Question

Mike Corporation, which owns stock in Red Corporation, had net operating income of $125,000 for the year. Red pays Mike a dividend of $100,000. Mike takes a dividends received deduction of $80,000. Which of the following statements is correct?

a. Pearl owns less than 20% of Opal Corporation.

b. None of the above

c. Pearl owns more than 80% of Opal Corporation.

d. Pearl owns 20% or more, but less than 80% of Opal Corporation.

Answer 1

Answer:

Option D : Pearl (Mike) owns 20% or more, but less than 80% of Opal (Red) Corporation.

Explanation:

If a corporation owns between 20% and 80% in another corporation and receives dividend, then the dividend received deduction is 80% of the dividend.  

Here, Mike received $100,000 as dividend mad takes a deduction of 80% , which is 80% of the amount received. Therefore, Mike must own more than 20% but less than 80% in red.

So the correct answer is option D.

Note : In the options, they have provided "Paul" and "Opal" for " Mike" and " Red" in the question respectively. That's an error of the options but is the answer is correct.