Denver Corporation owns 25 percent of the voting shares of Alamos Corporation. In 20X8, Alamos reported net income of $120,000 and paid dividends of $30,000. Denver uses the equity method to account for this investment. Denver reported taxable income of $160,000 on its separate operations and has an effective tax rate of 40 percent. There is an 80 percent exemption on intercompany dividends.
-Based on the preceding information,income taxes payable for Denver for the year 20X8 will be:
A) $67,000
B) $64,600
C) $64,000
D) $76,000

Question

Quizplus · Accepted Answer

Denver Corporation uses the equity method to account for its investment in Alamos Corporation, which means its portion of Alamos' net income is included in Denver's taxable income. Denver's share of Alamos' net income is $120,000 × 25% = $30,000.

Denver also received dividends from Alamos of $30,000 × 25% = $7,500, but 80% of this amount is exempt from taxes, so only $7,500 × 20% = $1,500 is included in Denver's taxable income.

Therefore, Denver's total taxable income is $160,000 + $30,000 + $1,500 = $191,500.

Denver's income tax payable is calculated as follows:
Taxable income × Tax rate = Income tax payable
$160,000 × 40% = $64,000 (from Denver's separate operations)
$30,000 × 25% × (1 - 80%) × 40% = $600 (from its share of Alamos' net income)
$1,500 × 40% = $600 (from the taxable portion of intercompany dividends)
Total income tax payable = $64,000 + $600 + $600 = $64,600.

Therefore, the correct answer is B) $64,600.

Denver Corporation Owns 25 Percent of the Voting Shares of Alamos