江西财经大学高级财务会计国际学院题库chapter-10

AdvancedAccounting,11e(Beams/Anthony/Bettinghaus/Smith)

Chapter10SubsidiaryPreferredStock,ConsolidatedEarningsPerShare,andConsolidatedIncomeTaxation

MultipleChoiceQuestions

Usethefollowinginformationtoanswerthequestion(s)below.

OnDecember31,2010,ParminterCorporationownsan80%interestinthecommonstockofSanchezCorporationandan80%interestinSanchez'spreferredstock.OnDecember31,2010,Sanchez'sstockholders'equitywasasfollows:

10%preferredstock,cumulative,$10parvalue $50,000

Commonstock 350,000

Retainedearnings 100,000

Totalstockholders'equity $500,000

OnDecember31,2010,preferreddividendsarenotinarrears.Sanchezhad2011netincomeof$30,000andonlypreferreddividendsaredeclaredandpaidin2011.Therearenobookvalue/fairvaluedifferentialsassociatedwithParminter'sinvestments.

1)HowmuchshouldtheParminter'sInvestmentinSanchez—CommonStock,changeduring2011?

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)Whatshouldbethenoncontrollinginterestshare,commonintheconsolidatedfinancialstatementsofParminterfortheyearendingDecember31,2011?

A)$5,000

B)$20,000

C)$25,000

D)$30,000

Answer:A

Explanation:A)($25,000×20%)

Objective:LO1

Difficulty:Moderate

3)Whatshouldbethenoncontrollinginterestshare,preferredintheconsolidatedfinancialstatementsofParminterfortheyearendingDecember31,2011?

A)$1,000

B)$2,000

C)$4,000

D)$5,000

Answer:A

Explanation:A)($5,000×20%)

Objective:LO1

Difficulty:Moderate

4)Asubsidiaryhasdilutivesecuritiesoutstandingthatincludeconvertiblebondspayable.Thebondsareconvertibleintotheparent'scommonstock.Whencalculatingconsolidateddilutedearningspershare,theconvertiblebondswillaffect

A)thenumeratorofconsolidateddilutedEPSonly.

B)thedenominatorofconsolidateddilutedEPSonly.

C)thenumeratoranddenominatorofconsolidateddilutedEPS.

D)Noneoftheabovewillbeaffected.

Answer:C

Objective:LO2

Difficulty:Moderate

Usethefollowinginformationtoanswerthequestion(s)below.

OnJanuary1,2011,PardyCorporationacquireda70%interestinthecommonstockofSalterCorporationfor$7,000,000whenSalter'sstockholders'equitywasasfollows:

10%cumulative,nonparticipatingpreferredstock,

$100par,witha$105liquidationpreference,

callableat$110 $1,000,000

Commonstock,$10parvalue 6,000,000

Additionalpaid-incapital 1,500,000

Retainedearnings 2,500,000

Totalstockholders'equity $11,000,000

TherewerenopreferreddividendsinarrearsonJanuary1,2011.Therearenobookvalue/fairvaluedifferentials.

5)WhatistheimpliedgoodwillforSalterbasedonPardy'spurchasepriceforSalteronJanuary1,2011?

A)$0

B)$35,000

C)$70,000

D)$100,000

Answer:D

Explanation:D)

Stockholders'equity $11,000,000

Less:Preferredstockholders'equity(10,000×$110) 1,100,000

Commonstockholders'equity 9,900,000

Costof70%interestacquired $7,000,000

Impliedfairvalueofinvestment($7,000,000/0.7) 10,000,000

Commonstockholders'equity 9,900,000

Goodwill $100,000

Objective:LO1

Difficulty:Moderate

6)Salterhasa2011netlossof$200,000.Nodividendsaredeclaredorpaidin2011.WhatisthechangeinPardy'sInvestmentinSalterfortheyearendingDecember31,2011?

A)$50,000

B)$70,000

C)$140,000

D)$210,000

Answer:D

Explanation:D)

Salter'snetloss $(200,000)

Preferreddividend10%×$1,000,000 (100,000)

TotalLosstocommonstockholders (300,000)

Pardy'sownershippercentage 70%

Pardy'sshareofthelossoninvestment $(210,000)

Objective:LO1

Difficulty:Moderate

7)AssumeSalter'snetincomefor2011is$220,000.Nodividendsaredeclaredorpaidin2011.WhatisthechangeinPardy'sInvestmentinSalterfortheyearendingDecember31,2011?

