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 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 recognizes $10,000 in dividend income for tax purposes but only $8,000 of book income (40 percent of the $20,000 earnings of Chicken). Because taxable income is greater than book income, the difference is unfavorable.

Coop Inc Owns 40% of Chicken Inc