ParentCo and SubCo are calendar year corporations that keep their respective boo

Question

ParentCo and SubCo are calendar year corporations that keep their respective books on the accrual basis. The companies have taxable income of $200,000 and $250,000, respectively, for tax year 2013 (before consolidation adjustments, elimination entries and charitable deductions).

The following transactions are included:

1. Land was sold by ParentCo to a third party for $80,000. The land was acquired from SubCo in 2011. SubCo acquired the land in 2008 for $48,000.

2. ParentCo’s taxable income includes a $12,000 dividend SubCo paid to ParentCo.

3. ParentCo sold inventory to SubCo in 2013 for a realized $100,000 profit. The intercompany profit on the unsold inventory is $8,000. ParentCo sold inventory to SubCo in 2012 for which deferred profit at the beginning of the year is $5,000. SubCo sold this inventory to an external party. ParentCo sold additional inventory to SubCo in 2013 for a realized $100,000 profit. The intercompany profit on the unsold inventory is $8,000.

4. ParentCo and SubCo contribute $17,000 and $11,000 to charity, respectively.

Directions: Calculate the consolidated taxable income and consolidated tax liability of ParentCo and SubCo for 2013. Than calculate the basis of ParentCo’s stock at the end of 2013, assuming that it was $1,400,000 at the beginning of the year.

Explanation / Answer

Consolidated Tax Computation of Profit of ParentCo and SubCo USD ParentCo Profit 200000 SubCo Profit 250000 Consolidated Profit of ParentCo and SubCo 450000 Less, Dividend from Subsidiary Company -12000 Less, Profit in unsold stock of 2013 sale by ParentCo to SubCo -8000 Less, ParentCo Contribution to Charity ( Deduction) -17000 Less, SubCo Contribution to Charity (Deduction) -11000 Add, Interco profit on Sale of 2012 unsold stock 5000 Consolidated Taxable Income 407000 US Corporate Tax : 113900+72000*39% 141980 Profit After Tax 265020 Parent Co Stock at the beginning of the year 1400000 Add Profit After Tax 265020 Parent Co Stock at the end of the year 1665020 Note: Sale of asset already considered at individual Profit calculation hence no              effect to be given in consolidated Profit and loss account.

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