Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financialaccounting earnings of $20,000 for that year. Assume that 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 dividendsreceived deduction)?

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Quizplus · Accepted Answer

Under the general rule of accounting for investments, Coop would record its share of Chicken's earnings as income and record any dividends received as a reduction of the investment account. Coop's share of Chicken's earnings would be $8,000 (40% x $20,000) and it would reduce its investment account by $10,000. The book-tax difference associated with the dividend distribution would be $2,000 unfavorable because Coop would record the $10,000 dividend as a reduction of its investment account for book purposes, but for tax purposes, it would be treated as dividend income and subject to taxation.

Coop Inc Owns 40% of Chicken Inc