Consider the following;

XCO pays $500,000 for a 30% interest in ZCO. XCO uses the equity method to account for this investment. At the end of the first year, ZCO has total earnings of $120,000 and has made total distributions with respect to its stock of $40,000.

A)Calculate the basis difference in the investment at the end of the first year and the underlying deferred tax related to it (assume 21% rate).

B)Discuss the criteria required to record the deferred taxes if it is a domestic investment and if it is a foreign investment.