1 Chapter 8. Consolidations – Lecture C12-Chp-08-1A-Consol-Tax-Acctg- 2011.PPT Howard Godfrey,...

1

Chapter 8. Consolidations –

LectureC12-Chp-08-1A-Consol-Tax-Acctg-

2011.PPT

Howard Godfrey, Ph.D., CPAProfessor of Accounting

Copyright Howard Godfrey, 2012.

Controlled groups of corporations

1 Corp. tax rates in Section 11? 11 b 1

2 Rates for corps in controlled group? 1561 a 1

Exemption amounts, etc. are limited 1561 a 2+

3 Sched J, B-30-appendix. (Form 1120)

4 Three types of controlled groups 1563 a

5 Brother-sister corp. compute tax? 1563 a 2

6 Who may file a consolidated return?

Code

1501 - 03

Dad owns C Corp. in Charlotte. Daugher owns a corp

in Monroe, and one in Gastonia. Son owns a corp in

Concord & Salisbury. (5 corps.) No election is made.

Revenue of Dad's C corporation $200,000

Expense of Dad's C corporation ($170,000)

Taxable income $30,000

Tax 15%

25%

34%

39%

Dad owns C Corp. in Charlotte. Daugher owns a corp

in Monroe, and one in Gastonia. Son owns a corp in

Concord & Salisbury. (5 corps.) No election is made.

Revenue of Dad's C corporation $200,000

Expense of Dad's C corporation ($170,000)

Taxable income $30,000

Tax $10,000 15% $1,500

$5,000 25% $1,250

$5,000 34% $1,700

$10,000 39% $3,900

$8,350

5

Sue owns 100% of these corps.

Build, Inc Repair, Inc.

Revenue $800,000 $200,000 Expenses 750,000 170,000Tax. Income $50,000 $30,000 Type of controlled group? 1563.What is combined tax liability? $12,000 b. $15,000 c. $15,450

Controlled Corporations

6

Build Total Allocate Rate TaxLayer 1 $50,000 $25,000 15% $3,750Layer 2 $25,000 $12,500 25% $3,125Layer 3 $25,000 $12,500 34% $4,250Total $50,000 $11,125

RepairLayer 1 $50,000 $25,000 15% $3,750Layer 2 $25,000 $5,000 25% $1,250Layer 3 $25,000 $0 34% $0Total $30,000 $5,000Would you allocate differently?

7

Determine whether a group of

corporations is a brother-sister group.

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Brother-Sister Controlled Groups. -OLD A group of two or more corporations is a brother-sister controlled group if five or fewer individuals, trusts, or estates own (1) At least 80% of the voting power of all classes of voting stock (or at least 80% of the total value of the outstanding stock) of each corporation, and (2) more than 50% of the voting power of all classes of stock (or more than 50% of the total value of the outstanding stock) of each corporation, taking into account only the stock ownership that each person has that is common with respect to each corporation. A shareholder's common ownership is the percentage of stock the shareholder owns that is common or identical in each of the corporations.

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Brother-Sister Controlled Groups. A second definition of a brother-sister group is a broader definition. Under the 50% definition, five or fewer shareholders must satisfy only the 50% common ownership test described above. Where the 50% only definition applies, more corporations may be pulled into the controlled group than under the 50%-80% definition.

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Controlled groups must apportion lower tax rates to members of group

Parent-subsidiary group – 2 or more corporations with a common parent–Parent directly owns 80% of stock of at least one sub.

–80% or more of stock of additional subs must be jointly or separately owned of all other corporations by parent and subsidiaries

Brother-sister group–2 or more corps have 80% of more of each corp’s stock owned by 5 or few individuals and sum of lowest common ownership of each shareholder is 50% or more.

11

Brother-Sister-AJCA-1Unrelated Individuals A, B, C and D own some corporations in the percentages listed on the next slide.

Each corporation has taxable income of $50,000.

How is the income tax computed for each corporation?

12

Owners A B C DJames 20% 40% 15% 15%Carol 25% 10% 20% 20%Joan 20% 40% 40% 20%Wallace 10% 10% 20% 25%Total

Brother-Sister Controlled GroupsIdentify brother-sister corps given theindividual ownership percentages.

Corporations

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Owners A B C DJames 20% 40% 15% 15% 15%Carol 25% 10% 20% 20% 10%Joan 20% 40% 40% 20% 20%Wallace 10% 10% 20% 25% 10%Total 75% 100% 95% 80% 55%

Brother-Sister Controlled GroupsIdentify brother-sister corps given theindividual ownership percentages.

