CFA Level I · CFA Level I Exam · Analysis of Income Taxes
A firm's taxable income for the year is 800,000 and its pre-tax accounting profit is 950,000. The tax rate is 25%. Income tax payable is closest to:
Income tax payable is about 200,000, found by applying the 25% rate to taxable income of 800,000. Tax payable is determined by the tax return, so accounting profit of 950,000 is not the base for the amount owed to the tax authority.
- A200,000Correct
- B237,500
- C250,000
Explanation
Income tax payable is based on taxable income, not accounting profit: 800,000 x 25% = 200,000. Using accounting profit gives 237,500, which is income tax expense only if there were no temporary differences. The 250,000 figure comes from an unrelated base.
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