Tower Company owns 85% of Hill Company. The two companies engaged in several intra-entity transactions. Each company's operating and dividend income for the current time period follow, as well as the effects of unrealized gains. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%. Under the separate return method, how much income tax expense will be assigned to Hill?

Question

Tower Company owns 85% of Hill Company. The two companies engaged in several intra-entity transactions. Each company's operating and dividend income for the current time period follow, as well as the effects of unrealized gains. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%.  Under the separate return method, how much income tax expense will be assigned to Hill?

Quizplus · Accepted Answer

Parent Operating Income $200,000 × .30 = $60,000Sub Operating Income $80,000 × .30 = $24,000Total from Separate Returns = $84,000Sub's Income $24,000/Total from Separate Returns $84,000 = 28.5%Consolidated Income Tax $73,500 × .285 = $21,000

Tower Company Owns 85% of Hill Company