Question

Before considering a net operating loss carryforward of $81 million, Fama Corporation reported $200 million of pretax accounting and taxable income in the current year. The income tax rate for all previous years was 33%. On January 1 of the current year, a new tax law was enacted, reducing the rate to 29% effective immediately. Fama's income tax payable for the current year would be: (Round your answer to the nearest whole million.)

Answer 1

Answer: $35 million (nearest whole million)

Explanation:

To calculate the current year's tax Payable we will start by ascertaining the Net Taxable income.

Fema Corporation did not account for the net operating loss carryforward of $81 million in the $200 million pretax accounting and taxable income for the current year so we have to do that.

Doing that would be,

= $200 million - 81 million

= $119 million

This is the Net Taxable Income.

We will then use the NEW tax rate which was effected immediately to determine the new Tax Payable,

= $119 million * 0.29

= $34.51 million

= $35 million (nearest whole million)