Corporations

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In preceding slide, Corps B, C, and D meet both the 80% test and the 50% test under old law.

Current law (e.g. tax rates) eliminates the 80% test for many purposes. See Corp. A on preceding slide.

Sec. 1563(a)(2) vs. 1563(f)(5)

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Crp-1 Crp-2 Crp-3 Crp-4 50%

A 20% 10% 5% 60%B 10% 20% 60% 5%C 10% 70% 35% 25%D 60% 10%

80% 100% 100% 100% 100%

Ownership by A, B, C, & D

Which are in a controlled group?They are individual stockholders

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Crp-1 Crp-2 Crp-3 Crp-4 50%

A 20% 10% 5% 60% 5%B 10% 20% 60% 5% 5%C 10% 70% 35% 25% 10%D 60% 10%

80% 100% 100% 100% 100% 20%

Ownership by A, B, C, & D

Which are in a controlled group?They are individual stockholders

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Brother-Sister-AJCA-3A brother-sister controlled group means two or more corporations if five or fewer persons who are individuals, estates or trusts own (or constructively own) stock possessing (1) at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total value of all stock, and…

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Brother-Sister-AJCA-4(2) more than 50 percent of percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of all stock, taking into account the stock ownership of each person only to the extent the stock ownership is identical with respect to each corporation.

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Brother-Sister-AJCA-5 – Reasons…

Committee is concerned that taxpayers may be able to obtain benefits, such as multiple lower-bracket corporate tax rates, through the use of corporations that are effectively under common control even though the 80% test of present law is not satisfied. Committee believes it is appropriate to eliminate the 80% test for purposes of the currently effective provisions under sec. 1561 (corporate tax brackets, the accumulated earnings credit, and the minimum tax.)

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Brother-Sister-AJCA-6Explanation of Provision

Under the provision, a brother-sister controlled group means two or more corporations if five or fewer persons who are individuals, estates or trusts own (or constructively own) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or more than 50 percent of the total value of all stock, taking into account the stock ownership of each person only to the extent the stock ownership is identical with respect to each corporation.

21


The provision applies only for purposes of section 1561, currently relating to corporate tax brackets, the accumulated earnings credit, and the minimum tax. The provision does not affect other Code sections or other provisions that utilize or refer to the section 1563 brother-sister corporation controlled group test for other purposes.

22

Ms. Investor owns all of thestock of four corporations. Each corp. has taxable income of $25,000 per year.How much is the total taxfor all four corps each year?

a. $15,000 b. $22,250c. $34,000 d. $25,000

Ms. Investor

Tax 15%

25%

34%

39%

Ms. Investor

Tax $50,000 15% $7,500

$25,000 25% $6,250

$25,000 34% $8,500

$0 39% $0

$22,250

25



26



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Election to Allocate Reduced Tax Rates.

A controlled group may elect to apportion the tax benefits of the 15%, 25% and 34% tax rates to the member corporations in any manner that it chooses.

If no special apportionment plan is elected, the $50,000, $25,000, and $9,925,000 amounts allocated to the 15%, 25%, and 34% tax rate brackets are divided equally among all the corporations in the group.

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Ms. Investor owns all of thestock of Corp A and Corp B. Corp A has taxable incomeof $50,000. Corp B has taxable income of zero.There is no election under Sec. 1561.What is the total tax forboth corporations?

a. $7,500 b. $11,125

Ms. Investor

Tax 15%

25%

34%

39%

Ms. Investor

Tax $25,000 15% $3,750

$12,500 25% $3,125

$12,500 34% $4,250

$0 39% $0

$11,125

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Combined Controlled Groups.

A controlled group is a group of three or more corporations that are members of the above groups where one is a parent corporation of a parent-subsidiary controlled group and a member of a brother-sister controlled group.

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Determine whether

a group of corps can file a

consolidated return.

Pg. 12

33

Source of Consolidated Return RulesCode Secs. 1501 through 1504 are the primary statutory provisions governing the filing of consolidated tax returns. The statute is very general and primarily defines the composition of affiliated groups that are eligible to elect to file a consolidated tax return. Regulations provide the guidance needed to file consolidated tax returns.

