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?

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

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

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