Palmer Company owns a 25% interest in Sad, Incorporated, a domestic company. Sad had net income of $60,000 and paid dividends of $20,000. Palmer’s tax rate is 35%. For simplicity, assume that Sad’s undistributed earnings are Palmer’s only temporary timing difference. Assume Sad qualifies for the 80% dividend received deduction. Which of the following statements is correct?
A. The current tax liability is $700.
B. The current tax liability is $1,050.
C. Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred tax liability of $700.
D. Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred tax liability of $1,050.
Answer:C
Palmer Company owns a 25% interest in Sad, Incorporated, a domestic company. Sad had net income of $60,000 and paid dividends of $20,000. Palmer’s tax rate is 35%. For simplicity, assume that Sad’s undistributed earnings are Palmer’s only temporary timing difference. Assume Sad qualifies for the 80% dividend received deduction. Which of the following statements is correct?
A. The current tax liability is $700. B. The current tax liability is $1,050. C. Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred tax liability of $700. D. Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred tax liability of $1,050.