Question

The financial reporting carrying value of Boze Music's only depreciable asset exceeded its tax basis by $148,000 at December 31, 2018. This was a result of differences between straight-line depreciation for financial reporting purposes and MACRS for tax purposes. The asset was acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is 25% for 2018 and 36% thereafter. Boze should report the deferred tax effect of this difference in its December 31, 2018, balance sheet as:

a. A liability of $54,140
b. A liability of $53,280.
c. An asset of $53,280.
d. An asset of $54,140.

Answer 1

The correct answer is option (b).

Step-by-step explanation:

According to the scenario, the given data are as follows:

Exceeding value = $148,000

Tax rate = 36%

So, we can calculate the deferred tax effect by using following formula:

Deferred tax effect = Exceeding value × Tax rate

By putting the value in the formula, we get

Deferred tax effect = $148,000 × 36%

= $53,280

Hence, the Deferred tax liability of $53,280 should be reported in balance sheet.