Consolidated Return Scenario: Company P purchased an 80% interest in Company S on January 1, 20X3, for $800,000. On the purchase date, Company S stockholders' equity was $800,000. Any excess of cost over book value was attributed to a patent with a 10-year remaining life. In 20X3, Company P reported internally generated net income before taxes of $150,000. Company S reported a net income before taxes of $70,000. The firms file a consolidated tax return at a 30% tax rate.
-Refer to the Separate Return scenario. The tax applicable to Company S's income is

Question

Quizplus · Accepted Answer

Under the Separate Return scenario, Company S's income tax liability would be $9,750 ($70,000 income x 30% tax rate). However, in the Consolidated Return scenario, the income of both companies is combined and taxed at the group level. The net income before taxes for the consolidated group is $220,000 ($150,000 from Company P and $70,000 from Company S). The tax liability for the consolidated group is $66,000 ($220,000 x 30% tax rate). Since the tax liability is at the group level, it is not necessary to determine the tax liability of each individual company. Therefore, the tax applicable to Company S's income is also $66,000 (consolidated group tax liability), and the correct answer is B.

Consolidated Return Scenario: Company P Purchased an 80% Interest in Company