The computation of a company's third quarter provision for income taxes should be based upon earnings:
A) for the quarter at an expected annual effective income tax rate.
B) for the quarter at the statutory rate.
C) to date at an expected annual effective income tax rate less prior quarters' provisions.
D) to date at the statutory rate less prior quarters' provisions.

Question

Quizplus · Accepted Answer

The correct approach for computing a company's third quarter provision for income taxes involves calculating the taxes based on the earnings to date (from the beginning of the year through the end of the third quarter) at the expected annual effective income tax rate, and then subtracting the provisions that have already been made in the prior quarters. This method aligns with accounting principles that aim for income tax expense to reflect the average annual effective tax rate applied to the year-to-date earnings, ensuring that the tax expense is evenly distributed throughout the year.

The Computation of a Company's Third Quarter Provision for Income