Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc., all of which are domestic corporations. Information for the three companies for the year ending December 31, 2011 follows: What is Gamma's accrual-based income for 2011?
A) $76,000.
B) $80,000.
C) $96,000.
D) $100,000.
E) $104,000.

Question

Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc., all of which are domestic corporations. Information for the three companies for the year ending December 31, 2011 follows:  What is Gamma's accrual-based income for 2011?
A) $76,000. 
B) $80,000. 
C) $96,000. 
D) $100,000. 
E) $104,000.

Quizplus · Accepted Answer

Gamma's accrual-based income is its pre-tax income before the intercompany dividends paid to Beta. 
Gamma's pre-tax income = $150,000 - $30,000 = $120,000
Beta's share of Gamma's pre-tax income = 80% x $120,000 = $96,000
Since Beta owns 100% of Gamma, Beta would receive all of Gamma's after-tax income, and so Beta's dividends from Gamma would be $24,000 (80% x $30,000). Therefore, Gamma's accrual-based income for 2011 is $120,000 - $24,000 = $96,000.

Alpha Corporation Owns 100 Percent of Beta Company, and Beta