Question

Ake paid a $90,000 cash dividend during the current year, and boxwood distributed $10,000. Boxwood sells inventory to Lake each period. Intra-entity gross profits of $18,000 were present in Lake's beginning inventory for the current year, and its ending inventory carried $32,000 in intra-entity gross profits. 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?

a) $11,400
b) $10,800
c) $9,450
d) $8,400

Answer 1

The total income tax expense on the consolidated income statement for this period is $6,720.

Step-by-step explanation:

To calculate the total income tax expense on a consolidated income statement, we need to consider the cash dividend paid by Ake and the distribution made by Boxwood, as well as the intra-entity gross profits carried in Lake's beginning and ending inventory.

First, we calculate the taxable income for Lake and Boxwood. Lake's taxable income will be its share of the intra-entity gross profits in its ending inventory, which is 60% of $32,000 or $19,200. Boxwood's taxable income will be the remaining 40% of $32,000 or $12,800.

Next, we calculate the income tax expense for Lake and Boxwood using the effective tax rate of 21%. Lake's income tax expense will be 21% of $19,200, which is $4,032. Boxwood's income tax expense will be 21% of $12,800, which is $2,688.

Finally, we sum up the income tax expenses for Lake and Boxwood to get the total income tax expense on the consolidated income statement. The total income tax expense is $4,032 + $2,688 = $6,720.