In its first three years of operations Sharp Chairs reported the following operating income (loss) amounts: There were no deferred income taxes in any year. In 2008, Sharp elected to carry back its operating loss. The enacted income tax rate was 35% in 2007 and 40% thereafter. In its 2009 balance sheet, what amount should Sharp report as current income tax payable?

Question

Quizplus · Accepted Answer

To determine the current income tax payable in the 2009 balance sheet, we need to calculate the income tax expense for 2009 first.

From the information given, we know that in 2007 the enacted income tax rate was 35% and in 2008 and 2009 it was 40%. Since Sharp elected to carry back its operating loss in 2008, we do not need to consider it in our calculation of income tax expense for 2009.

To calculate income tax expense for 2009: 
Operating income in 2009: $4,000,000 
Tax rate in 2009: 40% 
Tax expense in 2009: $4,000,000 x 40% = $1,600,000

Next, we need to calculate the income tax payable for 2009. Since there were no deferred taxes in any year and Sharp elected to carry back its operating loss in 2008, the current income tax payable for 2009 would be equal to the income tax expense for 2009.

Therefore, the current income tax payable in the 2009 balance sheet would be $1,440,000 (answer choice C).

In Its First Three Years of Operations Sharp Chairs Reported