Question

On January 1, 2017, Abbey acquires 90 percent of Benjamin's outstanding shares. Financial information for these two companies for the years of 2017 and 2018 follows:

		2017			2018
Abbey Company:
Sales	$	(817,000	)	$	(1,086,000	)
Operating expenses		546,000			630,000
Intra-entity gross profits in ending inventory (included in above figures)		(175,000	)		(181,000	)
Dividend income—Benjamin Company		(22,500	)		(27,000	)
Benjamin Company:
Sales		(280,000	)		(386,000	)
Operating expenses		135,000			195,000
Dividends paid		(25,000	)		(30,000	)

Assume that a tax rate of 40 percent is applicable to both companies.

1. On consolidated financial statements for 2018, 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 2018, what are the income tax expense and income tax currently payable if they choose to file separate returns?

Answer 1

Answer:

a	Income tax expense	256,400
	Income tax payable	256,400
b	Income tax expense	256,400
	Income tax payable	258,800

Calculation

a.

Here Abbey and Benjamin file consolidated tax return. So the calculation will be:

Abbey income 2018 (sales less expenses)	456,000
Benjamin income 2018 (sales less expenses)	191,000
2017 deferred intra-entity gross profit	175,000
2018 deferred intra-entity gross profit	(181,000)
Taxable income	641,000
Tax rate	40%
Income tax payable-current	256,400

Abbey income 2018 = Sales - Expenses =   1,086,000 - 630,000 = 456,000

Benjamin income 2018 = 386,000 - 195,000 = 191,000

There are no temporary differences here. Hence the income tax expense will so be 256,400.

Dividend income is not considered as it is a consolidated return.

b.

Here Abbey and Benjamin file separate tax return. So the calculation will be:

Abbey's taxable income =456,000 as the intra-entity inventory gross profits can't be deferred

Dividends are not taxable as Benjamin meets the criteria to be the member of affiliated group.

Income taxes payable by Abbey = $456,000 × 40% = 182,400

Taxable income	456,000
Intra-entity gross profit taxed in 2017 although recognized in 2018	175,000
Intra-entity gross profit in inventory taxed in 2018	(181,000)
2018 net income subject to taxation	450,000
Tax rate	40%
Abbey's Income tax expense	180,000

Difference between the expense and the payable = 2,400, due to tax effect on net intra-entity gross profit.

Benjamin's Tax expense and payable = 191,000 * 40% = 76,400

Total income tax expense = 180,000 + 76,400 = 256,400

Total income tax payable = 182,400 + 76,400 = 258,800