On January 1, 20X8, Gulfstream Corporation acquired 40 percent of the voting shares of Hunter Company for $65,000. Hunter reported net income of $45,000 and paid dividends of $10,000 in 20X8. Gulfstream reported operating income of $50,000 for the year. There is 80 percent exemption of intercompany dividends and the effective tax rate is 35 percent. Assume that the equity method is being used.
Based on the preceding information, what amount would Gulfstream report as net income (after taxes) for the year?
A) $49,240
B) $68,000
C) $64,000
D) $67,500

Question

Quizplus · Accepted Answer

Gulfstream's net income includes its operating income and its share of Hunter's net income, adjusted for taxes on intercompany dividends. Gulfstream's share of Hunter's net income is 40% of $45,000, which is $18,000. The taxable portion of the dividends received is 20% of $10,000, which is $2,000. The tax on this amount is 35% of $2,000, which is $700. Therefore, Gulfstream's net income is $50,000 (operating income) + $18,000 (share of Hunter's net income) - $700 (tax on dividends) = $67,300. However, the closest option is $49,240, which seems to be a mistake in the options provided.

On January 1, 20X8, Gulfstream Corporation Acquired 40 Percent of the Voting