Question

Haag Corp.'s 2021 income statement showed pretax accounting income of $2,500,000. To compute the federal income tax liability, the following 2021 data are provided:
Income from exempt municipal bonds $ 100,000
Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes 200,000
Enacted corporate income tax rate 20%

Required:
Compute the amount that Haag should record for income tax payable.

Answer 1

Answer:

$440,000

Explanation:

The first is to calculate the taxable profits and taxable profit can be calculated as under:

Taxable Profit = Pre-Tax Accounting Profit - Tax allowable expenses not deducted + Tax disallowed expenses deducted previously   -  Tax disallowed Income added previously  - Tax allowed income not added in accounting profits

Here

Pre-Tax Accounting Income is $2,500,000

Municipal Bond Income is the Tax Disallowed Income added previously to accounting profits and must be eliminated from it at $100,000

Depreciation for tax purposes which is in excess of the book depreciation allowed is $200,000 and is Tax allowed Expenses not deducted.

By putting the values, we have:

Taxable Profit = $2,500,000 - $200,000  -  $100,000

Taxable Profit = $2,200,000

Now we will compute the income tax payable at 20%

Tax Payable = 20% *  $2,200,000 = $440,000