Question

Bart, Inc., a newly organized corporation, uses the equity method of accounting for its 30% investment in Rex Co.'s common stock. During 20X5, Rex paid dividends of $300,000 and reported earnings of $900,000. In addition: The dividends received from Rex are eligible for the 80% dividends-received deduction. All the undistributed earnings of Rex will be distributed in future years. There are no other temporary differences. Bart's 20X5 income tax rate is 30%. The enacted income tax rate after 20X5 is 25%. In Bart's December 31, 20X5 balance sheet, the deferred income tax liability should be

Answer 1

Answer:

The right answer is "$9,000". A further explanation is given below.

Explanation:

The given values are:

Rex paid dividends,

= $300,000

Reported earnings,

= $900,000

Investment,

= 30%

Taxable rate applicable,

= 25%

Now,

Throughout the future years, the amount of dividends taxable will be:

= $(900,000 - 300,000)\times 30 \ percent$

= $180,000$ ($)

Dividends received deduction will be:

= $180,000\times 80 \ percent$

= $144,000$ ($)

then,

Net taxable dividend will be:

= $180,000-144,000$

= $36,000$

hence,

Deferred tax liability will be:

= $36,000\times 25 \ percent$

= $9,000$ ($)