Question

On January 1, 2017, Abbey acquires 90 percent of Benjamin's outstanding shares. Financial information for these two companies for the years of 2017 and 2018 follows:

2017 2018
Abbey Company:
S ales $ (742,000 ) $ (994,000 )
Operating expenses 512,000 564,000
Intra-entity gross profits in ending
inventory (included in above figures) (185,000 ) (232,000 )
Dividend income—Benjamin Company (22,500 ) (27,000 )
Benjamin Company:
Sales (237,000 ) (279,000 )
Operating expenses 128,000 162,000
Dividends paid (25,000 ) (30,000 )
Assume that a tax rate of 40 percent is applicable to both companies.
a. On consolidated financial statements for 2018, what are the income tax expense and the income tax currently payable if Abbey and Benjamin file a consolidated tax return as an affiliated group?
b. On consolidated financial statements for 2018, what are the income tax expense and income tax currently payable if they choose to file separate returns?

Answer 1

To determine the share price of Babble, Inc., we must discount the expected dividend payments to their present values using the dividend discount model.

Step-by-step explanation:

Considering the case of Babble, Inc., the value of its shares can be calculated based on the expected dividends, as profits are paid out as dividends to shareholders.

We can use the dividend discount model (DDM) for valuation, which in its simplest form reflects the present value of the expected dividends.

Since Babble, Inc. will pay out dividends of $15 million, $20 million, and $25 million over the next two years and then be disbanded, we discount these future dividends to their present values.

The investor's expected rate of return, or discount rate, is not provided, so we cannot calculate the exact price per share without it. However, we can provide the formula for calculating the present value of each dividend:

Present Value of Dividend 1 = Dividend 1 / (1 + r)
Present Value of Dividend 2 = Dividend 2 / (1 + r)²
Present Value of Dividend 3 = Dividend 3 / (1 + r)³

Where 'r' is the discount rate, and we would sum these present values to get the total present value of all dividends. To find the price per share, we would then divide this sum by the total number of shares. Without the discount rate, we cannot provide the specific share price.

Answer 2

Abbey and Benjamin's 90% shares

a. Income tax expense for 2018 = $214,120

Income tax payable = $214,120

b. Income tax expense for 2018:

Abbey Benjamin

Income Tax Expense (40%) $172,000 $46,800

Income tax payable $172,000 $46,800

Step-by-step explanation:

a) Data and Calculations:

1. Abbey Company:

2017 2018

Sales $ (742,000) $ (994,000)

Operating expenses 512,000 564,000

Intra-entity gross profits in ending 230,000 430,000

inventory (included in above figures) (185,000 ) (232,000 )

Dividend income—Benjamin Company (22,500 ) (27,000 )

2. Benjamin Company:

2017 2018

Sales (237,000 ) (279,000 )

Operating expenses 128,000 162,000

Dividends paid (25,000 ) (30,000 )

3. Consolidated Statements

Abbey Benjamin Consolidated

Sales $ (994,000) $ (279,000 ) $ 1,245,100

Operating expenses 564,000 162,000 709,800

Intra-entity gross profits in ending 430,000 117,000 535,300

Income Tax Expense (40%) 172,000 46,800 214,120