Question

Mozart Inc.’s $98,000 taxable income for 2017 will be taxed at the 35% corporate tax rate. For tax purposes, its depreciation expense exceeded the depreciation used for financial reporting purposes by $27,000. Mozart has $45,000 of purchased goodwill on its books; during 2017, the company determined that the goodwill had suffered a $3,000 impairment of value for financial reporting purposes. None of the goodwill impairment is deductible for tax purposes. Mozart purchased a three-year corporate liability insurance policy on July 1, 2017, for $36,000 cash. The entire premium was deducted for tax purposes in 2017.

Required:

Determine Mozart’s pre-tax book income for 2017.

Determine the changes in Mozart’s deferred tax amounts for 2017.

Calculate tax expense for Mozart Inc. for 2017.

Answer 1

1
	Taxable Income	$98,000
	Permanent difference
	Goodwill impairment	($3,000)
	Temporary difference
	Depreciation expense (excess)	$27,000
	Insurance expense (deducted for tax purpose prior to financial recognition) ($36,000 - $36,000 x 6/36)	$30,000
	Pre-tax Book Income	$152,000
2	Changes in Mozart’s deferred tax amounts
	Temporary difference
	Depreciation expense (excess)	$27,000
	Insurance expense	$30,000
		$57,000
	tax rate	35%
	Increase in deferred tax liability	$19,950
3	Taxable Income	$152,000
	Tax rate	35%
	Taxes payable for 2017	$53,200
	Increase in deferred tax liability	$19,950
	Income tax expense	$73,150