Pet Instructional Programs Corp. (PIP) and its 89% owned subsidiary, Squeak Toys Ltd
(Squeak), join in filing consolidated returns for U.S. tax purposes.
On August 12, 2017, Squeak purchased new office furniture for $17,400, which Squeak
immediately placed into service in its business. On January 1, 2018, when the office furniture
had an adjusted basis of $7,457, Squeak sold the office furniture to PIP for $10,400. Although
PIP immediately placed the office furniture into service in 2018, PIP ended up selling the office
furniture to an unrelated purchaser on February 16, 2019. Under the terms of the sale, the
unrelated purchaser agreed to pay PIP 10% of whatever profit the purchaser reported in the
month of October for nine consecutive years, starting with October 2019. Accordingly, the
unrelated purchaser made its first payment to PIP of $1,700 on November 15, 2019.
Required (25 points): Explain what depreciation, gain, and/or loss PIP and Squeak would
include in their respective separate taxable incomes (i.e., taxable income after any adjustments
for intercompany transactions) for 2018 and 2019 with respect to the office furniture.
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