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In all cases, no tax benefit can be carried forward beyond 20X2. The following information is also available:

Company B: Pretax income (loss) was $17,000 in 20X0 and ($3,000) in 20X1. The ($3,000) loss was carried back to 20X0. The effective tax rate was 30% in 20X0.

Company D: Pretax income was $92,000 in 20X0 and $30,000 in 20X1. The effective tax rate was 30% in 20X0 and 32% in 20X1.

Calculate the estimated effective annual tax rate for each company.

Exercise 4 (LO 3, 4) Tax expense/benefit traceable to nonordinary items of income. Your client has no permanent or temporary differences between accounting and tax measures of income. However, the client has a tax credit carryforward from last year in the amount of $6,000. The benefit of this credit was recognized last year to the extent of $4,000 because at that time it was anticipated that, more likely than not, there would be future income resulting in some tax liability. The client incurs income taxes at the following rates: 15% on the first $50,000, 20% on the next $25,000, 30% on the next $25,000, and 40% on all additional income. Your client has year-to-date (YTD) pretax net income from continuing operations (NICO) of $24,000 and is projecting another $36,000 of such income for the balance of the year. Furthermore, your client has the following additional YTD pretax components of income:

Extraordinary gain $ 40,000

Loss from discontinued operation (20,000)

Cumulative effect of a change in accounting method 30,000

Calculate the amount of tax expense traceable to the extraordinary gain.

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Template CD

Exercise 5 (LO 3, 4) Estimated effective annual tax rate for various fact situations. The following data represent the accounting results for the year ended December 31, 20X3, for four different manufacturing corporations. The effective tax rates were as follows: 30% for 20X1, 32% for 20X2, and 40% for 20X3 and thereafter.

_Corporation A

YTD operating income (loss) $95,000

Projected interim income (loss) 30,000

Tax exempt municipal income

Deductions not allowed for tax purposes

Annual tax credit available 2,000

Carryback income:

For 20X1

For 20X2

Projected future income for carryforward period:

More likely than not

Not more likely than not

Calculate the estimated effective annual tax rate for each company.

Corporation B Corporation C Corporation D

32,000 15,000

40,000

2,000

105,000 35,000

1,000

12,500

Exercise 6 (LO 3, 4) Estimated effective annual tax rate, prior period restatement, discontinued operation. The Merlot Corporation reported a net operating loss before taxes for the first quarter of 20X3 in the amount of $80,000 (which included $4,000 of tax-exempt income) and a projected loss for the balance of the year in the amount of $50,000 (which included $2,000 of tax-exempt income). The company also had a first-quarter tax credit in the amount of $4,000 and anticipated tax credits of $6,000 for the balance of the year. Pretax income and effective rates for the prior two years are as follows:

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