TarHeel Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, TarHeel subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Assume a tax rate of 21%. TarHeel's accounting effective tax rate is:

Answer: 18.9%

Explanation:

The Effective Tax Rate is calculated by dividing total federal and state income tax expense by Pre-tax income.

So we will have to calculate the tax expense and then divide it by the Pre-tax income.

To calculate the Tax income we will do the following,

= Pre-tax income + increase in net warranty reserve (taxable) - Excess Tax Depreciation Expense - Dividends received (not to be taxed)

= 1,000,000 + 25,000 - 100,000 - 25,000

= $900,000

The taxable income is therefore $900,000

Tax rate is 21% so the tax expense is,

= 900,000 * 0.21

= $189,000

We will now divide tax Expense by the Pre-tax income to find the Effective Tax Rate.

= 189,000/1,000,000

= 0.189

= 18.9%

TarHeel's accounting effective tax rate is 18.9%