Question

In its 2016 income statement, Tow Inc. reported proceeds from an officer's life insurance policy of $90,000 and depreciation of $250,000. Tow was the owner and beneficiary of the life insurance on its officer. Tow deducted depreciation of $370,000 in its 2016 income tax return when the tax rate was 25%. Data related to the reversal of the excess tax deduction for depreciation follow: Year 2017 2018 2019 2020 Reversal of excess tax deduction $10,000 20,000 40,000 50,000 Enacted tax rates 30% 30% 35% 35% There are no other temporary differences. Taxable income in 2016 is $68,000. Tow expects to report profits (rather than losses) for tax purposes for all future years. What is 2016 Income Tax Expense? Select one: a. $57,500 b. $47,000 c. $84,500 O d. $53,000 O e. $80,000

Answer 1

The correct answer is "A" : 57,500

Workings :

1. The life-insurance receipt represents a permanent difference and therefore do not contribute to the deferred tax liability. Only temporary differences are taken into consideration for calculation of deferred tax liability/asset.

2. Calculation of deferred tax liability on account of temporary differences in depreciation :

Year	Reversal	Tax rates	DTL
2017	10000	30%	3000
2018	20000	30%	6000
2019	40000	35%	14000
2020	50000	35%	17500
		TOTAL DTL	40500

3. Income tax on current year taxable income = 68,000$ * 25% = 17,000$

4. Therefore, total income tax expense to be recorded in 2016 = 40,500+17,000 = 57,500 $