[LStevens225]

I am stuck on something. I’ve noticed in one question they take the Net Income from a sub minus the dividend THEN 80% of that. But in this question below they actually take the 80% of just the dividend…. Why? When do you take 80% the net of the investment vs. the dividends recevied (which makes more sense I’d think)

Leer Corp’s pretax income for year 1 was $100,000. The temp differences between amts reported in the F/S and tax return are:

Dep in the F/S was $8,000 more then tax depreciation

The equity method of accounting resulted in F/S income of $35,000. A $25,000 dividend was recevied during the year, which is eligible for the 80% of the dividends received deduction.

Tax rate is 30%. In year one I/S, What is the current provision for income taxes?

This explaination has 100,000+ 8,000 (Dep) -30,000 (35,000 – (20%+25,000) = Taxable Income 78,000

[Anonymous]

I think you're talking about two different things. If a Parent (P) company owns 80% of another company (S), then P will record changes to the “Investment in S” account by adding 80% of S's income and subtracting 80% of S's dividends. That is essentially the same as the first part of what you mentioned — net income of sub minus the dividends paid by sub, times 80%.

However, the question you posted is about book/tax differences and how to get to taxable income from book income. The equity method of accounting is going to be treated differently in book than in tax. In the question you posted, you're not trying to determine the amount to record in “Investment in S.” For the question you posted, you need to know how ACCOUNTING treats subsidiary income and dividends, and how TAX treats subsidiary income and dividends., and adjust accordingly to get to taxable income.

I don't know if that helped, but basically you're confusing two completely different topics

[Author]

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