Ponte Corporation owns 25 percent of the voting shares of Scala Corporation.In 20X8,Scala reported net income of $120,000 and paid dividends of $30,000.Ponte uses the equity method to account for this investment.Ponte reported taxable income of $160,000 on its separate operations and has an effective tax rate of 40 percent.There is an 80 percent exemption on intercompany dividends.
-Based on the preceding information,income taxes payable for Ponte for the year 20X8 will be:
A)$67,000
B)$64,600
C)$64,000
D)$76,000

Question

Quizplus · Accepted Answer

To calculate income taxes payable for Ponte for the year 20X8, we need to follow the steps below: 
- First, we need to calculate the share of income from Scala Corporation using the equity method. 
  - Share of income = 25% x $120,000 = $30,000 
- Next, we need to add this share of income to Ponte's separate taxable income: 
  - Taxable income = $160,000 + $30,000 = $190,000 
- Then, we need to calculate the income tax on this taxable income: 
  - Income tax = $190,000 x 40% = $76,000 
- Finally, we need to apply the 80% exemption on intercompany dividends: 
  - Tax payable = $76,000 - ($30,000 x 80%) = $64,600

Therefore, the answer is B.

Ponte Corporation Owns 25 Percent of the Voting Shares of Scala