Lake acquired a controlling interest in Boxwood several years ago. During the current fiscal period, the two companies individually reported the following income (exclusive of any investment income):
Lake paid a $90,000 cash dividend during the current year and Boxwood distributed $10,000. Boxwood sells inventory to Lake each period. Unrealized intra-entity gross profits of $18,000 were present in Lake’s beginning inventory for the current year, and its ending inventory carried $32,000 in unrealized profits. View each of the following questions as an independent situation. The effective tax rate for both companies is 40 percent.
a. If Lake owns a 60 percent interest in Boxwood, what total income tax expense must be reported on a consolidated income statement for this period?
b. If Lake owns a 60 percent interest in Boxwood, what total amount of income taxes must be paid by these two companies for the current year?
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