Palmer Company Owns a 25% Interest in Sad,Incorporated,a Domestic Company

question 43

Multiple Choice

Palmer Company owns a 25% interest in Sad,Incorporated,a domestic company.Sad had net income of $60,000 and paid dividends of $20,000.Palmer's tax rate is 35%.For simplicity,assume that Sad's undistributed earnings are Palmer's only temporary timing difference.Assume Sad qualifies for the 80% dividend received deduction.Which of the following statements is correct?

• A)The current tax liability is $700.
• B)The current tax liability is $1,050.
• C)Under GAAP,Palmer provides for income taxes on Sad's undistributed earnings with a credit to deferred tax liability of $700.
• D)Under GAAP,Palmer provides for income taxes on Sad's undistributed earnings with a credit to deferred tax liability of $1,050.

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Definitions:

Takeover

The acquisition of one company by another, wherein the acquiring company gains control over the target company's operations and assets.

Incremental Cash Flows

The additional cash flow a company receives from undertaking a new project, considering only revenues and expenses directly related to the project.

Discount Rate

The interest rate used to determine the present value of future cash flows in discounted cash flow analysis.

Privately Owned

A business that is owned by private individuals or entities and not by the government or public investors.