Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded book depreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Compute Sparrow's current income tax expense or benefit.
What will be an ideal response?
$1,018,500 current income tax expense.
| Pretax book income | $ | 5,000,000 | |
| Increase in warranty reserve | 300,000 | ||
| Excess tax depreciation | (400,000 | ) | |
| Tax-exempt municipal bond interest | (50,000 | ) | |
| Taxable income | $ | 4,850,000 | |
| × 21% | × 21 | % | |
| Current income tax expense | $ | 1,018,500 | |
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