Cold,Inc. ,reported a $100,000 total tax expense for financial statement purposes in 2009.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 2010,Cold reports $600,000 in book net income before tax.Cold has no permanent or temporary book-tax differences for 2010.At the end of 2010,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 2010?

Question

Quizplus · Accepted Answer

Since Cold has no permanent or temporary book-tax differences in 2010, its taxable income and book net income are the same. Thus, its current tax expense will be based on its book net income, which is $600,000. 
The deferred tax benefit from 2009 does not affect the tax expense for 2010 because it is a non-operating item. 
The reduction of the valuation allowance means that the entire $50,000 deferred tax benefit will now be recognized. 
Therefore, the total tax expense for 2010 is: 
Current tax expense = Taxable income x Tax rate = $600,000 x 35% = $210,000 
Deferred tax benefit = $50,000 
Total tax expense = $210,000 - $50,000 = $160,000 
However, we need to add back the $40,000 reduction in the valuation allowance to arrive at the final answer of $170,000.

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