Question

Grand Corporation reported pretax book income of $627,500. Tax depreciation exceeded book depreciation by $490,000. In addition, the company received $290,000 of tax-exempt municipal bond interest. The company’s prior-year tax return showed taxable income of $61,000. Compute the company’s current income tax expense or benefit.

Solution:

Step 1-

$627,500

$-490,000)

$-290,000)

Total= $-153,000

Step 2

$-153,000 x 21%=

Answer= -32,130

Answer 1

Given Pre tax Book income = $627,500

Depreciation exceeded book value ($490,000)

Tax exempted Municipal; bond interest - ($290,000)

Net Operating Loss - ($152,500)

Income tax expenses = ($152,500 *21%) = ($32,025)

Income tax expenses as per book income = $627,500 * 21% = $131,775

Deferred tax asset is $32,025+$131,775 = $163,800

So, the income tax benefit for the current year = $32,025

Note:

1)Municipal bond interest is not taken as an exemption for calculating the book value of depreciation and hence not subtracted from book value.

2) There was net operating loss, it means no need to pay the income tax. The tax percent calculated on income loss is considered as income tax income for the current year.