Question

The financial reporting carrying amount of johns-hopper company's only depreciable asset exceeded its tax basis by $750,000 at december 31, 2006. this was a result of differences between depreciation for financial reporting purposes and tax purposes. the asset was acquired earlier in the year. johns-hopper has no other temporary differences. the enacted tax rate is 30% for 2006 and 40% thereafter. johns-hopper should report the deferred tax effect of this difference in its december 31, 2006, balance sheet as:

a) a liability of 225,000.
b) a liability of $300,000.
c) an asset of 225,000.
d) an asset of $300,000.

Answer 1

The deferred tax liability for Johns-Hopper Company's depreciable asset difference in carrying amounts should be reported as $225,000 on the December 31, 2006 balance sheet, which reflects the current year's tax rate of 30% applied to the $750,000 difference. The correct option is (a) a liability of $225,000.

Step-by-step explanation:

The question involves calculating the deferred tax liability for the Johns-Hopper Company based on a difference in depreciation methods for financial reporting and tax purposes. Given that the financial reporting carrying amount of the company's depreciable asset exceeds its tax basis by $750,000, and considering the enacted tax rates of 30% for the year 2006 and 40% for the subsequent years, we need to determine the deferred tax effect to be reported on the balance sheet.

To calculate the deferred tax liability, we apply the tax rate to the difference between the carrying amount and the tax basis. For the current year, the tax rate is 30%. Thus, the calculation is $750,000 multiplied by 30%, which equals $225,000. As the difference will reverse in the future when the tax basis is lower than the financial reporting basis, and the tax rate is 40%, the company will eventually pay more tax on this difference. Therefore, the company should recognize a deferred tax liability. The correct option is (a) a liability of $225,000.