Question

On January 1, 2020, Abbey acquires 90 percent of Benjamin's outstanding shares. Financial information for these two companies for the years 2020 and 2021 follows  (credit balances indicated by parentheses):

 

		2020			2021
Abbey Company:
Sales	$	(785,000	)	$	(1,042,000	)
Operating expenses		536,000			662,000
Intra-entity gross profits in ending inventory (included in above figures)		(148,000	)		(168,000	)
Dividend income—Benjamin Company		(22,500	)		(27,000	)
Benjamin Company:
Sales		(330,000	)		(335,000	)
Operating expenses		167,000			206,000
Dividends paid		(25,000	)		(30,000	)

 

Assume that a tax rate of 21 percent is applicable to both companies.

 

1. On consolidated financial statements for 2021, 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?

2. On consolidated financial statements for 2021, what are the income tax expense and income tax currently payable if they choose to file separate returns?

   

		amount
a.	income tax expense	102,690
	income tax payable	102,690
b.	income tax expense
	income tax payable

Answer 1

Abbey company	Benjamin Company
Income tax currently payable	$63000	$21000
Income tax expense	$56700	$21000

1
Abbey Company

Particulars	Amount ($)
Sales	700000
Less: Operating expenses	(400000)
Taxable income of Abbey in 2021	300000
Tax rate	21%
Income tax payable by Abbey in 2021	$63000

Particulars	Amount ($)
Taxable Income of Abbey in 2021	300000
Add: Intra-entity gross profit taxed in 2020 although recognized in 2021	120000
Less: Intra-entity gross profit in inventory taxed in 2021	(150000)
Net income subject to taxation in 2021	270000
Tax rate	21%
Income tax expense by Abbey in 2021	$56700

2
Benjamin Company

Particulars	Amount ($)
Sales	270000
Less: Operating expenses	(170000)
Taxable income of Benjamin in 2021	100000
Tax rate	21%
Income tax expense and payable by Benjamin in 2021	$21000