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%.
-What is the tax liability for the current year if consolidated tax returns are prepared?

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%. 
-What is the tax liability for the current year if consolidated tax returns are prepared?

Quizplus · Accepted Answer

- To compute the consolidated tax liability, we first need to compute the consolidated taxable income. This is done by adding up the taxable incomes of both companies and adjusting for intra-entity transactions. 
- Consolidated taxable income = (Tower's taxable income + Hill's taxable income) - (unrealized gain on intra-entity transaction) 
= ($450,000 + $150,000) - $30,000 
= $570,000 
- The tax liability is then computed by multiplying the consolidated taxable income by the overall tax rate of 30%. 
- Tax liability = $570,000 x 30% 
= $171,000 
- However, we also need to adjust for the tax liability attributable to Hill Company's minority interest. 
- Minority interest share of tax liability = Hill's taxable income x Hill's tax rate x (1 - consolidation%) 
= $150,000 x 30% x (1 - 85%) 
= $31,500 
- Therefore, the consolidated tax liability is $171,000 - $31,500 = $139,500. 
- This corresponds to answer choice D.

Tower Company Owns 85% of Hill Company