ExpertMedium1 markMultiple Choice
CPA · Question 41 · Area III: Select Transactions
At year-end, Company Y has the following temporary differences:<br/>- Tax depreciation exceeds book depreciation by $40,000.<br/>- Warranty expense (book) exceeds warranty deductions (tax) by $10,000.<br/>Tax rate is 25%. What is the net Deferred Tax Liability (DTL) or Asset (DTA)?
At year-end, Company Y has the following temporary differences:<br/>- Tax depreciation exceeds book depreciation by $40,000.<br/>- Warranty expense (book) exceeds warranty deductions (tax) by $10,000.<br/>Tax rate is 25%. What is the net Deferred Tax Liability (DTL) or Asset (DTA)?
Answer options:
A.
$10,000 DTL
B.
$2,500 DTA
C.
$7,500 DTL
D.
$12,500 DTL
How to approach this question
1. Identify Taxable vs Deductible differences. Tax Depr > Book Depr -> Future Taxable Income -> DTL. Book Exp > Tax Ded -> Future Deductible -> DTA. 2. Calculate tax effect. 3. Net them.
Full Answer
C.$7,500 DTL✓ Correct
DTL from Depreciation: $40,000 * 25% = $10,000.<br/>DTA from Warranty: $10,000 * 25% = $2,500.<br/>Net DTL = $10,000 - $2,500 = $7,500.
Common mistakes
Confusing DTA and DTL drivers.
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