[msgolds]

This question was in my Becker review.

Question CPA-00805

Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During the current year, 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 current and future periods.

In its December 31 balance sheet, what amount should Taft report for deferred income tax liability?

a. $9,000 b. $10,800 c. $45,000 d. $54,000.

The answer provided is $9,000, which is by multiplying the equity in earnings by the DRD percentage (180,000 – 180,000 x 80%), subtracting the portion of the tax dividend that would receive the DRD (30,000 – 30,000 x 80%) and multiplying the difference by the enacted tax rate. I’m confused… why would you multiply the equity in earnings by the DRD amount in order to get to the answer?

BEC - 90 PASSED
FAR - 84 PASSED
AUD - 93 PASSED
REG - 84 PASSED

I DID IT!!!!

Using Becker Self-Study

"If we were put here to carry a great weight, then the very things we hate are here to build those muscles."

[Anonymous]

I hope I'm about to say this right and not confuse both of us. The equity earnings are added to Taft Corps books for the year. They received dividends that were eligible for the DRD. The amount of Flame's earnings times the DRD rate is what Taft will eventually receive from Flame. They will get to take the DRD when they receive them. Since Flame reported $180,000 in income that they did not distribute in dividends then Taft will eventually have to pay tax on their portion of Flame's income less the DRD. Does this make sense or have I confused us both? Deferred taxes were never my strong suit but I try!

[Anonymous]

I hope I'm about to say this right and not confuse both of us. The equity earnings are added to Taft Corps books for the year. They received dividends that were eligible for the DRD. The amount of Flame's earnings times the DRD rate is what Taft will eventually receive from Flame. They will get to take the DRD when they receive them. Since Flame reported $180,000 in income that they did not distribute in dividends then Taft will eventually have to pay tax on their portion of Flame's income less the DRD. Does this make sense or have I confused us both? Deferred taxes were never my strong suit but I try!

[msgolds]

Kricket, thanks for your response. My co-worker explained it to me, and you were spot on. Since presumably, the earnings in equity will eventually be distributed to you, you treat the equity in earnings like an unreceived dividend, and the difference between financial earnings and taxable earnings as a deferred liability.

BEC - 90 PASSED
FAR - 84 PASSED
AUD - 93 PASSED
REG - 84 PASSED

I DID IT!!!!

Using Becker Self-Study

"If we were put here to carry a great weight, then the very things we hate are here to build those muscles."

[msgolds]

Kricket, thanks for your response. My co-worker explained it to me, and you were spot on. Since presumably, the earnings in equity will eventually be distributed to you, you treat the equity in earnings like an unreceived dividend, and the difference between financial earnings and taxable earnings as a deferred liability.

BEC - 90 PASSED
FAR - 84 PASSED
AUD - 93 PASSED
REG - 84 PASSED

I DID IT!!!!

Using Becker Self-Study

"If we were put here to carry a great weight, then the very things we hate are here to build those muscles."

[Anonymous]

Am reviewing for FAR and came across this question; had the same confusion as to why the DRD was being applied to the Equity in investment earnings, Googled the question which brought me straight here. I may dislike deferred taxes, but I LOVE THIS SITE!

[Anonymous]

Am reviewing for FAR and came across this question; had the same confusion as to why the DRD was being applied to the Equity in investment earnings, Googled the question which brought me straight here. I may dislike deferred taxes, but I LOVE THIS SITE!

[jahnesta8]

Sorry, old post, but figured I would add to the response for future help:

The 80% dividends received deduction is a permanent difference, that is why it must be subtracted to find the temporary taxable difference.

As annoying as presumptions are, we are too presume that the $150,000 remaining equity ($180,000 – $30,000 dividends already received) will be paid out in future dividends.

Therefore we must first subtract out the permanent differences, then subtract the amount recognized by both book and tax ($6,000) to get the future taxable amount of $30,000. Then multiply this by the future tax rate of 30%.

[jahnesta8]

Sorry, old post, but figured I would add to the response for future help:

The 80% dividends received deduction is a permanent difference, that is why it must be subtracted to find the temporary taxable difference.

As annoying as presumptions are, we are too presume that the $150,000 remaining equity ($180,000 – $30,000 dividends already received) will be paid out in future dividends.

Therefore we must first subtract out the permanent differences, then subtract the amount recognized by both book and tax ($6,000) to get the future taxable amount of $30,000. Then multiply this by the future tax rate of 30%.

[Author]

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