During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000, and its effective income tax rate was 15%. Worth's…

According to U.S. GAAP (ASC 740-270, Interim Reporting), income tax expense for an interim period should be computed using the best estimate of the annual effective tax rate expected for the full fiscal year. This rate is then applied to the year-to-date pre-tax income. For Worth Co., the estimated annual effective tax rate for the current year is 25%. Therefore, the income tax expense for the first quarter is calculated as the pre-tax income of $100,000 multiplied by this 25% rate, which equals $25,000. The other rates provided, such as the prior year's rate or the statutory rate, are not used for this specific calculation.

A. $15,000 is incorrect because it uses the quarterly effective rate (15%), while GAAP requires the use of the estimated annual effective tax rate for interim periods.
C. $30,000 is incorrect as it is based on the previous year's effective tax rate (30%). Prior-year rates are not used to calculate the current year's interim tax expense.
D. $35,000 is incorrect because it uses the statutory tax rate (35%). The calculation must use the estimated effective annual rate, which accounts for permanent differences, credits, and other items. ---

1. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).

ASC 740-270-30-6: "At the end of each interim period the entity shall make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined shall be used in providing for income taxes on a current year-to-date basis."

ASC 740-270-30-8: "The tax (or benefit) related to ordinary income (or loss) shall be computed at an estimated annual effective tax rate and the tax (or benefit) related to all other items shall be individually computed and recognized when the items occur."

2. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2022). Intermediate Accounting (18th ed.). Wiley.

Chapter 19, Accounting for Income Taxes, Appendix 19A: This section explains that for interim reporting, companies should determine income tax expense by applying an estimated annual effective tax rate to the year-to-date income. It explicitly states, "Companies should not try to determine the income tax expense for the interim period as a separate, discrete period." This supports using the 25% annual rate over any other rate.

3. Spiceland, J. D., Nelson, M. W., & Thomas, W. B. (2021). Intermediate Accounting (11th ed.). McGraw-Hill Education.

Chapter 16, Accounting for Income Taxes: The chapter discusses interim tax reporting, stating, "The estimated annual effective tax rate is multiplied by the year-to-date pretax earnings to determine the year-to-date income tax expense. The income tax expense for the current interim period is the difference between the year-to-date income tax expense and the income tax expense recognized in previous interim periods." For the first quarter, this simplifies to Pre-tax Income × Estimated Annual Effective Rate.