For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $6 and $20 in depreciation expense. Two million of warranty costs were incurred, and depreciation deductions in the tax return amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's taxable income currently, assuming a tax rate of 40%?

a. 19.6 million.

b. 27.6 million.

c. 29.2 million.

d. 25.2 million

Question

Business

Deanna Estes

4 May, 16:53

For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $6 and $20 in depreciation expense. Two million of warranty costs were incurred, and depreciation deductions in the tax return amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's taxable income currently, assuming a tax rate of 40%?

a. 19.6 million.

b. 27.6 million.

c. 29.2 million.

d. 25.2 million

+3

Answers (1)

Know the Answer?

Tucker Kim · Answer 1

The correct option is B,$27.6 million

Explanation:

In order to compute Centipede Corp's taxable income for the current year, we need to adjust the pre-tax accounting income by adding back estimates of warranty and depreciation expenses, whereas the actual warranty and depreciation deductions allowed by the tax authority are deducted.

Million ($)

Pre-tax accounting income 80

add:

estimated warranty expense 6

estimated depreciation expense 20

Total 106

less:

actual warranty cost (2)

actual depreciation deductions (35)

Taxable income 69

Since $69 million is not one of the options, hence the income tax payable is computed thus:

40%*$69 million=$27.6