Deferred Tax Consequences of Intercompany Inventory and Equipment
Peer Company acquired an 80% interest in Sells Company on January 1, 2011, for $1,600,000. On this date, the common stock and retained earnings balances were $1,500,000 and $500,000, respectively. During the year, Peer Company sold merchandise to Sells Company for $200,000. Only one-fourth of this merchandise was in Sells Company”s 2011 ending inventory, and $10,000 of this amount is unrealized profit.
On January 2, 2011, Sells Company sold equipment with a book value of $300,000 to Peer Company for $400,000. The equipment has a remaining useful life of four years. Sells Company”s net income for 2011 was $300,000, while Peer Company”s was $800,000. Neither company declared dividends in 2011. The affiliated companies file separate income tax returns, the dividends received exclusion is 80%, and the prior, current, and expected future marginal income tax rates for both companies are 40%.
Required:
- Prepare in general journal form all consolidated statements workpaper entries necessary for 2011.
- Calculate the controlling interest in consolidated net income for the year ended December 31, 2011.
- Calculate the noncontrolling interest in consolidated income for the year ended December 31, 2011.