Green Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, tax depreciationexceeded book depreciation by $100,000. Finally, Green subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Using a tax rate of34%, Green's cash tax rate is:

Question

Quizplus · Accepted Answer

The cash tax rate is calculated by adjusting the pretax book income for temporary and permanent differences and then applying the tax rate. The adjustments are: add $25,000 for the warranty reserve increase, subtract $100,000 for excess tax depreciation, and subtract $25,000 for the dividends received deduction. The adjusted taxable income is $1,000,000 + $25,000 - $100,000 - $25,000 = $900,000. The tax is $900,000 * 34% = $306,000. The cash tax rate is $306,000 / $1,000,000 = 30.6%.

Green Corporation Reported Pretax Book Income of $1,000,000