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II. Definition of an Affiliated Group 1. Only an affiliated group of corporations can elect to file a consolidated return. Stock ownership requirements are: (1) a parent must directly own stock having at least 80% of the total voting power of all classes of stock entitled to vote and at least 80% of the total value of all outstanding stock in at least one includible corporation; (2) for each other corp eligible to be included in the affiliated group, stock having at least 80% of the total voting power of all classes of stock entitled to vote and at least 80% of the total value of all outstanding stock must be owned directly by the parent & other group members

35

Shareholders Corp. A Corp. B Corp. CMr. Jones 60% 40%Ms. Hill 40% 60%Corp. B 80%

100% 100% 80%Which corporations are Brother-Sister?How many are in a controlled Group?

Corporations

Corporations A, B, and C each have only one class of stock.

Ownership is as follows

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Owns 90%

Owns 70%

Parent

Sub-1

Sub-2

37

Owns Owns 90%

Owns 70%

Parent

Sub-1

Sub-2

30%

38

Ted owns all stock of 2 corps.

Corp-1 Corp-2

Net income (loss) $60,000 ($70,000)

May they file consolidated return?

If corps will have this result in

future years, your suggestion? 8-8

Stock Basis adjustment

Parent buys 100% of sub stock for $130,000 (1-1-2012).

Year 1 tax return Parent Sub. Consol.

Revenue $700,000 $400,000 $1,100,000

Expenses ($500,000) ($300,000) ($800,000)

Net income $200,000 $100,000 $300,000

Dividends paid $0 $0 $0

On 1-1-2013, parent sells all sub stock for $240,000.

Parent's basis in sub stock on 1-1-2013?

Parent's gain on the sale?

Stock Basis adjustmentParent buys 100% of sub stock for $130,000 (1-1-2012).

Year 1 tax return Parent Sub. Consol.

Revenue $700,000 $400,000 $1,100,000

Expenses ($500,000) ($300,000) ($800,000)

Net income $200,000 $100,000 $300,000

Dividends paid $0 $0 $0

On 1-1-2013, parent sells all sub stock for $240,000.

Parent's basis in sub stock on 1-1-2013? $230,000

Parent's gain on the sale? $20,000

41

Comparison with Controlled Group Definition. There are three types of controlled groups: brother-sister groups, parent-subsidiary groups, and combined groups Brother-sister groups cannot file a consolidated tax return. Parent-subsidiary groups and the parent-subsidiary portion of combined controlled group can elect to file a consolidated tax return.Difference Between Definitions. Only affiliated groups can elect to file consolidated tax returns. Four differences between the definitions of Sec. 1504 and Sec. 1563 (parent-sub controlled group) do exist. These differences cause some members of a controlled group to be excluded from the affiliated group.

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Consolidated Tax Returns.

Most parent-subsidiary controlled groups are eligible to file a consolidated return. An election is made to file a consolidated tax return by combining all of the income and expenses of each member on a Form 1120. Each corporate member of the affiliated group must consent to the election.

For brother-sister corporations, the broader 50% only definition applies for limiting the reduced tax rates.

43

Advantages of ConsolidationsWhat advantages to you see on the next slide for filing a consolidated income tax return?

44

Parent Sub.

Sales $900,000 $600,000

Cost of Sales (400,000) (400,000)

Gross Profit 500,000 200,000

Operating Exp. (300,000) (100,000)

Net Op. Income 200,000 100,000

Char. Cont.-Actual ($40,000)

Advantages of Consolidations

45

Consolidated Returns Affiliated group – parent corporation must own directly 80% or more of subsidiary’s stock (by voting and value)

– Can include more than 2 corporations if 80% of stock owned by one or more corporations that are part of affiliated group

Consolidated return reports combined results of operations of all corporations in the group

– All subs must consent and must have or change to same tax year as parent.

46

Consolidated Net Income Affiliated corporations viewed as divisions of parent requiring modification for deferred intercompany transactions and intercompany dividends

Items subject to limitations and netting are determined on a consolidated basis.–Capital gains and losses–Section 1231 gains and losses–Charitable contributions deductions

47

Consolidated Tax Returns Advantages

–Intercompany dividends are eliminated from gross income

–Gains on intercompany transactions are eliminated

–Deductions subject to limitation may be allowed when consolidated

48

Consol. Returns Advantages- Cont’d

–Losses of one corporation can offset gains of another

–Income from one corporation can offset losses of another

–Limitations based on consolidated income permit greater use of deductions or credits

49

Parent Sub Total

Sales $900,000 $600,000

Cost of Sales (400,000) (400,000)

Gross Profit 500,000 200,000

Operating Exp. (300,000) (100,000)

Net Op. Income 200,000 100,000 300,000

Char. Cont.-Actual (40,000)What is Charitable Cont. Ded on separate return?

