Burcham Corporation reported pretax book income of $672,500. Tax depreciation ex

Question

Burcham Corporation reported pretax book income of $672,500. Tax depreciation exceeded book depreciation by $550,000. In addition, the company received $210,000 of tax-exempt municipal bond interest. The company’s prior-year tax return showed taxable income of $55,000. Compute the company’s book equivalent of taxable income. Use this number to compute the company’s total income tax provision or benefit, assuming a tax rate of 34 percent.

1. Book equivalent of taxable income?

2. Total income tax provision or benefit?

Explanation / Answer

Answer

The net increase in the deferred income tax liability is recorded as the company’s deferred tax expense in the current year. This assumes the company does not record a valuation against the deferred tax asset created by the NOL carryover. Permanent differences do not affect the deferred tax provision.

Particulars Amount Pre-tax book income 672500 Excess tax depreciation (550000) Tax-exempt interest income (210000) Net operating loss (87500) NOL carryback to prior year $55000 Tax rate 34% Current income tax refundable $18700 Excess tax depreciation $550000 NOL carryover to last year $55000 Net increase in favorable temporary difference $495000 Tax rate 34% Net increase in deferred income tax liability 168300

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