South, Inc., earns book net income before tax of $400,000 in year 1.South acquires a depreciable asset in year 1, and first year tax depreciation exceeds book depreciation by $50,000.At the end of year 1, South's deferred tax liability account balance is $17,500.In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000.South records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21%, what is South's total provision for income tax expense reported on its GAAP financial statements for year 2?

Question

Quizplus · Accepted Answer

First, we need to calculate the deferred tax liability balance at the end of year 2:
Deferred tax liability balance at the end of year 1 = $17,500
+ (Temporary difference in depreciation in year 1 = $50,000 x 21% tax rate) = $10,500
= $28,000
Temporary difference in depreciation in year 2 = Book depreciation ($500,000) - Tax depreciation ($500,000 - $20,000) = $20,000
Deferred tax liability balance at the end of year 2 = $28,000 + ($20,000 x 21% tax rate) = $32,200
Total provision for income tax expense in year 2 = Current tax expense + Change in deferred tax expense
Current tax expense = Book income before taxes ($500,000) x 21% tax rate = $105,000
Change in deferred tax expense = Deferred tax liability balance at end of year 2 ($32,200) - Deferred tax liability balance at end of year 1 ($17,500) = $14,700
Total provision for income tax expense in year 2 = $105,000 + $14,700 = $119,700, which is closest to answer choice C: $105,000.