Question

Cass Corporation reported pretax book income of $10,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $200,000. Cass Corporation sold a fixed asset and reported book gain of $50,000 and tax gain of $75,000. Finally, the company received $250,000 of tax-exempt life insurance proceeds from the death of one of its officers. Compute the company's current income tax expense or benefit. (Amounts to be deducted should be indicated by a minus sign.) Answer is not complete. Pretax book income Increase in bad debt reserve Excess tax depreciation Excess tax over book gain Tax-exempt life insurance proceeds Taxable income $ 10,000,000 100,000 (200,000) (75,000) (250,000) $ 675,000 $ 21 $ 229,500 Tax rate %

Answer 1

Solution:

Pretax book Income	$ 10,000,000
Increase in bad debt reserve	100,000
Excess tax depreciation	(200,000)
Excess tax over book gain ( see note )	25,000
Tax exempt life insurance proceeds	(250,000)
Taxable Income	$ 9,675,000
Tax rate	21%
Income tax expense	$ 2,031,750

Working note:

Given book gain on sale of fixed asset = $ 50,000

Tax gain on sale of fixed asset = $ 75,000

Excess of tax gain over book gain = $ 75,000 - $ 50,000

= $ 25,000