_____ Pilax owns 100% of the outstanding common stock of Silax, a foreign subsidiary located in a country having a 30% income tax rate and a 10% dividend withholding tax. For 2006, Silax reported net income of $1,400,000 and paid dividends of $560,000. Pilax intends for Silax's remaining 2006 earnings to be invested for an indefinite future period. Pilax's income tax rate is 40%. How much should Pilax record on its books in 2006 for income tax expense pertaining to Silax's 2006 earnings?
A) $ -0-
B) $24,000
C) $56,000
D) $80,000
E) $200,000

Question

Quizplus · Accepted Answer

Pilax should record $80,000 for income tax expense pertaining to Silax's 2006 earnings. This is calculated by taking the dividends paid ($560,000) and applying the 10% dividend withholding tax rate, which equals $56,000. Since Pilax intends for the remaining earnings to be reinvested indefinitely, no additional U.S. tax is due because of the deferral provision for foreign income. Therefore, the total tax expense recorded is just the withholding tax of $56,000, plus the income tax paid to the foreign country on the net income before dividends ($1,400,000 * 30% = $420,000). However, since the question only asks about the tax expense pertaining to the dividends, the correct answer is the withholding tax on the dividends, which is $56,000. My explanation mistakenly included the foreign income tax on net income, which should not be added to the withholding tax on dividends for this specific question's answer. The correct approach is to consider only the taxes directly associated with the dividends paid, which in this case, involves reevaluating the correct calculation solely based on the information provided and the question's specific requirements.

_____ Pilax Owns 100% of the Outstanding Common Stock of Silax