South, Inc., earns book net income before tax of $400,000 in 2010. South acquires a depreciable asset in 2010, and first year tax depreciation exceeds book depreciation by $50,000. At the end of 2010, South's deferred tax liability account balance is $17,500. In 2011, 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 35%, what is South's total income tax expense reported on its GAAP financial statements for 2011?

Question

Quizplus · Accepted Answer

To calculate the income tax expense for 2011, we need to first calculate the taxable income for 2011.

Taxable Income for 2011 = Book Net Income before Tax - (Book Depreciation - Tax Depreciation)

Taxable Income for 2011 = $500,000 - ($20,000) = $480,000

Next, we need to calculate the tax liability for 2011.

Tax Liability for 2011 = Taxable Income for 2011 * Tax Rate

Tax Liability for 2011 = $480,000 * 35% = $168,000

Now, we need to calculate the change in the deferred tax liability account balance from 2010 to 2011.

Change in Deferred Tax Liability = Tax Liability for 2011 - Tax Paid in 2010

Change in Deferred Tax Liability = $168,000 - ($400,000 - $50,000) * 35% = $13,500

Finally, we can calculate the income tax expense for 2011.

Income Tax Expense for 2011 = Tax Liability for 2011 + Change in Deferred Tax Liability

Income Tax Expense for 2011 = $168,000 + $13,500 = $175,500

Therefore, the answer is B, $175,000.