Question

For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $6 and $20 in depreciation expense. Two million of warranty costs were incurred, and depreciation deductions in the tax return amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's taxable income currently, assuming a tax rate of 40%?
a. 19.6 million.
b. 27.6 million.
c. 29.2 million.
d. 25.2 million

Answer 1

Answer:

The correct option is B,$27.6 million

Explanation:

In order to compute Centipede Corp's taxable income for the current year,we need to adjust the pre-tax accounting income by adding back estimates of warranty and depreciation expenses,whereas the actual warranty and depreciation deductions allowed by the tax authority are deducted.

                                                    Million($)

Pre-tax accounting income              80

add:

estimated warranty expense            6

estimated depreciation expense      20

Total                                                    106

less:

actual warranty cost                             (2)

actual depreciation deductions          (35)

Taxable income                                    69

Since $69 million is not one of the options,hence the income tax payable is computed thus:

40%*$69 million=$27.6