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 paid a $70,000 cash dividend during the current year, and Boxwood distributed $8,000. Boxwood sells inventory to Lake each period. Intra-entity gross profits of $23,000 were present in Lake's beginning inventory for the current year, and its ending inventory carried $37,500 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.

Answer 1

Explanation:

To determine the consolidated income for Lake and Boxwood, we'll need to go through the consolidation process. Here's how you can calculate the consolidated income for the current fiscal period:

Calculate the income of Lake and Boxwood before considering intra-entity transactions and dividends.

Eliminate the intra-entity gross profit from Lake's beginning and ending inventory.

Calculate the consolidated income after considering dividends and taxes.

Let's go step by step:

Step 1: Calculate the income for Lake and Boxwood before considering intra-entity transactions and dividends.

Lake's Income (before intra-entity transactions):

Let L be Lake's income.

L = Lake's reported income - Dividend received from Boxwood

L = Lake's reported income - $8,000 (dividend received from Boxwood)

Boxwood's Income (before intra-entity transactions):

Let B be Boxwood's income.

B = Boxwood's reported income - Dividend paid to Lake

B = Boxwood's reported income - $70,000 (dividend paid to Lake)

Step 2: Eliminate the intra-entity gross profit from Lake's beginning and ending inventory.

Beginning Inventory Gross Profit Elimination:

Lake had $23,000 in intra-entity gross profit in the beginning inventory, so this amount needs to be eliminated.

Ending Inventory Gross Profit Elimination:

Lake's ending inventory carried $37,500 in intra-entity gross profit, so this amount also needs to be eliminated.

Step 3: Calculate the consolidated income after considering dividends and taxes.

Consolidated Income (Income after eliminating intra-entity profits, considering dividends, and taxes):

Let C be the consolidated income.

C = (L - Eliminate beginning inventory profit) + (B - Dividend paid to Lake) - Eliminate ending inventory profit

C = (L - $23,000) + (B - $70,000) - $37,500

Now, you need to apply the effective tax rate to the consolidated income to calculate the net income:

Consolidated Net Income = C * (1 - Tax Rate)

Consolidated Net Income = C * (1 - 0.21)

Now you can plug in the values for L and B:

Consolidated Net Income = (L - $23,000) + (B - $70,000) - $37,500 * (1 - 0.21)

Plug in the values for L and B and calculate the consolidated net income.

Keep in mind that for a completely accurate calculation, you would need the specific income values for Lake and Boxwood. This is a general method for consolidation based on the information you provided.