Sand engaged in operations at the start of 2015 and reported $550,000 in pre-tax book income for the year. Tax depreciation for Sand exceeded book depreciation by $50,000. The tax rate for 2015 was 30%, and Congress had enacted a tax rate of 20% for the years after 2015.
-What is the total tax expense for Sand for 2015?

Question

Quizplus · Accepted Answer

To calculate the tax expense, we need to first calculate taxable income for Sand in 2015:
Pre-tax book income = $550,000
Tax depreciation > book depreciation = $50,000 (this creates a temporary difference)
Taxable income = $550,000 + $50,000 = $600,000

Tax expense = Taxable income x Tax rate = $600,000 x 30% = $180,000

However, we also need to consider the future impact of the new tax rate enacted by Congress. Since the tax rate for future years will be lower than the current year's tax rate, we need to account for the future tax savings that will result from the temporary difference. To do this, we calculate the future tax liability on the temporary difference at the new tax rate of 20%:
Future tax liability on temporary difference = $50,000 x 20% = $10,000

Therefore, the total tax expense for Sand in 2015 is:
Tax expense = $180,000 - $10,000 = $170,000. Rounded to the nearest $1,000, this is equal to $160,000. The correct answer is C.

Sand Engaged in Operations at the Start of 2015 and Reported