Smith Corporation owns only 25 percent of the voting stock of Jones Corporation, but exercises significant influence over its operating and financial policies. The tax effect of differences between taxable income and pretax accounting income attributable to undistributed earnings of Jones Corporation should be

Question

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When a company exercises significant influence over another company but does not have a controlling interest, the tax effect of differences between taxable income and pretax accounting income attributable to undistributed earnings of the investee company should be accounted for as a timing difference rather than a permanent difference. This is because the investee company's earnings will eventually be distributed to the investor company, which will then be subject to taxation. Therefore, the tax effect should be deferred until the earnings are actually distributed. The fact that Smith Corporation holds only 25 percent of the voting stock of Jones Corporation is not relevant in this case.

Smith Corporation Owns Only 25 Percent of the Voting Stock