Question

State tax allocation problem

Beach Hut is based in Georgia and has stores in Florida. Georgia has a 3.8% corporate tax rate, Florida is 17%.

Because it is a seasonal operation, Beach Hut sells all merchandise at end of season for 40% of manufacturer’s list price to a discount jobber. There are no opening or closing inventories.

All merchandise is ordered by the Georgia office.

Financial reports show the following activity for 2017.

Purchases 14,000,000

Sales 21,000,000 (16,000,000in Georgia, 5,000,000 in Florida)

Expenses

Executive office rental 150,000

Executive salaries 300,000

Insurance (all properties) 42,000

Georgia stores

Rental 185,000

Utilities 40,000

Salary 160,000

Florida

Rental 27,000

Utilities 8,000

Salary 21,000

For tax reporting, Beach Hut allocates all common expenses based on sales.

Compute Georgia and Florida income based on the above

Answer 1

STATEMENT OF INCOME OF BEACH HUT
		Georgia		Florida		Total
Sales	(A)	1,60,00,000.00		50,00,000.00		2,10,00,000.00
Less : Cost of Goods sold
	Purchases	1,06,66,666.67	33,33,333.33			1,40,00,000.00
Direct Expenses	Rentals	1,85,000.00	27,000.00			2,12,000.00
	Utilities	40,000.00	8,000.00			48,000.00
	Salary	1,60,000.00	21,000.00			1,81,000.00
Allocated Expenses To be apporioned in Sales ratio 16:5)
Common Expenses	Executive Ofiice Rental	1,14,285.71	35,714.29			1,50,000.00
	Executive Salaries	2,28,571.43	71,428.57			3,00,000.00
	Insurance	32,000.00	10,000.00			42,000.00
Total	(B)	1,14,26,523.81	35,06,476.19			1,49,33,000.00
Net Profit before Corporate Tax (C )	(A)-(B)	45,73,476.19	14,93,523.81			60,67,000.00
Corporate Tax	at 3.8% & 17% of ( C )	1,73,792.10	2,53,899.05			4,27,691.14
Net Profit after Tax		43,99,684.10	12,39,624.76			56,39,308.86
Sales Ratio is		(16000000/21000000)*100	(5000000/21000000)*100
		16/21 5/21
Discount given on Manufacturer's list price is trade discount, hence not recorded in boooks of accounts
As Sales are made at a common discount rate, Purchase value is also allocated in Sales Ratio