Canada Revenue Agency audited Plum essay solution
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages
Revenue Agency Audited Plum
On January 1, Year 4, Plum purchased 100% of the common shares of Slum. On December 31, Year 5,Slum purchased a machine for $168,000 from an external supplier. The machine had an estimated useful life of six years with no residual value. On December 31, Year 7, Plum purchased the machine from Slum for $200,000. The estimated remaining life at the time of the intercompany sale was four years. Plum pays income tax at the rate of 40%, whereas Slum is taxed at a rate of 30%.
When preparing the consolidated statements for Year 8, the controller and manager of accounting at Plum got into a heated debate as to the proper tax rate to use when eliminating the tax on the excess depreciation being taken by Plum. The controller thought that Slum’s tax rate should be used since Slum was the owner of this machine before the intercompany sale. The manager of accounting thought that Plum’s tax rate should be used since Plum was the actual company saving the tax at the rate of 40%.
In Year 9, the Canada Revenue Agency (CRA) audited Plum. It questioned the legitimacy of the intercompany transaction for the following reasons:
1. Was the selling price of $200,000 a fair reflection of market value? 2. Was Plum trying to gain a tax advantage by saving tax at a rate of 40% rather than the 30% saving that Slum used to realize?
Plum argued that, under the terms of the sale, CRA was better off because it received tax in Year 7 from the gain on the intercompany sale. Had the intercompany sale not occurred, it would not have received this tax.
(a) Determine the economic benefits, if any, to the consolidated entity from tax savings as a result of this intercompany transaction. Was it a good financial decision to undertake this transaction? Explain. (b) Page 442
Would your answer to (a) be any different if Plum owned only 60% of the common shares of Slum? Explain.
(c) Indicate what amount of tax savings related to depreciation expense would be reflected on the consolidated income statement under the alternatives suggested by the controller and manager, or other options you could suggest. Which method would you recommend? Explain your answer using basic accounting principles.
(a) The following amounts would be reported on the separate-entity financial statements:
Slum’s books Plum’s books
Years 4 + 5 Years 6 through 9
Amortization per year 168,000 / 6 = 28,000 200,000 / 4 = 50,000
Tax Rate 30% 40%
Tax savings per year 8,400 20,000
Gain on Sale at end of Year 5
Proceeds on sale 200,000
Carrying amount (168,000 x 4/6) 112,000
Gain on sale 88,000
Income tax (@30%) 26,400
The consolidated entity paid taxes of $26,400 at the end of Year 5 and gained a tax saving of $20,000 – $8,400 = $11,600 per year in Years 6 through 9. In nominal terms, it gained $11,600 x 4 – $26,400 = $20,000. In present value terms, it realized a return of nearly 30%. Therefore, the intercompany sale was a good financial decision.
(b) 40% of Slum’s after-tax gain on the sale of the machine would now be credited to the non-controlling interest i.e., ($88,000 – $26,400) x 40% = $24,640. Since this amount is greater than the overall tax saving of $20,000, Plum would realize an overall loss of $4,640 on the intercompany transaction. From Plum’s perspective, it is not a good financial decision.
(c) As a result of the intercompany transaction, amortization expense has increased from $28,000 to $50,000 per year. The extra $22,000 must be eliminated on consolidation so that only $28,000 of amortization expense is reported on the consolidated income statement. Income tax on the $22,000 must also be eliminated. Three alternatives are presented below for the elimination of tax on the excess amortization for each of Years 6 to 9:
Controller Manager Other
Excess amortization $22,000 $22,000 $22,000
Proposed tax rate 30% 40% 52.727%
Tax saving eliminated 6,600 8,800 11,600
Tax saving before adjustment 20,000 20,000 20,000
Tax saving after adjustment 13,400 11,600 8,400
The controller’s suggestion of 30% can be supported on the basis that the total tax eliminated over 4 years will be $26,400 which is equal to the tax paid by Slum when the gain was reported for tax purposes. This results in reporting a tax saving of $13,400 on amortization expense of $28,000 on the consolidated income statement. This is $5,000 per year more than Slum’s tax saving of $8,400 per year before it sold the machine to Plum. This fairly presents the actual situation because Plum is achieving an incremental tax benefit of $5,000 per year (i.e. $20,000 overall gain spread over 4 years) as a result of the intercompany transaction.
The other option can initially be supported on the basis that it would report a tax saving of $8,400 on amortization expense of $28,000 on the consolidated income statement which is consistent with what was reported before the intercompany transaction occurred. However, it would eliminate a total of $46,400 of tax over 4 years, which is $20,000 more than the tax paid on the original sale of the machine. Therefore, this alternative does not fairly present the true tax situation for the consolidated entity or the non-controlling interest. The manager’s suggestion would produce similar results as the other option.
- Case background
- Your role and requirements
QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points: Student failed to submit the final paper. 20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. 40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. 50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. Use of Sources (worth a maximum of 20% of the total points). Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper. 5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. 10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. 15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. 20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. Grammar (worth maximum of 20% of total points) Zero points: Student failed to submit the final paper. 5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors 10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors 15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. 20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. Structure of the Paper (worth 10% of total points) Zero points: Student failed to submit the final paper. 3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. 5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper 7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. 10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper.
GET THIS PROJECT NOW BY CLICKING ON THIS LINK TO PLACE THE ORDER
CLICK ON THE LINK HERE: https://essaysolver.com/orders/ordernow
You Can Also Place the Order In www.perfectacademic.com/orders/ordernow / www.essaysolver.com/orders/ordernow
Do You Have Any Other Essay/Assignment/Class Project/Homework Related to this? Click Here Now [CLICK ME] and Have It Done by Our PhD Qualified Writers!!
Tired of getting an average grade in all your school assignments, projects, essays, and homework? Try us today for all your academic schoolwork needs. We are among the most trusted and recognized professional writing services in the market.
We provide unique, original and plagiarism-free high quality academic, homework, assignments and essay submissions for all our clients. At our company, we capitalize on producing A+ Grades for all our clients and also ensure that you have smooth academic progress in all your school term and semesters.
High-quality academic submissions, A 100% plagiarism-free submission, Meet even the most urgent deadlines, Provide our services to you at the most competitive rates in the market, Give you free revisions until you meet your desired grades and Provide you with 24/7 customer support service via calls or live chats.