Question

Problem 3-18 (LO. 6) RoofCo reports total book income before taxes of $20,000,000 and a total tax expense of $8,000,000. FloorCo reports book income before taxes of $30,000,000 and a total tax expense of $12,000,000. The companies' breakdown between current and deferred tax expense (benefit) is as follows: Current tax expense Deferred tax benefit Total tax expense RoofCo $10,000,000 (2,000,000) $8,000,000 FloorCo $13,000,000 (1,000,000) $12,000,000 RoofCo's deferred tax benefit is from a deferred tax asset created because of differences in depreciation methods for equipment. FloorCo's deferred tax benefit is created by the expected future use of an NOL. Compute the companies' effective tax rates Roofco: % Floorco: % Select either "True" or "False to indicate whether the following statements are true or false regarding both companies' deferred tax benefits. a. It appears that both companies have created deferred tax assets in the current year that are expected to produce tax savings in the future. b. Since RoofCo's deferred tax benefit is from a deferred tax asset created because of differences in depreciation methods for equipment, it will reverse out in the future. c. If FloorCo is unable to use the NOL for the foreseeable future, its deferred tax asset may remain on the balance sheet for some time.

Answer 1

Effective interest rate = Tax Expense/Total Income*100

	Effective rate
RoofCo	$8000000/$20000000*100 =	40%
Floor co	$12000000/$30000000*100 =	40%
True/False
a	TRUE
b	TRUE
c	TRUE