Question

Weatherly Company reported the following results for the year ended December 31, 2013, its first year of operations:

Income (per books before income taxes) - $3,300,000
Taxable income - 4,450,000
The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2014. What should Weatherly record as a net deferred tax asset or liability for the year ended December 31, 2013, assuming that the enacted tax rates in effect are
A) 35% in 2013 and 30% in 2014?
B) $402,500 deferred tax asset
C) $345,000 deferred tax asset
D) $345,000 deferred tax liability
E) $402,500 deferred tax liability

Answer 1

Weatherly Company should record a $345,000 deferred tax liability for the year ended December 31, 2013, due to the temporary difference that will reverse at a lower tax rate in 2014.

Step-by-step explanation:

The student is asking about how Weatherly Company should account for the difference between book income and taxable income due to a temporary difference that will reverse in the following year. Given the temporary difference of $1,150,000 (taxable income of $4,450,000 minus book income of $3,300,000), and the change in tax rate from 35% in 2013 to 30% in 2014, Weatherly Company should recognize a deferred tax liability for the expected future tax effects of this difference.We calculate the deferred tax by applying the future tax rate to the temporary difference:Deferred tax liability = Temporary difference × Future tax rate= $1,150,000 × 30%= $345,000Therefore, the correct answer to the student's question is D) $345,000 deferred tax liability.

The net deferred tax asset or liability for Weatherly Company can be calculated by multiplying the temporary difference between income (per books) and taxable income by the applicable enacted tax rate for each relevant year. In this case, since the disparity between book income and taxable income is due to a temporary difference that will reverse in 2014, the net deferred tax asset or liability should be recorded based on the enacted tax rates for 2013 and 2014. A) Assuming a 35% tax rate in 2013 and 30% in 2014: Temporary difference: $4,450,000 - $3,300,000 = $1,150,000 Deferred tax asset: $1,150,000 * 0.35 = $402,500 The correct answer is B) $402,500 deferred tax asset.