Question

In: Accounting

Parson Company acquired an 80 percent interest in Syber Company on January 1, 2017. Any portion...

Parson Company acquired an 80 percent interest in Syber Company on January 1, 2017. Any portion of Syber's business fair value in excess of its corresponding book value was assigned to trademarks. This intangible asset has subsequently undergone annual amortization based on a 15-year life. Over the past two years, regular intra-entity inventory sales transpired between the two companies. No payment has yet been made on the latest transfer. All dividends are paid in the same period as declared.

The individual financial statements for the two companies as well as consolidated totals for 2018 follow:

Parson
Company
Syber
Company
Consolidated
Totals
Sales $ (980,000 ) $ (780,000 ) $ (1,604,000 )
Cost of goods sold 590,000 490,000 937,000
Operating expenses 136,000 154,000 292,500
Income of Syber (101,800 ) 0 0
Separate company net income $ (355,800 ) $ (136,000 )
Consolidated net income $ (374,500 )
Net income attributable to noncontrolling interest 18,700
Net income attributable to Parson Company $ (355,800 )
Retained earnings, 1/1/18 $ (638,600 ) $ (326,000 ) $ (638,600 )
Net income (above) (355,800 ) (136,000 ) (355,800 )
Dividends declared 67,000 48,000 67,000
Retained earnings, 12/31/18 $ (927,400 ) $ (414,000 ) $ (927,400 )
Cash and receivables $ 478,000 $ 98,000 $ 550,400
Inventory 208,000 196,000 385,500
Investment in Syber Company 443,400 0 0
Land, buildings, and equipment 416,000 314,000 730,000
Trademarks 0 0 32,500
Total assets $ 1,545,400 $ 608,000 $ 1,698,400
Liabilities $ (360,000 ) $ (117,000 ) $ (417,400 )
Common stock (210,000 ) (77,000 ) (210,000 )
Additional paid-in capital (48,000 ) 0 (48,000 )
Noncontrolling interest in Syber 0 0 (95,600 )
Retained earnings (above) (927,400 ) (414,000 ) (927,400 )
Total liabilities and equities $ (1,545,400 ) $ (608,000 ) $ (1,698,400 )

i. With a tax rate of 40 percent, what income tax journal entry is recorded if the companies prepare a consolidated tax return?
j. With a tax rate of 40 percent, what income tax journal entry is recorded if these two companies prepare separate tax returns?

(If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Solutions

Expert Solution

i. Income tax journal entry, if the companies prepare a consolidated tax return
Income tax expenses $149,800
Income tax payable $149,800
Income tax expenses = Consolidated net income x tax rate
                                            = $374500 x 40%
                                            = $149800
j. Income tax journal entry, if the two companies prepare separate tax returns
Parson company
Income tax expenses $101,600
Income tax payable $101,600
Income tax expenses =(Net income - Income of syber) x tax rate
                                            = ($355800-$101800) x 40%
                                            = $254000 x 40%
                                            = $101600
Syber company
Income tax expenses $48,200
Income tax payable $48,200
Income tax expenses =(Net income-Amortization of trademarks-Profit on intercompany transaction) x tax rate
                                            = ($136000-$2500-$13000) x 40%
                                            = $120500 x 40%
                                            = $48200

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