Question

Burcham Corporation reported pretax book income of $672,500. Tax depreciation exceeded book depreciation by $550,000. In addition, the company received $210,000 of tax-exempt municipal bond interest. The company’s prior-year tax return showed taxable income of $55,000. Compute the company’s book equivalent of taxable income. Use this number to compute the company’s total income tax provision or benefit, assuming a tax rate of 34 percent.

1. Book equivalent of taxable income?

2. Total income tax provision or benefit?

Answer 1

Answer

Particulars	Amount
Pre-tax book income	672500
Excess tax depreciation	(550000)
Tax-exempt interest income	(210000)
Net operating loss	(87500)
NOL carryback to prior year	$55000
Tax rate	34%
Current income tax refundable	$18700
Excess tax depreciation	$550000
NOL carryover to last year	$55000
Net increase in favorable temporary difference	$495000
Tax rate	34%
Net increase in deferred income tax liability	168300

The net increase in the deferred income tax liability is recorded as the company’s deferred tax expense in the current year. This assumes the company does not record a valuation against the deferred tax asset created by the NOL carryover. Permanent differences do not affect the deferred tax provision.