_____ Pindax owns 100% of the outstanding common stock of Sindax, a foreign subsidiary located in a country having a 25% income tax rate and a 5% dividend withholding tax. For 2006, Sindax reported net income of $300,000 and paid dividends of $300,000. Pindax's income tax rate is 40%. How much should Pindax record on its books in 2006 for income tax expense pertaining to Sindax's 2006 earnings?
A) $ -0-
B) $5,000
C) $15,000
D) $45,000
E) $60,000

Question

Quizplus · Accepted Answer

Pindax should record $60,000 as income tax expense. Sindax's net income is $300,000, and with a 25% tax rate, the tax is $75,000. The dividend withholding tax is 5% of $300,000, which is $15,000. Pindax's tax rate is 40%, but it can claim a foreign tax credit for the $75,000 already paid, so the additional tax is $45,000 (40% of $300,000 - $75,000). Adding the withholding tax of $15,000, the total is $60,000.

_____ Pindax Owns 100% of the Outstanding Common Stock of Sindax