Cold, Inc., reported a $100,000 total tax expense for financial statement purposes in 2010. This total expense consisted of $150,000 in current tax expense and a deferred tax benefit of $50,000. The deferred tax benefit consisted of $90,000 in deferred tax assets reduced by a valuation allowance of $40,000. In 2011, Cold reports $600,000 in book net income before tax. Cold records no other permanent or temporary book-tax differences for 2011. At the end of 2011, Cold's auditors determine that the existing valuation allowance of $40,000 should be reduced to zero. What is Cold's total tax expense for 2011?

Question

Quizplus · Accepted Answer

In 2011, there are no other permanent or temporary book-tax differences, so the taxable income for Cold in 2011 is $600,000. Since the valuation allowance was reduced to zero, the deferred tax benefits of $50,000 would be recognized on the income statement. Hence, the total tax expense for 2011 is $150,000 (current tax expense) + $50,000 (deferred tax benefit) = $200,000. However, the $100,000 total tax expense reported in 2010 should be subtracted since it is already accounted for. Therefore, the total tax expense for 2011 is $200,000 - $100,000 = $100,000, which is equivalent to the current tax expense of $150,000 minus the deferred tax asset of $50,000 (the valuation allowance of $40,000 is already taken into account).

Cold, Inc, Reported a $100,000 Total Tax Expense for Financial Statement