[Anonymous]

Even with the explanation this problem does not make much sense to me. It may be because I forgot the equity method from previous chapters. Can somebody try their best to explain this in plain English?

Taft Corp uses the equity method to account for its 25% investment in Flame, Inc. During 20×1, 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 20×1 and thereafter.
In its December 31, 20X1, balance sheet, what amount should Taft report for deferred income tax liability?

Answer $9000

[lampy44]

The differences are arising because of a book and tax difference. Equity is going to be assigned to book when dividends are always temporary differences.

Therefore book = 180,000
Tax = 30,000

Since they have 25% equity and hold significant influence, you must account for the other portion you dont own (80% as stated in the problem)

Book = 180,000 – (180 x 80%) = 360
Tax = 30,000 – (30,000 x 80%) = (6,000)

Total temporary difference in taxable future is the sum of book and tax = 30,000

Now the future enacted tax rate is 30% so take the 30,000 x .3 = 9,000 DTL

Hope that helps!

[Anonymous]

@lampy44 “The differences are arising because of a book and tax difference. Equity is going to be assigned to book when dividends are always temporary differences.” This part doesn't make much sense to me. I must have forgotten the investments sections?

[waffle_house]

I always like to think of taxes as a cash basis. You'll always get taxed when you receive cash no matter if you recognized the revenue or not, or in some cases equity.

AUD - 80
BEC - 75
FAR - 84
REG - 76

Exams started Sep 2014 -Exams done Mar 2017

Texas CPA

I put in work, it was evident

[Lentilcounter]

I'm lost.

Book = 180,000 – (180 x 80%) = 36,000 not 360
Tax = 30,000 – (30,000 x 80%) = (6,000) – Why is this negative $6K

Total temporary difference in taxable future is the sum of book and tax = 30,000

How do you calculate the $30K which is the sum of book and tax

BEC = 79

AUD = 79

FAR = 84

REG = 86

Prayer + AICPA blueprints = my success

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Anonymous]

Not exactly sure how I've been studying non-stop since July and still unable to answer this question. Thankfully it is only one of the few.

[Juice23]

1. Book Income from equity investment = $180,000 – this will all be paid as a cash dividend in the future: “All the undistributed earnings of Flame will be distributed as dividends in future periods.”

2. Current Cash Income from Dividends = $30,000

3. Temporary Book/Tax Difference = $150,000 (because you will eventually receive cash dividend per #1)

4. Tax Rate = 30%

5. Book/Tax Difference x Tax Rate = $150,000 x .3 = $45,000 <–this would be your answer if it weren't for the dividends received reduction

6. Dividends received deduction means 80% reduction in tax for dividends received by corporations it in which it has an ownership stake (this is to avoid double or triple taxation)

7. $45,000 x 20% = $9,000 Deferred Tax Liability

AUD - NINJA in Training
BEC - NINJA in Training
FAR - 78
REG - NINJA in Training

BBA, MA, MA.

"Philosophy is a battle against the bewitchment of our intelligence by means of language." - Wittgenstein

[Author]

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