Question

arc, Inc., owns 70 percent of SRS Company. During the current year, SRS reported net income of $515,000 but paid a total cash dividend of only $105,000. What deferred income tax liability must be recognized in the consolidated balance sheet? Assume the tax rate is 40 percent.

Answer 1

Calculation of Deferred income tax liability:

Particulars	Amount
SRS reported net income	515,000
Less: Dividend paid	105,000
Undistributed income	410,000
Share of Marc. Inc (70% of 410,000)	287,000
Less: Non Taxable portion (80% of 287,00)	229,600
Taxable income	57,400
Tax rate	40%
Deferred income tax payable (40% of	22,960

Note:

Marc, Inc. owns 70% of SRS Company so; SRS Company is subsidiary of Marc Inc. As Marc Inc. is holding only 70% of holding which is less than 80% so, each company has to file separate tax returns and intra-entity dividend is taxed partially. If the ownership level is less than 80% then parent company has to pay tax on 20% of the dividend and the 80% of dividend is not taxable. Marc Inc. is liable to pay tax on the dividends received from SRS Company.

In addition to the tax paid on dividend received the parent company has to create deferred income tax liability on the subsidiary's income which is not declared as dividend because a temporary difference is created and eventually when subsidiary company declares dividend in the future to parent company tax payments has to be created by the parent company. So, Marc has to create deferred tax liability on the income which is not distributed as dividend by SRS Company.