The Chance Company began operations in 2016 and, for that calendar year, reported an operating loss of $200,000. Due to sufficient verifiable positive evidence, no valuation allowance was established to reduce the deferred tax asset as of December 31, 2016. During 2017, Chance reported pretax accounting income of $375,000. Assuming an income tax rate of 35%, what should Chance record in 2017 as income tax payable at the end of 2017?

Question

Quizplus · Accepted Answer

The income tax payable for 2017 is calculated by applying the tax rate to the pretax accounting income. Thus, $375,000 * 35% = $131,250. However, the company can use the deferred tax asset from the previous year's operating loss ($200,000) to offset the current year's tax liability. The actual payable amount is the tax on the income after considering the benefit of the operating loss carryforward. Since the question asks for the payable amount, not the effective tax expense which would consider the deferred tax asset utilization, the calculation is straightforward: 35% of $375,000 = $131,250. The confusion might stem from considering the impact of the deferred tax asset on the payable amount, but the question specifically asks for the payable amount, not the net tax expense after deferred tax asset application.

The Chance Company Began Operations in 2016 And, for That