Chapter 8 Homework - ACCT 4455 Chp 8 Chapter 8 HOMEWORK...

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ACCT 4455 Chp 8 Chapter 8: HOMEWORK REVIEW QUESTIONS: 4. No. The only time an adjustment of this kind affects the minority (noncontrolling) interest calculation is when the subsidiary was the selling company in the transaction that created the original intercompany gain. 5. As long as the purchaser continues to depreciate the depreciable asset an adjustment will be required on consolidation to change depreciation expense to what it would have been had the intercompany sale not taken place. 7. The four approaches are as follows: (a) The purchasing affiliate acted as an agent for the issuing affiliate; therefore gains or losses are allocated to the issuer. (b) Gains or losses are allocated to the purchasing affiliate because it made the open market purchase of the bonds. (c) Gains or losses are allocated to the parent company because it controls the actions of the affiliates. (d) Gains or losses are allocated to both the purchasing and the issuing affiliates. Approach (d) is conceptually superior because each affiliate will actually record the gain (loss) so allocated when it amortizes the premiums or discounts that caused the consolidated gains (losses) in the first place. As a result, the eliminations in consolidated statements mirror the entries made by both the purchaser and the issuer. 9. The holdback of an intercompany asset gain results in the creation of a deferred tax asset in the preparation of the consolidated balance sheet because, although the selling affiliate has recorded the tax in its income statement, it will not be an expense of the entity until the asset is sold to outsiders. The adjustment in the preparation of a consolidated income statement creating a gain on bond retirement results in a deferred tax liability in the consolidated balance sheet because none of the constituent affiliates has paid (or recorded) the tax on the gain, but will do so in future periods when they amortize the premiums or discounts that caused the gain. 1
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ACCT 4455 Chp 8 MULTIPLE CHOICE 1. d 3,000/.8 – (1,000 + 1,500) = 1,250 2. b 2,100 + 3,500 – (800 – 640) x 6/8 = 5,480 3. a 250 + 300 – (800 – 640) / 8 = 530 4. c 300 + 350 + (800 – 640) / 8 x 40% = 658 5. d [525 + (800 – 640) / 8 x (1 - 40%)] x 20% = 107.4 6. c [1,000 + 2,800 + 525 + 1,250 - (800 – 640) x 6/8 x (1 - 40%)] x 20% = 1,100.6 7. c (800 – 640) x 6/8 x 40% = 48 8. a (800 – 640) x 7/8 x (1 - 40%) = 84 11. c 12. d 13. b [200,000 + 12,000] x 70% = 148,400 14. a 12,000 x 30% x 10% = 360 15. b 2
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ACCT 4455 Chp 8 Problem 2 Equipment profit Before Tax 40% tax After tax Year 2 sale – Sally selling 15,000 * Depreciation Years 2 and 3 (3,000 × 2) 6,000 Balance December 31, Year 3 9,000 3,600 5,400 Depreciation Year 4 3,000 1,200 1,800 (a) Balance December 31, Year 4 6,000 2,400 (b) 3,600 * Assuming the sale took place at the beginning of Year 2 (a) Calculation of consolidated net income – Year 4 Income of Peggy 185,000 Income of Sally 53,000 Add: Equipment profit realized (a) 1,800 Adjusted net income 54,800 (c) Peggy's ownership % .75 41,100 Consolidated net income, Year 4 226,100 (b) Peggy Company Consolidated Income Statement For the year ended December 31, Year 4 Gross profit (580,000 + 270,000) $850,000 Miscellaneous expense (110,000 + 85,000) 195,000 Depreciation expense (162,000 + 97,000 - (a) 3,000) 256,000 Income tax expense (123,000 + 35,000 + (a) 1,200) 159,200 Total expenses 610,200 Net income - consolidated entity 239,800 Noncontrolling interest ((c) 54,800 × 0.25) 13,700
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