Final answer:
The tax expense for Rubio, a C corporation, is calculated by adjusting the book income for permanent differences, resulting in $26,100 from a taxable income of $87,000 applying the 30% tax rate.
Step-by-step explanation:
The question revolves around determining the current tax expense for a C corporation, given specific financial details, and categorizing whether certain items create temporary or permanent differences between book income and taxable income.
Understanding Temporary and Permanent Differences:
Temporary differences are differences between book income and taxable income that will reverse in future periods, whereas permanent differences never reverse and cause a variance between tax and book expense indefinitely.
An increase in book allowance for anticipated warranty costs creates a temporary difference because this increase will reverse when the costs are actually incurred. Interest income from City of Westerville bonds creates a permanent difference because this income is tax-exempt and will never be taxable. The bribes paid to Federal inspectors are not tax deductible and create a permanent difference as they will never be included in the taxable income.
Calculating Current Tax Expense:
To calculate Rubio's current tax expense, we must adjust the book income for the permanent differences, which in this case are the interest income from bonds ($10,000) and the bribes paid ($17,000). Thus, the taxable income is:
Book income $80,000 - Interest income $10,000 (tax-exempt) + Bribes paid $17,000 (non-deductible) = $87,000
Applying the 30% tax rate:
Tax expense = $87,000 * 30% = $26,100
Therefore, Rubio's current tax expense is $26,100.