Question

In 2015​ Charmed, Inc. recorded book income of​ $370,000. The​company's only temporary difference relates to a​ $60,000 installment sale that it recorded for book​ purposes; there are no permanent differences. Charmed anticipates receiving payments equally over the following three years. The current enacted tax rate in 2015 is​ 35%. The substantively enacted tax rates for the following three years are​ 30%, 35%, and​ 38%, respectively.

Under U.S.​ GAAP, what deferred tax amount should Charmed record for this temporary​ difference?
A.$21,000
B.​$20,600
C.​$21,600
D.​$20,000

Answer 1

A. $21,000

Step-by-step explanation:

The temporary difference is a difference between carrying amount of an asset or liability in a Balance sheet and carrying amount of an asset or liability in its tax base. In the given scenario the temporary difference relates to installments sales which are $60,000 recorded in the book purpose. The tax base is different than the amount recorded in the company book. According to U.S. GAAP the deferred tax amount will be $60,000 * 35% which is current year tax rate.