Question

Brown and lowery, inc. reported $470 million in income before income taxes for 2006, its first year of operations. tax depreciation exceeded depreciation for financial reporting purposes by $50 million. the firm also had non-tax-deductible expenses of $20 million relating to non-temporary differences. the income tax rate for 2006 was 35%, but the enacted rate for years after 2006 is 40%. the balance in the deferred tax liability in the december 31, 2006, balance sheet is:

a) 8.0 million
b) $17.5 million
c) $20.0 million
d) $28.0 million

Answer 1

The balance in the deferred tax liability on the December 31, 2006, balance sheet is $20.0 million. Therefore, the correct answer is c) $20.0 million.

Step-by-step explanation:

To calculate the balance in the deferred tax liability, we need to consider the temporary differences between tax depreciation and depreciation for financial reporting purposes. In this case, tax depreciation exceeded depreciation by $50 million, resulting in a taxable temporary difference. Additionally, there were non-tax-deductible expenses of $20 million, which also created a taxable temporary difference.

The income tax rate for 2006 was 35%, so the tax impact of the taxable temporary difference is $35 million ($50 million * 35%). However, the enacted tax rate for years after 2006 is 40%, so the tax impact after 2006 would be $40 million ($50 million * 40%).

The difference between the tax impact at the enacted rate and the tax impact at the current rate is the change in the deferred tax liability. In this case, the change is $5 million ($40 million - $35 million). Adding the change in the deferred tax liability to the current deferred tax liability of $15 million gives us a balance of $20 million. Therefore, the correct answer is c) $20.0 million.