ExpertHard1 markMultiple Choice
CPA · Question 05 · Area III: Select Transactions
Summit Corp. has the following book-to-tax differences at December 31, Year 1 (enacted tax rate: 25%):<br/>- Equipment depreciation: Book $200,000, Tax (MACRS) $300,000<br/>- Warranty expense: Book accrual $80,000, Tax deduction $0 (cash basis)<br/>- Installment sale income: Book recognition $120,000, Tax recognition $0 (deferred)<br/><br/>What is Summit Corp.'s net deferred tax balance at December 31, Year 1?
Summit Corp. has the following book-to-tax differences at December 31, Year 1 (enacted tax rate: 25%):<br/>- Equipment depreciation: Book $200,000, Tax (MACRS) $300,000<br/>- Warranty expense: Book accrual $80,000, Tax deduction $0 (cash basis)<br/>- Installment sale income: Book recognition $120,000, Tax recognition $0 (deferred)<br/><br/>What is Summit Corp.'s net deferred tax balance at December 31, Year 1?
Answer options:
A.
Net deferred tax liability of $75,000
B.
Net deferred tax liability of $35,000
C.
Net deferred tax asset of $25,000
D.
Net deferred tax liability of $25,000
How to approach this question
Identify each book-to-tax difference as either taxable (creating DTL) or deductible (creating DTA). Calculate each component by multiplying the temporary difference by the enacted tax rate, then net all components together.
Full Answer
B.Net deferred tax liability of $35,000✓ Correct
Net deferred tax liability of $50,000
Under ASC 740-10-25, deferred taxes arise from temporary differences between book and tax bases. Equipment depreciation (tax > book) and installment sales (book > tax) create taxable temporary differences (DTL). Warranty accruals (book > tax deduction) create deductible temporary differences (DTA). Calculate each at the enacted tax rate and net together.
Common mistakes
Confusing which differences create DTL vs DTA, using wrong tax rates, or failing to net all components together
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