On 12/31/94, S Co had income taxes payable of 13K and current deferred tax asset of 20K before valuation account.  S Co had reported a deferred tax asset of 15K last 12/31/93.  No estimated tax payments were made.  At 12/31/94 S Co determined that 10% of the deferred asset would not be realized.  In the 1994 income statement, what amount should S Co report as total income tax expense?

8,000

8,500

10,000

13,000

Becker says the answer is 10K. 

Temporary difference = 20K – 2K for valuation allowance = 18K

Minus the beginning balance of 15K

= 3K

13K = 3K = 10K

I know this is simple, but I don’t get it.  Why isn’t the answer 13K?  It asks for the current tax expense.

Income taxes payable 13K:

Dr.Income tax expense-current 13000

Cr.Income taxes payable 13000

DTA went from 15K on 12/31/93 to 20K on 12/31/94, so an increase of 5K

JE:

Dr.Deferred tax asset 5000

Cr.Income tax expense-deferred 5000

10% of DTA will not be realized: 10%(20000)=2000

Dr.Income tax expense-deferred 2000

Cr.DTA  2000

Total income tax expense:(the question asks for total tax expense)

Income tax expense-current 13000

Income tax expense-deferred(3000) **-5000+2000 

total income tax expense      10000

hope that helps!

BEC passed

FAR 7/2/09

It asks for "total income tax expense," not current tax expense.

Total income tax expense = current tax expense(benefit) + deferred tax expense(benefit)
 = 13k - 5k(increase in def tax asset from 15k to 20k) + 2k(add valuation account)

The journal entries would be

income tax expense 10,000
deferred tax asset 5000
         income taxes payable 13,000
         allowance to reduce deferred tax asset to expected realizable value 2000

Thanks.  It comes into focus now.