What is Charitable Cont. Ded on consol. return?

Advantages of Consolidated Tax Return

50

Parent Sub Total

Sales $900,000 $600,000

Cost of Sales (400,000) (400,000)

Gross Profit 500,000 200,000

Operating Exp. (300,000) (300,000)

Net Op. Income 200,000 (100,000) 100,000

Char. Cont.-Actual (40,000)What is Charitable Cont. Ded on separate return?

What is Charitable Cont. Ded on consol. return?

Advantages of Consolidated Tax Return

51

Parent Sub Consol.Gross Income-Sales 300,000 200,000

Interest income 17,000

MACRS Deprec. (22,000) (5,000)

Other Op. Expenses (200,000) (203,000)

Sec. 1231 gain 70,000

Capital Loss (80,000)

Subtotal 165,000 (88,000) 77,000

Consol. Tax Inc.

What is consolidated taxable income

a. $77,000 b. $87,000 c. $95,000 d. $165,000

Compute Consolidated Taxable Income

52

Intercompany TransactionsAn intercompany transaction takes place during a consolidated return year between corporations that are members of the same group immediately after the transaction.

Property Transactions. In general, gains and losses on intercompany transactions involving the sale or exchange of property between two group members are recognized in calculating the group member's separate taxable income. Recognized gain or loss (an intercompany item) is deferred until a corresponding item Corresponding items that can trigger the recognition of an intercompany item include sale of the property outside the group.

53

2005 Pcorp bought land at a cost of $702006 Pcorp sells the land to Scorp for $1002007 Scorp sells the land to Outsider for $110

How are gains reported after Consolidation Adj.

Pcorp S Corp Pcorp S Corpa $30 $10b $30 $10c $40d $40

See Reg. 1.1502-13

Intercompany Transactions - Parent-Sub.

2006 2007

54

2005 Pcorp bought land at a cost of $702006 Pcorp sells the land to Scorp for $1002007 Scorp sells the land to Outsider for $90

How are the gains reported after Consolidation Adj.

Pcorp S Corp Pcorp S Corpa $30 ($10)b $30 ($10)c $20d $20

See Reg. 1.1502-13

Intercompany Transactions - Parent-Sub.

2006 2007

55

Remainder of this file is optional review of some

important concepts already covered in this course- concepts that

often are now well understood

56

Reconciling taxable income and book

income.

Also, accounting for income taxes.

57

An accrual basis Big Manufacturing Corporation had federal taxable income of $20,000 during its first year of operations. In the computation of taxable income, the corporation made the appropriate adjustment related to its total entertainment expense of $2,000 for the year. Big is subject to the normal tax rates applicable to corporations, and does not qualify for credits. Do not consider any penalty for underpayment of estimated tax. What is the balance to be shown on line 8 of Schedule M-2 on Form 1120?a. $19,000 b. $18,000 c. $17,000 d. $16,000 e. None of these

58

Big Manufacturing Corp.See Preceding SlideBook Income ??Ent. Exp. Adj. ??Taxable Income $20,000Tax ??End. Ret. Earn. ??

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Big Manufacturing Corp.See Preceding SlideBook Income $19,000Ent. Exp. Adj. 1,000Taxable Income 20,000Tax 3,000End. Ret. Earn. $16,000

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For its year ending 12-31, 2006, AB-Inc.Reported:

Amount Tax. Income

Book income before tax 100,000$ 100,000$

Included in this $100,000 were:

Provision for state income tax 1,000

Interest on U.S. Bonds 6,000

Interest exp. on bank loan

buy U.S. Treasury Bonds 2,000

AB's taxable income for 2006

a. $96,000 b. $ 97,000 c. $100,000 d. $101,000 (CPA-90)

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For its year ending 12-31, 2006, AB-Inc.Reported:

Amount Tax. Income

Book income before tax $100,000 $100,000

Included in this $100,000:

Provision for state income tax $1,000

Interest on U.S. Bonds $6,000

Interest exp. on bank loan

buy U.S. Treasury Bonds $2,000

AB's taxable income for 2006 $100,000

a. $96,000 b. $ 97,000 c. $100,000 d. $101,000 (CPA-90)

