Detailed Answer
(b) To determine the current federal tax liability, book
income ($90,000) must be adjusted for any temporary or permanent
differences to determine taxable income.
Book income $ 90,000
Rent received in advance 16,000
Municipal interest (20,000)
Excess tax depreciation (10,000)
Taxable income $ 76,000
Rent received in advance (temporary difference) is added to
book income because rent is taxable when received, but is not
recognized as book revenue until earned. Municipal interest
(permanent difference) is subtracted from book income because
it is excluded from taxable income. The excess tax depreciation
(temporary difference) is subtracted because this excess amount
is an additional tax deduction beyond accounting depreciation.
The current tax liability is computed by multiplying taxable income
by the tax rate ($76,000 x 30% = $22,800).