Question

Randolph Company reported pretax net income from continuing operations of $800,000 and taxable income of $500,000. The book-tax difference of $300,000 was due to a $200,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $80,000 due to an increase in the reserve for bad debts, and a $180,000 favorable permanent difference from the receipt of life insurance proceeds.

a. Compute Randolph Company’s current income tax expense.

b. Compute Randolph Company’s deferred income tax expense or benefit.

c. Compute Randolph Company’s effective tax rate.

d. Provide a reconciliation of Randolph Company’s effective tax rate with its hypothetical tax rate of 21 percent.

Answer 1

a) Current Inocme tax expense
Taxable inome*tax rate
=500,000*21%
105000
b) Deferred tax
Favarable temporaty depn differene		200000
Unfavarable temporaty diff due to provision for bad debts		80000
Net differene		120000
Tax rate		21%
Deferred tax expense		25200
c) Effective tax rate
Effective tax rate		=total tax/Net income
Total tax		Current tax+deferred tax
		=(105000+25200)/800000
effective tax rate		16.28%
d) Reconciliation
Effective tax rate		16.28%
income does not liable to tax		180000
Tax @ 21%		37800
		4.73%
Hypothetical tax rate		21.00%