of the income taxes remitted to the IRS.
D) 90% to the subsidiary.
Answer: B
Objective: LO3
9
Exercises
1) Saito Corporation's stockholders' equity on December 31, 2010 was as follows:
10% cumulative preferred stock, $100 par value,
callable at $105, with one year dividends in arrears
Retained earnings
$10,000
50,000
150,000
160,000
$370,000
On January 1, 2011, Panata Corporation paid $300,000 for a 70% interest in Saito's common stock. On
January 1, 2011, 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, 2011.
2. What is the amount of goodwill reported on the consolidated balance sheet for Panata Corporation
(and Subsidiary) at January 2, 2011?
3. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panata
Corporation (and Subsidiary) on January 2, 2011?
Answer:
Requirement 1:
Total stockholders' equity at December 31, 2010
$370,000
Less: Preferred stockholders' equity 100 shares
($105 call price + $10 dividend per share in arrears)
(11,500)
$358,500
Requirement 2:
Implied fair value of investment ($300,000/0.7)
Book value of common stockholders' equity
Goodwill
$428,571
358,500
$70,071
Requirement 3
Noncontrolling interest at January 2, 2011:
Noncontrolling portion of Goodwill ($70,071 30%)
Noncontrolling interest: Preferred (100 shares $115)
Noncontrolling interest: Common ($358,500 30%)
Total noncontrolling interest
$21,021
11,500
107,550
$140,071
Objective: LO1
10
2) Sally Corporation's stockholders' equity on December 31, 2010 was as follows:

Retained earnings
$10,000
50,000
150,000
160,000
$370,000
On January 1, 2011, Panera Corporation paid $500,000 for a 70% interest in Sally's common stock. On
January 1, 2011, 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, 2011.
2. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and
Subsidiary at January 2, 2011?
3. On January 2, 2011, Panera purchased 70% of Sally's preferred stock for $5,000. Prepare the journal
entry(ies) for Panera for this purchase on January 2, 2011.
4. Prepare the elimination entry on the consolidating work papers for the Investment in Sally, Preferred
Stock and Sally's Preferred Stock on January 2, 2011.
Answer:
Requirement 1
$370,000
($105 call price + $10 dividend per share in arrears)
(11,500)
$358,500
Requirement 2
Implied fair value of investment ($500,000/0.7)
Goodwill
Requirement 3
Investment in Sally, Preferred Stock
Cash
($11,500 70%) = $8,050 - $5,000 = $3,050
$714,286
358,500
$355,786
5,000
3,050
5,000
3,050
11
Requirement 4
Preferred stock
Retained earnings
Noncontrolling interest share
In Sally, Preferred Stock
10,000
1,500
8,050
3,450
Objective: LO1
12
3) Samford Corporation's stockholders' equity on December 31, 2010 was as follows:

callable at $109, with two years of dividends
in arrears
Retained earnings
$100,000
700,000
250,000
400,000
$1,450,000
On January 1, 2011, 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,
2011.
2. What is the amount of goodwill reported on the consolidated balance sheet for Panera Corporation and
3. What is the noncontrolling interest that appeared on a consolidated balance sheet for Panera
Corporation and Subsidiary on January 2, 2011?
Answer:
Requirement 1
$1,450,000
[$109 call price + ($8 dividend per share in arrears 2 years)]
(125,000)
$1,325,000
Requirement 2
Implied fair value of investment($1,400,000/0.70)
Goodwill
$2,000,000
(1,325,000)
$675,000
Requirement 3
Noncontrolling interest, January 2, 2011:
Preferred stockholders' equity
Common stockholders' equity (30% $1,325,000)
Goodwill (30% $675,000)
Total
$125,000
397,500
202,500
$725,000
Objective: LO1
13
4) Savy Corporation's stockholders' equity on December 31, 2010 was as follows:

callable at $109, with two years of dividends
in arrears
Retained earnings
$100,000
700,000
250,000
400,000
$1,450,000
On January 1, 2011, 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, 2011.
2. What is the amount of goodwill reported on the consolidated balance sheet for Paul Corporation and
3. On January 2, 2011, Paul purchased 70% of Savy's preferred stock for $50,000. Prepare the journal
entry(ies) for Paul for this purchase on January 2, 2011.
4. Prepare the elimination entry on the consolidating work papers for the Investment in Savy, Preferred
Stock and Savy's Preferred Stock on January 2, 2011.
Answer:
Requirement 1
$1,450,000
[$109 call price + ($8 dividend per share in arrears 2 years)]
(125,000)
$1,325,000
Requirement 2
Implied fair value of investment ($2,100,000/0.70)
Goodwill
Requirement 3
Investment in Savy, Preferred Stock
Cash
($125,000 70%) - $50,000 = $37,500
$3,000,000
1,325,000
$1,675,000
50,000
37,500
50,000
37,500
14
Requirement 4
Preferred Stock
Retained earnings
Noncontrolling interest
100,000
25,000
Objective: LO1
87,500
37,500
5) Pancino Corporation owns a 90% interest in Sakal Corporation's common stock. Throughout 2010,
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 2010. 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
Options:
Diluted EPS:
($50-$20)/$50 2,500
Common shares and common equivalents
Earnings per share
Pancino's Basic and Diluted EPS:

