Reggie, Inc. owns 70% of Nancy Corporation. During the current year, Nancy reported operating income before tax of $100,000 and paid a dividend of $30,000. The income tax rate for both companies is 30%. What deferred income tax liability arising in the current year must be recognized in the consolidated balance sheet?

Question

Quizplus · Accepted Answer

The deferred income tax liability is calculated as the difference between the income tax expense reported by the subsidiary and the income tax expense that would have been reported if the subsidiary had been consolidated. In this case, the subsidiary reported operating income before tax of $100,000 and paid a dividend of $30,000. The income tax expense reported by the subsidiary is $100,000 x 30% = $30,000. The income tax expense that would have been reported if the subsidiary had been consolidated is $100,000 x 30% x 70% = $21,000. The deferred income tax liability is $30,000 - $21,000 = $9,000.