Question

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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: 2018 $ (986,000) 552,000 2017 Abbey Company: Sales $ (724,000) Operating expenses 518,000 Intraentity gross profits in ending Inventory (included in above figures) (160,000) Dividend income-Benjamin Company (22,500) Benjamin Company: Sales (306,000) Operating expenses 180,000 Dividends paid (25,000) (221,000) (27,000) (341,000) 216.000 (30,000) Assume that a tax rate of 40 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? 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?

Answer 1

1. Please find below table useful to compute desired results: -

A -986000-552000 -341000-216000 160000 -221000 - SUM(B1B4) 40 / 100 -B5*B6 1 Abbey Income 2018 2 Benjamin Income 2018 3 2017 Deferred intra-entity gross profit 4 2018 Deferred intra-entity gross profit 5 Taxabale Income 6 Tax Rate 7 Income Tax payable-current

End Results would be as follows: -

A S 434,000.00 S 125,000.00 S 160,000.00 S(221,000.00) S 498,000.00 40% S 199,200.00 1 Abbey Income 2018 2 Benjamin Income 2018 3 2017 Deferred intra-entity gross profit 4 2018 Deferred intra-entity gross profit 5 Taxabale Income 6 Tax Rate Income Tax payable-current 7

Because no temporary differences exist in this problem, the income tax expense would also be $199,200. The intra-entity gross profit is not taxed until the goods are sold to an outside customer or consumed within the consolidated group. Dividend income is not important because a consolidated return is being filed

2. On its separate tax return, Abbey will report taxable income of $434,000—the intra-entity inventory gross profits cannot be deferred. The dividends would not be taxable because Benjamin still meets the criteria to be a member of an affiliated group. A consolidated return is not a requirement for these dividends to be excluded. Thus, income taxes payable by Abbey would be $173,600 ($434,000*40%).To determine the income tax expense for Abbey, the two temporary differences must be taken into account:

A -986000-552000 160000 9 Taxable income 10 Intra-entity gross profit taxed in 2017 recognized in 2018 11 Intra-entity gross profit taxed in 2018 12 2018 net income subject to taxation 13 Tax rate --221000 - SUM(B9.B11) - 40/ 100 =B12*B13 14 Income tax expense

Final Table will be as follows: -

S 434,000.00 S 160,000.00 S(221,000.00) S 373,000.00 40% S 149,200.00 9 Taxable income 10 Intra-entity gross profit taxed in 2017 recognized in 2018 11 Intra-entity gross profit taxed in 2018 12 2018 net income subject to taxation 13 Tax rate 14 Income tax expense

The $24,400 difference between the expense and the payable is the tax effect on the net intra-entity gross profit ($61,000*40%).

Benjamin will have an expense and payable of $50,000 ($125,000*40%)