Abbot Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Abbot received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Using a tax rate of 34%, Abbot's current income tax expense or benefit would be:

Question

Quizplus · Accepted Answer

To calculate Abbot's taxable income, we need to adjust its pretax book income as follows:
Pretax book income: $500,000
(+) Increase in bad debt reserve: $5,000 (this is not deductible for tax purposes)
(+) Excess tax depreciation over book depreciation: $40,000 (this is a timing difference that will reverse in the future when tax depreciation is lower than book depreciation)
(-) Tax-exempt life insurance proceeds: ($3,000) (this is not included in taxable income)
Taxable income: $542,000

Next, we can calculate the income tax expense or benefit as follows:
Taxable income: $542,000
Tax rate: 34%
Income tax expense or benefit: $183,880

Therefore, the closest option to our calculation is B: $157,080.

Abbot Corporation Reported Pretax Book Income of $500,000