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24 October, 16:45

TarHeel Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, TarHeel subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Assume a tax rate of 21%. TarHeel's accounting effective tax rate is:

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  1. 24 October, 19:17
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    Answer: 18.9%

    Explanation:

    The Effective Tax Rate is calculated by dividing total federal and state income tax expense by Pre-tax income.

    So we will have to calculate the tax expense and then divide it by the Pre-tax income.

    To calculate the Tax income we will do the following,

    = Pre-tax income + increase in net warranty reserve (taxable) - Excess Tax Depreciation Expense - Dividends received (not to be taxed)

    = 1,000,000 + 25,000 - 100,000 - 25,000

    = $900,000

    The taxable income is therefore $900,000

    Tax rate is 21% so the tax expense is,

    = 900,000 * 0.21

    = $189,000

    We will now divide tax Expense by the Pre-tax income to find the Effective Tax Rate.

    = 189,000/1,000,000

    = 0.189

    = 18.9%

    TarHeel's accounting effective tax rate is 18.9%
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