Question

On its December 31, 2005 balance sheet, Shin Co. has income tax payable of $13,000 and a current deferred tax asset of $20,000, before determining the need for a valuation account. Shin had reported a current deferred tax asset of $15,000 at December 31, 2004. No estimated tax payments are made during 2005. At December 31, 2005, Shin determines that it is more likely than not that 10% of the deferred tax asset would not be realized.

In its 2005 income statement, what amount should Shin report as total income tax expense?

A. $8,000
B. $8,500
C. $10,000
D. $13,000

Answer 1

The correct option here is C) $10,000.

Step-by-step 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