Financial Accounting and Reporting-CPA Practice Exam

The current liability for income tax is calculated as?

1. Deferred Taxes x Previous Year's Tax Rate

2. Tax Return multiplied by Current Tax Rate

3. Current Tax Expense adjusted for previous liabilities

4. Future Tax Asset based on projected income

The correct answer is: Tax Return multiplied by Current Tax Rate

The current liability for income tax is calculated by taking the tax return, which reflects the taxable income for the current period, and multiplying it by the current tax rate. This calculation represents the amount of tax that the company owes to the tax authorities based on its taxable income for the reporting period. The current tax expense is the liability that the company expects to pay in cash for taxes due. It focuses on the current period's operations rather than deferrals or projections about future tax outcomes. This method directly correlates to the actual income recognized for tax purposes and applies the applicable current tax rate to that taxable income. In other choices, deferred taxes relate to timing differences and future tax consequences, but do not define the current liability. Previous liabilities and adjustments do not reflect the straightforward calculation necessary for determining current tax liability. Future tax assets pertain to projected tax benefits in future periods and are not relevant in assessing the current tax liability for the existing reporting period.