Calculate The Consolidated Taxable Income And T

Calculate the consolidated taxable income and consolidated tax liability of Greenacre

Part 1greenacre Corp And Its Subsidiary Blueacre Are Calendar Year Cor

PART 1 Greenacre Corp and its subsidiary Blueacre are calendar year corporations that keep their respective books on the accrual basis. The companies have taxable income of $300,000 and $350,000, respectively, for tax year 20x4 (before consolidation adjustments, elimination entries, and charitable deductions). The following transactions are included: Land was sold by Greenacre Corp to a third party for $90,000. The land was acquired from Blueacre in 20x2. Blueacre acquired the land in 20x0 for $52,000.

Greenacre Corp’s taxable income includes a $15,000 dividend Blueacre paid to Greenacre Corp. Greenacre Corp sold inventory to Blueacre in 20x5 for a realized $120,000 profit. The intercompany profit on the unsold inventory is $9,500. Greenacre Corp sold inventory to Blueacre in 20x6 for which deferred profit at the beginning of the year is $8,000. Blueacre sold this inventory to an external party.

Greenacre Corp sold additional inventory to Blueacre in 20x6 for a realized $155,000 profit. The intercompany profit on the unsold inventory is $7,000. Greenacre Corp and Blueacre contribute $16,000 and $15,000 to charity, respectively. Directions: Calculate the consolidated taxable income and consolidated tax liability of Greenacre Corp and Blueacre for 20x6. Then calculate the basis of Greenacre Corp’s stock at the end of 20x6, assuming that it was $1,650,000 at the beginning of the year.

Paper For Above instruction

Calculate the consolidated taxable income and tax liability of Greenacre Corp and Blueacre, addressing intra-group transactions, intercompany profits, and eliminations, including the effects of the sale of land, inventory transactions, dividends, and charitable contributions. Additionally, determine the stock basis at year-end, considering transactions and income adjustments. Support all calculations with detailed explanations and appropriate accounting principles.

Introduction

The process of consolidating taxable incomes of parent and subsidiary corporations involves considering intra-group transactions, eliminations of intercompany profits, and adjustments for transactions that impact taxable income. This paper systematically calculates the consolidated taxable income and resultant tax liability for Greenacre and Blueacre for tax year 20x6. It also determines the ending stock basis for Greenacre, considering the beginning basis and all relevant adjustments based on transactions and income reported during the year.

Analysis of Individual Taxable Incomes

Initially, the individual taxable incomes are provided: Greenacre with $300,000 and Blueacre with $350,000. These figures are before any consolidation adjustments. To proceed, each component—intercompany transactions, land sale, inventory profits, and dividends—must be carefully analyzed.

Impact of Land Sale

Greenacre sold land to a third party for $90,000, originally acquired from Blueacre in 20x2, for $52,000. Since the sale occurred outside the group, the gain of $38,000 ($90,000 sale minus $52,000 basis) is recognized in Greenacre's taxable income, and no adjustment is needed for consolidation purposes beyond this recognition.

Dividend from Blueacre to Greenacre

The $15,000 dividend included in Greenacre's taxable income must be eliminated in consolidation because dividends between group members are not taxable at the group level. This adjustment reduces the consolidated taxable income accordingly.

Intra-group Inventory Transactions and Profits

Greenacre sold inventory to Blueacre with the following details:

• In 20x5, sale profit: $120,000; unrecognized profit on unsold inventory: $9,500.
• In 20x6, sale profit: $155,000; unrecognized profit on unsold inventory: $7,000.

Adjustments must eliminate these unrealized profits to avoid inflating taxable income. The unrecognized profits on unsold inventory represent profits realized by the seller but unrealized for tax purposes until inventory is sold externally.

Charitable Contributions

Greenacre and Blueacre contributed $16,000 and $15,000 respectively. These are deductible charitable expenses within limits, and they are included in taxable income calculations.

Consolidation Adjustments

To compute consolidated taxable income, we adjust the sum of individual incomes for: elimination of intercompany profits, dividends, and intercompany assets’ unrealized gains or losses. The key steps are:

1. Sum individual taxable incomes: $300,000 (Greenacre) + $350,000 (Blueacre) = $650,000.
2. Subtract dividend paid by Blueacre to Greenacre: $15,000. This is eliminated on consolidation.
3. Eliminate intercompany profits on inventory: the $9,500 profit from the 20x5 sale and the $7,000 profit from the 20x6 sale are unrealized until the inventory is sold externally. Adjust the taxable income to remove these amounts.
4. Account for land sale gain: in this case, the $38,000 gain recognized by Greenacre (sale to third party), is included in taxable income, so no further adjustment is necessary beyond recognizing the gain.
5. Adjust for charitable contributions: since charitable deductions are generally deductible, they are included in the individual incomes but are now consolidated, so no adjustment is needed for their deductibility—it’s a part of taxable income computation.

Calculations of Adjustments

1. Unrealized intercompany profits:

• 20x5 inventory profit adjustment: $9,500.
• 20x6 inventory profit adjustment: $7,000.

2. Total unrealized profits to eliminate: $9,500 + $7,000 = $16,500.

3. Adjusted total taxable income:

Consolidated taxable income = ($300,000 + $350,000) - $15,000 (dividends) - $16,500 (unrealized profit) + $38,000 (land gain) = $650,000 - $15,000 - $16,500 + $38,000 = $656,500.

Tax Liability Calculation

Assuming a flat corporate tax rate of 21%, the total tax liability on the consolidated taxable income is:

Tax Liability = 21% of $656,500 = $137,865.

Calculation of Stock Basis at Year-End

The beginning basis was $1,650,000. Adjustments during the year include the taxable income, less dividends received from Blueacre, and any other relevant adjustments such as gains or losses from transactions. The basis at year-end is:

Beginning basis: $1,650,000

+ Consolidated taxable income: +$656,500

- Dividends received from Blueacre: -$15,000

= Ending stock basis: $1,650,000 + $656,500 - $15,000 = $2,291,500

Conclusion

The consolidated taxable income for Greenacre and Blueacre for 20x6 is approximately $656,500, with a total tax liability of $137,865 at a 21% tax rate. The stock basis of Greenacre at year's end is estimated at $2,291,500, reflecting the addition of taxable income, repayment of dividends, and investment adjustments. These calculations provide a comprehensive view of the tax implications of intra-group transactions, the treatment of unrealized profits, and the overall financial effects on the corporation's tax position.

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