ParentCo owned 100% of SubCo for the entire year. ParentCo uses the accrual meth

Question

ParentCo owned 100% of SubCo for the entire year. ParentCo uses the accrual method of tax accounting, whereas SubCo uses the cash method. During the year, SubCo sold raw materials to ParentCo for $30,000 under a contract that requires no payment to SubCo until the following year. Exclusive of this transaction, ParentCo had income for the year of $35,000, and SubCo had income of $50,000. The group’s consolidated taxable income for the year was: Select one:

a. $115,000.

b. $ 85,000.

c. $ 80,000.

d. $150,000.

Explanation / Answer

While preparing the consolidated Financial Statements the method of taxation is followed which is being followed by the Parent Co. While consolidation the profit to sub co. due to parent co and vice versa is removed. Therefore the taxable income would be Income of Parent Co. 35000 Income of Subs. Co. 50000 Taxable Income 85000 The correct option is b. $ 85000

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