ParentCo owned 100% of SubCo for the entire year.ParentCo uses the accrual method of tax accounting,whereas SubCo uses the cash method.During the year,SubCo sold raw materials to ParentCo for $35,000 under a contract that requires no payment to SubCo until the following year.
Exclusive of this transaction,ParentCo had income for the year of $80,000,and SubCo had income of $50,000.The group's consolidated taxable income for the year was:
A)$165,000.
B)$130,000.
C)$95,000.
D)Some other amount.

Question

Quizplus · Accepted Answer

Since SubCo uses the cash method of accounting,it will not recognize the $35,000 of income for the materials sold to ParentCo until the next tax period (when payment is received).ParentCo's related deduction must also be deferred until the later year.The group's consolidated taxable income is $130,000,the sum of ParentCo's and SubCo's separate incomes.

ParentCo Owned 100% of SubCo for the Entire Year