[Anonymous]

Why is there a percentage DRD added back to taxable income? I thought DRD was a permanent tax difference, so shouldn’t the entire DRD be added back?

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Leer Corp.’s pretax income in the current year was $100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows:

Depreciation in the financial statements was $8,000 more than tax depreciation.

The equity method of accounting resulted in financial statement income of $35,000. A $25,000 dividend was received during the year, which is eligible for the 80% dividends-received deduction.

Leer’s effective income tax rate was 30%. In its current year income statement, Leer should report a cur­rent provision for income taxes of:

A. $26,400.

B. $23,400.

C. $21,900.

D. $18,600.

The current provision for income taxes is simply the taxable income for the year multiplied by the tax rate for the year. Thus, we need to find the taxable income for the year.

Start with the pretax income of $100,000, and add $8,000 to it because tax depreciation expense was less than book depreciation. The $35,000 equity method income for financial accounting needs to be subtracted since it is not the taxed amount:

$100,000 + $8,000 – $35,000 = $73,000

The dividends that are taxable are subject to a dividends-received deduction of 80%. Thus, only add in $5,000 of the dividends ($25,000 × 0.20 (1 − 0.80)), because the dividends, though taxable in part, are not financial accounting income when applying the equity method:

$73,000 + $5,000 = $78,000

Thus, taxable income is $78,000 ($100,000 + $8,000 – $35,000 + $5,000) and the current income tax due is $23,400:

$78,000 × 0.30 = $23,400