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	$647,500	$100,000
	(includes a $156,000 net unrealized gross profit on intra-entity inventory transfers)
Rogers	245,000	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

Solution: a. Calculate the income tax amount Income tax amount-(Operating income-Unrealized gross profit+ Rogers Operating income)xTaxrate = ($647,500-S 1 56,000+$245,000) x 40% =$294,600. Therefore income tax amount is S294,600 b. Calculate the income tax for affiliated group: Income tax amount-(Operating income-Unrealized gross profit+ Rogers Operating income) Taxrate =($647,500-$156,000+$245,000) x 40% =$294,600 Therefore income tax for affiliated group is $294,600 c. Calculate the separate income tax for two companies: Clarke income tax =Operating income«Taxrate -$259,000 Rogers income tax =Operating income«Taxrate =$98,000 -S647,500x40% $245,000×40% Therefore total income tax isS 357,000(259,000+98,000)