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 Topic: Urgent help! D.R.D--defer tax ( Topic Closed)
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2010rockcpa
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| Posted: 04 Jul 2010 at 16:42 | IP Logged
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Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During 1992, Taft received dividends of $30,000 from Flame and recorded $180,000 as its equity in the earnings of Flame. Additional information follows:
• All the undistributed earnings of Flame will be distributed as dividends in future periods
The dividends received from Flame are eligible for the 80% dividends received deduction. There are no other temporary differences. Enacted income tax rates are 30% for 1992 and thereafter.
Taft elected early application of FASB Statement No. 109, Accounting for Income Taxes. In its December 31, 1992, balance sheet, what amount should Taft report for deferred income tax liability?
a. $9,000 b. $10,800 c. $45,000 d. $54,000
Correct A.
I know for tax purposes TI is 30,000-24000=6000
The answer calculate F/S TI as 180,000-144,000=36,000.
I don't understand why 144,000 is subtracted? 180K is equity in earnings under equity method, NOT DIVIDEND. why it has something to do with F/S TI. ??
Cant get my mind straight. Thanks!!
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Louky
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| Posted: 04 Jul 2010 at 17:54 | IP Logged
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OK, I'm not really sure about this, but here's what I think:
Taft's share of earnings for 1992 was $180,00, of which $30,000 was
distributed in the form of a cash dividend and is taxable now.
So that leaves $150,000 for later.
After the 80% DRD, ($150,000 - $120,000) = $30,000 will be taxed in the
future at 30% (as far as we know right now).
$30,000 * 30% = $9,000 deferred tax liability.
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bobthecpa
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| Posted: 05 Jul 2010 at 11:11 | IP Logged
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I think this question has been discussed before. If you search you might find a better explanation than mine.
180,000 x .8 = 144,000 = 80% Dividends Received Deduction of which is non-taxable
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bobthecpa
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| Posted: 05 Jul 2010 at 16:41 | IP Logged
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The 180,000 equity in earnings gets the 80% Dividends Rec'd Deduction because the parent company doesn't actually receive that amount for the period. The equity in earnings is simply a percentage of the parent's ownership in the subsidiary multiplied by the subsidiaries net income. It qualifies for the Div Rec'd Deduction because the parent will eventually receive the 180,000 in the form of dividend payments in the future (assuming the sub. pays out).
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