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 35%, what is South's current income tax expense reported on its GAAP financial statements for year 2?

Question

Quizplus · Accepted Answer

To calculate current income tax expense, we need to consider the change in deferred tax liability from year 1 to year 2.

In year 1, the excess tax depreciation over book depreciation created a deferred tax liability of $50,000 * 35% = $17,500.

In year 2, the excess book depreciation over tax depreciation creates a deferred tax asset of $20,000 * 35% = $7,000.

Therefore, the change in deferred tax liability from year 1 to year 2 is ($17,500 - $7,000) = $10,500, which represents a reduction in the amount of tax that will be payable in the future.

Current income tax expense for year 2 is the tax liability on South's year 2 taxable income, minus the decrease in deferred tax liability.

South's taxable income for year 2 is $500,000 - $20,000 = $480,000.

The tax liability on $480,000 is $168,000 ($480,000 * 35%).

Therefore, current income tax expense for year 2 is $168,000 - $10,500 = $157,500.

However, we also need to add back the $7,000 reduction in deferred tax liability that was credited to income tax expense.

Thus, the final answer is $157,500 + $7,000 = $182,000.

Therefore, the correct answer choice is D, $182,000.