Deferred Income Taxes
Response to the following problem:
Oranjestad Company began operating on January 1, 2009. At the end of the first year of operations, Oranjestad reported $650,000 income before income taxes on its income statement but taxable income of $720,000 on its tax return. This difference arose because $70,000 in expenses incurred during 2009 were not yet deductible for income tax purposes according to the income tax regulations. The tax rate is 35%
1. Compute the amount of income tax that Oranjestad legally owes for taxable income generated during 2009.
2. Compute the amount of income tax expense to be reported on Oranjestad's income statement for 2009.
3. State whether Oranjestad has a deferred income tax asset or a deferred income tax liability as of the end of 2009. What is the amount of the asset or liability?