Pancino's separate income
Pancino's income from Sakal
20,000
20,000
_______
20,000
$4.00
1,500
21,500
$3.72
Basic
Diluted
$100,000
72,000
$100,000
72,000
Replacement computation:
18,000 shares $3.72
Income to common
(72,000)
________
$172,000
66,960
$166,960
50,000
50,000
3.44
3.34

Earnings per share
Objective: LO2
15
6) Pandy Corporation owns a 90% interest in Sakaj Corporation's common stock. Throughout 2010, 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 2010. 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
Options:
Diluted EPS:
($50-$20)/$50 10,000
Earnings per share
Pandy's Basic and Diluted EPS:

Pandy's separate income
Pandy's income from Sakaj ($180,000 90%)
20,000
20,000
_______
20,000
$9.00
6,000
26,000
$6.92
Basic
Diluted
$200,000
162,000
$200,000
162,000
________
$362,000
(162,000)
124,560
324,560
18,000 shares $6.92
Income to common
Earnings per share
Objective: LO2
50,000
50,000
$7.24
$6.49
16
7) Parker Corporation owns an 80% interest in Sample Corporation's common stock. Throughout 2010,
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
$75,000
$75,000
0
$75,000
2,640
$77,640
10,000
10,000
______
10,000
$7.50
1,000
11,000
$7.06
Parker's Basic and Diluted EPS:

Parker's separate income
Parker's income from Sample
Basic
Diluted
$100,000
60,000
$100,000
60,000
Parker's income from Sample
8,000 shares $7.06
Income to common
________
$160,000
(60,000)
56,480
$156,480
100,000
100,000
$1.60
$1.56
Sample's Basic and Diluted EPS:

Sample's income to common shareholders
Add: Net of tax interest expense
$50,000 8% 66%
Adjusted subsidiary earnings
Incremental shares:
Diluted EPS:
50 bonds 20 shares
Earnings per share
Earnings per share

Objective: LO2
17
8) Peyton Corporation owns an 80% interest in Sampe Corporation's common stock. Throughout 2011,
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
Incremental shares:
Diluted EPS:
100 bonds 20 shares
Earnings per share
10,000
10,000
_______
10,000
$15.00
2,000
12,000
$12.94
Basic
Diluted
$200,000
$200,000
120,000
120,000
Peyton's income from Sampe
8,000 shares $12.94
Income to common
________
$320,000
(120,000)
103,520
$303,520
100,000
100,000
$3.20
$3.04
Peyton's Basic and Diluted EPS:

Peyton's separate income
Peyton's income from Sampe
(80% $150,000)
Earnings per share

Objective: LO2
18
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 2011, Pane Corporation
received the following cash dividends:
From Alder:
From Ball:
From Cake:
From Dash:
From Eager:
$180,000
$170,000
$160,000
$100,000
$ 60,000
Required:
1. Compute the amount of the dividend income that would be excluded from taxation under the current
Internal Revenue Code.
2. Compute Pane's current income tax liability for the dividend income received in 2011.
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
Total excluded dividend income
Included dividend income
Current Income Tax Liability:
$70,000 35% = $24,500
$670,000
600,000
$70,000
Objective: LO3
19
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 2011, 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:
From Balme:
From Calder:
From Dale:
From East:
From Faber:
$90,000
$92,000
$88,000
$66,000
$50,000
$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
20
11) Peter Corporation owns 90% of the common stock of Subsidiary Subway. The following data is
available:
Peter
Subway
Net income for 2011
$150,000
$50,000
Preferred dividends for 2011
$10,000
Common dividends for 2011
$15,000
Number of common shares outstanding 200,000
20,000
10% Preferred Stock, $100 par
$100,000
The preferred stock is cumulative and convertible. The annual preferred dividends are $10,000.
Required:
1. Subway's preferred stock is convertible into 12,000 shares of Subway's common stock. Peter and Subway
do not have any other potentially dilutive securities outstanding.
a. What is Subway's basic EPS and diluted EPS?
b. What is consolidated basic EPS and diluted EPS?
2. Subway's preferred stock is convertible into 12,000 shares of Peter's common stock. Peter and Subway
do not have any other potentially dilutive securities outstanding. What is consolidated basic EPS and
diluted EPS?
Answer:
Requirement 1
Subway Basic EPS:
$50,000 - $10,000
= $2.00
20,000
Subway Diluted EPS:
$50,000
= $1.56
20,000 12,000
Consolidated Basic EPS:
$150,000 $40,000 90%

