On January 1, 2020, Penguin Corporation, the parent corporation of a consolidated group of corporations filing...

On January 1, 2020, Penguin Corporation, the parent corporation of a consolidated group of corporations filing a calendar year consolidated tax return, acquires all of the stock of Steeler corporation for $3 million. In 2020, Steeler Corporation earns $500,000 of taxable income, it earns $20,000 of tax-exempt interest income, it pays Penguin corporation a dividend of $400,000. Steeler pays Penguin an amount equal to its stand-alone income tax liability for 2020, computed at the statutory tax rate of 21%. Compute Penguin’s year-end 2020 tax basis in Steeler stock.

Solutions

Expert Solution

For a 80% or more owned domestic corporation, dividends are not included in the income if consolidated tax return is filled. However, the basis of the parent in the subsidiary is reduced by the amount of dividend received.

Thus the basis of Steeler's stock held by Penguin as at Dec 31, 2020 would be calculated as follows:

Beginning Basis	$ 3,000,000.00
Add: tax on subsidiary income	$ 105,000.00
Less: Dividend distribution	$ (400,000.00)
less: Tax libility distribution	$ (105,000.00)
Ending Basis	$ 2,600,000.00

For any clarification, please comment. Kindly Up Vote

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

Jupiter, Inc. is a U.S. corporation and the parent of a group of affiliated corporations. Some...

Jupiter, Inc. is a U.S. corporation and the parent of a group of affiliated corporations. Some of the Jupiter subsidiaries are incorporated in foreign countries. Jupiter decided to restructure its international operations for both economic and tax reasons. Jupiter also wanted to use its overseas earnings more effectively and avoid using cash from its U.S. operations to fund overseas expansion. In order to accomplish these goals, Jupiter issued multi-million dollar “advance agreements” to its foreign subsidiaries in exchange for existing...

Do parent corporations generally prefer to file consolidated tax returns with their subsidiaries as opposed to...

Do parent corporations generally prefer to file consolidated tax returns with their subsidiaries as opposed to filing separate returns? Why or why not?

On January 1, 2020, Holland Corporation paid $9 per share to a group of Zeeland Corporation...

On January 1, 2020, Holland Corporation paid $9 per share to a group of Zeeland Corporation shareholders to acquire 60,000 shares of Zeeland’s outstanding voting stock, representing a 60 percent ownership interest. The remaining 40,000 shares of Zeeland continued to trade in the market close to its recent average of $7.50 per share both before and after the acquisition by Holland. Zeeland’s acquisition date balance sheet follows: Current assets $ 14,100 Liabilities $ 213,500 Property and equipment (net) 308,100 Common...

On January 1, 2020, Holland Corporation paid $9 per share to a group of Zeeland Corporation...

On January 1, 2020, Holland Corporation paid $9 per share to a group of Zeeland Corporation shareholders to acquire 60,000 shares of Zeeland’s outstanding voting stock, representing a 60 percent ownership interest. The remaining 40,000 shares of Zeeland continued to trade in the market close to its recent average of $8.00 per share both before and after the acquisition by Holland. Zeeland’s acquisition date balance sheet follows: Current assets $ 14,200 Liabilities $ 215,000 Property and equipment (net) 328,200 Common...

1. Parent Ltd(P) and Sub Ltd(S) are a consolidated group for financial accounting purpose. Ignore GST...

1. Parent Ltd(P) and Sub Ltd(S) are a consolidated group for financial accounting purpose. Ignore GST in this question. Both companies use the perpetual inventory system. On the first day of the current year P bought $10,000 worth of inventory on credit. A few months later it sold $1000 of this inventory to S for $3000 on credit. By the end of the current year, S had sold 90% of this inventory to an outsider for $2100. Select the correct...

When an affiliated group filing a consolidated tax return acquires a new member who has never...

When an affiliated group filing a consolidated tax return acquires a new member who has never consented to the regulations, which of the following is true? A. A form 1122 must be filed by the newly acquired subsidiary. B. A new form 1122 must be filed by the common parent corporation. C. No consents are required to be filed after the initial consolidated return year. D. The entire group is required to submit a form 1122

Assume that a Parent company acquires an 80% interest in its Subsidiary on January 1, 2020....

Assume that a Parent company acquires an 80% interest in its Subsidiary on January 1, 2020. On January 1, 2020, the book value of net assets and the fair value of the identifiable net assets equaled the book value of identifiable net assets (i.e. there was no AAP or Goodwill). The parent uses the equity method to account for its investment in the subsidiary. On December 31, 2021, the Subsidiary company issued $1,000,000 (face) 6 percent, five-year bonds to an...

Parent acquired Subsidiary on January 1, 2020 at a price $450,000 in excess of book value....

Parent acquired Subsidiary on January 1, 2020 at a price $450,000 in excess of book value. Of that excess, $350,000 was allocated to an unrecorded patent with a 10-year life, with the remainder to goodwill. The parent uses the equity method to account for its investment in its subsidiary. In 2021, Subsidiary sold to Parent land having a book value of $90,000 for a total price of $244,000. Financial statements of the two companies for the year ended December 31,...

On January 1, 2020, Parent Company purchased 80% of the common stock of Subsidiary Company for...

On January 1, 2020, Parent Company purchased 80% of the common stock of Subsidiary Company for $320,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for Subsidiary Company were $50,000 and $10,000, respectively. Parent Company has used the simple equity method for recording the Subsidiary income and dividends. On January 1, 2020, the only tangible assets of Subsidiary that were undervalued were inventory and equipment....

On January 1, 2020, Caliber Corporation issued 9% bonds dated January 1, 2020, with a face...

On January 1, 2020, Caliber Corporation issued 9% bonds dated January 1, 2020, with a face amount of $10 million. The bonds mature in 2029 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid annually on December 31. 1. What is the amount of the annual interest payment? 2. What is the price of the bond on the issue date? (state method used) 3. Was the bond sold at a discount or...

Subjects