South, Inc., earns book net income before tax of $400,000 in year 1. It acquires a depreciable asset in year 1, and its first-year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $10,500. 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 21% in both years, what is South's current income tax expense reported on its GAAP financial statements for year 2?
A) $4,200
B) $94,500
C) $105,000
D) $109,200

Question

Quizplus · Accepted Answer

In year 2, South's current income tax expense is calculated based on its book net income before tax of $500,000. The tax expense at the 21% tax rate is $500,000 * 21% = $105,000. However, since book depreciation exceeds tax depreciation by $20,000 in year 2, this creates a temporary difference that will reverse in the future, reducing the deferred tax liability. The change in the deferred tax liability is $20,000 * 21% = $4,200. Therefore, the total current income tax expense reported on the GAAP financial statements for year 2 is $105,000 + $4,200 = $109,200.