TarHeel Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $100,000. In addition, tax depreciation exceeded book depreciation by $200,000. Finally, TarHeel subtracted a dividends received deduction of $50,000 in computing its current year taxable income. TarHeel's accounting effective tax rate is:

Question

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The effective tax rate is the hypothetical tax rate (21%) adjusted for the tax cost or benefit from permanent differences. In this example, the dividends received deduction reduces the effective tax rate by 1.05% ($50,000 × 21% = $10,500 / $1,000,000).

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