Chapter 8:
P and S Corporations have filed consolidated tax returns for several years. The group had no intercompany inventory sales before the cu
ent year (Year 1). P and S use the first-in, first-out (FIFO) inventory method.
1.) During Year 1, S sells 60,000 widgets to P, earning $6 per unit profit on the sale. Also, during Year 1, P sells 45,200 of these widgets to third parties for an additional per $4 unit profit. Thus, P's inventory at the end of Year 1 includes 14,800 of unsold widgets. During Year 2, S sells 65,000 widgets to P, earning $7 per unit profit on the sale. Also during Year 2, P sells to third parties 40,000 of these widgets and also sells the 14,800 widgets from beginning inventory, all for an additional $4 per unit profit. Thus, P's inventory at the end of Year 2 includes 25,000 widgets P purchased from S in Year 2. No intercompany inventory sales occur in Year 3. However, during Year 3, P sells all widgets in beginning inventory for an additional $5 per unit profit. In addition to these intercompany transactions, P incurs a $75,000 loss and S earns $350,000 of profit in each year from other business activities.
Requirement
What is the group's consolidated taxable income for each of Years 1, 2, and 3?
Compute the group's consolidated taxable income for Years 1, 2, and 3 using the worksheet format. (Use a parentheses or minus sign for any adjustments and eliminations reducing the consolidated taxable income.)
Consolidated taxable income
Adjustments and eliminations
S's separate reporting
P's separate reporting
Year 1
Consolidated taxable income
Adjustments and eliminations
S's separate reporting
P's separate reporting
Year 2
Consolidated taxable income
Adjustments and eliminations
S's separate reporting
P's separate reporting
Year 3
2.) P and S Corporations have filed consolidated tax returns for several years. In Year 1, P purchased land as an investment for $65,000. In Year 3, P sold the land to S for $110,000. S used the land for four years as additional parking space for its employees and made no improvements to the land. In Year 7, S sells the land to Z Corporation, an unrelated party, for $250,000. The sale's terms require Z to pay S $50,000 in each of Years 7 through 11. The terms also require Z to pay S interest at a rate acceptable to the IRS. Z pays all the required amounts. (Assume the installment method applies.)
Requirement a. What are the intercompany item, the co
esponding items, and the recomputed co
esponding items?
For each item, select the company that is affected, enter the amount, then select the character type and what year the shares were sold in. (Do not round intermediary calculations. Only round the amounts you input in the cell to the nearest dollar.)
Company
(P,S,Z)
Year land sold
(yr 1-11)
Amount
Characte
(Capital Gain, Loss, Ordinary Gain, Loss)
Intercompany item
$
Co
esponding items
Recomputed co
esponding items
Requirement b. In what year(s) does the consolidated group include P's gain or loss and S's gain or loss in its taxable income?
Begin by entering any gain or loss for P Corporation, then for S Corporation.
P has (a gain, a loss, no gain or loss) _____ in (Year 1-11) ____ in the amount of _____
that is included in consolidated taxable income.
S has (a gain, a loss, no gain or loss) _____ in (Year 1-11) ____ in the amount of _____
that is included in consolidated taxable income.
Requirement c. How does the consolidated group report the interest income?
A.
S and P share equally the interest income earned on the installment sale to Z and report it on their separate taxable income. The timing of the interest recognition depends on the accounting method that S and P use (e.g., cash or accrual). The interest income is an intercompany item because it pertains to an intercompany transaction, so it is included in consolidated taxable income when S and P reports it.
B.
P includes the income earned on the installment sale to Z in its separate reporting. The timing of the interest income recognition depends on the accounting method that P uses (e.g., cash or accrual). The interest income is not an intercompany item because it pertains to a transaction with a non-group member, so it is included in consolidated taxable income when P reports it.
C.
S includes the income earned on the installment sale to Z in its separate reporting. The timing of the interest income recognition depends on the accounting method that S uses (e.g., cash or accrual). The interest income is not an intercompany item because it pertains to a transaction with a non-group member, so it is included in consolidated taxable income when S reports it.
