Randolph Company reported pretax net income from continuing operations of $1,010,500 and taxable income of $667,500. The book-tax difference of $343,000 was due to a $213,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $138,000 due to an increase in the reserve for bad debts, and a $268,000 favorable permanent difference from the receipt of life insurance proceeds. Randolph Company’s applicable tax rate is 34%.A. Compute Randolph Company’s current income tax expense. B. Complete the reconciliation of Randolph Company’s effective tax rate with its hypothetical tax rate of 34%C. Compute Randolph Company’s effective tax rate. D. Compute Randolph Company’s deferred income tax expense or benefit.

A. Current income tax expense = $226,950

B. Reconciliation of effective tax rate with hypothetical tax rate gives an effective tax rate of 24.98%.

C. Effective tax rate = 24.98%

D. Deferred income tax expense is $25,500

Explanation:

A. Compute Randolph Company’s current income tax expense.

Current income tax expense = (Pretax net income from continuing operations - Favorable temporary difference relating to depreciation + Unfavorable temporary difference - Favorable permanent difference) * Applicable tax rate = ($1,010,500 - $213,000 + $138,000 - $268,000) * 34% = $226,950

B. Complete the reconciliation of Randolph Company’s effective tax rate with its hypothetical tax rate of 34%

Hypothetical tax rate = Applicable tax rate = 34%

Income tax expense = Pretax net income from continuing operations * Applicable tax rate = $1,010,500 * 34% = $343,570

Tax benefit from Favorable permanent difference = Favorable permanent difference * Applicable tax rate = $268,000 * 34% = $91,120

Income tax provision = Income tax expense - Tax benefit from Favorable permanent difference = $343,570 - $91,120 = $252,450

Rate of tax benefit from Favorable permanent difference = (Tax benefit from Favorable permanent difference / Pretax net income from continuing operations) * 100 = ($91,120 / $1,010,500) * 100 = 9.02%

Therefore, we have reconciliation of effective tax rate with hypothetical tax rate as follows:

Effective tax rate = Hypothetical tax rate - Rate of tax benefit from Favorable permanent difference = 34% - 9.02% = 24.98%

C. Compute Randolph Company’s effective tax rate.

Effective tax rate = (Total income provision / Pretax net income) * 100 (1)

Where:

Total income provision = Current income tax expense + Deferred income tax expense = $226,950 + $25,500 = $252,450

Pretax net income = $1,010,500

Substituting the values into equation (1), we have:

Effective tax rate = ($252,450 / $1,010,500) * 100 = 24.98%

D. Compute Randolph Company’s deferred income tax expense or benefit.

Deferred income tax expense or benefit = (-Favorable temporary difference relating to depreciation + Unfavorable temporary difference) * Applicable tax rate = (-$213,000 + $138,000) * 34% = -$25,500

Since the answer is negative, it implies that it is a Deferred income tax expense of $25,500

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