Question

Bungles, Inc. reports net income before taxes on its income statement for 2016 (its first year...

Bungles, Inc. reports net income before taxes on its income statement for 2016 (its first year of operations) in the amount of $1,300,000. Included in income is $100,000 in interest income from municipal bonds issued by the state of Ohio. Tax depreciation for the year is $250,000, while depreciation according to GAAP is $150,000. The applicable income tax rate for all relevant years is 40%

What is Bungles' effective income tax rate for 2016 (to 4 decimal points, e.g.  12.98%)?

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Answer #1
Taxable Income
Net Income $        13,00,000
Less : Interest on Municipal Bonds (Tax free) $         -1,00,000
Add : Depreciation as per GAAP $          1,50,000
Less : Tax Depreciation $         -2,50,000
Taxable Income $       11,00,000

Income Tax Payable = $1100000 x 40% = $440000
Deferred Tax Liability = ($250000 - 150000) x 40% = $40000
Total Tax Expense = $480000 i.e. $440000 + $40000

Effective Income tax rate = Income tax / Net Income x 100
= $480000 / $1300000 x 100 = 36.92%

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