ADV_SP08_MAR_05 - Olin Business School ACCOUNTING 4680 563 SPRING 2008 ADVANCED ACCOUNTING LECTURE OUTLINE March 5 2008 INTERIM REPORTING(continued c

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Olin Business School ACCOUNTING 4680 / 563 - SPRING 2008 ADVANCED ACCOUNTING LECTURE OUTLINE - March 5, 2008 INTERIM REPORTING (continued) c. INCOME TAX EXPENSE IN INTERIM PERIODS For purposes of calculating income tax, income is measured on an annual basis, and the actual amount of income tax for a year will not be known until the year is complete. However, the matching concept would suggest that income tax expense (benefits) be recorded on an interim basis. The integral theory suggests that income tax expense (benefit) be recorded on an interim basis based on an estimate of the “effective tax rate” that will apply to the corporation over the entire fiscal year. The “effective tax rate” for a year can be estimated with the following formula: Estimated Tax Rate = Estimated Income Taxes for Year . for Year Estimated Income from Continuing Operations for Year At the end of each interim period, the estimated tax rate is calculated. This estimated tax rate is then applied to the cumulative pre-tax income through the end of the applicable interim period to determine the cumulative income tax expense (benefit) that should be recorded through the end of the applicable interim period. The cumulative income tax expense (benefit) as of the beginning of the period is then subtracted from the cumulative expense (benefit) as of the end of the period in order to calculate the applicable income tax expense (benefit) for the interim period. 1

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PROBLEM 13-16 (Baker, Lembke & King) P13-16 Interim Income Statement a. Estimate of effective annual tax rate at end of second quarter: 2
Es timated Annual Amounts Income from continuing operations \$ 600,000 Less: Dividend exclusion ( 30,000 ) Estimated annual taxable income \$ 570,000 Combined tax rate x .50 Estimated annual taxes before credits \$ 285,000 Less: Business tax credit (15,000 ) Estimated income taxes for year \$ 270,000 Estimated effective annual tax rate (\$270,000/\$600,000) = .45 b. Chris, Inc. Income Statement For Three Months Ended June 30, 20X2 Sales \$ 850,000 Cost of goods sold 525,000 a Gross profit \$ 325,000 Operating expense (\$230,000 - \$45,000 factory rearrangement deferred) 185,000 Income before taxes \$ 140,000 Income taxes 68,000 b Net income \$ 72,000 a Computation of Cost of Goods Sold Cost of goods sold as given \$ 420,000 Add: LIFO inventory liquidation [7,500 x (\$26 - \$12)] 105,000 Adjusted cost of goods sold \$525,000 b Computation of Income Taxes Income (Loss) Estimated Tax (Benefit) Before Taxes Annual Less Reported Interim Current Year- Effective Year- Previously in this Period Period to-date Tax Rate to-date Provided Period 1 100,000 100,000 .40 40,000 40,000 2 140,000 240,000 .45 108,000 40,000 68,000 3

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Google Tosses IRS Under The Bus David A. Utter Staff Writer Published: 2006-02-02 During its earnings announcement, Google noted how higher than expected taxes caused the company to miss Wall Street expectations. Google's recent earnings news, impressive except for the earnings per share figures that were hurt by higher taxes, brings a call for Google to provide financial guidance from some quarters. Should Google be more forthcoming? Give us your disclosures at WebProWorld .
• Spring '08
• Unknown
• Accounting, Fiscal Year, U.S. Securities and Exchange Commission, Form 10-K, Securities Exchange Act of 1934, Form 8K

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