Question

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars):

Pretax accounting income:	$	195
Pretax accounting income included:
Overweight fines (not deductible for tax purposes)		5
Depreciation expense		70
Depreciation in the tax return		110

The applicable tax rate is 25%. There are no other temporary or permanent differences.


Franklin's net income ($ in millions) is:

Multiple Choice

• $134.

• $156.25.

• $147.5.

• $145.

Answer 1

Answer
The correct option is D : $ 145
Explanation
	Accounting Income	$                  195
	Less: Income tax expenses
	Tax payable (Note 1)	$                    40
	Deferred tax liability ($40*0.25) (Note 2)	$                    10
	Net Income	$                  145
Note 1:
	Pre Tax Accounting Income	$                  195
	Adjustments
Add :	Overweight Fines	$                      5
Add :	Depreciation Exp	$                    70
		$                  270
Less :	Depreciation as per tax return	$                  110
	Taxable Income	$                  160
Note 1: Tax = 160 *25% = $ 40
Note 2: Deferred tax liability
Temperory difference multiplied by tax rate, $ 40 * 25% = $ 10
$40.00