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Learning Objective 1 Modify consolidation procedures for subsidiary companies with preferred stock in their capital structure.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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When preferred stock has a call or redemption price, this amount is used in allocating the investees equity to preferred stockholders.
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A parent companys purchase of the outstanding preferred stock of a subsidiary results in a retirement of the stock purchased from the viewpoint of the consolidated entity.
Investment in Sol Preferred 12,000 Other Paid-in Capital 12,000 To adjust other paid-in capital to reflect constructive retirement
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 10 - 15
Dividends
Learning Objective 2 Calculated basic and diluted earnings per share for a consolidated reporting entity.
C YYY +Y +Y YYY ab
Plant
$1,000,000
Seed
$200,000
500,000 $1,500,000
Syd is 80% owned by Paddy. 80% $450,000 Syd net income 80% $50,000 unrealized profit Amortization Income from Syd
46,200 $446,200
Paddys income to common stockholders Add: Net-of-tax interest expense assuming bonds were converted into shares ($1,000,000 7% 66% net-of-tax effect) Paddys adjusted earnings = a
$1,800,000
46,200 $1,846,200
Learning Objective 3 Understand the complexities of accounting for income taxes by consolidated entities.
FASB Statement No. 109, Accounting for Income Taxes, is the primary source of GAAP for accounting for income taxes. Events that have future tax consequences are designated temporary differences.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 10 - 46
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and to recognize deferred tax liabilities and assets for the tax consequences of events that have been recognized in the financial statements or tax returns.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 10 - 47
$ 60,000
120,000 $180,000
Steps equity consisted of $300,000 capital stock and $200,000 retained earnings.
One-Line Consolidation
January 1, 2003 Investment in Step 375,000 Cash 375,000 To record purchase of 75% interest December 2003 Cash 21,000 Investment in Step To record dividends received
21,000
One-Line Consolidation
December 31, 2003 Investment in Step 23,600 Income from Step 23,600 To record income from Step Pacos share of Step net income ($52,800 75%) $39,600 Less: Unrealized profit 20,000 Add: Piecemeal recognition of gain 4,000 Income from Step $23,600
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 10 - 56
Business Combination
Taxable combination
Tax-free reorganization
Business Combination
In a purchase business combination, the cost/book value differential is allocated to the assets and liabilities acquired at gross fair values, and a deferred tax asset or liability is recorded for the related tax effect.
Current
Noncurrent
End of Chapter 10