Question

At December 31, DePaul Corporation had the following cumulative temporary differences associated with its operations:

1. Estimated warranty expense, $16 million temporary difference: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million temporary difference: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $20 million temporary difference: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Rent revenue collected in advance, $24 million temporary difference; taxable in the year collected; recorded as income when the performance obligation is satisfied in the following year.

Required:
Assuming DePaul will show a single noncurrent net amount in its December 31 balance sheet, indicate that amount and whether it is a net deferred tax asset or liability. The tax rate is 25%.

Answer 1

$25 million net differed tax liability

Step-by-step explanation:

The computation is shown below;

Net deferred tax liability is computed as;

= (Taxable temporary difference - Deductible temporary difference) × Tax rate

= ($120 million + $20 million - $16million - $24million ) × 25%

= $100 million × 25%

= $25 million

The above shows the net deferred tax liability of $25million hence same is to be considered.