Lynch Company had a net deferred tax asset of $69,292 at the beginning of the year, representing a net taxable deductible difference of $203,800 (taxed at 34 percent). During the year, Lynch reported pretax book income of $815,200. Included in the computation were favorable temporary differences of $23,800 and unfavorable temporary differences of $51,900.At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Lynch's deferred income tax expense or benefit for the current year would be:

Question

Quizplus · Accepted Answer

To calculate the current year's deferred income tax expense or benefit for Lynch Company, we need to first calculate the net taxable temporary differences at the end of the year.

Cumulative net taxable temporary differences at the beginning of the year = $203,800

Favorable temporary differences during the year = $23,800

Unfavorable temporary differences during the year = -$51,900

Net taxable temporary differences at the end of the year = $175,700

Since Congress reduced the corporate tax rate from 34% to 21% at the beginning of the year, the net deferred tax asset at the beginning of the year needs to be recalculated.

Net deferred tax asset at the beginning of the year = $69,292

Cumulative net taxable temporary differences at the beginning of the year = $203,800

Effective tax rate at the beginning of the year = 34%

Net deferred tax asset at the beginning of the year (recalculated) = $51,906

Now, we can calculate the deferred income tax expense or benefit for the current year:

Effective tax rate for the current year = 21%

Deferred tax expense or benefit = (Net taxable temporary differences at the end of the year x (effective tax rate at the end of the year - effective tax rate at the beginning of the year)) - change in net deferred tax asset

= ($175,700 x (21% - 34%)) - ($51,906 - $69,292)

= $20,593

Therefore, the net deferred tax expense for Lynch Company for the current year is $20,593.

Choice D is the correct answer.

Lynch Company Had a Net Deferred Tax Asset of $69,292