P 10-16

[Tax] Computations (separate tax returns with goodwill, downstream inventory sales, and upstream land sale)

On January 3, 2016, Pam Corporation purchased a 90% interest in Sun Corporation at a price $120,000 in excess of book value and fair value. The excess is goodwill. During 2016, Pam sold inventory items to Sun for $100,000, and $15,000 in profit from the sale remained unrealized at year-end. Sun sold land to Pam during the year at a gain of $30,000.

384 CHAPTER 10 ADDITIONAL INFORMATION 1. The companies are an affiliated group for tax purposes.

2. Sun declared and paid dividends of $100,000 in 2016.

3. Pam and Sun file separate income tax returns, and a 34 percent tax rate is applicable to both companies.

4. Pam uses the complete equity method to account for its investment in Sun.

5. Pretax accounting incomes, excluding Pam’s income from Sun, are as follows (in thousands):

Pam Sun Sales $ 3,815 $ 2,000 Gain on land — 30 Cost of sales (2,200) (1,200)

Other expenses (1,000) (400)

Pretax accounting income $ 615 $ 430 REQuIRED: Calculate the following:

1. Sun’s net income 2. Pam’s income from Sun 3. Pam’s net income