Van Dyke, Inc., hopes to report a total book tax expense of $150,000 in the current year. This amount consists of $200,000 in current tax expense and a $50,000 tax benefit related to the expected future use of an NOL by Van Dyke. If the auditors determine that a valuation allowance of $20,000 must be placed against Van Dyke's deferred tax assets, what is Van Dyke's total book tax expense?

Question

Quizplus · Accepted Answer

The total book tax expense is the current tax expense plus the change in deferred tax assets and liabilities. The deferred tax asset related to the NOL will be reduced by the valuation allowance of $20,000, resulting in a change of $30,000 ($50,000 - $20,000). Therefore, the total book tax expense is $200,000 + $30,000 = $230,000. However, the question asks for the total book tax expense that Van Dyke hopes to report, which is $150,000. This means that Van Dyke will need to recognize a tax benefit of $80,000 ($230,000 - $150,000) to reconcile the two amounts. Therefore, the total book tax expense is $150,000 + $80,000 = $170,000. So, option B is the correct choice.