Cold, Inc, reported a $100,000 total tax expense for financial statement purposes in year 1 . 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 year 2, Cold reports $600,000 in book net income before tax. Cold records no other
permanent or temporary book-tax differences. At the end of year 2, 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 year 2?
a. $250,000
b. $210,000
c. $170,000
d. $40,000
c
RATIONALE: With $600,000 of book income, the potential total book tax provision is $210,000 ($600,000 × 35%). However, the release of the $40,000 valuation allowance in the current year allows an additional $40,000 of future tax benefits (savings) to be considered in the current year. Accordingly, the total tax provision is $170,000 ($210,000 – $40,000).
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