Question

Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book-tax difference to Coop associated with the dividend distribution (ignoring the dividends received deduction)?

Answer 1

The dividend for income tax is greater than the income as per the books, the difference is unfavourable and is $ 2000.

Step-by-step explanation:

Coop inc. must take into consideration $ 10000 dividend for tax purposes.

on the books, the income is = $20000*40%

= $ 8000

the difference = $ 10000 - $ 8000

= $ 2000

clearly, the dividend for income tax is greater than the income as per the books, the difference is unfavourable and is $ 2000.