300697 Effective tax rate 3D Flashcards
Fern Co. has net income, before taxes, of $200,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers’ life insurance premiums where the company is the beneficiary. The tax rate for the current year is 30%. What is Fern’s effective tax rate?
31.5%
27.0%
28.5%
30.0%
Question #300697
The first step is to know the taxable income. Net income for accounting purposes before tax would be the starting point. Adjust this number up or down for nontaxable or nondeductible items.
The municipal interest income would be nontaxable, so this would be subtracted from accounting income and the insurance premiums would be nondeductible (since they relate to nontaxed income) and would need to be added.
Thus, net income before taxes of $200,000 minus the municipal bond interest of $20,000, plus the insurance premiums $10,000 equals taxable income of $190,000:
$200,000 - $20,000 + $10,000 = $190,000
Taxable income times the tax rate equals tax due of $57,000:
$190,000 × 0.30 = $57,000
The effective tax rate would be the total tax due divided by the total income earned:
$57,000 ÷ $200,000 = 0.285 (28.5%)
Tax Rate
A tax rate is the percentage applied to taxable income to compute tentative income tax payable.
2341.05
The term “liability method” comes from the fact that the balance sheet elements are calculated first and, from those figures, the amount of income tax expense is derived. For example, if a company determined that its current income tax payable was $100,000 and that its deferred tax liability balance resulting from temporary differences increased during the year by $30,000, the entry to record income taxes for the year would be:
Income Tax Expense 130,000
Income Tax Payable 100,000
Deferred Income Tax Liability, noncurrent 30,000
The elements of the balance sheet—in this case, liabilities—are first determined, and they become the basis for determining the amount of the income tax expense.
FASB ASC 740-10-30-6
