Entries for Deferred Taxes from Undistributed Income, Cost and Equity On January 1, 2002, Plenty Company purchased a 70% interest in the common stock of Set Company for $650,000, an amount $20,000 in excess of the book value of equity acquired.
The excess relates to the understatement of Set Company’s land holdings.
Excerpts from both company’s financial statements for the year ended December 31, 2002, follow: LO6 Set Plenty Company Company 1/1/02 Retained Earnings 190,000 880,000 Income from Independent Operations 132,000 420,000 Dividends Declared (50,000) (88,000)
Set Company’s stockholders’ equity is composed of common stock and retained earnings only. Both companies file separate tax returns and the expected tax rate is 40%. The capital gains tax rate is 20% and there is an 80% dividend exclusion rate.
Required:
A. Prepare the entry(s) needed at the end of 2002 to report the income tax consequences of undistributed income assuming the use of the cost method, under each of the following assumptions. Indicate whether the entry is recorded on the books of Set, Plenty, or workpaper only.
(1) Plenty expects the undistributed income will be realized in the form of future dividends.
(2) Plenty expects the undistributed income will be realized only when the stock is sold, in the form of capital gains.
B. Prepare the entry(s) needed at the end of 2002 to report the income tax consequences of undistributed income assuming the use of the partial equity method, under each of the following assumptions. Indicate whether the entry is recorded on the books of Set, Plenty, or workpaper only.

(1) Plenty expects the undistributed income will be realized in the form of future dividends.
(2) Plenty expects the undistributed income will be realized only when the stock is sold, in the form of capital gains.
C. Prepare the entry(s) needed at the end of 2002 to report the income tax consequences of undistributed income assuming the use of the complete equity method, under each of the following assumptions. Indicate whether the entry is recorded on the books of Set, Plenty, or workpaper only.
(1) Plenty expects the undistributed income will be realized in the form of future dividends.
(2) Plenty expects the undistributed income will be realized only when the stock is sold, in the form of capital gains.