COST ACCOUNTING W/CONNECT
6th Edition
ISBN: 9781264022021
Author: LANEN
Publisher: MCG
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Textbook Question
Chapter 15, Problem 42P
International Transfer Prices
Badger Air is an all-cargo airline that operates on four continents. Its headquarters are in the United States. It has two divisions, Cargo and Maintenance. Cargo Division flies cargo to and from international locations, but does not operate services between two points outside the United States. That is, the planes fly to and from the United States only. Badger Air also has a maintenance facility located in Hong Kong and schedules its planes in such a way that most maintenance can be done there. In addition to Badger aircraft, Maintenance Division also provides services to Asian passenger and cargo air companies.
All of the Cargo Division income is deemed to be earned in the United States. Income from the Maintenance Division is deemed to be earned in Hong Kong. Badger’s income deemed attributable to the United States is taxed at a 40 percent rate. Its income attributable to Hong Kong is taxed at a 25 percent rate. Last year, Maintenance Division had operating revenues of $26 million, excluding services performed for Cargo Division aircraft. Cargo Division revenues last year were $95 million.
Operating costs of Maintenance Division were $16 million last year and operating costs for the Cargo Division, before considering maintenance costs, totaled $47 million. No similar maintenance facilities in Hong Kong are available to Badger.
Recently, a maintenance facility opened in the Philippines. That facility proposed to Cargo Division that it could conduct the maintenance in the Philippines. The facility proposed a price of $22 million for the services that Maintenance Division in Hong Kong provided to Cargo Division. Badger management estimated that had the services been provided in United States, the costs for the year would have totaled $35 million. In its latest tax filing, Badger assigned the $35 million as the appropriate transfer price Cargo paid for the services from Maintenance. The U.S. tax authorities denied that expense and instead applied $22 million dollars as the appropriate transfer price.
Required
What is the difference in tax costs to Badger between the alternate transfer prices for maintenance services, that is, the difference between a transfer price of $22 million and $35 million?
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Exercise 15-31 (Algo) International Transfer Prices: Ethical Issues (LO 15-4)
Whitehill Chemicals has two operating divisions. Its Formulation Division in the United States mixes, processes, and tests basic
chemicals, and then ships them to Ireland, where the company's Commercial Division uses the chemicals to produce and sell various
products Operating expenses amount to $27.5 million in the U.S. and $79.5 million in Ireland exclusive of the costs of any goods
transferred from the U.S. Revenues in Ireland are $210 million.
If the chemicals were purchased from one of the company's Irish mixing divisions, the costs would be $40.5 million. However, if it had
been purchased from an independent U.S. supplier, the cost would be $53.5 million. The marginal income tax rate is 20 percent in the
U.S. and 12 percent in Ireland,
Required:
What is the company's total tax liability to both jurisdictions for each of the two alternative transfer pricing scenarios ($40.5 million and
$53.5 million)?…
ABC Ltd. ABC Ltd.’s principal business activity is the assembly of circuit boards. One of the key materials used is copper wiring, all of which is imported. As a cost cutting measure, a contract with a new overseas supplier was signed, and all of the company’s copper wiring is now supplied under this contract. Purchases are denominated in a foreign currency, but the company does not use forward exchange contracts in relation to its imports of copper wiring. The company has two production facilities, one of which produces goods for the export market, and the other produces goods for the domestic market. About half of its goods are exported, but the export market is suffering due to competition from cheaper producers overseas. Most domestic sales are made under contract with approximately 20 customers.
In October 2020, production was halted for a week at the production facility which supplies the domestic market. A number of customers had returned goods, claiming faults in the circuit…
Hanshaben
Chapter 15 Solutions
COST ACCOUNTING W/CONNECT
Ch. 15 - What is the purpose of a transfer price?Ch. 15 - Prob. 2RQCh. 15 - Prob. 3RQCh. 15 - What are the limitations of market-based transfer...Ch. 15 - Prob. 5RQCh. 15 - When would you advise a firm to use prices other...Ch. 15 - What is the basis for choosing between actual and...Ch. 15 - What are the advantages and disadvantages of a...Ch. 15 - Prob. 9RQCh. 15 - Why is transfer pricing important in tax...
Ch. 15 - Prob. 11RQCh. 15 - What should an effective transfer pricing system...Ch. 15 - Prob. 13CADQCh. 15 - Prob. 14CADQCh. 15 - Refer to the Business Application item, Transfer...Ch. 15 - Prob. 16CADQCh. 15 - Prob. 17CADQCh. 15 - In what ways is transfer pricing like cost...Ch. 15 - In Chapter 12, we discussed corporate cost...Ch. 15 - Prob. 20ECh. 15 - Prob. 21ECh. 15 - Apply Transfer Pricing Rules Best Practices, Inc.,...Ch. 15 - Prob. 23ECh. 15 - Prob. 24ECh. 15 - Evaluate Transfer Pricing System Southwest...Ch. 15 - Prob. 26ECh. 15 - Evaluate Transfer Pricing System Carmen Seville...Ch. 15 - Prob. 28ECh. 15 - Prob. 29ECh. 15 - Prob. 30ECh. 15 - Prob. 31ECh. 15 - Prob. 32ECh. 15 - Prob. 33ECh. 15 - Prob. 34ECh. 15 - Prob. 35ECh. 15 - Segment Reporting Leapin Larrys Pre-Owned Cars has...Ch. 15 - Segment Reporting Perth Corporation has two...Ch. 15 - Prob. 38PCh. 15 - Prob. 39PCh. 15 - Prob. 40PCh. 15 - International Transfer Prices Skane Shipping Ltd....Ch. 15 - International Transfer Prices Badger Air is an...Ch. 15 - Prob. 43PCh. 15 - Prob. 44PCh. 15 - Prob. 45PCh. 15 - Weaver, Inc., is a large consumer products...Ch. 15 - Western States Supply, Inc. (WSS), consists of...Ch. 15 - Prob. 48PCh. 15 - Midwest Entertainment has four operating...Ch. 15 - Prob. 50PCh. 15 - Mathes Corporation manufactures paper products....Ch. 15 - Refer to the data in Problem 15-51. At the end of...Ch. 15 - CHS is a large multidivision firm. One division,...Ch. 15 - Prob. 54PCh. 15 - Prob. 56IC
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What is Transfer Pricing for Small Businesses?; Author: Nomad Capitalist;https://www.youtube.com/watch?v=_Q6nN3s1Xjs;License: Standard Youtube License