2. Oriole Company reported pretax net income from continuing operations of $1,00

Question

2. Oriole Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $1,200,000. The unfavorable book-tax difference of $200,000 was due to a $200,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $300,000 due to an increase in the reserve for bad debts, and a $100,000 unfavorable permanent difference from the disallowance of compensation expense related to the exercise of incentive stock options. Oriole Company's applicable tax rate is 34%. a. Compute Oriole Company's current income tax expense. b. Compute Oriole Company's deferred income tax expense or benefit. c. Compute Oriole Company's effective tax rate. d. Provide a reconciliation of Oriole Company's effective tax rate with its hypothetical tax rate of 34%.

Explanation / Answer

Timing Differences:

100000

Unfavourable

34000

Defered tax payable

a. Current income tax expense = Taxable income * Tax rate = 1200000*0.34 = $408000

b. Defered income tax expense = $34000

c. Tax expense = Current tax + Defered tax = 408000 + 34000 = $442000

Taxable income = $1200000

Effective tax rate = 442000/1200000*100 = 36.83%

d. Effective tax rate                                                        = 36.83%

Less: Defered tax expense rate = 34000/1200000*100 = 2.83%

Hypothetical tax rate                                                       = 34%

Favourable Unfavourable Net Depreciation 200000 Reserve for bad debts 300000 200000 300000

100000

Unfavourable

Tax rate 34% 34% Deferred tax 68000 102000

34000

Defered tax payable

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