Advanced Accounting 11th Edition by Paul Fischer,William Tayler, Rita Cheng

Exercise 10

Company S is an 80% owned subsidiary of Company P. On January 1, 2011, Company P sells equipment to Company S at a $50,000 profit. Assume a 30% corporate tax rate and an 80% dividend exclusion. The equipment has a 5-year life. The question is, would taxes be paid on this profit and what adjustments (if needed) for the tax would be made, if:
a. Companies P and S are an ''affiliated firm'' and file a consolidated tax return?
b. Companies P and S are not an ''affiliated firm'' and file separate tax returns?