Question

Marc, Inc., owns 70 percent of SRS Company. During the current year, SRS reported net income of $515,000 but paid a total cash dividend of only $105,000. What deferred income tax liability must be recognized in the consolidated balance sheet? Assume the tax rate is 40 percent.

Answer 1

The deferred income tax liability that must be recognized in the consolidated balance sheet is $186960.

Step-by-step explanation:

undistributed income = SRS reported net income - paid dividends

= $515,000 - $105,000

= $410000

share of Marc, inc = 70%×$410000 = $287000

taxable income = undistributed income + share of Marc, inc - non taxable portion

= $410000 + $287000 - 80%×287000

= $410000 + $287000 - $229600

= $467400

since the tax rate is 40%, the deferred income tax payable is

40%×$467400 = $186960

Therefore, the deferred income tax liability that must be recognized in the consolidated balance sheet is $186960.