Dotes, Inc. owns 40% of Abner Co. Dotes accounts for its investment using the eq

Question

Dotes, Inc. owns 40% of Abner Co. Dotes accounts for its investment using the equity method. Abner follows a policy of paying dividends equal to 30% of its income each year. During the current year, Abner reported net income of $216,000. Dotes has an effective income tax rate of 32%.

Required:

What journal entry would Dotes record at the end of the current year for income taxes relating to the investment in Abner? Assume the investment is to be held for an indefinite time and that all amounts are to be rounded to the nearest dollar.

Explanation / Answer

Books of Dotes Inc. Equity method of accounting of 40% investment in Abner Co. Current Year Abner Co. Net income Equity Investment in Abner Co. (Balance Sheet a/c) 86400 Investment Income (Income Statement a/c) 86400 (To accrue its 40% (216000*40%)share of Abner Co. income ) Cash/Dividends Receivable    (Current asset) 25920 Eqyity Investment in Abner Co.   (Balance Sheet a/c) 25920 (to reduce the carrying amount of the investment account by the 40% share of dividends) (216000*40%*30%) So, for income tax Income Tax expense      (Income statement a/c) 27648 Cash/Income tax payable (Current asset/Liability a/c) 27648 86400*32%

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