Tecktroniks Company reported in its annual report software refinement expenses of $12 million, $15 million, and $18 million for fiscal years 2005, 2006, and 2007, respectively. At the end of fiscal 2007, it had total assets of $140 million. Net income was $20 million for fiscal 2007, and it had a marginal tax rate of 35%.
-If the software refinement had been capitalized and amortized over a three-year period beginning in the year the cost was incurred, but was expensed for tax purposes, the deferred tax position at the end of fiscal 2005 would have been:
A)a deferred tax credit of $2.8 million.
B)a deferred tax credit of $3.5 million.
C)a deferred tax credit of $5.2 million.
D)a deferred tax debit of $4 million.

Question

Quizplus · Accepted Answer

The deferred tax position at the end of fiscal 2005 would have been a deferred tax credit of $2.8 million. This is calculated by taking the software refinement expense for 2005 ($12 million), dividing it by the 3-year amortization period to get $4 million as the annual amortization expense, and then applying the marginal tax rate of 35% to this amount ($4 million * 35% = $1.4 million). Since the expense was capitalized and amortized over three years, only one year's amortization would affect the deferred tax position in 2005, resulting in a deferred tax credit of $1.4 million. However, the correct calculation should consider the full expense for the year, leading to a deferred tax credit of $12 million * 35% = $4.2 million, indicating an error in the initial explanation. The correct choice, based on the options provided and the correct calculation method, should reflect the proper understanding of deferred tax calculations under capitalization and amortization of expenses. Given the options and the error in the explanation, the correct deferred tax position calculation seems to have been misunderstood. The correct answer should reflect the tax impact of the entire expense being capitalized and amortized, but without the specific details provided in the options, the calculation process involves recognizing the tax effect of the expense as if it were capitalized and amortized, which differs from the immediate expensing for tax purposes.

Tecktroniks Company Reported in Its Annual Report Software Refinement Expenses