Question

Cass Corporation reported pretax book income of $10,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $200,000. Cass Corporation sold a fixed asset and reported book gain of $50,000 and tax gain of $75,000. Finally, the company received $250,000 of tax-exempt life insurance proceeds from the death of one of its officers. Assuming a tax rate of 34 percent, compute the company’s current income tax expense or benefit

Answer 1

The company’s current income tax expense

-Increase in Bad Debt Reserve = $100,000

-Excess Tax Depreciation = -$200,000 [$100,000 – 200,000]

-Excess Tax Gain = $25,000 [$75,000 – 50,000]

-Net Increase = -$75,000 [$100,000 – 200,000 + 25,000]

-Tax Rate = 34%

-Therefore, The Net Increase in Deferred Tax Liability (DTL) = -$25,500 [-$75,000 x 34%]

The Company should record the Net Increase in the Deferred Income Tax Liability (DTL) as the company’s current income tax expenses

“Hence, The company’s current income tax expense would be $25,500”

answered by: anonymous