Worksheet, consolidated taxation, simple equity, inventory, fixed asset sale, later year. Refer to the preceding facts for Parson’s acquisition of Solar common stock. Parson uses the simple equity method to account for its investment in Solar. During 2017, Solar sells $40,000 worth of merchandise to Parson. As a result of these intercompany sales, Parson holds beginning inventory of $16,000 and ending inventory of $10,000 of merchandise acquired from Solar. At December 31, 2017, Parson owes Solar $8,000 from merchandise sales. Solar has a gross profit rate of 30%. During 2017, Parson sells $60,000 worth of merchandise to Solar. Solar holds $15,000 of this merchandise in its ending inventory. Solar owes $10,000 to Parson as a result of these intercompany sales. Parson has a gross profit rate of 40%.
On January 1, 2015, Parson sells equipment having a net book value of $50,000 to Solar for $80,000. The equipment has a 5-year useful life and is depreciated using the straight-line method.
On January 1, 2017, Solar sells equipment to Parson at a profit of $25,000. The equipment has a 5-year useful life and is depreciated using the straight-line method.
Neither company has provided for income tax. The companies qualify as an affiliated group and, thus, will file a consolidated tax return based on a 40% corporate tax rate. The original purchase is not a nontaxable exchange.
On December 31, 2017, Parson and Solar have the following trial balances:
1. Prepare a determination and distribution of excess schedule.
2. Prepare a consolidated worksheet for the year ended December 31, 2017. Include a provision for income tax and income distribution schedules.