River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements: Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%.
What was the amount of income tax expense that should have been assigned to Boat using the separate return method?

Question

River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:  Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%.
What was the amount of income tax expense that should have been assigned to Boat using the separate return method?

Quizplus · Accepted Answer

Parent Operating Income $600,000 × .30 = $180,000Sub Operating Income $120,000 × .30 = $36,000Total from Separate Returns = $216,000Sub's Income $36,000/Total from Separate Returns $216,000 = 16.67%Consolidated Income Tax $196,500 × .167 = $32,750

River Co Owned 80% of Boat Inc