Question

Denver Company, a calendar-year corporation, had the following actual income before income tax expense and estimated effective annual income tax rates for the first three quarters in 20X8:

							Estimated Effective
	Income Before						Annual Tax Rate at the
Quarter	Income Tax Expense						End of Each Quarter
First		$	100,000						30	%
Second		$	140,000						24	%
Third		$	180,000						30	%

Denver's income tax expense in its interim income statement for the third quarter should be:

Multiple Choice

$126,000.

$68,400.

$62,400.

$54,000

Answer 1

Solution:

Cumulative Income of 3 quarters before income tax expense = $100,000 + $140,000 + $180,000 = $420,000

Annual effective tax at the end of 3rd quarter = 30%

Total income tax expense for 3 quarters = $420,000 * 30% = $126,000

Income tax expense reported upto 2 quarters = Income for first 2 quarters * Effective tax rate for 2nd quarter

= ($100,000 + $140,000) * 24% = $57,600

Denver's income tax expense in its interim income statement for the third quarter should be = $126,000 - $57,600 = $68,400

Hence 2nd option is correct.