In Year 1, a company has a $100,000 temporary difference (Liability > Tax Basis) that will reverse in Year 3. The enacted tax rates are: Year 1 (21%), Year 2 (25%), Year 3 (28%). What is the Deferred Tax Liability at Dec 31, Year 1?

Answer options:

$21,000

$25,000

$28,000

$24,667

How to approach this question

Rule: Use the Enacted Rate for the year of REVERSAL. Ignore the current year rate for the DTL calculation.

Full Answer

C.$28,000✓ Correct

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Since it reverses in Year 3, use the 28% rate.

Common mistakes

Using the current year's tax rate.

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