Question

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

Estimated warranty expense, $36 million temporary difference: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
Depreciation expense, $116 million temporary difference: straight-line in the income statement; MACRS on the tax return. Income from installment sales of properties, $60 million temporary difference:
income recorded in the year of the sale; taxable when received equally over the next five years.
Rent revenue collected in advance, $36 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%. (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Answer: $26 million Net deferred tax liability

Step-by-step explanation:

Net deferred tax liability (asset) = (Taxable temporary differences - Deductible temporary differences)* Tax rate

Taxable temporary differences = Depreciation expense + Income from installment sales

= 116 + 60

= $176 million

Deductible tax differences = Estimated warranty expense + rent revenue collected in advance

= 36 + 36

= $72 million

Net deferred tax liability (asset) = (176 - 72) * 25%

= $26 million