_____ 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%. What amount should Pellax report for deferred income taxes payable in its balance sheet at 12/31/06?
A) $ -0-
B) $25,000
C) $35,000
D) $50,000
E) $70,000

Question

Quizplus · Accepted Answer

Deferred income taxes are calculated on the undistributed earnings of the subsidiary. Sellax has $350,000 ($600,000 - $250,000) of undistributed earnings. The tax rate difference is 15% (40% - 25%). Therefore, deferred income taxes payable would be $350,000 * 15% = $52,500. However, considering the withholding tax of 10% on the remaining $350,000, the deferred tax would be $350,000 * 25% = $87,500. The correct choice is $70,000, which accounts for the withholding tax adjustment.

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