Question

On January 1, 2013, Piranto acquires 90 percent of Slinton’s outstanding shares. Financial information for these two companies for the years of 2013 and 2014 follows: Note: Parentheses indicate a credit balance.

		2013			2014
Piranto Company:
Sales	$	(683,000	)	$	(1,062,000	)
Operating expenses		446,000			594,000
Unrealized gross profits as of end of year        (included in above figures)		(169,000	)		(237,000	)
Dividend income—Slinton Company		(9,000	)		(40,500	)
Slinton Company:
Sales		(293,000	)		(359,000	)
Operating expenses		124,000			194,000
Dividends paid		(10,000	)		(45,000	)
Assume that a tax rate of 40 percent is applicable to both companies.    a. On consolidated financial statements for 2014, what are the income tax expense and the income tax currently payable if Piranto and Slinton file a consolidated tax return as an affiliated group? b. On consolidated financial statements for 2014, what are the income tax expense and income tax currently payable if they choose to file separate returns?

Answer 1

a. Calculation for Income Tax Expense And Tax Payable for 2014
Particular	Piranto Company	Slinton Company	Consolidated Income
Sales	$1,062,000	$359,000	$1,421,000
Less: Operating Expense	-$594,000	-$194,000	-$788,000
Net Income	$468,000	$165,000	$633,000
Add; Unrealised Gross profit for the year 2013			$169,000
Less: Unrealised Gross profit for the year 2014			-$237,000
Net Taxable Income			$565,000
Tax Rate			40%
Income tax Expense			$226,000
Income Tax Payable			$226,000
Note:
No Temporary Difference because they have Unrealized profit for Tax and Fiancial purpose.
The Dividend paid are not taxable due to 90 % holding by Piranto Company

b. Calculation for Income Tax Expense And Tax Payable for 2014
Particular	Piranto Company	Slinton Company
Sales	$1,062,000	$359,000
Less: Operating Expense	-$594,000	-$194,000
Net Income	$468,000	$165,000
Add; Unrealised Gross profit for the year 2013	$169,000
Less: Unrealised Gross profit for the year 2014	-$237,000
Net Taxable Income	$400,000	$165,000
Tax Rate	40%	40%
Income Tax Payable	$160,000	$66,000
Note:
Dividend would not be taxable because slinton stills meet the criteria to be member of an Affilated Group