Question

Costello Corporation reported pretax book income of $500,900. During the current year, the reserve for bad debts increased by $6,800. In addition, tax depreciation exceeded book depreciation by $40,900. Finally, Costello received $3,450 of tax-exempt life insurance proceeds from the death of one of its officers. Costello's deferred income tax expense or benefit would be:

Multiple Choice

• $7,851 net deferred tax benefit.

• $7,161 net deferred tax benefit.

• $7,886 net deferred tax expense.

• $7,161 net deferred tax expense.

Answer 1

Two temporary differences in the question are the reserve for bad debts and depreciation.

Tax-exempt life insurance proceeds are not temporary differences.

Reserve for bad debts amounting 6800 is a future tax-deductible account, as tax has been actually paid on this item but it will reverse in the future when the bad debt is actually written off.

For depreciation, the extra benefit of 40900 is availed in this year, this will be taxable in some future tax period.

Hence net taxable temporary difference is =40900 - 6800 = 34100

Deferred income tax expense on this amount is 34100*21% = 7161

The answer is d)$7,161 net deferred tax expense.

Note: I believe you have mistakenly not quoted the tax rate, but I solved the question with 21% as it seems most likely due to the current 2018 tax rates.