Question

Cremshaw Inc.’s auditors prepared the following detail reconciliation between book and taxable income. Cremshaw’s income tax rate is 21%. Book income before tax $650,000 Bad debt allowance $25,000 Meals ($30,000 * 50%) $15,000 Tax-exempt interest income $(20,000) Wages not paid in 2 ½ months $45,000 Taxable income $715,000 Compute Cremshaw’s financial tax expense and Cremshaw’s tax payable.

Answer 1

Tax-exempt interest income is excluded from the book income before tax because the Tax-exempt interest income is not consider for income tax (Permanent nature).

	Pretax financial income	$             650,000
	Permanent differences
Less:	Tax-exempt interest income	$             (20,000)
	Pretax financial income after adjusted to permanent differences	$             630,000
	Temporary differences
Add:	Bad debt allowance	$               25,000
Add:	Meals	$               15,000
Add:	Wages not paid in 2 ½ months	$               45,000
	Taxable income	$             715,000
Multiply:	Tax rate	21%
	Income tax payable	$             150,150
	Pretax financial income after adjusted to permanent differences	$             630,000
Multiply:	Tax rate	21%
	Financial tax expense	$             132,300