Question

TarHeel Corporation reported pretax book income of $1,008,000. During the current year, the net reserve for warranties increased by $100,400. In addition, tax depreciation exceeded book depreciation by $202,000. Finally, TarHeel subtracted a dividends received deduction of $51,600 in computing its current year taxable income. TarHeel's accounting effective tax rate is:

Answer 1

Given

Pre-tax income = $1,008,000

net reserve for warranties = $100,400

tax depreciation exceeded book depreciation = $202,000

TarHeel subtracted a dividends received deduction = $ 51,600

Find

TarHeel's accounting effective tax rate

Explanation

As we know

effective tax rate = Tax Liability/Pre-tax income * 100

so , we need to find Tax liability

Tax Liability = Taxable Income * Tax Rate

Taxable Income = Pre tax income + Increase in Reserve - (Additional Tax Depreciation + Deduction in the form of Dividend received)

so ,

$\begin{gathered} 1,008,000+100,400-(202,000+51,600) \\ 1,108,400-251,600 \\ 766,440 \end{gathered}$

As the tax rate is not mentioned in the question , it has been assumed to be 21% as it will not be possible to attempt the question without the tax rate

Tax Liability =

$\begin{gathered} 766,440\times21\% \\ 160,952.4 \end{gathered}$

so,

Effective Tax Rate =

$\begin{gathered} \frac{160,952.4}{1,008,000}\times100 \\ 15.9675 \end{gathered}$

Final Answer

TarHeel's accounting effective tax rate = 16% Approx