= $0.93
200,000
Consolidated Diluted EPS:
$150,000 $1.56 20,000 90%

= $0.89
200,000
21
Requirement 2
$150,000 $40,000 90%

= $0.93
200,000
$150,000 $50,000 90%

= $0.92
200,000 12,000
Objective: LO2
22
12) Jeff Corporation owns 90% of the common stock of Subsidiary Jordan. The following data is available:
Jeff
Jordan
Net income for 2011
$250,000
$150,000
Preferred dividends for 2011
$20,000
Common dividends for 2011
$25,000
Number of common shares outstanding 200,000
20,000
10% Preferred Stock, $100 par
$200,000
The preferred stock is cumulative and convertible. The annual preferred dividends are $20,000.
Required:
1. Jordan's preferred stock is convertible into 20,000 shares of Jordan's common stock. Jeff and Jordan do
not have any other potentially dilutive securities outstanding.
a. What is Jordan's basic EPS and diluted EPS?
b. What is consolidated basic EPS and diluted EPS?
2. Jordan's preferred stock is convertible into 20,000 shares of Jeff's common stock. Jeff and Jordan do not
have any other potentially dilutive securities outstanding. What is consolidated basic EPS and diluted
EPS?
Answer:
Requirement 1
Jordan Basic EPS:
$150,000 - $20,000
= $6.50
20,000
Jordan Diluted EPS:
$150,000
= $3.75
20,000 20,000
$250,000 $130,000 90%

= $1.84
200,000
$250,000 $3.75 20,000 90%

= $1.59
200,000
Requirement 2
$250,000 $130,000 90%

= $1.84
200,000
$250,000 $150,000 90%

= $1.75
200,000 20,000
Objective: LO2
23
13) Sandy Corporation's stockholders' equity on December 31, 2010 was as follows:
Retained earnings
$100,000
200,000
40,000
160,000
$500,000
On January 1, 2011, Bombard Corporation paid $200,000 for a 90% interest in Sandy's common stock. On
January 1, 2011, the book values of Sandy's assets and liabilities were equal to fair values. On January 2,
2011, 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,
2011.
2. Prepare the journal entry(ies) on January 1, 2011 for Bombard Corporation.
3. Prepare the journal entry(ies) on January 2, 2011 for Bombard Corporation.
4. For the year ending December 31, 2011, 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
$500,000
($105 call price + $10 dividend) 1,000
(115,000)
$385,000
Requirement 2
Investment in Sandy Corp.common stock
Cash
200,000
Requirement 3
Investment in Sandy Corp.pref. stock
Cash
120,000

Investment in Sandy Corp.pref. stock
($120,000 - $103,500)
($115,000 90%) = $103,500
16,500
200,000
120,000
16,500
24
Requirement 4
Cash ($20,000 90%)
Investment Income in Sandy Corp.pref. stock
18,000
Cash ($10,000 90%)

9,000

Investment income in Sandy Corp.
common stock
($50,000 - $20,000) 90%
18,000
9,000
27,000
27,000
Objective: LO1
25
14) Stello Corporation's stockholders' equity on December 31, 2010 was as follows:
callable at $110, with no dividends in arrears
Retained earnings
$100,000
300,000
40,000
160,000
$600,000
On January 1, 2011, Kaprelian Corporation paid $300,000 for a 90% interest in Stello's common stock. On
January 1, 2011, the book values of Stello's assets and liabilities were equal to fair values. On January 2,
2011, 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,
2011.
2. Prepare the journal entry(ies) on January 1, 2011 for Kaprelian Corporation.
3. Prepare the journal entry(ies) on January 2, 2011 for Kaprelian Corporation.
4. For the year ending December 31, 2011, 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
$600,000
$110 call price 1,000
(110,000)
$490,000
Requirement 2
Investment in Stello Corp.common stock
Cash
300,000
Requirement 3
Investment in Stello Corp.pref. stock
Cash
100,000

