Shoyoroku - Case 18: Joshu's Dog [1]

A monk asked Joshu,
  "Does the dog have buddha-nature, or not?"
Joshu said,
  "It has" [U].
The monk said,
  "If it has it, why did it creep into that skin bag?"
Joshu said,
  "Because it does so knowingly."
Another monk asked,
  "Does the dog have buddha-nature, or not?"
Joshu said,
  "It has not" [Mu].
The monk said,
  "All living beings have buddha-nature [2]. Why doesn't the dog have any?"
Joshu said,
  "Because it is in its karma-consciousness."

[1]: see case 1 of Mumonkan: the Shoyoroku case presents a fuller text of
     the dialogue.
[2]: Quotation from the Nirvana Sutra 7, 25.