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.

Answer 1

Answer:

$229,500

Explanation:

For computing the company’s current income tax expense or benefit, first we have to compute the taxable income which is shown below:

= Pre-tax book income + Increase in bad debt reserve - Excess tax depreciation + Excess tax gain over book gain - Tax-exempt life insurance proceeds

= $10,000,000 + $100,000 - $200,000 + $25,000 - $250,000

= $675,000

We assume the tax rate is 34%

So, the current income tax expense or benefit would be

= $675,000 × 34%

= $229,500

The Excess tax gain over book gain is computed below:

= $75,000 - $50,000

= $25,000