Swordfish Corporation reported pretax book income of $1,000,000.During the current year,the net reserve for warranties increased by $25,000.In addition,book depreciation exceeded tax depreciation by $100,000.In prior years,tax depreciation exceeded book depreciation by a cumulative amount of $500,000.Finally,Swordfish subtracted a dividends received deduction of $15,000 in computing its current year taxable income.Using a tax rate of 34%,Swordfish's deferred income tax expense or benefit would be:

Question

Quizplus · Accepted Answer

To calculate the deferred income tax expense or benefit, we need to consider the temporary differences between book and tax accounting that are expected to reverse in future years.

The increase in the warranty reserve and the difference in book and tax depreciation both create temporary differences that will result in a deferred tax liability. The dividends received deduction creates a permanent difference that will not result in a deferred tax liability.

To calculate the deferred tax liability related to the warranty reserve, we multiply the increase in the reserve by the tax rate: $25,000 * 34% = $8,500.

To calculate the deferred tax asset related to the difference in depreciation, we multiply the cumulative difference in depreciation by the tax rate: $500,000 * 34% = $170,000.

Since the deferred tax asset exceeds the deferred tax liability, the net deferred tax benefit is $170,000 - $8,500 = $161,500.

However, since the deferred tax asset is only partially realizable due to the current year's taxable income, we need to multiply the deferred tax asset by the tax rate and subtract the result from the net deferred tax benefit:

$161,500 - ($100,000 * 34%) = $95,500.

Therefore, the answer is C) $42,500 net deferred tax benefit.

Swordfish Corporation Reported Pretax Book Income of $1,000,000