Question

grand corporation reported pretax book income of $675,000. tax depreciation exceeded book depreciation by $450,000. in addition, the company received $337,500 of tax-exempt municipal bond interest. the company's prior-year tax return showed taxable income of $56,250. grand's beginning book (tax) basis in its fixed assets was $2,125,000 ($1,900,000) and its ending book (tax) basis is $2,625,000 ($1,975,000). compute the company's current income tax expense or benefit.

Answer 1

The company's current income tax expense or benefit is $387,500.

Step-by-step explanation:

To compute the company's current income tax expense or benefit, we need to consider several factors:

1. We start with the pretax book income of $675,000.
2. We deduct the excess of tax depreciation over book depreciation, which is $450,000. This reduces the taxable income to $225,000 ($675,000 - $450,000).
3. We then subtract the tax-exempt municipal bond interest of $337,500 from the taxable income, resulting in a taxable income of $-112,500 ($225,000 - $337,500). Thus, the company has a tax benefit.
4. Next, we compare the beginning and ending book basis in fixed assets to calculate the change in book (tax) basis. The change in book basis is $500,000 ($2,625,000 - $2,125,000).
5. This change in book basis is added to the negative taxable income of $-112,500. The total is $387,500. This amount represents the tax benefit that can be recognized in the current year and is included as a reduction to income tax expense.

Therefore, the company's current income tax expense or benefit is $387,500.