ExpertHard1 markMultiple Choice
CPA · Question 12 · Area 1: Financial Reporting
Company X is preparing its interim financial statements for the first quarter. The company expects to earn $200,000 pre-tax income each quarter. It has a permanent difference of $20,000 (tax-exempt income) expected for the full year. The statutory tax rate is 30%. No other temporary differences exist. What is the income tax expense for the first quarter?
Company X is preparing its interim financial statements for the first quarter. The company expects to earn $200,000 pre-tax income each quarter. It has a permanent difference of $20,000 (tax-exempt income) expected for the full year. The statutory tax rate is 30%. No other temporary differences exist. What is the income tax expense for the first quarter?
Answer options:
A.
$60,000
B.
$58,500
C.
$54,000
D.
$52,500
How to approach this question
Interim reporting uses the 'Annual Effective Tax Rate'. 1. Project full year pre-tax income. 2. Project full year tax expense. 3. Calculate Effective Rate = Tax / Pre-tax Income. 4. Apply this rate to the quarter's pre-tax income.
Full Answer
B.$58,500✓ Correct
B
Interim tax expense is based on the estimated annual effective tax rate. Annual Pre-tax = $800,000. Taxable = $780,000. Tax = $234,000. Effective Rate = 29.25%. Q1 Expense = $200,000 * 29.25% = $58,500.
Common mistakes
Applying the statutory rate directly to the quarter's income; deducting the full permanent difference from the quarter's income.
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