A)$84,000

B)$119,000

C)$154,000

D)$189,000

Answer:A

Explanation:A)Salter'snetincome $220,000

Less:Incometothepreferredstockholders (100,000)

Incometothecommonstockholders 120,000

Pardy'sownershippercentage 70%

Pardy'sshareoftheincome $84,000

Objective:LO1

Difficulty:Moderate

Usethefollowinginformationtoanswerthequestion(s)below.

OnJanuary1,2011,PamplinCorporationstockholders'equityconsistedof$1,000,000of$10parvalueCommonStock,$750,000ofAdditionalPaid-inCapital,and$3,000,000ofRetainedEarnings.OnJanuary1,2011,Pamplinpurchased90%oftheoutstandingcommonstockofSageCorporationfor$1,500,000withallexcesspurchasecostassignedtogoodwill.Thestockholders'equityofSageonthisdateconsistedof$800,000of$100parvalue,8%cumulative,preferredstockcallableat$105,$900,000of$10parvaluecommonstockand$500,000ofRetainedEarnings.Sage'snetincomefor2011was$100,000.

OnJanuary1,2011,nopreferreddividendsareinarrears.Nodividendsaredeclaredorpaidin2011.InaseparatetransactiononJanuary1,2011,Pamplinpurchased70%ofSage'spreferredstockfor$600,000.

8)FortheyearendingDecember31,2011,theamountofPamplin'sincomefromSage(associatedwiththecommonstockinvestmentinSage)is

A)$32,400.

B)$36,000.

C)$60,000.

D)$90,000.

Answer:A

Explanation:A)

Preliminarycomputations:

Totalstockholders'equity(Sage) $2,200,000

Less:Preferredstockholders'equity

($800,000×1.05) 840,000

Equals:Commonstockholders'equity $1,360,000

Netincomeasgiven $100,000

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

Incomeavailabletothecommonstockholders $36,000

Ownershippercentage 90%

IncomefromSage $32,400

Objective:LO1

Difficulty:Moderate

9)WhatisthegoodwillontheconsolidatedbalancesheetforPamplinandSubsidiariesonDecember31,2011basedonPamplin'spurchaseofSage'scommonstock?

A)$140,000

B)$240,000

C)$290,000

D)$306,667

Answer:D

Explanation:D)

Impliedfairvalue($1,500,000/0.90) $1,666,667

Less:Commonstockholders'equity 1,360,000

Goodwill $306,667

Objective:LO1

Difficulty:Moderate

10)PanCorporationhastotalstockholders'equityof$5,000,000consistingof$1,000,000of$10parvalueCommonStock,$1,000,000ofAdditionalPaid-inCapital,and$3,000,000ofRetainedEarnings.Panowns80%ofSailorCorporation'scommonstockpurchasedatbookvalue,whichequalsfairvalue.Sailorhas$900,000of10%cumulativepreferredstockoutstanding,withnopreferreddividendsinarrears.Thepreferredstockhasnocallprice,redemptionpriceorliquidationprice.Panacquired60%ofthepreferredstockofSailorfor$500,000.AfterthistransactionthebalancesinPan'sRetainedEarningsandAdditionalPaid-inCapitalaccounts,respectively,are

A)$2,960,000and$1,000,000.

B)$3,000,000and$960,000.

C)$3,000,000and$1,040,000.

D)$3,040,000and$1,000,000.

Answer:C

Explanation:C)Ifthebookvalue($900,000×60%)ofpreferredstockisgreaterthanthepricepaid($500,000)forthepreferredstock,thenthedifferenceisaddedtotheparent'sadditionalpaid-incapital.

Objective:LO1

Difficulty:Moderate

11)Assumeacompany'spreferredstockiscumulativewithacallprovisionandhasdividendsinarrears.Theamountofstockholders'equityallocatedtopreferredstockholdersisequaltothenumberofsharesoutstandingtimesthe

A)sumoftheparvaluepershareplusanyliquidationpremiumpershare,plusthesumofanypreferreddividendsinarrears,plusthecurrentyear'sdividendrequirement,butonlyifdividendshavebeendeclared.

B)sumoftheparvaluepershare,plusanyliquidationpremiumpershare,plusthesumofanypreferreddividendsinarrears,plusthecurrentyear'sdividendrequirement,regardlessofwhetherdividendshavebeendeclared.

