Question

Baltimore Inc. reported pretax GAAP income of $45,000 in 2020. In analyzing differences between GAAP income and taxable income, the company determined that it had deducted $5,000 in nondeductible fines and added $2,800 in tax-exempt municipal interest revenue to GAAP income. The statutory tax rate is 25%. Determine the following:

a. Taxable income
b. Income tax payable
c. Income tax expense
d. Net income

Answer 1

Baltimore Inc.

a. Total taxable income = $47,200

b. Income tax payable = $11,800

c. Income tax expense = $11,250

d. Net income = $33,750

Step-by-step explanation:

a) Data and Calculations:

GAAP determined pretax income = $45,000

Add nondeductible fines 5,000

Less exempt municipal interest revenue 2,800

Total taxable income $47,200

Income tax (25%) 11,800

Income tax expense:

GAAP determined pretax income = $45,000

Income tax (25%) 11,250

Net income $33,750

b) The differences between the GAAP determined pretax income and the tax determined taxable income are due to permanent differences (not temporary). This implies that there are no deferred tax assets and liabilities and no recoveries from deferred taxes. However, in reporting its financial performance for the year, Baltimore Inc. still has to comply with the GAAP rules and not the tax rules.