Detailed Answer
(b) The deferred income tax liability is the result of the
undistributed earnings of an equity investee, which are expected
to be distributed as dividends in future periods. For accounting
purposes, investment revenue is $270,000 ($900,000 × 30%).
For tax purposes, dividend revenue is $90,000 ($300,000 ×
30%), which will be partially offset by the 80% dividends received
deduction. Because of this 80% deduction, the difference
($270,000 −$90,000 = $180,000) is partially a permanent difference
(80% × $180,000 = $144,000 which will never be subject to
taxes) and partially a temporary difference (20% × $180,000 =
$36,000 which will be taxable in future years). This future taxable
amount of $36,000 will become taxable after 2010, when the
expected tax rate is 25%. Therefore, the deferred tax liability is
$9,000 (25% × $36,000). The entry to record the liability is as
follows:
Income tax expense—deferred 9,000
Deferred tax liability 9,000