Question

Clarke has a controlling interest in Rogers's outstanding stock. At the current year-end, the following information...

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

$645,000

$110,000

(includes a $115,000 net unrealized gross profit in intra-entity ending inventory)

Rogers

380,000

85,000

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.

1. 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?

2. 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?

3. 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?

4. 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?

5. 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?

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Homework Answers

Answer #1

Part A

Since the parent owns 100%, afiliated group will be taxed on its operating income. Inter company transfer and dividends have no impact on consolidation return when it is filled

(645000-115000+380000)x 40% = 364000

Part B

Even though parent owns 92% it qualifies for consolidated tax return

(645000-115000+380000)x 40% = 364000

Part C

Seperate tax return will be filled.

Parent tax = 645,000 x 40% = $ 258,000

Subsidiary tax return = 380,000 x 40% = % 152,000

Total = $ 410,000

Part E

Dividend Received = 85,000 x 70% x 20% = $ 11900

Income Tax Payable = (645000+11900) x 40% = $ 262,760

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