29 Jun Question 7. Dills Company purchased a
Question
7. Dills Company purchased an 80% interest in the common stock of Sarah Company for $860,000 on January 1, 20X7. The price was $90,000 in excess of the book value of the underlying equity, and the excess was attributed to a patent with a 10-year life.
During 20X9, Dills Company and Sarah Company reported the following internally generated income before tax:
……………………………..
Sales
Dills Co.
Sarah Co.
$
300,000
$120,000
Cost of goods sold………………….
(200,000)
(90,000)
Gain on machine…………………….
10,000
—
Expenses…………………………..
(40,000)
(20,000)
…………………..Incomebeforetax
$
70,000
$ 10,000
=========
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Sarah Company sold goods to Dills Company for $60,000. Dills Company had $30,000 of Sarah Company goods in its beginning inventory and $12,000 of Sarah Company’s goods in its ending inventory. Sarah Company sells goods to Dills Company at cost plus 20%.
Dills Company sold a new machine to Sarah Company on January 1, 20X9, for $40,000. The cost of the machine was $30,000. It has a 5-year life.
The firms file separate tax returns. Both are subject to a 30% tax rate. Dills Company receives an 80% dividend deduction.
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