At the end of their first year of operations on December 31, 2010 Zephyr, Inc had total GAAP financial net income before taxes of $190,000. Zephyr, Inc.'s tax rate is 35%. They had the following book-tax differences in 2010:
$30,000 Tax depreciation in excess of book depreciation
$1,500 Municipal bond interest income
$10,000 Change in allowance for bad debt - no actual bad debt expense during the year
$3,500 Nondeductible club dues
$1,800 Nondeductible meals and entertainment
On December 31, 2011 Zephyr, Inc. had only one book-tax difference:
$8,000 Book depreciation in excess of tax depreciation
a. Identify which of the 2010 and 2011 book-tax differences are temporary, and which are permanent
b. Calculate Zephyr, Inc.'s 2010 current tax expense, deferred tax expense, and total tax expense
c. Calculate the balance of Zephyr Inc's Deferred Tax Asset account, and Deferred Tax Liability account as of December 31, 2010.
d. Calculate the balance of Zephyr, Inc.s Deferred Tax Asset account, and Deferred Tax Liability account as of December 31, 2011.
This solution illustrates how to compute a corporation's deferred tax asset, deferred tax liability, current tax expense, deferred tax expense, and total tax expense.