Question

Headland Inc.’s only temporary difference at the beginning and end of 2019 is caused by a $3,150,000 deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half of which is classified as a current asset) is due in equal installments in 2020 and 2021. The related deferred tax liability at the beginning of the year is $1,260,000. In the third quarter of 2019, a new tax rate of 20% is enacted into law and is scheduled to become effective for 2021. Taxable income for 2019 is $5,250,000, and taxable income is expected in all future years.

Determine the amount reported as a deferred tax liability at the end of 2019. Indicate proper classification(s)

Answer 1

The answer is given below;

Step-by-step explanation:

Deferred Liability opening $1,260,000

Deferred Liability as result of new tax rates $3,150,000*20%=($630,000)

Net difference deferred tax liability overstated $630,000

Net Taxable income for the year $5,250,000

Current Tax Expense (5,250,000*20%) $1,050,000

Net deferred tax liability to be reported as at 2019 will be $630,000

The additional amount booked will be reversed by;

Deferred Tax liability Dr.$630,000

Deferred Tax Expense Cr.$630,000

Therefore current tax expense will be $1,050,000-$630,000=$420,000