Problem 6-5 (LO 3) Consolidated income statement, affiliated firm for tax. On January 1, 2015, Dawn Corporation exchanges 12,000 shares of its common stock for an 80% interest in Mercer Company. The stock issued has a par value of $10 per share and a fair value of $25 per share. On the date of purchase, Mercer has the following balance sheet: Common stock ($2 par). . . . . . . . . . . . . . . . . . . . $ 20,000 Paid-in capital in excess of par . . . . . . . . . . . . . . 50,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,000 On the purchase date, Mercer has equipment with an 8-year remaining life that is undervalued by $100,000. Any remaining excess cost is attributed to goodwill. There are intercompany merchandise sales. During 2016, Dawn sells $20,000 of merchandise to Mercer. Mercer sells $30,000 of merchandise to Dawn. Mercer has $2,000 of Dawn goods in its beginning inventory and $4,200 of Dawn goods in its ending inventory. Dawn has $2,500 of Mercer goods in its beginning inventory and $3,000 of Mercer goods in its ending inventory. Dawns gross profit rate is 40%; Mercers is 25%. Required Required 364 Part 1 COMBINED CORPORATE ENTITIES AND CONSOLIDATIONS Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. On July 1, 2015, Dawn sells a machine to Mercer for $90,000. The book value of the machine on Dawns books is $50,000 at the time of the sale. The machine has a 5-year remaining life. Depreciation on the machine is included in expenses. The consolidated group meets the requirements of an affiliated group under the tax law and files a consolidated tax return. The corporate tax rate is 30%. The original purchase is not structured as a nontaxable exchange. Dawn uses the cost method to record its investment in Mercer. Since Mercer has never paid dividends, Dawn has not recorded any income on its investment in Mercer. The two companies prepare the following income statements for 2016: Dawn Corporation Mercer Company Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000 $600,000 Less cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000 375,000 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,000 $225,000 Less expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 185,000 Income before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 120,000 $ 40,000 Prepare a determination and distribution of excess schedule. Prepare the 2016 consolidated net income in schedule form. Include eliminations and adjustments. Provide income distribution schedules to allocate consolidated net income (after tax) to the controlling and noncontrolling interests.