Dice Inc Owns 40% of the Outstanding Shares of Spalding Corp

question 81

Essay

Dice Inc. owns 40% of the outstanding shares of Spalding Corp., an investment accounted for by the equity method. During 2011, Dice earned operating income (not including income from its investment in Spalding) of $370,000. For this same period, Spalding reported net income of $160,000 and paid cash dividends of $60,000. Dice has an effective income tax rate of 35% and anticipates holding its investment in Spalding for an indefinite period.
Required:
(A.) What income tax expense journal entry would Dice Inc. record at the end of 2011?
(B.) If Dice expects to sell its interest in Spalding in the near future, how does that decision change the 2011 income tax expense journal entry?

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Definitions:

Average Total Cost

The total cost of production divided by the total quantity produced, representing the per-unit cost of production.

Long-Run Equilibrium

A state in which all factors of production and economic variables are in balance, with no external pressures forcing change.

Demand Decreases

A situation where the quantity of a product or service that consumers are willing to buy at a given price drops, often due to changes in preferences, income, or substitutes.

Industry Exit

The process or act of businesses leaving a particular market or industry, often due to unfavorable conditions or better opportunities elsewhere.