Pan Corporation paid $1,155,000 cash for a 70 percent interest in Sir Corporation's outstanding common stock on January 2, 2011, when the equity of Sir consisted of $1,000,000 common stock and $600,000 retained earnings. The excess fair value is due to goodwill.
In December 2011, Sir sold inventory items to Pan at a gross profit of $100,000 (selling price $240,000 and cost $140,000), and all these items were included in Pan's inventory at December 31, 2011.
Sir paid dividends of $100,000 in 2011, and an 80 percent dividends-received deduction is applicable. A flat 34 percent income tax rate is applicable to both companies.
Separate pretax incomes of Pan and Sir for 2011 are as follows (in thousands):
Pan Sir
Sales ........................... $8,000 ................. $2,000
Cost of sales .................. (4,000) ................ (1,100)
Operating expenses .......... (3,000) .................. (500)
Pretax income ................ $ 1,000 .................. $ 400
REQUIRED
1. Determine 2011 income tax currently payable and income tax expense for Pan and Sir.
2. Calculate Pan's income from Sir for 2011.
3. Prepare a consolidated income statement for Pan and Sir for 2011.