Question

Brown and Lowery, Inc. reported $470 million in income before income taxes for 2016, 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 permanent differences. The income tax rate for 2016 was 35%, but the enacted rate for years after 2016 is 40%. The balance in the deferred tax liability in the December 31, 2016, balance sheet is:

Answer 1

The balance in the deferred tax liability in the December 31, 2016, balance sheet is $20 million

Step-by-step explanation:

Given that:

Brown and Lowery, Inc. income before tax = $470 million

non-tax-deductible expenses = $20 million

The amount of tax depreciation that exceeded depreciation for financial reporting purposes = $50 million

The income tax rate for 2016 = 35%

the enacted rate for years after 2016 = 40%.

The balance in the deferred tax liability in the December 31, 2016, balance sheet is = The amount of tax depreciation that exceeded depreciation for financial reporting purposes × the enacted rate for years after 2016 = $50 million × 40% = $20 million.

The balance in the deferred tax liability in the December 31, 2016, balance sheet is $20 million

Answer 2

$20 million

Step-by-step explanation:

In the scenario, Brown and Lowery, Inc. Tax depreciation exceeded depreciation for financial reporting purposes by $50 million.

The income tax rate for 2016 was 35%, but the enacted rate for years after 2016 is 40%.

Since the area of concern here, which is deferred tax liability, is not for the present but the future years, we will use the tax rate after 2016.

Therefore the balance in the deferred tax liability in the December 31, 2016, balance sheet is: 40% x $50 million = $20 million