Pear,Inc.owns 80 percent of Apple Corporation.During the current year,Apple reported net income of $400,000 and paid a dividend of $120,000.The income tax rate for each company is 40 percent and separate tax returns are prepared.What deferred income tax liability arising this year must be recognized in the consolidated balance sheet?

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The deferred income tax liability arises from the temporary difference due to the undistributed earnings of Apple Corporation. Pear, Inc. owns 80% of Apple, so it is responsible for 80% of the undistributed earnings. Apple's net income is $400,000, and it paid $120,000 in dividends, leaving $280,000 undistributed. Pear's share is 80% of $280,000, which is $224,000. The deferred tax liability is 40% of $224,000, which is $89,600. However, since Pear only recognizes its share of the deferred tax liability, it is 40% of 80% of the undistributed earnings, which is $7,680.

Pear,IncOwns 80 Percent of Apple Corporation