CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Assume U.S. GAAP. A company reports net income of $800,000 for the year. The table below indicates selected items included in net income and their associated tax status.

Depreciation Expense: $70,000 ($90,000 allowed for tax purposes)
Dividend Income: $120,000 (Dividends not taxable)
Fine related to environmental damage: $100,000 (Not deductible for tax purposes)
R&D Expenditures: $50,000 ($20,000 allowed for tax purposes)

The company's tax rate is 35 percent. The company's current income taxes payable (in $) is closest to ______.
A. 208,500
B. 249,000
C. 276,500
Explanation: Net income: $800,000
Add back book depreciation: $70,000
Deduct tax-allowed depreciation: ($90,000)
Deduct dividend income: ($120,000)
Add back fine: $100,000
Add back book R&D: $50,000
Deduct tax-allowed R&D: ($20,000)
Taxable income: 790,000
Current taxes payable: 35% x $790,000 = $276,500

User Contributed Comments 2

User Comment
bretonpa Why are we adding it back to Net Income? Shouldn't it be to Gross income (so 800/0.65)?
milica818 The company reported accounting net income as 800k, so we have to work backwards to figure out taxable income from a tax perspective
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