Question

The FGCC Company had an enacted income tax rate of 28 percent. The company ended Year One with a deferred income tax liability of $40,000, a deferred income tax asset of $50,000 and a valuation allowance of $19,000. The enacted tax rate was raised at the start of Year Two to 30 percent. The company ended Year Two with a deferred income tax liability of $70,000, a deferred income tax asset of $40,000, and a valuation allowance of $24,000. On the company's Year Two income statement, what is the amount of income tax expense (deferred) that is reported?

a.$35,000
b.$15,000
c.$45,000
d.$25,000

Answer 1

The amount of income tax expense (deferred) reported on the company's Year Two income statement is $15,000.

Step-by-step explanation:

The income tax expense (deferred) reported on the company's Year Two income statement can be calculated by considering the changes in the deferred income tax liability, deferred income tax asset, and valuation allowance.

First, we need to calculate the change in deferred income tax liability, which is $70,000 - $40,000 = $30,000. This represents an increase in the liability.

Next, we need to calculate the change in deferred income tax asset, which is $40,000 - $50,000 = -$10,000. This represents a decrease in the asset.

Finally, we need to calculate the change in the valuation allowance, which is $24,000 - $19,000 = $5,000. This represents an increase in the allowance.

To calculate the income tax expense (deferred), we add the change in deferred income tax liability to the change in deferred income tax asset and subtract the change in valuation allowance. Therefore, the amount of income tax expense (deferred) reported on the company's Year Two income statement is $30,000 + (-$10,000) - $5,000 = $15,000