[Rhea]

Here is this question on Deferred Tax Related to Business Investments confuses me:

Bart, Inc, a newly organized corporation, uses the equity method of accounting for its 30% investment in Rex Co. ‘s

common stock. During 2010,Rex paid dividends of 300,000 and reported the earnings of 900,000. In addition

-The dividends receiver from Rex are eligible for the 80% dividends received deductions.

-All the undistributed earnings of Rex will be distributed in future years

-There are no other temporary difference.

-Bar’s 2010 income tax rate is 30%

‘-The enacted income tax rate after 2010 is 25%

In bart’s december 31,2010 balance sheet, the deferred

income tax liability should be

a. 10,800

b. 9,000

c. 5,400

d. 4,500

Here Answer is “c”

Why do we take difference between the 270,000 and 90,000.

Does 180,000 represents undistributed earnings? and what is undistributed earnings of an equity investee?

Can anyone explain me this whole problem in Layman’s language?

***

Leer Corp.’s pretax income in 2006 was $100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows:

Depreciation in the financial statements was $8,000 more than tax depreciation.

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

Leer’s effective income tax rate was 30% in 2006. In its 2006 income statement, Leer should report a current provision for income taxes of

$26,400

$23,400

$21,900

$18,600

Here answer is 26,400.How to come up with this answer?

Help is highly appreciated.

Rhea
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