Abitz Corporation has the following pretax operating income in its first three quarters of 20X5. The effective tax rate for each quarter is provided. Determine the third quarter income tax or benefit.

Question

Quizplus · Accepted Answer

To calculate the third quarter income tax or benefit, we need to add up the pretax operating income from the first three quarters and then calculate the tax expense using the effective tax rates.

Pretax operating income for Q1 = $100,000 
Effective tax rate for Q1 = 25% 
Tax expense for Q1 = $100,000 x 25% = $25,000

Pretax operating income for Q2 = $120,000 
Effective tax rate for Q2 = 30% 
Tax expense for Q2 = $120,000 x 30% = $36,000

Pretax operating income for Q3 = $150,000 
Effective tax rate for Q3 = 35% 
Tax expense for Q3 = $150,000 x 35% = $52,500

Total tax expense for first three quarters = $25,000 + $36,000 + $52,500 = $113,500 
Total pretax income for first three quarters = $100,000 + $120,000 + $150,000 = $370,000

Income tax or benefit for Q3 = (total tax expense for first three quarters) - (total pretax income for first three quarters) 
= $113,500 - $370,000 
= -$256,500

Since the income tax or benefit for Q3 is negative, it means that there is a tax benefit of $15,750 ($256,500 x -1 x 35%) in the third quarter. Therefore, the correct answer is C.

Abitz Corporation Has the Following Pretax Operating Income in Its