Randolph Company reported pretax net income from continuing operations of $1,003

Question

Randolph Company reported pretax net income from continuing operations of $1,003,000 and taxable income of $710,000. The book-tax difference of $293,000 was due to a $283,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $140,000 due to an increase in the reserve for bad debts, and a $150,000 favorable permanent difference from the receipt of life insurance proceeds. Randolph Company’s applicable tax rate is 34 percent.

d. Complete the reconciliation of Randolph Company’s effective tax rate with its hypothetical tax rate of 34 percent. (Amounts to be deducted should be indicated by a minus sign. Round your percentages to 2 decimal places.)

Explanation / Answer

ETR reconciliation (in $) Income tax expense at 34% ($1,003,000 x 34%) $341,020 Tax benefit from permanent difference ($150,000 x 34%) ($51,000) Income tax provision $290,020 ETR reconciliation (in %) Hypothetical income tax rate 34.00 % Tax benefit from permanent difference ($51,000 / $1,003,000) (5.08) % Effective tax rate 28.92 %

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