D.
S includes the income earned on the installment sale to P in its separate reporting. The timing of the interest income recognition depends on the accounting method that S uses (e.g., cash or accrual). The interest income is an intercompany item because it pertains to an intercompany transaction, so it is included in consolidated taxable income when S reports it.
3.) For which of the following tax-related matters can an affiliated group's parent corporation act as the group's agent?
a.
Consent by a subsidiary corporation to the filing of a consolidated tax return.
.
Changing a subsidiary corporation's accounting method.
c.
Co
esponding with the IRS during its audit regarding a subsidiary corporation's transaction that affects the group's consolidated taxable income.
d.
Requesting an extension of time to file a consolidated tax return.
Select the co
ect Answer:
A.
None of the tax-related matters allow an affiliated group's parent corporation to act as the group's agent because each entity is considered a standalone entity for tax-related matters such as those listed.
B.
Only a and c are tax-related matters that allow an affiliated group's parent corporation to act as the group's agent because the parent files the initial consent for allowing subsidiaries to file consolidated returns and they also work directly with the IRS in all co
espondence following that initial consenting return.
C.
All of the tax-related matters allow an affiliated group's parent corporation to act as the group's agent since once a subsidiary becomes 80% or more owned by a parent corporation, all tax-related matters must be answered through the parent corporation.
D.
Only b, c, and d are tax-related matters which the parent corporation can act as the group's agent. Each subsidiary corporation must first consent to participate in a consolidated return; thus giving the parent the right to act on their behalf for the other three actions.
4. P Corporation purchases 100% of S Corporation's stock for $8 million on January 1 of the cu
ent year. The corporations elect to file a consolidated tax return. During the cu
ent year, S reports $400,000 of taxable income and $45,000 of tax-exempt interest income, and it distributes a $500,000 dividend to P . Each corporation pays its portion of the consolidated tax liability. The corporate tax rate is 21 %.
Requirement
What is P's basis for its S stock at the end of the cu
ent year?
Begin by selecting the items needed to compute the basis for S's stock, then enter the values and compute the basis at December 31. (Enter amounts in dollars instead of in millions. Use a parentheses or minus sign for amounts decreasing the initial basis. If an input field is not used in the table, leave the input field empty; do not select a label or enter a zero.)
Items needed to compute basis
Values
Initial basis $8,000,000
Plus: Taxable Income $ 400,000
Tax Exempt Income $ 45,000
Minus: Federal Income Taxes $ ( )
Dividends $ (500,000)
Basis on December 31 $
Chapter 9:
1. Nick wishes to pass his business on to his children, Alicia and Velma, and gives each daughter a 5% partnership interest to begin getting them involved. Nick retains the remaining 90% interest. Neither daughter is employed by the partnership, which buys and manages real estate. Nick draws only a $55,000 guaranteed payment for his work for the partnership. Reasonable compensation for his services would be $100,000. The partnership reports ordinary income of $145,000 after deducting the guaranteed payment. Distributive shares for the three partners are tentatively reported as: Nick, $130,500; Alicia, $7,250; and Velma, $7,250.
What is the proper distributive share of income for each partner? (Assume that each daughter is a true owner of her partnership interest. Complete all input fields. Enter a "0" for any zero balances.)
The partnership's ordinary income is
.
Distributive share
Nick
Alicia
Velma
2. On May 31, six
others decided to form the Gatland Brothers Partnership to publish and print children's stories. The contributions of the
others and their partnership interests are listed below. They share the economic risk of loss from liabilities according to their partnership interests.
The following other information about the contributions may be of interest:
Requirement a. How much gain, loss, or income must each partner recognize as a result of the formation?
Identify the gain, loss, or income that each partner must recognize as a result of the formation, one partner at a time. (If no gain, loss, or income is recognized by a partner, enter a "0" in the amount column and leave