Reggie, Inc. owns 70 percent of Nancy Corporation. During the current year, Nancy reported earnings before tax of $100,000 and paid a dividend of $30,000. The income tax rate for both companies is 30 percent. What deferred income tax liability arising in the current year must be recognized in the consolidated balance sheet?

Question

Quizplus · Accepted Answer

The deferred income tax liability is calculated as the difference between the income tax expense recognized in the consolidated income statement and the income tax payable reported by the subsidiary. In this case, the income tax expense recognized in the consolidated income statement is $21,000 (30% x $70,000), and the income tax payable reported by the subsidiary is $22,680 (30% x $76,000). Therefore, the deferred income tax liability is $1,680 ($21,000 - $22,680).