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 share of Hunter's net income is 40% of $45,000, which is $18,000. Gulfstream's operating income is $50,000. The total income before taxes is $50,000 + $18,000 = $68,000. The dividends received are 40% of $10,000, which is $4,000, but only 20% of this is taxable due to the 80% exemption, so taxable dividends are $800. The tax on the taxable income ($68,000 + $800) is 35%, which is $24,560. Therefore, the net income after taxes is $68,800 - $24,560 = $49,240.

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