_____ Pellax owns 100% of the outstanding common stock of Sellax, a foreign subsidiary located in a country having a 25% income tax rate and a 10% dividend withholding tax. For 2006, Sellax reported net income of $600,000 and paid dividends of $250,000. Pellax intends for Sellax's remaining earnings to be distributed as dividends in the near future. Pellax's income tax rate is 40%. How much should Pellax record on its books in 2006 for income tax expense pertaining to Sellax's 2006 earnings?
A) $ -0-
B) $25,000
C) $60,000
D) $95,000
E) $120,000

Question

Quizplus · Accepted Answer

Pellax should record income tax expense for the withholding tax on the dividends received and the tax on the remaining earnings. The withholding tax on the $250,000 dividend is $25,000 (10% of $250,000). The remaining earnings are $350,000 ($600,000 - $250,000), and the tax on these earnings is $95,000 (40% of $350,000 - 25% foreign tax credit). Total tax expense is $120,000 ($25,000 + $95,000).

_____ Pellax Owns 100% of the Outstanding Common Stock of Sellax