Apache, a U.S. corporation, owns 80% of the stock in Burrito, incorporated in Co
ID: 2415962 • Letter: A
Question
Apache, a U.S. corporation, owns 80% of the stock in Burrito, incorporated in Country Y. Burrito reports the following results for the current year.
Gross Income
$300,000 Foreign base company sales income
$150,000 Foreign base company services income
$70,000 Dividend from Kane, a 70% owned Country Y Corporation
$280,000 Retail income earned in Country Y
Deductions
$120,000 Foreign base company sales income
$90,000 Foreign base company services income
$0 Dividend from Kane, a 70% owned Country Y Corporation
$220,000 Retail income earned in Country Y
Kane conducts substantially all its business in Country Y
a. What amount of income must Apache recognize as a result of Burrito's activities?
b. How would your answer to Part a change if Kane were instead a 70% owned Country M corporation?
c. How would your answer to Part b change if foreign base company sales income before deductions were instead $500,000?
Explanation / Answer
Q. a. What amount of income must Apache recognize as a result of Burrito's activities?
Income Statement
Particulars
Amount
Gross Income:
Foreign base company sales income
$300,000.00
Foreign base company services income
$150,000.00
Retail income earned in Country Y
$280,000.00
Dividend from Kane
$49,000.00
Total(A)
$779,000.00
Deductions:
Foreign base company sales income
$120,000.00
Foreign base company services income
$90,000.00
Retail income earned in Country Y
$220,000.00
Total(B)
$430,000.00
Net Income(A-B)
$349,000.00
Q. b. How would your answer to Part a change if Kane were instead a 70% owned Country M corporation?
Income Statement
Particulars
Amount
Gross Income:
Foreign base company sales income
$300,000.00
Foreign base company services income
$150,000.00
Retail income earned in Country Y
$280,000.00
Total(A)
$730,000.00
Deductions:
Foreign base company sales income
$120,000.00
Foreign base company services income
$90,000.00
Retail income earned in Country Y
$220,000.00
Total(B)
$430,000.00
Net Income(A-B)
$300,000.00
Q. c. How would your answer to Part b change if foreign base company sales income before deductions were instead $500,000?
Income Statement
Particulars
Amount
Gross Income:
Foreign base company sales income
$300,000.00
Foreign base company services income
$150,000.00
Retail income earned in Country Y
$280,000.00
Total(A)
$730,000.00
Deductions:
Foreign base company sales income
$500,000.00
Foreign base company services income
$90,000.00
Retail income earned in Country Y
$220,000.00
Total(B)
$810,000.00
Net Loss(A-B)
-$80,000.00
Income Statement
Particulars
Amount
Gross Income:
Foreign base company sales income
$300,000.00
Foreign base company services income
$150,000.00
Retail income earned in Country Y
$280,000.00
Dividend from Kane
$49,000.00
Total(A)
$779,000.00
Deductions:
Foreign base company sales income
$120,000.00
Foreign base company services income
$90,000.00
Retail income earned in Country Y
$220,000.00
Total(B)
$430,000.00
Net Income(A-B)
$349,000.00
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