Farnworth Corp.pays income tax at an average rate of 30 percent.This year its revenue is $100,000 and its expenses are $70,000.The adjusting entry to record the income tax expense will:

Question

Quizplus · Accepted Answer

Since Farnworth Corp. pays income tax at an average rate of 30 percent, the income tax expense will be 30% of its taxable income. The taxable income, in this case, is the difference between revenue and expenses, which is $30,000 ($100,000 - $70,000). Thus, the income tax expense is $9,000 ($30,000 x 30%).

The adjusting entry to record the income tax expense will decrease the company's net income by $9,000 and decrease its stockholders' equity by the same amount. Therefore, the correct answer is (C), decrease stockholders' equity by $9,000.