Question

Grand Corporation reported pretax book income of $752,500. Tax depreciation exceeded book depreciation by $620,000. In addition, E the company received $320,000 of tax-exempt municipal bond interest. The company's prior-year tax return showed taxable income E of $117,000. Compute the company's current or deferred income tax expense or benefit. & Answer is complete but not entirely correct. Deferred income tax benefit $ 14,805

Answer 1

Particulars	Amount($)
Book Income	$752,500
Less excess of tax depreciation over book depreciation	$620,000
Balance	$132,500
Less interest received on tax exempt municipal bonds	$320,000
Taxable income / loss	($187,500)
Income tax expenses(35% of $187,500)	($65,625)
Income tax expenses as per book income (35% of $752,500)	$263,375
As tax payable as per tax authorities is ($65,625), the amount of tax paid in advance is deferred tax asset or deferred income tax benefit	$329,000

Note :

The difference between book profits and taxable profits leads to differed tax liability or deferred tax asset.

1. The book depreciation is lower than the tax depreciation. Normally for taxation purposes, companies have to adopt a higher depreciation rate which gives rise to difference between book depreciation and tax depreciation. This difference is adjusted from the book income, to compute the taxable income or loss.

2. The tax exempt interest received on municipal bonds need not be included to the gross income of the Corporation for taxation purposes. The book income includes this tax-exempt value as it is interest received and a revenue item. Hence this value also need to be deducted.

3. The previous years taxable income is immaterial for this problem as tax would have already been paid for the previous year taxable income.