C)callpriceplusthesumofanypreferreddividendsinarrears,plusthecurrentyear'sdividendrequirement,butonlyifdividendshavebeendeclared.

D)callpriceplusthesumofanypreferreddividendsinarrears,plusthecurrentyear'sdividendrequirement,regardlessofwhetherdividendshavebeendeclared.

Answer:D

Objective:LO1

Difficulty:Moderate

12)Whenaparentacquiresthepreferredstockofasubsidiary,therewillbeaconstructiveretirementand

A)anydifferencepaidabovethebookvalueofthepreferredstockreducestheparent'sadditionalpaid-incapital.

B)anydifferencepaidabovethebookvalueofthepreferredstockreducesthesubsidiary'sretainedearnings.

C)anydifferencepaidabovethebookvalueofthepreferredstockincreasestheparent'sadditionalpaid-incapital.

D)anydifferencepaidabovethebookvalueofthepreferredstockincreasestheparent'sretainedearnings.

Answer:A

Objective:LO1

Difficulty:Moderate

13)Ifaparentcompanyhascontrollinginterestinasubsidiarywhichhasnopotentiallydilutivesecuritiesoutstanding,theninthecalculationofconsolidateddilutedEPS,itwillbenecessaryto

A)onlymakeanadjustmentofsubsidiary'sbasicearnings.

B)replacetheparent'sequityinsubsidiaryearningswiththeparent'sequityinsubsidiary'sdilutedEPS.

C)makeareplacementcalculationintheparent'sbasicearningsfortheEPS.

D)onlyusetheparent'scommonsharesandsharesrepresentedbytheparent'spotentiallydilutivesecurities.

Answer:D

Objective:LO2

Difficulty:Moderate

14)Parnabyhas25,000commonstocksharesoutstandingandits100%-ownedsubsidiarySandalhas5,000commonstocksharesoutstanding.ParnabyandSandaldonothaveanypotentiallydilutivesecuritiesoutstanding.TheseparatenetincomesforParnabyandSandalis$150,000and$75,000respectively.DilutedEPSfortheconsolidatedcompanyis

A)$5.00.

B)$6.00.

C)$7.50.

D)$9.00.

Answer:D

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

Objective:LO2

Difficulty:Moderate

15)IncomputingconsolidateddilutedEPS,thereplacementcalculationreplacestheparent'sequityinsubsidiaryearningswiththe

A)parent'sshareofbasicEPSofthesubsidiary.

B)subsidiary'sshareofbasicEPSoftheparent.

C)parent'sshareofdilutedEPSofthesubsidiary.

D)subsidiary'sshareofdilutedEPSoftheparent.

Answer:C

Objective:LO2

Difficulty:Moderate

16)Whenasubsidiaryhaspreferredstockthatisconvertibleintosubsidiarycommonstock,theparent'sequityinthesubsidiary'sdilutedearningsiscalculatedbythenumberof

A)subsidiarysharesintowhichthesubsidiary'sdilutivesecuritiescanbeconvertedtimesthesubsidiary'sbasicEPSfigure.

B)parentsharesintowhichthesubsidiary'sdilutivesecuritiescanbeconvertedtimestheparent'sbasicEPSfigure.

C)subsidiarycommonsharesheldbytheparenttimesthesubsidiary'sdilutedEPSfigure.

D)parentsharesintowhichthesubsidiary'sdilutivesecuritiescanbeconvertedtimesthesubsidiary'sbasicEPSfigure.

Answer:C

Objective:LO2

Difficulty:Moderate

17)Palmownsa70%interestinSable,adomesticsubsidiary.SableisnotpartofPalm'saffiliatedgroup.Palmwillpaytaxeson

A)noneofthedividendsitreceivesfromSable.

B)20%ofthedividendsitreceivesfromSable.

C)66%ofthedividendsitreceivesfromSable.

D)80%ofthedividendsitreceivesfromSable.

Answer:B

Objective:LO3

Difficulty:Moderate

18)PalmerCompanyownsa25%interestinSad,Incorporated,adomesticcompany.Sadhadnetincomeof$60,000andpaiddividendsof$20,000.Palmer'staxrateis35%.Forsimplicity,assumethatSad'sundistributedearningsarePalmer'sonlytemporarytimingdifference.AssumeSadqualifiesforthe80%dividendreceiveddeduction.Whichofthefollowingstatementsiscorrect?

