Question

Please help!

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: 2017 2018 $ (785,000) 536,000 $(1,042,000) 662,000 Abbey Company: Sales Operating expenses Intra-entity gross profits in ending inventory (included in above figures) Dividend income-Benjamin Company Benjamin Company: Sales Operating expenses Dividends paid (148,000) (22,500) (168,000) (27,000) (330,000) 167,000 (25,000) (335,000) 206,000 (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? $ 195,600 Income tax expense Income tax payable Income tax expense Income tax payable

Answer 1

Answer:

Part-A

Consolidated Return
Abbey income -2018 ( Sales - Expense)		$380,000
benjammin income -2018 ( Sales - Expense)		$129,000
2017 gain realized in 2018		$148,000
2018 deferred Gain		-$168,000
Taxable Income		$489,000
Tax Rate		40%
Income Tax Payable- Current		$195,600

In absence of any kind of temporary difference, income tax expense shall be same as income tax payable i.e. $195,600

Note: The Unrealized Gain is not taxed until realized . Dividend Income is not important because a consolidated return is being filled

Part-B: Separate Return

Abbey will report taxable income of $380000 - the unrealized gain cannot be deferred . The dividend would not be taxable because Benjammin still meets the criteria to be a member of an affiliated group . A consolidated return is not a requirement for these dividend to be excluded. Thus Income tax payable by P would be $380000*40%=$152000 To determine the income tax expense for , The two temporary difference must be taken into account Taxable Income 380000 Gain taxed in 2017 though realized in 2018 148000 Gain taxed in 2018 although not realized -168000 2018 realized income subject to taxation 360000 Tax rate 40% Income Tax Expense 144000 S will have an expense and payable of $51600 ($129000*40%)