Question

Relix, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year before recording any net deferred tax asset or net deferred tax liability.

Tax Debit/(Credit)			Book Debit/(Credit)
Assets
Cash	$500			$500
Accounts receivable	8,000			8,000
Buildings	750,000			750,000
Accumulated depreciation	(450,000)			(380,000)
Furniture and fixtures	70,000			70,000
Accumulated depreciation	(46,000)			(38,000)
Total assets	$332,500			$410,500
Liabilities
Accrued litigation expense	$0			($50,000)
Note payable	(78,000)			(78,000)
Total liabilities	($78,000)			($128,000)
Stockholders' Equity
Paid-in capital	($10,000)			($10,000)
Retained earnings	(244,500)			(272,500)
Total liabilities and stockholders' equity	($332,500)			($410,500)

The beginning of the year book-tax basis difference is listed below for the deferred tax asset.

Beginning of Year Accrued litigation expense $34,000

The beginning of the year book-tax basis differences are listed below for the deferred tax liabilities.

Beginning of Year Building—accumulated depreciation ($57,000) Furniture and fixtures— accumulated depreciation (4,200) Subtotal ($61,200)

In addition to the temporary differences above, Relix, Inc., reported two permanent differences between book and taxable income. It earned $2,375 in tax-exempt municipal bond interest, and it incurred $780 in nondeductible business meals expense. Relix's book income before tax is $4,800. Assume a 21% Federal corporate tax rate and no valuation allowance. With this additional information, calculate Relix's current tax expense.

Compute Relix's current tax expense.

If required, round your answers to the nearest dollar.

Pre-tax book income $4,800 Book-tax adjustments Permanent items ......:  tax-exempt income .......:  nondeductible business meals Temporary Differences   building depreciation   furniture and fixtures depreciation   accrued litigation expenses Taxable income $ Current tax expense $

Answer 1

a. The total difference in the book and tax bases of the assets is $78,000, which results in a gross deferred tax liability in the amount of $16,380. (78,000*21%)

b. The total difference in the book and tax bases of the liabilities is $50,000, which results in gross deferred tax asset in the amount of $10,500. (50,000*21%).

Deferred tax asset is created in the above situation as the tax base is less than the book base which result to deductible temporary differnce.

c. Relix's net deferred tax liablity.at year end is $5,880.