Question

Short-Answer Question (20 marks) 1. B-Line Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $800,000. The favorable book-tax difference of $200,000 was due to a $100,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $50,000 due to accrued vacation pay, and a $150,000 favorable permanent difference from the dividends received deduction. Required: Based on taxation in the United States of America, a) compute B-Line's current income tax expense. b) compute B-Line's deferred income tax expense or benefit. c) compute B-Line's effective tax rate. d) reconcile B-Line's effective tax rate with its hypothetical tax rate of 21 percent. (2 marks) (2 marks) (2 marks) (1 mark)

Answer 1

1. Favorable Temporary difference of $ 100,000 due to depreciation = Deferred tax liability

Un-Favorable Temporary difference of $ 50,000 due to accrued vacation pay = Deferred tax asset

Any permanent difference will not lead to the creation of any DTA/DTL

1. Income tax expense = Taxes payable + DTL - DTA

= (800,000 * 21%) + 100,000 - 50,000

= $ 218,000

2. Deferred Income tax benefit/expense

= 100,000 - 50,000

= $ 50,000 Deferred tax liability

3. Effective tax rate = Income tax expense / pretax income

= $218,000 / $ 1,000,000

= 21.80%

4. ASC 740 states that a company shall disclose a reconciliation of the significant items in the income tax expense as a dollar amount or as a percentage to pretax income based on statutory tax rates

Effective tax rate = (168,000/1,000,000) + (100,000/1,000,000) - (50,000/1,000,000)

= 16.80% + 10% - 5%

= 21.80%