D is corrent. Under the equity method, North included revenue of $300,000 ($600,000 x 50%) in its book income. The dividends received of $100,000 ($200,000 x 50%) were reported as a reduction of the investment in Mill Corp. account. Taxable income, however, included the dividends but excluded the undistributed earnings. The total difference between book and taxable income is, therefore, $200,000. This entire amount will eventually be included in taxable income when distributed as dividends. Then, however, there would be an 80% DRD (permanent difference) of $160,000 ($200,000 x 80%). The remaining $40,000 is a temporary difference which should be reflected as a $12,000 increase in the deferred tax liability account ($40,000 x 30%).
A is incorrect. Under the equity method, North included revenue of $300,000 ($600,000 x 50%) in its book income. The dividends received of $100,000 ($200,000 x 50%) were reported as a reduction of the investment in Mill Corp. account. Taxable income, however, included the dividends but excluded the undistributed earnings. The total difference between book and taxable income is, therefore, $200,000. This entire amount will eventually be included in taxable income when distributed as dividends. Then, however, there would be an 80% DRD (permanent difference) of $160,000 ($200,000 x 80%). The remaining $40,000 is a temporary difference which should be reflected as a $12,000 increase in the deferred tax liability account ($40,000 x 30%).
A is incorrect. Under the equity method, North included revenue of $300,000 ($600,000 x 50%) in its book income. The dividends received of $100,000 ($200,000 x 50%) were reported as a reduction of the investment in Mill Corp. account. Taxable income, however, included the dividends but excluded the undistributed earnings. The total difference between book and taxable income is, therefore, $200,000. This entire amount will eventually be included in taxable income when distributed as dividends. Then, however, there would be an 80% DRD (permanent difference) of $160,000 ($200,000 x 80%). The remaining $40,000 is a temporary difference which should be reflected as a $12,000 increase in the deferred tax liability account ($40,000 x 30%).
A is incorrect. Under the equity method, North included revenue of $300,000 ($600,000 x 50%) in its book income. The dividends received of $100,000 ($200,000 x 50%) were reported as a reduction of the investment in Mill Corp. account. Taxable income, however, included the dividends but excluded the undistributed earnings. The total difference between book and taxable income is, therefore, $200,000. This entire amount will eventually be included in taxable income when distributed as dividends. Then, however, there would be an 80% DRD (permanent difference) of $160,000 ($200,000 x 80%). The remaining $40,000 is a temporary difference which should be reflected as a $12,000 increase in the deferred tax liability account ($40,000 x 30%).
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