I was recently working through the Stalla practice exam workbook (pg 145, Q. 60) and it dealt with calculating income tax expense. Part of the solution involved adding “tax-exempt interest income” to revenue and then taxing it by the effective tax rate to calculate income tax expense. Why would you do this if it is “tax-exempt?” Thanks!!
Hmm…the tax exempt interest income you would want to show to your shareholders on the FS so that’s why it would be added back. Not sure why it’s multiplied by the ER, I just take it as a given. The interest income would be tax exempt for tax reporting purposes, but again, you would want to show this income to your shareholders on the financial statements.
Do you think the effective rate, as opposed to the statutory rate has something to do with it? Does the effective tax rate take into consideration any tax-exempt line items?