Question

Morris Inc. had pretax financial income of $4,500,000 in 2025. Included in the computation of that amount is meal and entertainment expense of $400,000 which is not deductible for tax purposes. In addition, Morris has the following timing differences:

Depreciation for tax purposes exceeds accounting depreciation by $200,000
Bad debts for financial accounting purposes are not recognizable for tax purposes in the amount of $75,000
The tax rate is 21%. What is the tax expense and the current taxes payable for 2025?

Answer 1

The tax expense for 2025 is $886,250 and the current taxes payable is also $886,250.

Step-by-step explanation:

The tax expense and the current taxes payable for 2025 can be calculated as follows:

1. Start with pretax financial income: $4,500,000
2. Subtract the meal and entertainment expense that is not deductible for tax purposes: $400,000
3. Add the timing differences:
   1. Add the excess of tax depreciation over accounting depreciation: $200,000
   2. Deduct the bad debts not recognized for tax purposes: $75,000
4. You now have taxable income: $4,225,000 ($4,500,000 - $400,000 + $200,000 - $75,000)
5. Calculate the tax expense using the tax rate of 21%: $886,250 ($4,225,000 * 21%)
6. The current taxes payable for 2025 is the tax expense: $886,250