Question

In Year 1, Lobo Corp. reported for financial-statement purposes the following revenue and expenses that were not included in taxable income:

Premiums on officers' life insurance under which the corporation is the beneficiary $5,000
Interest revenue on qualified-state or municipal bonds $10,000
Estimated future warranty costs to be paid in Year 2 and Year 3 $60,000

Lobo's enacted tax rate for the current and future years is 30%. Lobo has paid income taxes of $170,000 for the three-year period ended December 31, Year 1. There were no temporary differences in prior years. The deferred tax benefit to be applied against current income tax expense is:_________

a. $21,000
b. $19,500
c. $18,000
d. $22,500

Answer 1

Answer: $18,000

Step-by-step explanation:

Interest from municipal bonds is tax free and will therefore result in a permanent difference along with the premium on officers' insurance.

Temporary difference will arise from the estimated future warranty costs to be paid in Year 2 and 3 and this will be a tax benefit because they will only be recognized in Year 2 and 3 but have already been recognized by the tax authority:

= 60,000 * 30%

= $18,000