(Consolidated Financial Statements: Various Issues) Algo Company and Bevo Corporation

Case 16-1 Consolidated Financial Statements: Various Issues

Because of irreconcilable differences of opinion, a dissenting group within the management and board of directors of the Algo Company resigned and formed the Bevo Corporation to purchase a manufacturing division of the Algo Company. After negotiation of the agreement, but just before closing and actual transfer of the property, a minority stockholder of Algo notified Bevo that a prior stockholder’s agreement with Algo empowered him to prevent the sale. The minority stockholder’s claim was acknowledged by Bevo’s board of directors. Bevo’s board then organized Casco, Inc. to acquire the minority stockholder’s interest in Algo for $75,000, and Bevo advanced the cash to Casco. Bevo exercised control over Casco as a subsidiary corporation with common officers and directors. Casco paid the minority stockholder $75,000 (about twice the market value of the Algo stock) for his interest in Algo. Bevo then purchased the manufacturing division from Algo.

Required:
a. What expenditures are usually included in the cost of property, plant, and equipment acquired in a purchase?
b. i. What are the criteria for determining whether to consolidate the financial statements of Bevo Corporation and Casco, Inc.?
ii. Should the financial statements of Bevo and Casco be consolidated? Discuss.
c. Assume that unconsolidated financial statements are prepared. Discuss the propriety of treating the $75,000 expenditure in the financial statements of the Bevo as
i. an account receivable from Casco
ii. an investment in Casco
iii. part of the cost of the property, plant, and equipment
iv. a loss


Click here for the solution: (Consolidated Financial Statements: Various Issues) Algo Company and Bevo Corporation

Compute consolidated taxable income for the calendar year Moose Group

Compute consolidated taxable income for the calendar year Moose Group, which elected consolidated status immediately upon the creation of the two member corporations on January 1, 2010. All recognized income is ordinary in nature, and no intercompany transactions were completed during the indicated years.

Year Moose Corporation Elk Corporation
2010 $ 250,000 $ 50,000
2011 $ 250,000 (110,000)
2012 $ 250,000 (400,000)
2013 $ 250,000 75,000

Click here for the solution: Compute consolidated taxable income for the calendar year Moose Group

Cantu was hired as a special education teacher by the San Benito Consolidated Independent School District under a one-year contract for the 1990–91 school year

Cantu was hired as a special education teacher by the San Benito Consolidated Independent School District under a one-year contract for the 1990–91 school year. On August 18, 1990, shortly before the start of the school year, Cantu hand-delivered to her supervisor a letter of resignation, effective August 17, 1990. In this letter, Cantu requested that her final paycheck be forwarded to an address in McAllen, Texas, some 50 miles from the San Benito office where she tendered the resignation. The San Benito superintendent of schools, the only official authorized to accept resignations on behalf of the school district, received Cantu’s resignation on Monday, August 20. The superintendent wrote a letter accepting Cantu’s resignation the same day and deposited the letter, properly stamped and addressed, in the mail at approximately 5:15 PM that afternoon. At about 8:00 AM the next morning, August 21, Cantu hand-delivered to the superintendent’s office a letter withdrawing her resignation. This letter contained a San Benito return address. In response, the superintendent hand-delivered that same day a copy of his letter mailed the previous day to inform Cantu that her resignation had been accepted and could not be withdrawn. The dispute was taken to the state commissioner of education, who concluded that the school district’s refusal to honor Cantu’s contract was lawful, because the school district’s acceptance of Cantu’s resignation was effective when mailed, which resulted in the formation of an agreement to rescind Cantu’s employment contract. Cantu argued that the mailbox rule should not apply because her offer was made in person and the superintendent was not authorized to accept by using mail. Is this a good argument?

Click here for the solution: Cantu was hired as a special education teacher by the San Benito Consolidated Independent School District under a one-year contract for the 1990–91 school year

The Flying Gator Corporation and its 100%-owned subsidiary, T Corporation, have filed consolidated tax returns for many years

The Flying Gator Corporation and its 100%-owned subsidiary, T Corporation, have filed consolidated tax returns for many years. Both corporations use the hybrid method of accounting and the calendar year as their tax year. During 201 (which is the current year for this problem), they report the operating results. Note the following additional information:
• Flying Gator and T Corporations are the only members of their controlled group.
• Flying Gator’s address is 2101 W. University Ave., Gainesburg, FL 32611. Its employer identification number is 38-2345678. Flying Gator was incorporated on June 11, 2000. Its total assets are $430,000. Stephen Marks is Flying Gator’s president.
• A $50,000 consolidated NOL carryover from the preceding year is available. The NOL is wholly attributable to Flying Gator.
• Flying Gator and T use the first-in, first-out (FIFO) inventory method. T began selling inventory to Flying Gator in the preceding year, which resulted in a $40,700 deferred intercompany profit at the end of the preceding year. Flying Gator is deemed to realize this profit in the current year because it uses the FIFO method. During the current year, T sells additional inventory to Flying Gator, realizing a $300,000 profit. At the end of the current year, Flying Gator holds inventory responsible for $45,100 of this profit.
• Flying Gator receives all its dividends from T. T receives all its dividends from a 60%-owned domestic corporation. All distributions are from E&P.
• Flying Gator receives all its interest income from T. T pays Flying Gator the interest on March 31 of the current year on a loan that was outstanding from October 1 of the preceding year through March 31 of the current year. Flying Gator and T did not accrue any interest at the end of the preceding year because they use the hybrid method of accounting. T pays $5,000 of its interest expense to a third party.
• Officer’s salaries are $80,000 for Flying Gator and $65,000 for T. These amounts are included in salaries and wages in Table.
• Flying Gator’s capital losses include a $9,000 long-term loss on a sale of land to T in the current year. T holds the land at year-end.
• The corporations have no nonrecaptured net Sec. 1231 losses from prior tax years.
• Qualified production activities income for Flying Gator is $340,000 and for T is $(35,000). The applicable percentage for 2010 is 9%.
• Estimated tax payments for the current year are $150,000.
Determine the consolidated group’s 2012 tax liability. Prepare the front page of the consolidated group’s current year corporate income tax return (Form 1120).

Click here for the solution: The Flying Gator Corporation and its 100%-owned subsidiary, T Corporation, have filed consolidated tax returns for many years