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Exercise 4-14 On January 1, 2014, Plenty Company purchased a 70% interest in the common stock of Set Company for $709,600, an amount $18,000 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, 2014, follow: 1/1/14 retained earnings Income from independent operations Dividends declared Set Company 185,000 121,000 (49,000) Plenty Company 886,000 443,000 (80,000) 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. Prepare the entry(s) needed at the end of 2014 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 worksheet only. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, sele "No Entry" for the account titles and enter o for the amounts.) (1) Plenty expects the undistributed income will be realized in the form of future dividends. The entry is recorded on the books of Plenty Account Titles and Explanation Debit Credit 18000 18000 1 (2) Plenty expects the undistributed income will be realized only when the stock is sold, in the form of capital gains. The entry is recorded on the he books of Set Account Titles and Explanation Debit Credit 18000 Exercise 4-14 On January 1, 2014, Plenty Company purchased a 70% interest in the common stock of Set Company for $709,600, an amount $18,000 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, 2014, follow: 1/1/14 retained earnings Income from independent operations Dividends declared Set Company 185,000 121,000 (49,000) Plenty Company 886,000 443,000 (80,000) 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. Prepare the entry(s) needed at the end of 2014 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 worksheet only. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, sele "No Entry" for the account titles and enter o for the amounts.) (1) Plenty expects the undistributed income will be realized in the form of future dividends. The entry is recorded on the books of Plenty Account Titles and Explanation Debit Credit 18000 18000 1 (2) Plenty expects the undistributed income will be realized only when the stock is sold, in the form of capital gains. The entry is recorded on the he books of Set Account Titles and Explanation Debit Credit 18000
