Coop Inc. owns 40 percent of Chicken Inc. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book-tax difference to Coop associated with the dividend distribution (ignoring the dividends received deduction)?

Question

Quizplus · Accepted Answer

Coop Inc. owns 40% of Chicken Inc., which means it uses the equity method for accounting. Under this method, Coop recognizes its share of Chicken's earnings, which is 40% of $20,000, or $8,000. Coop receives a $10,000 dividend, which is more than its share of earnings, creating a $2,000 unfavorable book-tax difference.

Coop Inc Owns 40 Percent of Chicken Inc