Question

Lake acquired a controlling interest in Boxwood several years ago. During the current fiscal period, the two companies individually reported the following income (exclusive of any investment income):
Lake $ 363,000
Boxwood 120,000


Lake paid a $60,000 cash dividend during the current year, and Boxwood distributed $5,000.



Boxwood sells inventory to Lake each period. Intra-entity gross profits of $22,400 were present in Lake's beginning inventory for the current year, and its ending inventory carried $41,500 in intra-entity gross profits.



View each of the following questions as an independent situation. The effective tax rate for both companies is 21 percent.



If Lake owns a 60 percent interest in Boxwood, what total income tax expense must be reported on a consolidated income statement for this period? (Round the intermediate calculations and final answers to the nearest dollar amount.)

If Lake owns a 60 percent interest in Boxwood, what total amount of income taxes must be paid by these two companies for the current year? (Round the intermediate calculations and final answers to the nearest dollar amount.)

If Lake owns a 90 percent interest in Boxwood and a consolidated tax return is filed, what amount of income tax expense would be reported on a consolidated income statement for the year?

Answer 1

a) With Lake's 60% controlling interest in Boxwood, the total income tax expense reported on a consolidated income statement for this period is $99,023 ($471,540 x 21%).

b)  With Lake's 60% controlling interest in Boxwood, the total amount of income taxes payable for the current year is $101,400 ($363,000 + $120,000) x 21%.

c)  With Lake's 90% controlling interest in Boxwood, the amount of income tax expense to be reported on the consolidated income statement for the year is $97,820 ($465,810 x 21%).

What is controlling interest?

Controlling interest exists when a company or an individual owns more than 50% of the shareholdings of another company.  This gives the investor shareholder a majority voting share to influence decisions of the subsidiary company.

Data and Calculations:

                                    Lake        Boxwood

Income reported    $363,000    $120,000

Dividend paid             60,000          5,000

Dividend income          3,000 ($5,000 x 60%)

Increase in intra-entity gross profits = $19,100 ($41,500 - $22,400).

Excludable intra-entity gross profits = $11,460 ($19,100 x 60%).

Consolidated Income = $471,540 ($363,000 + $120,000 - $11,460)

Excludable intra-entity gross profits = $17,190 ($19,100 x 90%).

Consolidated Income = $465,810 ($363,000 + $120,000 - $17,190)

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