5. On January 1, 2015, Piper Corp. purchased 40% of the voting common stock of B

Question

5. On January 1, 2015, Piper Corp. purchased 40% of the voting common stock of Betz, Inc. and appropriately accounts for its investment by the equity method. During 2015, Betz reported earnings of $720,000 and paid dividends of $240,000. Piper assumes that all of Betz's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper's current enacted income tax rate is 25%. The increase in Piper's deferred income tax liability for this temporary difference is a. $144,000. b. $120,000. c. $ 86,400. d. $ 57,600.

Explanation / Answer

A deferred tax liability occurs when taxable income is smaller than the income reported on the income statements. This is a result of the accounting difference of certain income and expense accounts. This is only a temporary difference

The answer is B) $ 120,000

$ 720,000 - $ 240,000 = $ 480,000

$ 480,000 * 25% = $ 120,000

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