Question

Giada Foods reported $940 million in income before income taxes for 2011, its first year of operations.

Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company
also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate
for 2011 was 35%, but the enacted rate for years after 2011 is 40%. The balance in the deferred tax
liability in the December 31, 2011, balance sheet is
A. $35 million.
B. $16 million.
C. $40 million.
D. $56 million.

Answer 1

C. $40 million

Step-by-step explanation:

Deferred Tax only caters temporary differences and hence

Deferred tax liability in the December 31, 2011, balance sheet is ($100M x 40%) = $40M.

There is no impact of non-tax-deductible expenses of $80 million relating to permanent differences on deferred tax liability account.