Question

Stone Co. began operations in year 3 and reported $225,000 in income before income taxes for the year. Stone's year 3 tax depreciation exceeded its book depreciation by $25,000. Stone also had nondeductible book expenses of $10,000 related to permanent differences. Stone's tax rate for year 3 was 40%, and the enacted rate for years after year 3 is 35%. In its December 31, year 3, balance sheet, what amount of deferred income tax liability should Stone report?

$8,750
$10,000
$12,250
$14,000

Answer 1

Given:

Income before income taxes = $225,000

Book depreciation = $25,000

Nondeductible book expenses = $10,000

Tax rate = 40%

Enacted rate = 35%

Deferred income tax liability is computed as:

Deferred income tax liability = Book depreciation × Enacted rate

= $25,000 × 35%

= $8,750