South, Inc., earns book net income before tax of $400,000 in 2014. South acquires a depreciable asset in 2014, and first year tax depreciation exceeds book depreciation by $50,000. At the end of 2014, South's deferred tax liability account balance is $17,500. In 2015, 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 2015?

Question

Quizplus · Accepted Answer

First, we need to calculate South's taxable income for each year:

2014 Taxable Income = $400,000 - $50,000 = $350,000
2015 Taxable Income = $500,000 + $20,000 = $520,000

Next, we need to calculate South's income tax expense for each year:

2014 Income Tax Expense = $350,000 * 35% = $122,500
2015 Income Tax Expense = $520,000 * 35% = $182,000

Finally, we need to calculate the change in South's deferred tax liability account balance from 2014 to 2015:

Change in Deferred Tax Liability = $17,500 - ($520,000 - $350,000) * 35% = $7,000 (This is a decrease in the deferred tax liability)

Therefore, South's total income tax expense reported on its GAAP financial statements for 2015 is:

Total Income Tax Expense = 2015 Income Tax Expense - Change in Deferred Tax Liability
Total Income Tax Expense = $182,000 - $7,000 = $175,000

Thus, the best choice is (C).