Question

Corporation A receives a dividend from Corporation B. It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B's stock does A own?
A. A owns less than 20 percent of the stock of
B B.A owns at least 20 but not more than 50 percent of the stock of B
C. A owns more than 50 percent of the stock of B
D. Cannot be determined

Answer 1

Answer:

Option A. A owns less than 20 percent of the stock of Corporation B.

Explanation:

The reason is that the dividend is recognized as gross income for tax purposes which means the tax difference is zero, in the financial statement. When equity method is used where the shareholding is above 20%, there is a tax difference and when the shareholding is above 50%, the financial statements are consolidated. In this case, there is neither a tax difference and nor the financial statements are consolidated which mean the shareholding is below 20%.