Question

A company has set up an unfunded deferred compensation plan for its executives. It accrues an expense on its income statement of $5 million per year, but the income tax deduction for these expenses is not taken until deferred compensation is paid out in the future. If the company has a 40% marginal tax rate and a 32% effective tax rate, each year in which the company funds the plan it will recognize a

Answer 1

Deferred tax assets = $2 million

Step-by-step explanation:

Given:

Total expenses on income statement = $5 million

Marginal tax rate = 40%

Effective tax rate = 32%

Find:

Deferred tax assets

Computation:

Deferred tax assets = Total expenses on income statement x Marginal tax rate

Deferred tax assets = 5 million x 40%

Deferred tax assets = $2 million