 Oh, and welcome to the session in which we would look at an interim reporting example, specifically that deals with income taxes. Now, on the prior session, I explained what interim reporting is and I gave specific details, but it's good to work an actual example, specifically showing the annualized approach when it comes to income taxes. Now, just an overview, what are we looking at here? Well, interim reporting basically breaks the year into into any periods, but we're going to say into quarterly periods, one, two, three and four. So each quarter, the company will have to compute their income tax expense based on how well, obviously, how well the company is doing. Otherwise, if they're not doing well, if they're incurring a loss, there's no income tax involved. So the point is they're going to have to compute their income tax expense every period. So the question is, how do we know what is our income tax expense? How much do we have to pay in income taxes? Well, we're going to have to annualize, use the annualized approach. Now, how do you use the annualized approach? This is what we will discuss in this session. So first, the annual first quarterly earnings was 400,000. That's the actual, the second quarter actual earning was 610. So I'm just going to put it down here. 400 was the actual and 610, this was the actual. Okay. Now, after we went through the first quarter, the company will have to do, once we are done with the first quarter, they're going to have to estimate the annual earnings. And after they end up in the first quarter, they thought for the whole year, they're going to estimate based on this quarter and based on projection, basically, they have to estimate, they're going to have total earnings of 1,450,000. Also, they have two, they're going to have two differences. They're going to have to pay environmental violation penalties of 35,000 and dividend exclusion, they qualify for 190. So now we are ready to do the computation. How do we do this computation? Well, remember, those are differences and specifically, they are permanent differences. So how do we compute our income tax expense, our tax provision for the first quarter? That's what we need to do. Here's what we need to do. The estimated annual earning, 1,450,000, that's giving, we add back to it the environmental violation policy. Why? Why do we do this? We do this because when we arrived to 1,450,000, we deducted 35,000 because we paid this penalty and this is for GAP. So for GAP, we deducted this number for tax purposes, we have to add it back. And this is one of the differences that we have to add it back. Also, dividend income exclusion, dividend income exclusion is a phantom, is basically a fake deduction, but it's a deduction for tax purposes. Then we'll have to deduct from 1,450,000 because we did not deduct this 190,000 to come up to 1,450,000. Therefore, for income tax purposes, we deduct this 190,000. Now, if you're confused here, like what is he talking about permanent and temporary differences, you want to go to Farhat Lectures and take a look at my income tax, deferred income tax session in order to understand this. But I'm assuming at this point, if you are learning about interim financial reporting, you already know the differences between permanent and temporary differences. Anyhow, we come up with estimated taxable income. So this is the taxable income, 1,250,000, although the annual earning 1,450,000 after we account for the tax differences, it will come down to 1,950,000. We multiply this amount by 42%. This is what we have to pay to the IRS, 42%. And we're going to come up with an estimated annual taxes payable of 543,900. Now, this is the estimated annual tax. If we take this amount divided by the estimated annual earning, we find out that the effective annual rate, because this is for both federal, state, and tax, the estimate is approximately 37.5% overall. Now, we actually earned 400,000 for this quarter. We'll take the 400,000 times 37.5. And this is how much we book for income tax expense provision. Therefore, we debit income tax expense $150,041 and credit income taxes payable $150,041. Now, let's take a look and do the computation for Q2, the second quarter. In the second quarter, remember what I did earlier, I said, you know, we were standing at the first, second, first, second, third, and fourth. The second quarter, when we got to the second quarter, our estimate of annual earning is 1,520,000. Well, estimates could change. We're making more profit now for the rest of the year. That's fine. The differences are the same, which is we deduct 190 at up 35. So the total deduction is 145 to arrive to our new estimated taxable income as of Q2. So as of Q2, our estimated taxable income is 1,350,000 after the adjustment for the environmental penalty and for the dividend received deduction. Our estimated annual taxable is 573,000, which is 1,365 times 42%. Again, what we do is we'll take this amount, we'll divide it divided by the total earnings and we find out our effective combined annual tax rate 37.7 as of the second quarter. Good. Now, in the second quarter, we have the first quarter earnings of actual earning of 400,000, the second quarter actual earning of 610. Together, the actual cumulative earnings here, I'm computing the cumulative earning 1,010,000. I'm gonna multiply this by 37.7 and my cumulative tax provision needed as of the second quarter, 380,943. Excellent. I already booked 150,041 in the first quarter. What's left in the second quarter is 230,902. Therefore, I will debit income tax expense 230,902, credit income taxes payable 230,902. Basically, when I combine the first and the second quarter, it will equal to 380,942, which is this number right here. At the end of the year, we're going to go through the third and the fourth quarter. We're going to find out the final income tax and income taxes payable, but this is how we annualize it. What should you do now? Go to farhatlectures.com, work MCQs through false exercises that's going to help you do better in your course as well as CPA exam. That's what I do. I provide supplemental material. Good luck, study hard, stay safe,