Stone Corporation reported pretax book income of $1,000,000. Tax depreciation exceeded book depreciation by $300,000. In addition, the reserve for bad debts decreased by $50,000. Stone had a net deferred tax asset of $34,000 at the beginning of the year, representing a net deductible temporary difference of $100,000. At the beginning of the tax year, Congress reduced the corporate tax rate from 34 percent to 21 percent. Compute the company's current and deferred income tax expense or benefit.
What will be an ideal response?
$136,500 current income tax expense and net $86,500 deferred income tax expense.
| Pretax book income | $ | 1,000,000 | |
| Excess tax depreciation | (300,000 | ) | |
| Decrease in bad debt reserve | (50,000 | ) | |
| Taxable income | $ | 650,000 | |
| × 21% | × 21 | % | |
| Current taxes payable | $ | 136,500 | |
| Excess tax depreciation | $ | (300,000 | ) |
| Decrease in bad debt reserve | (50,000 | ) | |
| Net favorable temporary differences | $ | (350,000 | ) |
| × 21% | × 21 | % | |
| Net increase in deferred income tax liability | $ | (73,500 | ) |
| Reduce beginning-year balance of deferred tax asset | |||
| $100,000 × (0.13) | (13,000 | ) | |
| Net increase in deferred income tax liability | $ | (86,500 | ) |
The net increase in the current-year deferred income tax liability plus the reduction in the deferred tax asset beginning balance is recorded as Stone's deferred tax expense in the current year.
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