Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in 2016. Chicken also reports financial accounting 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 dividends received deduction)?

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Quizplus · Accepted Answer

Coop owns 40% of Chicken Inc., which means Coop's share of Chicken's earnings is $8,000 (40% of $20,000). However, Chicken only paid Coop a dividend of $10,000, so there is a book-tax difference of $2,000 unfavorable. This is because for tax purposes, dividends are only partially taxable (at a lower rate) while accounting rules require full recognition of the dividend.

Coop Inc Owns 40% of Chicken Inc