Question

Randolph Company reported pretax net income from continuing operations of $1,003,000 and taxable income of $710,000. The book-tax difference of $293,000 was due to a $283,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $140,000 due to an increase in the reserve for bad debts, and a $150,000 favorable permanent difference from the receipt of life insurance proceeds. Randolph Company’s applicable tax rate is 34 percent.

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. (Round your answer to 2 decimal places.)

d. Complete the reconciliation of Randolph Company’s effective tax rate with its hypothetical tax rate of 34 percent. (Amounts to be deducted should be indicated by a minus sign. Round your percentages to 2 decimal places.)

	ETR reconciliation (in $) Income tax expense at 34% Income tax provision ETR reconciliation (in %) Hypothetical income tax rate 34.00 % % Effective tax rate %

Answer 1

a.	Pre-tax net income	1003000
	Favorable temporary difference	-283000
	Unfavorable temporary difference	140000
	Favorable permanent difference	-150000
	Taxable income	710000
	Tax rate	34%
	Current income tax expense	241400
b.	Favorable temporary difference	-283000
	Unfavorable temporary difference	140000
	Net Favorable temporary difference	-143000
	Tax rate	34%
	Deferred tax expense	-48620
c.	Effective tax rate=(Total income tax provision/Pre-tax net income)*100
	Total income tax provision=241400+48620=290020
	Effective tax rate=(290020/1003000)*100=28.92%
d.	ETR reconciliation (in $)
	Income tax expense at 34% (1003000*34%)	341020
	Tax benefit from permanent difference (150000*34%)	-51000
	Income tax provision	290020
	ETR reconciliation (in %)
	Hypothetical income tax rate	34%
	Tax benefit from permanent difference (%)
	(51000/1003000)*100	5.08%
	Effective tax rate	28.92%