Question

In its first year of operations, Woodmount Corporation reported pretax accounting income of $500 million for the current year. Depreciation reported in the tax return in excess of depreciation in the income statement was $60 million. The excess tax will reverse itself evenly over the next three years. The current year's tax rate of 40% will be reduced under the current law to 35% next year and 30% for all subsequent years. At the end of the current year, the deferred tax liability related to the excess depreciation will be:

A. $21 million.
B. $24 million.
C. $18 million.
D. $19 million

Answer 1

To calculate the deferred tax liability related to the excess depreciation, we need to calculate the tax effect of the excess depreciation and then adjust it for the reversal over the next three years. The excess tax liability is $24 million. Next, we need to adjust the excess tax liability for the tax rate changes over the next three years. Finally, the deferred tax liability related to the excess depreciation at the end of the current year is $39.6 million. The correct answer is option (D).

Step-by-step explanation:

To calculate the deferred tax liability related to the excess depreciation, we need to calculate the tax effect of the excess depreciation and then adjust it for the reversal over the next three years.

The excess tax is $60 million, and the current tax rate is 40%. This means that the excess tax liability is $60 million multiplied by 40%, which equals $24 million.

Next, we need to adjust the excess tax liability for the tax rate changes over the next three years. We multiply the excess tax liability of $24 million by 35% for the next year and 30% for subsequent years. The calculations are as follows:

Next year: $24 million x 35% = $8.4 million

Subsequent years: $24 million x 30% = $7.2 million

Finally, the deferred tax liability related to the excess depreciation at the end of the current year is the sum of the adjusted excess tax liabilities:

$24 million + $8.4 million + $7.2 million = $39.6 million

Therefore, the correct answer is D. $19 million.

Answer 2

D. $19 million

Step-by-step explanation:

The computation of the deferred tax liability for three years is shown below:

Total depreciation would be $60 million

For each year it would be = $60 million ÷ 3 years = $20 million

For the first year, it would be

= $20 million × 35%

= $7 million

For the second year, it would be

= $20 million × 30%

= $6 million

the first year, it would be

= $20 million × 30%

= $6 million

So, the total would be

= $7 million + $6 million + $6 million

= $19 million