Answer:
The correct option here is C) $10,000.
Explanation:
When we are talking about income tax expense it includes the net income tax liability, deferred tax changes and changes in valuation account for deferred tax assets.
Given tax liability = $13,000
Current Deferred tax assets(2005) before valuation account = $20,000,
but at the end of year at 31 December, 2004 it was = $15,000
So here there has been an increase in the deferred tax asset, which means now the income tax expense would decrease ,as this future anticipated deduction will be treated as asset when it will be realized in the current year.
Also it is recognized by shin that 10% of the deferred tax would not be realized, so therefore it is an increase in the valuation account, which will reduce the deferred tax asset effect.
INCOME TAX EXPENSE =
Tax liability - increase in deferred tax asset + increase in valuation account
= $13,000 - ($20,000 - $15,000) + 10% x $20,000
= $13,000 - $5000 + $2000
= $10,000
