Problem 6-5 (LO 3) Consolidated income statement, affiliatedfirm for tax. On January 1, 2015, Dawn Corporation exchanges 12,000shares 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 valueof $25 per share. On the date of purchase, Mercer has the followingbalance 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 hasequipment 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 ofmerchandise to Dawn. Mercer has $2,000 of Dawn goods in itsbeginning inventory and $4,200 of Dawn goods in its endinginventory. Dawn has $2,500 of Mercer goods in its beginninginventory and $3,000 of Mercer goods in its ending inventory.Dawn’s gross profit rate is 40%; Mercer’s is 25%. Required Required364 Part 1 COMBINED CORPORATE ENTITIES AND CONSOLIDATIONS Copyright2016 Cengage Learning. All Rights Reserved. May not be copied,scanned, or duplicated, in whole or in part. Due to electronicrights, some third party content may be suppressed from the eBookand/or eChapter(s). Editorial review has deemed that any suppressedcontent does not materially affect the overall learning experience.Cengage Learning reserves the right to remove additional content atany time if subsequent rights restrictions require it. On July 1,2015, Dawn sells a machine to Mercer for $90,000. The book value ofthe machine on Dawn’s books is $50,000 at the time of the sale. Themachine has a 5-year remaining life. Depreciation on the machine isincluded in expenses. The consolidated group meets the requirementsof an affiliated group under the tax law and files a consolidatedtax return. The corporate tax rate is 30%. The original purchase isnot structured as a nontaxable exchange. Dawn uses the cost methodto record its investment in Mercer. Since Mercer has never paiddividends, Dawn has not recorded any income on its investment inMercer. The two companies prepare the following income statementsfor 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 . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000185,000 Income before tax . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . $ 120,000 $ 40,000 Preparea determination and distribution of excess schedule. Prepare the2016 consolidated net income in schedule form. Include eliminationsand adjustments. Provide income distribution schedules to allocateconsolidated net income (after tax) to the controlling andnoncontrolling interests.