A)Thecurrenttaxliabilityis$700.

B)Thecurrenttaxliabilityis$1,050.

C)UnderGAAP,PalmerprovidesforincometaxesonSad'sundistributedearningswithacredittodeferredtaxliabilityof$700.

D)UnderGAAP,PalmerprovidesforincometaxesonSad'sundistributedearningswithacredittodeferredtaxliabilityof$1,050.

Answer:C

Objective:LO3

Difficulty:Moderate

19)PalmquistCorporationandits80%-ownedsubsidiary,SadlerCorporation,aremembersofanaffiliatedgroup.Theydonotfileconsolidatedtaxreturns.Sadlerhad$3,000,000ofincomeandpaid$1,000,000dividendsin2010.PalmquistandSadlerhad35%incometaxrates.WhatamountofSadler'sdividendsistaxabletoPalmquistin2010?

A)$0

B)$70,000

C)$160,000

D)$200,000

Answer:A

Objective:LO3

Difficulty:Moderate

20)PalombaCorporationallocatesconsolidatedincometaxestoits90%-ownedsubsidiaryusingthepercentageallocationmethod.Underthismethod,consolidatedincometaxexpensewillbeallocatedtoasubsidiary

A)onthebasisoftheagreementbetweentheparentandsubsidiary.

B)onthebasisofthesubsidiary'spretaxincomeasapercentageofconsolidatedpretaxincome.

C)onthebasisoftheincometaxesremittedtotheIRS.

D)90%tothesubsidiary.

Answer:B

Objective:LO3

Difficulty:Moderate

Exercises

1)SaitoCorporation'sstockholders'equityonDecember31,2010wasasfollows:

10%cumulativepreferredstock,$100parvalue,

callableat$105,withoneyeardividendsinarrears $10,000

Commonstock,$1parvalue 50,000

Additionalpaid-incapital 150,000

Retainedearnings 160,000

Totalstockholders'equity $370,000

OnJanuary1,2011,PanataCorporationpaid$300,000fora70%interestinSaito'scommonstock.OnJanuary1,2011,thebookvaluesofSaito'sassetsandliabilitieswereequaltofairvalues.

Required:

1.Determinethebookvalueofthecommonstockholders'equityforSaitoCorporationonJanuary1,2011.

2.WhatistheamountofgoodwillreportedontheconsolidatedbalancesheetforPanataCorporation(andSubsidiary)atJanuary2,2011?

3.WhatisthenoncontrollinginterestthatappearedonaconsolidatedbalancesheetforPanataCorporation(andSubsidiary)onJanuary2,2011?

Answer:

Requirement1:

Totalstockholders'equityatDecember31,2010 $370,000

Less:Preferredstockholders'equity100shares×

($105callprice+$10dividendpershareinarrears) (11,500)

Commonstockholders'equity $358,500

Requirement2:

Impliedfairvalueofinvestment($300,000/0.7) $428,571

Bookvalueofcommonstockholders'equity 358,500

Goodwill $70,071

Requirement3

NoncontrollinginterestatJanuary2,2011:

NoncontrollingportionofGoodwill($70,071×30%) $21,021

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

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

Totalnoncontrollinginterest $140,071

Objective:LO1

Difficulty:Moderate

2)SallyCorporation'sstockholders'equityonDecember31,2010wasasfollows:

10%cumulativepreferredstock,$100parvalue,

callableat$105,withoneyeardividendsinarrears $10,000

Commonstock,$1parvalue 50,000

Additionalpaid-incapital 150,000

Retainedearnings 160,000

Totalstockholders'equity $370,000

OnJanuary1,2011,PaneraCorporationpaid$500,000fora70%interestinSally'scommonstock.OnJanuary1,2011,thebookvaluesofSally'sassetsandliabilitieswereequaltofairvalues.

Required:

1.Determinethebookvalueofthecommonstockholders'equityforSallyCorporationonJanuary1,2011.

2.WhatistheamountofgoodwillreportedontheconsolidatedbalancesheetforPaneraCorporationandSubsidiaryatJanuary2,2011?

3.OnJanuary2,2011,Panerapurchased70%ofSally'spreferredstockfor$5,000.Preparethejournalentry(ies)forPaneraforthispurchaseonJanuary2,2011.