Investment in Stello Corp.pref. stock
($100,000 - $99,000) = $1,000
($110,000 90%) = $99,000
1,000
300,000
100,000
1,000
26
Requirement 4
Cash ($10,000 90%)
Investment Income in Stello Corp.
pref. stock
9,000
Cash ($10,000 90%)

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

Investment income in Stello Corp.
common stock
($50,000 - $10,000) 90%
36,000
9,000
9,000
36,000
Objective: LO1
27
15) Pretax operating incomes of Pang Corporation and its 70%-owned subsidiary, Sala Corporation, for
the year 2011, 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%.
Sales revenue
Gain on sale of land
Cost of sales
Other expenses
Pretax operating income (does not include investment income)
Pang
$900,000
35,000
(480,000)
(192,000)
$263,000
Sala
$600,000
(325,000)
(78,000)
$197,000
Required:
1. Determine the separate amounts of income tax expense for Pang and Sala as if they had filed separate
tax returns.
2. Determine Pang's net income from Sala.
Answer:
Requirement 1
Income taxes currently payable:
Taxes on operating income
$263,000 34%
$197,000 34%
Taxes on dividends received:
$60,000 70% 20% 34%
Income taxes currently payable
Pang
$89,420
Add: Tax on undistributed income:

($197,000 - $66,980 - $60,000)
70% 20% 34%
Less: Deferred tax on gain on sale of land ($35,000 34%)
Income tax expense
Requirement 2
Pre-tax income from Sala
Less: income tax expense
Net Income
Ownership Percentage
Subtotal
Less: Unrealized gain on sale of land
Income from Sala
Sala
$66,980
2,856
92,276
________
66,980
3,333
(11,900)
$83,709
________
$66,980
$197,000
(66,980)
130,020
70%
$91,014
(35,000)
$56,014
Objective: LO3
28
16) Pretax operating incomes of Panitz Corporation and its 80%-owned subsidiary, Salazar Corporation,
for the year 2011, 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%.
Sales revenue
Loss on sale of land
Cost of sales
Other expenses
Depreciation expense
Pretax operating income
(does not include Salazar investment income)
Panitz
$890,000
(15,000)
(400,000)
(350,000)
(50,000)
Salazar
$700,000
(250,000)
(350,000)
(35,000)
$75,000
$65,000
Required:
1. Determine the separate amounts of income tax expense for Panitz and Salazar as if they had filed
separate tax returns.
2. Determine Panitz's net income from Salazar.
Answer:
Requirement 1
Taxable Income Calculation:
Sales Revenue
Loss on sale of land
Cost of sales
Other expenses
Depreciation expense
Taxable income
Tax rate
Income taxes currently payable
Add: Deferred taxes on loss on sale of land ($15,000 34%)
Income tax expense
Requirement 2
Panitz's income from Salazar:
Assuming taxable income is the same as GAAP income
Less: Current income taxes expense
Net income
Panitz's ownership percentage
Subtotal
Add: Unrealized loss on sale of land
Income from Salazar
Objective: LO3
Panitz
Salazar
$890,000
(15,000)
(400,000)
(350,000)
(50,000)
$75,000
34%
$25,500
5,100
$30,600
$700,000
(250,000)
(350,000)
(35,000)
$65,000
34%
$22,100
_______
$22,100
$65,000
22,100
42,900
80%
34,320
15,000
$49,320
29
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Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)

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

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

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

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

2) Sally Corporation's stockholders' equity on December 31, 2010 was as follows:

3) Samford Corporation's stockholders' equity on December 31, 2010 was as follows:

4) Savy Corporation's stockholders' equity on December 31, 2010 was as follows:

Pancino's Basic and Diluted EPS:

Common shares outstanding

Pandy's Basic and Diluted EPS:

Parker's Basic and Diluted EPS:

Common shares outstanding

Sample's Basic and Diluted EPS:

Earnings per share

Common shares outstanding

Peyton's Basic and Diluted EPS:

Earnings per share

Consolidated Basic EPS:

$150,000 $40,000 90%

Consolidated Diluted EPS:

$150,000 $1.56 20,000 90%

$150,000 $40,000 90%

Consolidated Diluted EPS:

$150,000 $50,000 90%

$250,000 $130,000 90%

Consolidated Diluted EPS:

$250,000 $3.75 20,000 90%

$250,000 $130,000 90%

Consolidated Diluted EPS:

$250,000 $150,000 90%

Additional paid-in capital

Cash ($10,000 90%)

Investment in Sandy Corp.common stock

Additional paid-in capital

Cash ($10,000 90%)

Investment in Stello Corp.common stock

Add: Tax on undistributed income:

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