Question

Marc, Inc., owns 75% of SRS Company. During the current year, SRS reported net income of $415,000 but paid a total cash dividend of only $110,000. What deferred income tax liability must be recognized in the consolidated balance sheet? Assume the tax rate is 40 percent.

A. $25,380.
B. $18,300.
C. $22,140.
D. $41,340.

Answer 1

B) $18,300

Step-by-step explanation:

To determine the deferred income tax liability we must first find the undistributed earnings of SRS

undistributed earnings of SRS = total net income - dividends paid = $415,000 - $110,000 = $305,000

of the $305,000, 75% belongs to Marc, Inc. = $228,750

Marc, Inc., can deduct up to 80% of the distribution earnings = $228,750 x 80% = $183,000

So Marc's income = $228,750 - $183,000 = $45,750 x 40% tax rate = $18,300 deferred tax liability