4.PreparetheeliminationentryontheconsolidatingworkpapersfortheInvestmentinSally,PreferredStockandSally'sPreferredStockonJanuary2,2011.

Answer:

Requirement1

Totalstockholders'equityatDecember31,2010 $370,000

Less:Preferredstockholders'equity100shares×

($105callprice+$10dividendpershareinarrears) (11,500)

Commonstockholders'equity $358,500

Requirement2

Impliedfairvalueofinvestment($500,000/0.7) $714,286

Bookvalueofcommonstockholders'equity 358,500

Goodwill $355,786

Requirement3

InvestmentinSally,PreferredStock 5,000

Cash 5,000

InvestmentinSally,PreferredStock 3,050

Additionalpaid-incapital 3,050

($11,500×70%)=$8,050-$5,000=$3,050

Requirement4

Preferredstock 10,000

Retainedearnings 1,500

InvestmentinSally,PreferredStock 8,050

Noncontrollinginterestshare

InSally,PreferredStock 3,450

Objective:LO1

Difficulty:Moderate

3)SamfordCorporation'sstockholders'equityonDecember31,2010wasasfollows:

8%cumulativepreferredstock,$100parvalue,

callableat$109,withtwoyearsofdividends

inarrears $100,000

Commonstock,$25parvalue 700,000

Additionalpaid-incapital 250,000

Retainedearnings 400,000

Totalstockholders'equity $1,450,000

OnJanuary1,2011,PaneraCorporationpurchaseda70%interestinSamford'scommonstockfor$1,400,000.OnthisdatethebookvaluesofSamford'sassetsandliabilitiesareequaltotheirfairvalues.

Required:

1.Determinethebookvalueofthecommonstockholders'equityforSamfordCorporationonJanuary1,2011.

2.WhatistheamountofgoodwillreportedontheconsolidatedbalancesheetforPaneraCorporationandSubsidiaryatJanuary2,2011?

3.WhatisthenoncontrollinginterestthatappearedonaconsolidatedbalancesheetforPaneraCorporationandSubsidiaryonJanuary2,2011?

Answer:

Requirement1

Totalstockholders'equityatDecember31,2010 $1,450,000

Less:Preferredstockholders'equity1000shares×

[$109callprice+($8dividendpershareinarrears×2years)] (125,000)

Commonstockholders'equity $1,325,000

Requirement2

Impliedfairvalueofinvestment($1,400,000/0.70) $2,000,000

Less:Commonstockholders'equity (1,325,000)

Goodwill $675,000

Requirement3

Noncontrollinginterest,January2,2011:

Preferredstockholders'equity $125,000

Commonstockholders'equity(30%×$1,325,000) 397,500

Goodwill(30%×$675,000) 202,500

Total $725,000

Objective:LO1

Difficulty:Moderate

4)SavyCorporation'sstockholders'equityonDecember31,2010wasasfollows:

8%cumulativepreferredstock,$100parvalue,

callableat$109,withtwoyearsofdividends

inarrears $100,000

Commonstock,$25parvalue 700,000

Additionalpaid-incapital 250,000

Retainedearnings 400,000

Totalstockholders'equity $1,450,000

OnJanuary1,2011,PaulCorporationpurchaseda70%interestinSavy'scommonstockfor$2,100,000.OnthisdatethebookvaluesofSavy'sassetsandliabilitiesareequaltotheirfairvalues.

Required:

1.Determinethebookvalueofthecommonstockholders'equityforSavyCorporationonJanuary1,2011.

2.WhatistheamountofgoodwillreportedontheconsolidatedbalancesheetforPaulCorporationandSubsidiaryatJanuary2,2011?

3.OnJanuary2,2011,Paulpurchased70%ofSavy'spreferredstockfor$50,000.Preparethejournalentry(ies)forPaulforthispurchaseonJanuary2,2011.

4.PreparetheeliminationentryontheconsolidatingworkpapersfortheInvestmentinSavy,PreferredStockandSavy'sPreferredStockonJanuary2,2011.

