Question

Clarke has a controlling interest in Rogers's outstanding stock. At the current year-end, the following information has been accumulated for these two companies:

Separate Operating Income

Dividends Paid

Clarke 590,000 90,000

(includes a 181,000 net unrealized gross profit in

intra-entity ending inventory)

Rogers 257,500 70,000

Clarke uses the initial value method to account for the investment in Rogers. The separate operating income figures just presented include neither dividend nor other investment income. The effective tax rate for both companies is 40 percent.

a) Assume that Clarke owns 100 percent of Rogers's voting stock and is filing a consolidated tax return. What income tax amount does this affiliated group pay for the current period?

b) Assume that Clarke owns 92 percent of Rogers's voting stock and is filing a consolidated tax return. What amount of income taxes does this affiliated group pay for the current period?

c) Assume that Clarke owns 80 percent of Rogers's voting stock, but the companies elect to file separate tax returns. What is the total amount of income taxes that these two companies pay for the current period?

d) Assume that Clarke owns 70 percent of Rogers's voting stock, requiring separate tax returns. What is the total amount of income tax expense to be recognized in the consolidated income statement for the current period?

e) Assume that Clarke owns 70 percent of Rogers's voting stock so that separate tax returns are required. What amount of income taxes does Clarke have to pay for the current year?

Answer 1

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Answer:

a) $266600 (40% * 666500)

The affiliated group is taxable on its combined operating income of $666500 ($590000 − $181000 + $257500: the net unrealized gross profit is deferred on a consolidated return). The intraentity income and dividends are not relevant because a consolidated return is filed.

b) $266600 (40% * 666500)

The affiliated group is taxable on its combined operating income of $666500 (the net unrealized gross profit is deferred on a consolidated return). The intraentity income and dividends is not relevant because a consolidated return is filed. The percentage ownership does not affect the figures on a consolidated return.

c) $339000 (236000+130000)

Rogers have to pay $103,000 or 40% of its $257,500 separate operating income. Clarke have to pay $236,000 or 40% of its $590,000 separate operating income. The unrealized gross profit is not deferred because separate returns are filed. intraentity dividends are not taxable because the parties qualify as an affiliated group even though separate returns are being filed.

4) $275252

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