Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent.
Assuming that separate income tax returns are being filed, what deferred income tax asset is created?

Question

Quizplus · Accepted Answer

The intercompany sale results in a temporary difference between the book basis and the tax basis of the inventory. The book basis is $80,000 and the tax basis is $100,000, resulting in a temporary difference of $20,000. Since Dean owns 90 percent of Ralph, only 90 percent of the temporary difference is allocated to Dean. Therefore, the deferred tax asset is calculated as follows: 
Temporary difference x tax rate x 90% = $20,000 x 30% x 90% = $1,800.

Dean, Inc Owns 90 Percent of Ralph, Inc