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Prance, Inc., earns a pretax book net income of $800,000 in 2018. Prance acquires a depreciable asset that year, and first-year tax depreciation exceeds book depreciation by $80,000. Prance reported no other temporary or permanent book-tax differences. The relevant U.S. Federal corporate income tax rate is 21% and Prance earns an after-tax rate of return on capital of 8%. Compute Prance's total income tax expense, current income tax expense, and deferred income tax expense.

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jepessoa

Answer:

total income tax expense = $800,000 (net pretax income) x 21% (income tax rate) = $168,000 ⇒ this number must be reported in its GAAP financial statements

current income tax expense = ($800,000 - $80,000) x 21% = $151,200 ⇒ this is the amount of tax due for the current period

deferred tax liability = $80,000 x 21% = $16,800 ⇒ results from reporting differences (GAAP rules) and the rules that the IRS uses to collect axes, e.g expensing assets or bonus depreciation

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