Q- Tarft uses the equity method to account for its 25% investment in Flame. During the year, Taft received dividends of $30,000 from Falme and recorded $180,000 as its equity in the earnings of Flame. All the undistributed earning of Flame will be distributed as dividens in future periods. The dividens received from Flame are eligible fro the 80% dividens received deduction. There are no other temporary differences. Enacted income tax rates are 30% for the current year and thereafter. In its Dec 31 balance sheet, what amount should Taft report for deferred incoem tax liability?

A-45,000

b-54,000

c-9000

d-10,800

Correct answer - C) $9000

I got 10,440 - what am I missing?? this is what I did-

Equity earnings are not taxable b/c not cash received.

Dividends are not included in earnings (it decreases the invest in Flame). dividends are included in taxable income but get a 80% DRD. so I only include 6000.

to calculate the taxable amount

I substracted (180,000) No income for tax purposes

Added 6000 - for the cash dividend income after the 80% DRD

I have 174,000 as DTL. However this equity income when I receive the dividens it will be subject to the 80% DRD so I

174,000 * 20% = 34,800 (which is the amount that will not be deductible only 80% of DRD)

34,800 * 30% = 10440 MY ANSWER. But the correct answer is 9000.

What I'm doing wrong?

thanks a lot!

I would do this question in the following way:-

Taxable Income                     Temporary Differences                  Financial Income

Dividends recd $30,000                                                                   Equity in earnings         

Less. 80% dividend                                                                        $180,000

Recd deduction (24,000)                                                                  less. 80% dividend

                                                                                                      Recd deduction                                                                                                              (144,000)                

Taxable              6,000                  --$30,000--                                      Taxable                                                                                                                                                                                                                                               $36,000

Income tax payable              Income Tax – deferred                   Income tax expense

30% of 6,000 = $1,800        30% of 30,000 = $9,000                $10,800

Note:- It is presumed that all undistributed earnings will ultimately be distributed to the investor at some future time. Thus, we apply dividend received deduction to it as well.

And, dividend received deduction is a permanent difference.

Hope it helps !

thanks so much divy, i'm still working on this. How did you get the 144,000?

don't go by the format above, wannabe ! While copying it from my word doc to this forum, it got little out of place!

$144,000 = 80% of $180,000

Temporary Differences is $30,000 only.

thanks a lot, divy. I think I got it :)

So i get 180,000 equity earnings for financial income

I only get 30,000 in cash dividend

so I have left 150,000 to be received but only 20% would be taxable

150,000 * 20% =  30,000 future taxable amount

so for this year I have 30,000*30% = 9000 as DTL

Please correct me if I"m wrong.

Again, thank so much divy!