Class example 1: Chapter 9, Problem 10, pages 510-511 in text.

Intercompany revenues and expenses
Total rent for yr 9 $125,000
Kent’s ownership 40%
Amount to be eliminated $50,000 (d)

Land:
In yr 6 Kent would have eliminated 40% of the gain from the sale of the land as it would have been considered an intercompany sale. Unrealized gain:

Before taxes Taxes 40% After tax

Unrealized gain ($75,000 x 40%) $30,000 $12,000 $18,000

Kent would have reported 60% of the total gain on the land (considered sold to an outsider) as realized as follows: 75,000 × 60% × (1 – 40%) = $27,000 (net of tax)

In yr 9, there would be no consolidated income statement impact from the land still held.
But there is a consolidated impact from the land sold. Since 30% of the land was sold to an outsider in yr 9, Kent can now recognize 30% of the profits held back in 2002. Before taxes Taxes 40% After tax

Realized gain ($30,000 x 30%) $9,000 $3,600 $5,400 (e)

Unrealized gain at end of Year 9 (70%) 21,000 8,400 12,600

Thus, Kent would add $9,000 to its income as a gain on the sale of the land and bring in the tax effect of $3,600 for consolidation purposes.

Dividends: Total for yr 9: $80,000 x 40% = $32,000 (f) to be eliminated

Calculation of consolidated net income Year 9

Net income, Kent 800,000
Less: dividends 40% x 80,000 32,000 Acquisition differential amortization 9,500 41,500 758,500
Add: land gain 5,400 763,900
Net income, Laurier 230,000 40% 92,000 855,900

a)
KENT CORP.
Consolidated Income Statement for the year ended December 31, year 9

Sales [3,000,000 + (40% ( 1,200,000)] $ 3,480,000
Other income [200,000 –32,000 (f) + (40% × 70,000) – 50,000 (d)] 146,000
Gain on sale of land [9,000 (e) + (40% × 100,000)] 49,000 Total 3,675,000

Cost of sales [1,400,000 + (40% × 560,000)] 1,624,000
Selling and admin expenses [500,000 + (40% × 300,000) + 9,000 (a)] 629,000
Other expense [100,000 + (40% × 130,000) – 12,500 (c) – 50,000 (d)] 89,500
Goodwill impairment loss (b) 13,000
Income tax exp. [400,000 + 3,600 (e) + (40% × 150,000)] 463,600 Total 2,819,100

Net income $ 855,900

|b) |
|Kent Corp. |
|Income Statement |
|for the Year Ended December 31, Year 9 |
|Sales | | | | | |3,000,000 | | |
|Other income (200,000 – [40% x 80,000]) | | |168,000 | | |
|Investment income (Note 1) | | | |87,900 | | |
| | | | | | |3,255,900 | | |
| | | | | | | | | |
|Cost of sales |