Accrual of tax liability for an interim reporting period Assume that our company reports pretax income for the quarter of $500,000. This is typically a low profit quarter for us, and we estimate that taxable income will be $4,000,000 for the year. We also expect to be eligible for tax credits of $180,000 that will reduce our required tax payment by that amount.
a. Compute the estimated effective tax rate for the year assuming a statutory federal and state combined rate of 37.5%. Round to nearest whole percent.
Answer
%
b. Prepare the required journal entry to accrue tax liability for the interim period.
General Journal | ||
---|---|---|
Description | Debit | Credit |
AnswerIncome tax payableIncome tax expense | Answer | Answer |
AnswerIncome tax payableIncome tax expense | Answer | Answer |
Solution :-
a. Compute the estimated effective tax rate for the year assuming a statutory federal and state combined rate of 37.5%. Round to nearest whole percent.
Particulars | Amount |
Estimated taxable income for the year | $4,000,000 |
Federal tax rate | 37.5% |
Estimated tax expense for the year |
= $4,000,000 * 37.5% = $4,000,000 * 0.375 = $1,500,000 |
Expected tax credits | $180,000 |
Net tax payable |
= $1,500,000 - $180,000 = $1,320,000 |
Effective tax rate |
= $1,320,000 / $4,000,000 = 0.33 = 33% |
b. Prepare the required journal entry to accrue tax liability for the interim period.
General Journal | Debit | Credit |
Income tax expense |
= $500,000 * 33% = $165,000 |
|
Income tax payable | $165,000 |
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