Angel 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 depreciation exceeded book depreciation by $100,000. Finally, Angel subtracted a dividends received deduction of $25,000 in computing its current-year taxable income. Angel's hypothetical tax expense in its reconciliation of its income tax expense is:

Question

Quizplus · Accepted Answer

The hypothetical tax expense is calculated by adjusting the pretax book income for temporary and permanent differences and then applying the tax rate. The adjustments are: add back the increase in warranty reserve ($25,000), subtract the excess tax depreciation ($100,000), and subtract the dividends received deduction ($25,000). This results in a taxable income of $900,000. Assuming a tax rate of 21%, the tax expense is $900,000 * 21% = $189,000. However, the question asks for the hypothetical tax expense, which is based on the pretax book income of $1,000,000, so $1,000,000 * 21% = $210,000.

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