A is corrent. When temporary differences exist, income tax expense must be allocated between the amount currently payable (current portion) and the future tax effects of temporary differences (deferred portion). The current portion is computed based on taxable income. The pretax financial (book) income must be adjusted as follows as to arrive at taxable income:| Pretax book income | $400,000 | | Excess of royalty income per books over tax return amount | (20,000) | | Payment of a penalty per books | 15,000 | | Excess of depreciation per tax return over amount per books | (25,000) | | Taxable income | $370,000 |
| | | | Taxes currently payable are $148,000 ($370,000 × 40%). | | |
Note that the $15,000 of penalty expense (a permanent difference) must be added to book income because it will never be deductible on the tax return.B is incorrect. When temporary differences exist, income tax expense must be allocated between the amount currently payable (current portion) and the future tax effects of temporary differences (deferred portion). The current portion is computed based on taxable income. The pretax financial (book) income must be adjusted as follows as to arrive at taxable income: | Pretax book income | $400,000 | | Excess of royalty income per books over tax return amount | (20,000) | | Payment of a penalty per books | 15,000 | | Excess of depreciation per tax return over amount per books | (25,000) | | Taxable income | $370,000 |
| | | | Taxes currently payable are $148,000 ($370,000 × 40%). | | |
Note that the $15,000 of penalty expense (a permanent difference) must be added to book income because it will never be deductible on the tax return. C is incorrect. When temporary differences exist, income tax expense must be allocated between the amount currently payable (current portion) and the future tax effects of temporary differences (deferred portion). The current portion is computed based on taxable income. The pretax financial (book) income must be adjusted as follows as to arrive at taxable income: | Pretax book income | $400,000 | | Excess of royalty income per books over tax return amount | (20,000) | | Payment of a penalty per books | 15,000 | | Excess of depreciation per tax return over amount per books | (25,000) | | Taxable income | $370,000 |
| | | | Taxes currently payable are $148,000 ($370,000 × 40%). | | |
Note that the $15,000 of penalty expense (a permanent difference) must be added to book income because it will never be deductible on the tax return. D is incorrect. When temporary differences exist, income tax expense must be allocated between the amount currently payable (current portion) and the future tax effects of temporary differences (deferred portion). The current portion is computed based on taxable income. The pretax financial (book) income must be adjusted as follows as to arrive at taxable income: | Pretax book income | $400,000 | | Excess of royalty income per books over tax return amount | (20,000) | | Payment of a penalty per books | 15,000 | | Excess of depreciation per tax return over amount per books | (25,000) | | Taxable income | $370,000 |
| | | | Taxes currently payable are $148,000 ($370,000 × 40%). | | |
Note that the $15,000 of penalty expense (a permanent difference) must be added to book income because it will never be deductible on the tax return. |