62

For its year ending 12-31, 2006, Bard-Inc. Reported:

Info. Tax



State corp. income tax refunds 4,000

Life insurance - officer's death 15,000

Loss-stock bought for

investment in 1997 (20,000)

Bard's taxable income for 2006

a. $435,000 b. $451,000 c.$455,000 d.$470,000 (CPA-87)

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For its year ending 12-31, 2006, Bard-Inc. Reported:

Info. Tax



State corp. income tax refunds 4,000

Life insurance - officer's death 15,000 (15,000)

Loss-stock bought for

investment in 1997 (20,000) 20,000

Bard's taxable income for 2006 455,000$

a. $435,000 b. $451,000 c.$455,000 d.$470,000 (CPA-87)

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GAAP Tax Return

Recognize Recognizethis year later

Recognize Recognize later this year

Revenue

Expenses

Goals: GAAP vs. Income Tax.

65

GAAP Fin. Reports 2007 2008Revenue $800,000 $900,000Expenses 600,000 700,000Net Income $200,000 $200,000Tax Expense-25%Company defers reporting revenue of $200,000 until 2008 on tax return.

Tax Return 2007 2008

Revenue $600,000 $1,100,000Expenses 600,000 700,000Net Income $0 $400,000Tax Payable

Net income per books is as follows:

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GAAP Fin. Reports 2007 2008Revenue $800,000 $900,000Expenses 600,000 700,000Net Income $200,000 $200,000Tax Expense-25% $50,000 $50,000Company defers reporting revenue of $200,000 until 2008 on tax return.

Tax Return 2007 2008

Revenue $600,000 $1,100,000Expenses 600,000 700,000Net Income $0 $400,000Tax Payable $0 $100,000

Net income per books is as follows:

67

Enter Amounts for preceding slide

Accounts

Tax expense 50,000 50,000

Deferred tax 50,000 50,000

Tax payable 100,000

2007 2008

68

Tax Allocation Concepts

Deferred tax assetA deferred tax asset is the increase in tax refund or savings in future years as a result of deductible temporary differencesexisting at the end of the current year.

Deferred tax liabilityAmount that is recognized for deferred taxconsequences of temporary differences that will result in taxable amounts in future years.

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Bad Debts. Direct write-off for Tax PurposesAmounts in$Thousands GAAP Tax GAAP Tax

Sales $800 $800 $800 $800 Cost of Sales 500 500 500 500 Gross Margin 300 300 300 300 Bad Debts Expense 80 60 50 60 Total other expenses 100 100 120 120 Net Income Before Tax $120 $140 $130 $120

Assume income tax rate is 34%Amount of the deferred tax asset at 12-31-06?

Sales Co. (Co. started in 2005) [1]

2005 2006

Book TaxableYear Income Income

2005 $120,000 $140,0002006 130,000 120,000

Total 250,000 260,000

10,00034%

$3,400

Sales Co. [2]

DifferenceMarginal rate

Deferred Tax Asset

Realty Corp. Rental Income-Slide 1Realty Co. was organized on Jan-1, year 1. Realty bought a building on that date for $400,000, having an estimated 40‑year life with no salvage. The S/L depreciation method is used for tax & GAAP. Depreciation is $10,000 per year on the tax return and in the GAAP statements.Realty rented the building to IBM for 2 years at $20,000 per year. Rent of $40,000 was received on Jan-1, year 1. Realty’s income tax rate is 40%. Year 1 operations are described on the next slide.

GAAP TaxRent Revenue $20,000Cash Expenses (5,000)Depreciation Exp. (10,000)NIBT/Taxable Income 5,000Income Tax Rate 40%Income Tax ExpenseIncome Tax PaidNet Income

asset or liability at end of Yr 1?

Realty Corporation - Slide 2

What is the amount of the deferred tax

GAAP TaxRent Revenue $20,000 $40,000Cash Expenses (5,000) (5,000)Depreciation Exp. (10,000) (10,000)NIBT/Taxable Income 5,000 25,000Income Tax Rate 40% 40%Income Tax Expense 2,000Income Tax Paid 10,000Net Income $3,000

asset or liability at end of Yr 1?



