Question

Lyons Company deducts insurance expense of $126,000 for tax purposes in 2020, but the expense is not yet recognized for accounting purposes. In 2021, 2022, and 2023, no insurance expense will be deducted for tax purposes, but $42,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $108,000 at the end of 2020. There were no deferred taxes at the beginning of 2020. 3. What deferred amount should be recorded for Lyon's in relation to the above temporary difference at 12/31/20? If zero, write 0

Answer 1

$50,400

Step-by-step explanation:

Lyons company needs to recognize $126,000 x 40% (tax rate) = $50,400 as deferred tax liability at 12/31/2020.

Deferred tax temporary differences exist because sometimes US GAAP rules are not consistent with the rules that the IRS uses to determine the current taxes of a firm. E.g. US GAAP does not recognize expensing the purchase of assets, but the IRS does. So you need to depreciate the assets in your accounting records, but the ax benefits have already been taken by the firm in the first year.