CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingMedium
A publicly traded company, Zenith Corp., recognized pretax financial income of $1,000,000 for the year ended December 31, Year 1. Included in this amount was $200,000 of interest revenue from municipal bonds, which is tax-exempt. Zenith Corp.'s enacted tax rate is 25%. What is Zenith Corp.'s current income tax expense for Year 1?
- A$250,000
- B$200,000
- C$0
- D$50,000
Show answer & explanationAnswer & explanation
Correct answer: B. $200,000
Current income tax expense is calculated based on taxable income. Taxable income is pretax financial income adjusted for permanent and temporary differences. Tax-exempt municipal bond interest is a permanent difference that reduces taxable income.
Why the other options are wrong
- A. This would be the tax expense if all financial income was taxable.
- C. The company still has taxable income.
- D. This incorrectly applies the tax rate to the tax-exempt income.
Current Income Tax Expense
The amount of income tax payable to the government for the current period, based on taxable income.
- Calculated using taxable income, not pretax financial income.
- Affected by permanent differences between financial and tax accounting.
- Does not include deferred tax effects.
Memory trick: Current Tax: What the IRS Sees, Not Just the Books.