CFA Practice Question

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CFA Practice Question

Diamond, Inc. reported income before taxes for book purposes of $120,000 for 2015, their first year of operations. MACRS tax depreciation was $5,000 and book depreciation was $3,000. The statutory rate in effect is 35% and it is expected to remain the same in future years. If Diamond paid no estimated taxes during the year, what amount of income taxes payable should the firm report in its December 31, 2015 balance sheet?

A. $42,000
B. $41,300
C. $42,700
Correct Answer: B

Income taxes payable is computed based on the taxable income for the period. Since tax depreciation exceeds book depreciation by $2,000, taxable income for the period would be $118,000 ($120,000 book - $2,000). Thus, income tax payable would be $118,000 * .35= $41,300.

User Contributed Comments 12

User Comment
george2006 pretax income for tax purpose = pretax income for book purpose + difference in depre.
Mimi29 Income before taxes in financial statement is $120'000. But income reported for tax purposes will be 118'000 (120'000-2000), because depreciation for tax purposes is 2000 more. The amount of tax that they will pay is based on taxable income (= 118'000).
achu Remember, 3K book depreciation already included in Net PreTax Income. So we adjust only for the DIFFERENCE between Tax Depr and BalSheet Depr.
Khadria Its EBIT and not REVENUE.
krisscfa Good One!!
uberstyle yes, thanks achu, that is the key point.
weic08 thx Mimi29
boddunah EBT = $120,000.
$3000 DEP accounted for .
$5000-$3000 = $2000 should be deducted from EBT to get $118,000 taxable income.
sapu if in this question dtl or dta is given will it effect the answer?
rezazaveri DTL = (3000-5000)*0.35 = -700
ITE = TP +DTL-DTA = 42000 + (-700) - 0 = 41300
maryprz14 700 deferred tax liability?
mali97 why did u write what tax should firm report on its balance sheeet.
should write what tax authority should report onn their B/s
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