Question

Fox Co. reported $225,000 in income before income taxes for its first year with tax depreciation exceeding its book depreciation by $25,000. Fox also had nondeductible book expenses of $10,000 related to permanent differences. Fox's tax rate was 40%, and the enacted rate for future years is 35%. In its year-end balance sheet, what amount of deferred income tax liability should Fox report?

Answer 1

In its year-end balance sheet, Fox should report the amount of deferred income tax liability of $8,750

Step-by-step explanation:

1. Deferred Tax Liability

The deferred tax liability will be the $25,000 temporary difference in depreciation, multiplied by;

2. The applicable Tax rate

The enacted rate for future years of 35% because Deferred Tax Liabilities are the 'tax payable' in future periods.

Hence the figure and amount of deferred income tax liability that Fox should report will be 0.35*25,000 = $8,750