Coop Incorporated owns 38 percent of Chicken Incorporated. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $18,000 in the current year. Chicken also reports financial accounting earnings of $28,000 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)?

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Quizplus · Accepted Answer

Coop owns 38% of Chicken, which means it uses the equity method for accounting. Under this method, Coop recognizes its share of Chicken's earnings, which is 38% of $28,000 = $10,640. Coop received $18,000 in dividends, creating a book-tax difference of $18,000 - $10,640 = $7,360. Since the dividend income exceeds the equity income, it is an unfavorable difference.

Coop Incorporated Owns 38 Percent of Chicken Incorporated