Answer:

Requirement1

Totalstockholders'equityatDecember31,2010 $1,450,000

Less:Preferredstockholders'equity1000shares×

[$109callprice+($8dividendpershareinarrears×2years)] (125,000)

Commonstockholders'equity $1,325,000

Requirement2

Impliedfairvalueofinvestment($2,100,000/0.70) $3,000,000

Less:Commonstockholders'equity 1,325,000

Goodwill $1,675,000

Requirement3

InvestmentinSavy,PreferredStock 50,000

Cash 50,000

InvestmentinSavy,PreferredStock 37,500

Additionalpaid-incapital 37,500

($125,000×70%)-$50,000=$37,500

Requirement4

PreferredStock 100,000

Retainedearnings 25,000

InvestmentinSavy,PreferredStock 87,500

Noncontrollinginterest 37,500

Objective:LO1

Difficulty:Moderate

5)PancinoCorporationownsa90%interestinSakalCorporation'scommonstock.Throughout2010,Sakalhad20,000sharesofcommonstockoutstandingandPancinohad50,000sharesofcommonstockoutstanding.Sakal'sonlydilutivesecurityconsistsof2,500stockoptions,withanexercisepriceof$20pershare.TheaveragepriceofSakal'sstockis$50persharein2010.TheoptionsareexercisableforoneshareofSakal'scommonstock.Pancino'sandSakal'sseparatenetincomesfortheyearare$100,000and$80,000,respectively.

Required:

ComputetheamountofbasicanddilutedearningspershareforPancino(Consolidated)andSakalCorporations.

Answer:

BasicDiluted

Sakal'sBasicandDilutedEPS:

Sakal'sincometocommonshareholders $80,000$80,000

Commonsharesoutstanding 20,000 20,000

Options:

DilutedEPS:

($50-$20)/$50×2,500 _______ 1,500

Commonsharesandcommonequivalents 20,00021,500

Earningspershare $4.00$3.72

BasicDiluted

Pancino'sBasicandDilutedEPS:

Pancino'sseparateincome $100,000 $100,000

Pancino'sincomefromSakal 72,000 72,000

Replacementcomputation: (72,000)

18,000shares×$3.72 ________ 66,960

Incometocommon $172,000 $166,960

Commonsharesoutstanding 50,00050,000

Earningspershare 3.443.34

Objective:LO2

Difficulty:Moderate

6)PandyCorporationownsa90%interestinSakajCorporation'scommonstock.Throughout2010,Sakajhad20,000sharesofcommonstockoutstandingandPandyhad50,000sharesofcommonstockoutstanding.Sakaj'sonlydilutivesecurityconsistsof10,000stockoptions,withanexercisepriceof$20pershare.TheaveragepriceofSakaj'sstockis$50persharein2010.TheoptionsareexercisableforoneshareofSakaj'scommonstock.Pandy'sandSakaj'sseparatenetincomesfortheyearare$200,000and$180,000,respectively.

Required:

ComputetheamountofbasicanddilutedearningspershareforPandy(Consolidated)andSakajCorporations.

Answer:

BasicDiluted

Sakaj'sBasicandDilutedEPS:

Sakaj'sincometocommonshareholders $180,000$180,000

Commonsharesoutstanding 20,000 20,000

Options:

DilutedEPS:

($50-$20)/$50×10,000 _______ 6,000

Commonsharesandcommonequivalents 20,00026,000

Earningspershare $9.00$6.92

BasicDiluted

Pandy'sBasicandDilutedEPS:

Pandy'sseparateincome $200,000 $200,000

Pandy'sincomefromSakaj($180,000×90%) 162,000 162,000

Replacementcomputation:

(162,000)

18,000shares×$6.92 ________ 124,560

Incometocommon $362,000 324,560

Commonsharesoutstanding 50,00050,000

Earningspershare $7.24$6.49

Objective:LO2

Difficulty:Moderate

7)ParkerCorporationownsan80%interestinSampleCorporation'scommonstock.Throughout2010,Samplehad10,000sharesofcommonstockoutstandingandParkerhad100,000sharesofcommonstockoutstanding.Sample'sonlydilutivesecurityconsistsof$50,000faceamountof8%bondspayable.Each$1,000bondisconvertibleinto20sharesofSamplestock.ParkerandSample'sseparateincomesfortheyearare$100,000and$75,000,respectively.Assumea34%flatincometaxrate.

Required:

ComputetheamountofbasicanddilutedearningspershareforParker(Consolidated)andSampleCorporations.

