• Explanation

Income tax expense consists of two components: current tax expense (benefit) and deferred tax expense (benefit). The current tax expense is the amount due (payable) based on taxable income (TI), calculated using the current tax rate.

Deferred tax is based on temporary differences resulting from certain items being taxable or deductible on the tax return in a different period than reported on the accounting books.

• If a future taxable amount exists, a deferred tax liability (DTL) is created on the books. A future deductible amount produces a deferred tax asset (DTA).
• When there are existing DTAs or DTLs on the books, the deferred tax expense (benefit) is the increase (decrease) in the net DTA or DTL during the year.

In this scenario, a company has a beginning net DTL of $40,000 ($50,000 DTL− $10,000 DTA) and an ending net DTL of $39,000 ($55,00 DTL − $16,000 DTA). This produces a $1,000 ($40,000 − $39,000) deferred tax benefit (ie, decrease in net DTL). The current tax expense/payable is $42,000 ($120,000 TI × 35%) (Choice B). Restructuring the journal entry solves for the $41,000 ($42,000 current expense − $1,000 deferred tax benefit) total income tax expense (Choice C).

Note: An alternative approach is to record the changes in the DTA and DTL separately when preparing the entry.

(Choice D) An amount of $53,000 results from incorrectly adding the increases in the DTL and DTA to the current expense.

Things to remember:
Income tax expense is comprised of two components: a current tax expense (benefit) and a deferred tax expense (benefit). Current income tax expense is calculated by multiplying taxable income by the current tax rate. Deferred tax expense (benefit) is the increase (decrease) in the net deferred tax liability or deferred tax asset during the year.