Problem 7-21 On January 1, 2013, Piranto acquires 90 percent of Slinton’s outsta
ID: 2601016 • Letter: P
Question
Problem 7-21
On January 1, 2013, Piranto acquires 90 percent of Slinton’s outstanding shares. Financial information for these two companies for the years of 2013 and 2014 follows:
Piranto Company:
2013
2014
Sales
$
(860,000)
$
(964,000)
Operating expenses
572,000
636,000
Unrealized gross profits as of end of year
(included in above figures)
(193,000)
(226,000)
Dividend income—Slinton Company
(13,500)
(31,500)
Slinton Company:
Sales
(263,000)
(325,000)
Operating expenses
158,000
164,000
Dividends paid
(15,000)
(35,000)
Assume that a tax rate of 40 percent is applicable to both companies.
a. On consolidated financial statements for 2014, what are the income tax expense and the income tax currently payable if Piranto and Slinton file a consolidated tax return as an affiliated group?
Income Tax Expense
Income Tax Payable
b. On consolidated financial statements for 2014, what are the income tax expense and income tax currently payable if they choose to file separate returns?
Income Tax Expense
Income Tax Payable
Problem 7-21
On January 1, 2013, Piranto acquires 90 percent of Slinton’s outstanding shares. Financial information for these two companies for the years of 2013 and 2014 follows:
Explanation / Answer
a) Calculation of Income tax expense and income tax payable (Amount in $)
No temporary differences exist in the this problem, the income tax expense would also be $182,400.
b) Calculation of income tax for Piranto seperate return (Amount in $)
The dividends would not be taxable because Slinton still meets the criteria to be a member of an affiliated group.
Calculation of income tax for Slinton seperate return (Amount in $)
Consolidated Sales (964,000+325,000) 1,289,000 Less: Consolidated operating expenses (636,000+164,000) (800,000) Net profit 489,000 Add: Gain realized in 2014 193,000 Less: Deferred gain (226,000) Taxable Income 456,000 Tax rate 40% Income tax payable-current ($456,000*40%) 182,400 Income tax expense 182,400