Answer:

BasicDiluted

Sample'sBasicandDilutedEPS:

Sample'sincometocommonshareholders $75,000 $75,000

Add:Netoftaxinterestexpense

$50,000×8%×66% 02,640

Adjustedsubsidiaryearnings $75,000$77,640

Commonsharesoutstanding 10,000 10,000

Incrementalshares:

DilutedEPS:

50bonds×20shares ______ 1,000

Commonsharesandcommonequivalents 10,00011,000

Earningspershare $7.50$7.06

BasicDiluted

Parker'sBasicandDilutedEPS:

Parker'sseparateincome $100,000 $100,000

Parker'sincomefromSample 60,000 60,000

Replacementcomputation:

Parker'sincomefromSample (60,000)

8,000shares×$7.06 ________ 56,480

Incometocommon $160,000 $156,480

Commonsharesoutstanding 100,000100,000

Earningspershare $1.60$1.56

Objective:LO2

Difficulty:Moderate

8)PeytonCorporationownsan80%interestinSampeCorporation'scommonstock.Throughout2011,Sampehad10,000sharesofcommonstockoutstandingandPeytonhad100,000sharesofcommonstockoutstanding.Sampe'sonlydilutivesecurityconsistsof$100,000faceamountof8%bondspayable.Each$1,000bondisconvertibleinto20sharesofSampestock.PeytonandSampe'sseparatenetincomesfortheyearare$200,000and$150,000,respectively.Assumea34%flatincometaxrate.

Required:

ComputetheamountofbasicanddilutedearningspershareforPeyton(consolidated)andSampeCorporations.

Answer: BasicDiluted

Sampe'sBasicandDilutedEPS:

Sampe'sincometocommonshareholders $150,000 $150,000

Add:Netoftaxinterestexpense

$100,000×8%×66% 05,280

Adjustedsubsidiaryearnings $150,000$155,280

Commonsharesoutstanding 10,000 10,000

Incrementalshares:

DilutedEPS:

100bonds×20shares _______ 2,000

Commonsharesandcommonequivalents 10,00012,000

Earningspershare $15.00$12.94

BasicDiluted

Peyton'sBasicandDilutedEPS:

Peyton'sseparateincome $200,000 $200,000

Peyton'sincomefromSampe

(80%×$150,000) 120,000 120,000

Replacementcomputation:

Peyton'sincomefromSampe (120,000)

8,000shares×$12.94 ________ 103,520

Incometocommon $320,000 $303,520

Commonsharesoutstanding 100,000100,000

Earningspershare $3.20$3.04

Objective:LO2

Difficulty:Moderate

9)PaneCorporationowns100%ofAlderCorporation,85%ofBallCorporation,70%ofCakeCorporation,40%ofDashCorporation,and10%ofEagerCorporation.Allofthesecorporationsaredomesticcorporations.Pane,AlderandBallbelongtoanaffiliatedgroup.Pane'smarginalincometaxrateis35%.Allinvesteeshavepaidoutalltheirnetincomeintheformofdividends.During2011,PaneCorporationreceivedthefollowingcashdividends:

FromAlder: $180,000

FromBall: $170,000

FromCake: $160,000

FromDash: $100,000

FromEager: $60,000

Required:

1.ComputetheamountofthedividendincomethatwouldbeexcludedfromtaxationunderthecurrentInternalRevenueCode.

2.ComputePane'scurrentincometaxliabilityforthedividendincomereceivedin2011.

Answer:

Requirement1

Excludeddividendincome:

FromAlder:$180,000×100% $180,000

FromBall:$170,000×100% 170,000

FromCake:$160,000×80% 128,000

FromDash:$100,000×80% 80,000

FromEager:$60,000×70% 42,000

Totalexcludeddividendincome $600,000

Requirement2

Totaldividendincomereceived $670,000

Totalexcludeddividendincome 600,000

Includeddividendincome $70,000

CurrentIncomeTaxLiability:

$70,000×35%=$24,500

Objective:LO3

Difficulty:Moderate

10)ParadiseCorporationowns100%ofAldredCorporation,90%ofBalmeCorporation,80%ofCalderCorporation,75%ofDaleCorporation,20%ofEastCorporation,and8%ofFaberCorporation.Paradise,Aldred,BalmeandCalderbelongtoanaffiliatedgroup.Allofthesecorporationsaredomesticcorporations.During2011,ParadiseCorporationreportsnetincomeof$1,500,000.Thisnetincomeincludesthe