Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year: Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return:

Question

Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year:  Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return:

Quizplus · Accepted Answer

To compute consolidated taxable income, we add up the separate taxable incomes of Wave and Surf, and then eliminate any intercompany transactions. Therefore, we have:

Wave's taxable income: $300,000
Surf's taxable income: $120,000
Elimination of intercompany transactions: None given in the problem, so we assume there are none.

Total consolidated taxable income: $420,000

However, since Wave owns 90% of Surf, we need to eliminate the portion of Surf's taxable income that belongs to the minority interest (non-controlling interest). This is computed as:

Minority interest = 10% x Surf's taxable income = 10% x $120,000 = $12,000

Therefore, the consolidated taxable income is:

Consolidated taxable income = Total taxable income - Minority interest
Consolidated taxable income = $420,000 - $12,000 = $408,000

The closest answer choice to $408,000 is B) $395,000. However, this is not the correct answer. We can see that $408,000 is higher than both Wave's and Surf's taxable incomes, so the correct answer must be higher than either of those amounts. Therefore, the correct answer is B) $395,000.

Wave Corporation Owns 90% of the Stock of Surf, Inc