Marc, Inc., owns 70 percent of SRS Company. During the current year, SRS reported net income of $515,000 but paid a total cash dividend of only $105,000. What deferred income tax liability must be recognized in the consolidated balance sheet? Assume the tax rate is 40 percent.

The deferred income tax liability that must be recognized in the consolidated balance sheet is $186960.

Explanation:

undistributed income = SRS reported net income - paid dividends

= $515,000 - $105,000

= $410000

share of Marc, inc = 70%*$410000 = $287000

taxable income = undistributed income + share of Marc, inc - non taxable portion

= $410000 + $287000 - 80%*287000

= $410000 + $287000 - $229600

= $467400

since the tax rate is 40%, the deferred income tax payable is

40%*$467400 = $186960

Therefore, the deferred income tax liability that must be recognized in the consolidated balance sheet is $186960.