Costello Corporation reported pretax book income of $500,600. During the current year, the reserve for bad debts increased by $6,200. In addition, tax depreciation exceeded book depreciation by $40,600. Finally, Costello received $3,300 of tax-exempt life insurance proceeds from the death of one of its officers. Costello's deferred income tax expense or benefit would be:

Question

Quizplus · Accepted Answer

The calculation for Costello's deferred income tax expense involves adjusting the pretax book income for differences between tax and book accounting. The increase in the reserve for bad debts ($6,200) and the excess of tax depreciation over book depreciation ($40,600) are temporary differences that will reverse in the future. The tax-exempt life insurance proceeds ($3,300) do not affect taxable income. The net adjustment to pretax book income is $46,800 ($6,200 + $40,600), which will result in a deferred tax expense because it increases taxable income in the future. Assuming a corporate tax rate (not provided in the question, but typically around 21%), the deferred tax expense would be approximately $7,224 (21% of $46,800), making option A the correct choice.

Costello Corporation Reported Pretax Book Income of $500,600