GAAP TaxRent Revenue $20,000 $40,000Cash Expenses (5,000) (5,000)Depreciation Exp. (10,000) (10,000)NIBT/Taxable Income 5,000 25,000Income Tax Rate 40% 40%Income Tax Expense 2,000Income Tax Paid 10,000Net Income $3,000

asset or liability at end of Yr 1? 8,000



75

Turtle Co. Slide 1 of 3 Turtle Co. bought equipment on Jan-1 year 1, for $50,000. The equipment had an estimated 5‑year service life and no expected salvage value. Turtle uses the 200% double‑declining depreciation method. What is accumulated depreciation at the end of year 2? a. $30,000 b. $32,000 c. $39,200 d. $42,000

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Begin. Tax GAAP IncomeBook Deprec. Deprec. Excess Tax Tax

Year Value Exp. Exp. Deprec. Rate Benefit

Yr. 1 50,000 20,000 10,000 10,000 30% 3,000

Yr. 2 30,000 12,000 10,000 2,000 30% 600

Assume 30% income tax rate. Complete for Year 1.GAAP Expenses including depreciation total $60,000.

GAAP Tax

Revenue RevenueExpenses ExpensesNet Income before Tax Taxable IncomeIncome Tax Expense Tax DueNet Income

Answer?What is the deferred tax liability at the end of year 1?

Turtle Co. Tax Accounting. [2 of 3]

$100,000

Income

$100,00060,000

$40,000

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Begin. Tax GAAP IncomeBook Deprec. Deprec. Excess Tax Tax

Year Value Exp. Exp. Deprec. Rate Benefit

Yr. 1 50,000 20,000 10,000 10,000 30% 3,000

Yr. 2 30,000 12,000 10,000 2,000 30% 600

Assume 30% income tax rate. Complete for Year 1.GAAP Expenses including depreciation total $60,000.

GAAP Tax

Revenue RevenueExpenses ExpensesNet Income before Tax Taxable IncomeIncome Tax Expense Tax DueNet Income

Answer? $3,000What is the deferred tax liability at the end of year 1?

$9,000$12,000$28,000

Turtle Co. Tax Accounting. [3 of 3]

$100,00070,000

$30,000

Income

$100,00060,000

$40,000

Bug Co. Unearned Revenue [1 of 4]

Bug Co. will provide services to a customer over an 18-month period beginning 12-1-06. Customer will receive same service each month.Bug receives full $36,000 contract price 12-1-06. This collection is recorded as unearned income. Please enter this in the accounts on the next slide and in theT Accounts on the next following slide.How is this reported on Fin. Statements?

12-1 CashUnearned Revenue

12-31 Unearned RevenueEarned Revenue

Liabilities - CurrentUnearned revenue

Liabilities - Non-CurrentUnearned revenue

Bug. Co. Unearned Rev. [2 of 4]Journal Entries in December 2006

Balance Sheet - 12-31-06

12-1 Cash 36,000 Unearned Revenue 36,000

12-31 Unearned Revenue 2,000 Earned Revenue 2,000

Liabilities - CurrentUnearned revenue 24,000

Liabilities - Non-CurrentUnearned revenue 10,000

Bug Co. Unearned Rev. [3 of 4]Journal Entries in December 2006

Balance Sheet - 12-31-06

12-1 36,000

12-31 2,000 12-1 36,000

12-31 2,000

Bug Co. Unearned Rev. [4 of 4]

Accounts Payable

Other Assets

Unearned Revenue

Revenue Earned

Cash

Revenue and ExpenseExpenses

See previous & following Bug Co. Slides

Assuming the company starts operations on 12-1-06. The company had no revenue other than the revenue from this contract. The company has expenses of only $1,000 in December, 2006.

What will the income statement look like?

What will the company report as taxable income. (All income received in advance is generally subject to tax when received.) (40% tax bracket)

GAAP TAXRevenue $2,000 $36,000 Expenses 1,000 1,000 Net Income 1,000 Taxable Income $35,000 Income Tax Exp. $400 Income Tax Liab. $14,000

The difference is a tax asset.

Bug Company

Bug will show tax expense of $400but will pay income tax of $14,000

Income Tax Expense 400

Deferred Income Tax 13,600

Income Tax Payable 14,000

Income Tax Payable 14,000

Cash 14,000

Bug Company

Record Income Tax Expense

Pay Income Tax

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TheEnd

1 Chapter 8. Consolidations – Lecture C12-Chp-08-1A-Consol-Tax-Acctg- 2011.PPT Howard Godfrey,...

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