Gravel, Inc., earns book net income before tax of $600,000. Gravel puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Gravel has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Gravel's current income tax expense reported on its GAAP financial statements?

Question

Quizplus · Accepted Answer

The temporary difference between book and tax depreciation will result in a deferred tax liability of $42,000 ($120,000 x 35%), which will be recognized on the balance sheet. However, the current income tax expense reported on the income statement will only reflect the tax payable on the taxable income of $720,000 ($600,000 + $120,000) at a rate of 35%, which is $252,000. Since this is higher than the actual tax payable for the year, we need to adjust for the deferred tax liability, resulting in a current income tax expense of $210,000 ($252,000 - $42,000).