Question

Blossom Company deducts insurance expense of $171000 for tax purposes in 2021, but the expense is not yet recognized for accounting purposes. In 2022, 2023, and 2024, no insurance expense will be deducted for tax purposes, but $57000 of insurance expense will be reported for accounting purposes in each of these years. Blossom Company has a tax rate of 20% and income taxes payable of $154000 at the end of 2021. There were no deferred taxes at the beginning of 2021. What is the amount of the deferred tax liability at the end of 2021?

Answer 1

The deferred tax liability = $65,000 - $30,800 = $34,200

Step-by-step explanation:

Blossom company

Accounting principles of Accruals demands that expenses and income should be recognized in the year they occur.

If Blossom company expect these expenses to occur between 2022 and 2024, it means at 2021 it's not to be recognized. Thus, it's wrong to have deducted it from the income of that year.

In 2021 the company would have posted an income tac liability of 20% x $154,000 = $30,800

However from a tax stand point the $171,000 isn't acceptable. This it will be disallowed

The adjusted income will therefore become $154,000 + $171,000 = $325,000

And the correct tax liability = 20% x $325,000 = $65,000.

The deferred tax liability = $65,000 - $30,800 = $34,200