A Parent Holding Company Sells Shares in Its Subsidiary Such

question 4

Multiple Choice

A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can't be consolidated.The parent receives annual dividends from the subsidiary of $2,500,000.If the parent's marginal tax rate is 25% and if the exclusion on intercompany dividends is 50%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?

• A) 12.5%; $2,187,500
• B) 12.5%; $2,135,000
• C) 23.8%; $1,905,000
• D) 12.5%; $1,750,000
• E) 25.0%; $1,650,000

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Definitions:

Debit Memo

A document issued to adjust downwards the amount of money owed to a business by a customer or another business.

Journal Entries

Entries made in a journal documenting every financial transaction of a business and used as the first step in the accounting cycle.

Outstanding Checks

Checks that have been written and recorded in the payer's accounting records but have not yet been cashed or deposited by the payee.

Petty Cash

A modest sum of money maintained in reserve for small, unplanned costs.