Tax Effects of Different Transfer Prices During 2006, Perling Inc. sold inventory costing $100,000 to its 100%-owned British subsidiary. Sterling Inc., for $200,000. Sterling resold all of this inven¬

tory locally in 2006 for 300,000 pounds. For simplicity, assume that during 2006 one pound equalled one U.S. dollar.

Required 1. Calculate worldwide income tax in dollars. Assume a U.S. income tax rate of 40% and a British income tax rate of 50%.

2. Repeat requirement 1 using a transfer price of $250,000.

Problems P 8-1 Recording a Variety of Intercompany Transactions During 2006, Parr Inc. had the following transactions with Subb Inc., its 100%-owned subsidiary:

1. Parr lent Subb $50,000 on a noninterest-bearing basis.

2. Parr charged Subb management fees of $36,000.

3. On 5/1/06, Parr shipped to Subb inventory costing $128,000 at a billing price of $160,000. Of this inventory, Subb resold $145,000 worth for $220,000 by the end of 2006.

4. Subb declared dividends of $25,000.

5. Subb paid cash dividends of $20,000. The remaining $5,000 was paid on 1/4/07.

6. Parr charged Subb $15,000 for legal expenses incurred solely on behalf of Subb (a directly trace¬ able cost).

7. On 12/10/06, Parr shipped to Subb inventory costing $24,000 at a billing price of $30,000.

Subb received this inventory on 1/2/07.

8. On 12/31/06, Parr allocated 10% of its 2006 general and administrative expenses of $440,000 to Subb.

1. Prepare T-account analyses of the intercompany receivable and payable accounts for 2006.
2. Determine the amounts for the following accounts pertaining to the intercompany inventory transactions:
Account Parr Inc. Subb Inc.
Income Statement (2006):
Balance Sales Intercompany Cost Intercompany of .
Sheet sales (as .
sales cost of 12/31/06):
of .
sales .
Intercompany acquired inventory .
3. For the 5/1/06 intercompany inventory shipment, how much intercompany profit exists at yearend on the $15,000 portion that Subb still has on hand?