On January 1, 2018, Youder Inc. bought 120,000 shares of Nopple Co. for $384,000, giving Youder 30% ownership and the ability to apply significant influence to the operating and financing decisions of Nopple. Youder anticipated holding this investment for an indefinite time. In making this acquisition, Youder paid an amount equal to the book value for these shares. The fair value of each asset and liability was the same as its book value. Dividends and income for Nopple for 2018 were as follows:Dividends declared and paid: 7,680 Income before income tax provision: 7,680Required:Assume a 40% income tax rate. Prepare all necessary journal entries for Youder for 2018 beginning at acquisition and ending at tax accrual.
What will be an ideal response?
Entry One - To record the acquisition of Nopple common stock:
| Investment in Noople Co. | $384,000 | |
| Cash | $384,000 | |
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| Entry Two - To record income for the year: 30% of $400,000, reported balance: | ||
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| Investment in Noople Co. | $120,000 | |
| Equity Income - Investment in Noople Co. | $120,000 | |
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| Entry Three - To record the collection of dividends from Nopple Co.: 120,000 shares × $.40 per share: | ||
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| Cash | $48,000 | |
| Investment in Noople Co. | $48,000 | |
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| Entry Four - To record income tax for the year: | ||
| ? | ||
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| Current income taxes must be paid by Youder on the twenty percent of dividends ($9,600 = 20% of $48,000) that is taxable now. This current liability is $3,840 ($9,600 at the 40% rate). Furthermore, a deferred income tax liability also exists. On Youder's accounting records, the Equity Income - Investment in Nopple Co. account balance exceeds its income tax basis by $72,000 which is the undistributed earnings: ($120,000 - $48,000). Since this difference will be erased by the payment of future dividends, the eighty percent dividends-received deduction is applicable ($57,600 = 80% of 72,000). Thus, future taxable income will be increased by $14,400 ($72,000 - $57,600). Based on an income tax rate of forty percent, the deferred income tax liability is $5,760. | ||
| ? | ||
| Income tax expense - current | 3,840 | |
| Income tax expense - deferred | 5,760 | |
| Income tax payable | 3,840 | |
| Deferred tax liability | 5,760 | |
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