P 10-11

[Tax] Computations and income statement (upstream sales)

Pam Corporation paid $1,155,000 cash for a 70 percent interest in Sun Corporation’s outstanding common stock on January 2, 2016, when the equity of Sun consisted of $1,000,000 common stock and

$600,000 retained earnings. The excess fair value is due to goodwill.

In December 2016, Sun sold inventory items to Pam at a gross profit of $100,000 (selling price

$240,000 and cost $140,000), and all these items were included in Pam’s inventory at December 31, 2016.

Sun paid dividends of $100,000 in 2016, and an 80 percent dividends-received deduction applies. A flat 34 percent income tax rate applies to both companies.

Separate pretax incomes of Pam and Sun for 2016 are as follows (in thousands):

Pam Sun 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 2016 income tax currently payable and income tax expense for Pam and Sun.

2. Calculate Pam’s income from Sun for 2016.

3. Prepare a consolidated income statement for Pam and Sun for 2016.