Question

The European Specialty Company, which prepares its financial statements under IFRS, has reported income before taxes of $1,300 on its financial statements and taxable income of $900. The $400 difference is due exclusively to a gain recognized for financial statement purposes in the current year that will be taxed 3 years later. The company is subject to a tax rate of 25% in the current year and, based on enacted tax law, will be subject to tax at the rate of 35% in the year in which the $400 will be taxable. After the date of the financial statements, but prior to their issuance, the future tax rate was reduced from 35% to 30%. What amount of deferred tax liability will European Specialty recognize in its current financial statements?

Answer 1

The amount of deferred tax liability will European Specialty recognize in its current financial statements is $120

Step-by-step explanation:

For computing the amount of deferred tax liability, first, we need to find out the temporary difference which is shown below:

Temporary difference = Income before taxes - taxable income

= $1,300 - $900

= $400

Now the deferred tax liability would be

= Temporary difference × reduced tax rate

= $400 × 30%

= $120