Morrisson, Inc., earns book net income before tax of $500,000. In computing its book income, Morrisson deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Morrisson records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21% and no valuation allowance is required, what is Morrisson's current income tax expense reported on its GAAP financial statements?
A) $115,500
B) $105,000
C) $94,500
D) $10,500

Question

Quizplus · Accepted Answer

Morrisson's current income tax expense is calculated on its book income before tax, which is $500,000. The $50,000 excess warranty expense deducted for book purposes over tax purposes will reverse in the future, creating a temporary difference. The tax effect of this temporary difference is $50,000 * 21% = $10,500, which is a deferred tax asset. The current income tax expense is the book income before tax multiplied by the tax rate, which is $500,000 * 21% = $105,000. However, since the question asks for the total income tax expense reported on the GAAP financial statements, this includes both current and deferred portions. Therefore, the total reported income tax expense is the current income tax expense of $105,000 plus the deferred tax asset of $10,500, totaling $115,500.