On January 1, 2017, Abbey acquires 90 percent of Benjamin\'s outstanding shares.
ID: 2559434 • Letter: O
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:
Assume that a tax rate of 35 percent is applicable to both companies.
A) 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?
B) On consolidated financial statements for 2018, what are the income tax expense and income tax currently payable if they choose to file separate returns?
A. Income Tax Expense--- __________
Income Tax Payable--- __________
B. Income Tax Expense--- __________
Income Tax Payable--- __________
2017 2018 Abbey Company: Sales $ (500,000 ) $ (700,000 ) Operating expenses 300,000 400,000 Intra-entity gross profits in ending inventory (included in above figures) (120,000 ) (150,000 ) Dividend income—Benjamin Company (18,000 ) (36,000 ) Benjamin Company: Sales (210,000 ) (270,000 ) Operating expenses 130,000 170,000 Dividends paid (20,000 ) (40,000 )Explanation / Answer
A.
Consolidated Statement of Profit or Loss for the year ended of Abbey Company
Particulars (Amount in $)
2017
2018
Sales
7,10,000
9,70,000
(-) Inter Company Transactions)
1,20,000
1,50,000
Other Income
18,000
36,000
Total Income
6,08,000
8,56,000
Less :-
Operating Expenses
4,30,000
5,70,000
(-) Inter Company Transactions
1,20,000
1,50,000
Profit/(Loss) before Tax
2,98,000
4,36,000
Tax Expense @35%
1,04,300
1,52,600
Profit/(Loss) after Tax
1,93,700
2,83,400
A.
2017
2018
Debit - Income Tax Expense
1,04,300
1,52,600
Credit - Income Tax Payable
-1,04,300
-1,52,600
B.
Statement of Profit or Loss for the year ending of Abbey
Particulars (Amount in $)
2017
2018
Sales
5,00,000
7,00,000
Other Income
18,000
36,000
Total Income
5,18,000
7,36,000
Less :-
Operating Expenses
3,00,000
4,00,000
Profit/(Loss) before Tax
2,18,000
3,36,000
Tax Expense @35%
76,300
1,17,600
Profit/(Loss) after Tax
1,41,700
2,18,400
B. Abey Compnay
2017
2018
Debit - Income Tax Expense
76,300
1,17,600
Credit - Income Tax Payable
-76,300
-1,17,600
Statement of Profit or Loss for the year ending of Benjamin
Particulars (Amount in $)
2017
2018
Sales
2,10,000
2,70,000
Other Income
-
-
Total Income
2,10,000
2,70,000
Less :-
Operating Expenses
1,30,000
1,70,000
Profit/(Loss) before Tax
80,000
1,00,000
Tax Expense @35%
28,000
35,000
Profit/(Loss) after Tax
52,000
65,000
Since dividend payable is based on Profit after tax and the same is not an expense for the company.
Its merely a distribution of profits to the shareholders for the year and the same is taxable in the hands of shareholders
B. Benjamin Compnay
2017
2018
Debit - Income Tax Expense
28,000
65,000
Credit - Income Tax Payable
-28,000
-65,000
Consolidated Statement of Profit or Loss for the year ended of Abbey Company
Particulars (Amount in $)
2017
2018
Sales
7,10,000
9,70,000
(-) Inter Company Transactions)
1,20,000
1,50,000
Other Income
18,000
36,000
Total Income
6,08,000
8,56,000
Less :-
Operating Expenses
4,30,000
5,70,000
(-) Inter Company Transactions
1,20,000
1,50,000
Profit/(Loss) before Tax
2,98,000
4,36,000
Tax Expense @35%
1,04,300
1,52,600
Profit/(Loss) after Tax
1,93,700
2,83,400
A.
2017
2018
Debit - Income Tax Expense
1,04,300
1,52,600
Credit - Income Tax Payable
-1,04,300
-1,52,600
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