Simba Inc. reported a deferred tax liability of $6,000,000 for the year ended De

Question

Simba Inc. reported a deferred tax liability of $6,000,000 for the year ended December 31, 2014, when the tax rate was 40%. The deferred tax liability was related to a temporary difference of $15,000,000 caused by an installment sale in 2014. The temporary difference is expected to reverse in years 2015 through 2017 as $5,000,000 of installment income is expected to be recognized as taxable income in each of those years. There are no other temporary differences. A new tax law was passed in 2015 with the tax rate remaining 40% through December 31, 2015, then increase to 45% for tax years beginning after December 31, 2015. Taxable income for the year 2015 is $30,000,000. Income tax expense reported by Simba on its year end December 31, 2015 income statement is:

    A)$11,250,000

    B)$12,000,000

    C)$10,500,000

    D)$10,000,000

Explanation / Answer

Taxable Income for 2015 = 30000000-5000000 = 25,000,000

Tax Rate = 45%

Income Tax Expense = 25,000,000 X 45% = 11250000

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