Question

White Company owns 60% of Cody Company. Separate tax returns are required. For 2017, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody declared total dividends of $25,000; $15,000 (60%) to White and $10,000 to the noncontrolling interest. White declared dividends of $180,000. The income tax rate for both companies is 30%.Compute Cody's undistributed earnings for 2018.A. $62,500.B. $125,000.C. $87,500.D. $100,000.E. $70,000.

Answer 1

Answer:

Option (A) is correct.

Explanation:

Cody's undistributed earnings for 2018:

Given that,

Pretax Income = $125,000

Income tax rate for both companies = 30%

Cody declared total dividends = $25,000

Tax = Pretax income × Tax rate

      = $125,000 × 30%

      = $37,500

Undistributed Earnings = Pretax Income - Tax - Dividends distributed

                                        = $125,000 - $37,500 - $25,000

                                        = $62,500