Question

Accrual of tax liability for an interim reporting period

Assume that our company reports pretax income for the quarter of $900,000. This is typically a low profit quarter for us, and we estimate that taxable income will be $7,200,000 for the year. We also expect to be eligible for tax credits of $324,000 that will reduce our required tax payment by that amount.

a. Compute the estimated effective tax rate for the year assuming a statutory federal and state combined rate of 22%.
Round answer to one decimal place (ex: 0.235 = 23.5%).
Answer%

b. Prepare the required journal entry to accrue tax liability for the interim period.

General Journal
Description	Debit	Credit
AnswerIncome tax payableIncome tax expense	Answer	Answer
AnswerIncome tax payableIncome tax expense	Answer	Answer

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Answer 1

ANSWER

a. Compute the estimated effective tax rate for the year assuming a statutory federal and state combined rate of 22%. Round to nearest whole percent.

Particulars	Amount
Estimated taxable income for the year	$7,200,000
Federal tax rate	22%
Estimated tax expense for the year	= $7,200,000 * 22% = $7,200,000 * 0.22 = $1,584,000
Expected tax credits	$324,000
Net tax payable	= $1,584,000- $324,000 = $1,260,000
Effective tax rate	= $1,260,000/ $7,200,000 = 0.175 = 17.5%

b. Prepare the required journal entry to accrue tax liability for the interim period.

General Journal	Debit	Credit
Income tax expense	= $900,000* 17.5% = $157,500
Income tax payable		$157,500

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