On January 1, 20X8, Gulfstream Corporation acquired 40 percent of the voting shares of Hunter Company for $65,000. Hunter reported net income of $45,000 and paid dividends of $10,000 in 20X8. Gulfstream reported operating income of $50,000 for the year. There is 80 percent exemption of intercompany dividends and the effective tax rate is 35 percent. Assume that the equity method is being used.
Based on the preceding information, what would Gulfstream report as income tax expense for the year?
A) $17,500
B) $18,760
C) $23,800
D) $22,540

Question

Quizplus · Accepted Answer

Gulfstream's taxable income includes its operating income and 20% of the dividends received from Hunter due to the 80% exemption. Taxable income = $50,000 + (20% of $10,000) = $52,000. Tax expense = $52,000 * 35% = $18,760.

On January 1, 20X8, Gulfstream Corporation Acquired 40 Percent of the Voting