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 $10,500.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% in both years, what is South's current income tax expense reported on its GAAP financial statements for year 2?

Question

Quizplus · Accepted Answer

First, we need to calculate South's taxable income for year 2 based on book income and tax depreciation. 
Book income: $500,000 
Tax depreciation: $500,000 - $20,000 = $480,000 
Taxable income: $500,000 - $480,000 = $20,000 
Next, we need to calculate the income tax expense based on the deferred tax liability account balance at the end of year 1 and the current year's taxable income. 
Deferred tax liability: $10,500 
Current year taxable income: $20,000 
Total taxable amount: $30,500 
Income tax expense: $30,500 x 21% = $6,405 
However, South also needs to recognize the change in deferred tax liability from year 1 to year 2. The difference in temporary book-tax difference from year 1 to year 2 is -$50,000 (tax depreciation exceeded book depreciation in year 1, but the opposite is true in year 2). 
Change in deferred tax liability: -$50,000 x 21% = -$10,500 
Since the deferred tax liability account balance decreased by $10,500 from year 1 to year 2, this amount needs to be subtracted from the income tax expense calculated above. 
Final income tax expense: $6,405 - $10,500 = -$4,095. 
However, income tax expense cannot be negative, so it is adjusted to $0. 
Therefore, the correct answer is D) $109,200.