Cold, Inc., reported a $100,000 total tax expense for financial statement purposes in year 1. This total expense consisted of $150,000 in current tax expense and a deferred tax benefit of $50,000. The deferred tax benefit consisted of $90,000 in deferred tax assets reduced by a valuation allowance of $40,000. In year 2, Cold reports $600,000 in book net income before tax. Cold records no other permanent or temporary book-tax differences. At the end of year 2, Cold's management determines that the existing valuation allowance of $40,000 should be reduced to zero. What is Cold's total tax expense for year 2

Answer:

170,000

Explanation:

With $600,000 of book income, the potential total book tax expense is $210,000 ($600,000 × 35%). However, the release of the $40,000 valuation allowance in the current year allows an additional $40,000 of future tax benefits (savings) to be considered in the current year. Accordingly, the total tax expense is $170,000 ($210,000 – $40,000).

Cold's management determines that the existing valuation allowance of $40,000 should be reduced to zero. The Cold's total tax expense for year 2 is 170,000.

The amount of a deferred tax asset is offset by a reserve called a valuation allowance. Based on that element of the tax asset for which it is more probable than not that a tax advantage won't be realized by the reporting business, the allowance's size is determined.

The potential total book tax expense with $600,000 in book income is $210,000 ($600,000 x 35%).

However, an additional $40,000 in future tax benefits (savings) can be taken into account in the current year due to the release of the valuation allowance in the current year.

The total tax expense is therefore $170,000 ($210,000 - $40,000).

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QUESTION 7 / 10
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Larry signs a written contract with Sprint to buy the cell phone and pay $75.00 per month for the cell phone plan for a time period of 2 years.
Sprint agrees that Larry will pay $75.00 per month for 2 years for the cell phone plan.
Larry and Sprint sign a written contract on April 1, 2021. Larry makes his first payment of $75.00 on April 15, 2021.
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