Question

Grand Corporation reported pretax book income of $807,500. Tax depreciation exceeded book depreciation by $690,000. In addition, the company received $160,000 of tax-exempt municipal bond interest. The company’s prior-year tax return showed taxable income of $36,000. Compute the company's deferred income tax benefit. Assumed tax rate is 21%

Answer 1

Deferred tax asset is used to reduce the company’s tax obligations. In the current case, deferred tax assets is likely to be created as net operating loss exist. This net loss is to be set off from prior year net loss and the balance amount of net loss is to be carried forward for deferred tax asset creation purpose.

Pre-tax book income	$ 807,500
Excess tax depreciation	(690,000)
Tax exempt interest income	(160,000)
Net operating loss	($ 42,500)
NOL carryback to prior year	36,000
X Tax rate	21%
Current income tax benefit	7,560

The balance net operating loss of 42,500-36,000 = $ 6,500 carryover shall be recorded as deferred tax asset(benefit) of 6,500*21% = $ 1,365

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