On January 1, 2017, Abbey acquires 90 percent of Benjamin\'s outstanding shares.
ID: 2432216 • Letter: O
Question
On January 1, 2017, Abbey acquires 90 percent of Benjamin's outstanding shares. Financial information for these two companies for the years of 2017 and 2018 follows:
Assume that a tax rate of 35 percent is applicable to both companies.
A. On consolidated financial statements for 2018, what are the income tax expense and the income tax currently payable if Abbey and Benjamin file a consolidated tax return as an affiliated group?
Income Tax Expense:
Income Tax Payable:
B. On consolidated financial statements for 2018, what are the income tax expense and income tax currently payable if they choose to file separate returns?
Income Tax Expense:
Income Tax Payable:
2017 2018 Abbey Company: Sales $ (500,000 ) $ (700,000 ) Operating expenses 300,000 400,000 Intra-entity gross profits in ending inventory (included in above figures) (120,000 ) (150,000 ) Dividend income—Benjamin Company (18,000 ) (36,000 ) Benjamin Company: Sales (210,000 ) (270,000 ) Operating expenses 130,000 170,000 Dividends paid (20,000 ) (40,000 )Explanation / Answer
When filing returns as an affiliated group, Abbey and Benjamin will be taxed on their combined Operating Income,
The operating Income is given by Sales - Expenses
Dividends and Intra-entity gross profits don't matter when filing as an affiliated group.
For year 2017,
Operating Income of Abbey = Sales of Abbey - Expenses of Abbey = -$500,000 - $300,000 = -$800,000
The Operating Income of Benjamin = Sales of Benjamin - Expenses of Benjamin= -$210,000 - $130,000 = -$340,000
Combined Income of Abbey and Benjamin = -$800,000 + -$340,000 =-$1140,000
Tax rate = 35%
Tax payable = 35% of -$1140,000 = -$339,000
For year 2018,
Operating Income of Abbey = Sales of Abbey - Expenses of Abbey = -$700,000 - $400,000 = -$1100,000
Operating Income of Benjamin = Sales of Benjamin - Expenses of Benjamin= -$270,000 - $170,000 = -$440,000
Combined Income of Abbey and Benjamin = -$1100,000 + -$440,000 =-$1540,000
Tax rate = 35%
Tax payable = 35% of -$1540,000 - Tax refund from last year = -$539,000 - -$339,000 = -$200,000
Tax Expense = 0
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Even when taxes are filed separately, consolidated statement is presented by parent company (having over 80% rights).
Here we'll have to calculate taxes of both companies separately and combine them after which we need to adjust them for items reported on consolidated basis.
For year 2017,
Operating Income of Abbey = Sales of Abbey - Expenses of Abbey = -$500,000 - $300,000 = -$800,000
Operating Income of Benjamin = Sales of Benjamin - Expenses of Benjamin= -$210,000 - $130,000 = -$340,000
Combined Income of Abbey and Benjamin = -$800,000 + -$340,000 =-$1140, 000
Adjustment to combined income = -$1140, 000 + -$120,000 = -$1260, 000
Taxes for 2017 = 35% of -$1260, 000 = -$441,000
For year 2018,
The Operating Income of Abbey = Sales of Abbey - Expenses of Abbey = -$700,000 - $400,000 = -$1100,000
Operating Income of Benjamin = Sales of Benjamin - Expenses of Benjamin= -$270,000 - $170,000 = -$440,000
Combined Income of Abbey and Benjamin = -$800,000 + -$340,000 =-$1540,000
Adjustment to combined income = -$1540,000 + -$150,000 = -$1690,000
Taxes for 2018 = 35% of -$1690,000 - Tax refund from last year = -$591,500 - -$441,000 = -$150,500
Tax payable = -$150,500
Tax expense = 0
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