Choice "D" is correct. Income before special deductions includes sales, dividends received and cost of sales. It excludes the dividends received deduction, which is a "special" deduction.
| |
|---|
| Sales | $ 500,000 |
| Cost of sales | (250,000) |
| Gross profit | 250,000 |
| Dividends received | 25,000 |
| Income before special deductions | $ 275,000 |
Choice "b" is incorrect. Cost of sales must be deducted.
Choice "c" is incorrect. Cost of sales must be deducted and 100%, not 80%, of the dividends received are included in income before special deductions.
Choice "a" is incorrect. The $25,000 dividend must be included in income before special deductions.
