Cowboy Corporation reported depreciation of $450,000 on its 2011 tax return. However, in its 2011 income statement, Cowboy reported depreciation of $300,000,as well as $30,000 interest revenue on tax-free bonds. The difference in depreciation is only a temporary difference, and it will reverse equally over the next three years. Cowboy's enacted income tax rates are as follows:

What amount should be included in the deferred income tax liability in Cowboy's December 31, 2011, balance sheet?

Question

Cowboy Corporation reported depreciation of $450,000 on its 2011 tax return. However, in its 2011 income statement, Cowboy reported depreciation of $300,000,as well as $30,000 interest revenue on tax-free bonds. The difference in depreciation is only a temporary difference, and it will reverse equally over the next three years. Cowboy's enacted income tax rates are as follows:

What amount should be included in the deferred income tax liability in Cowboy's December 31, 2011, balance sheet?

Quizplus · Accepted Answer

The temporary difference in depreciation between the tax return and income statement is $150,000 ($450,000 - $300,000). This difference will reverse equally over the next three years, or $50,000 per year. Therefore, the deferred income tax liability for 2011 would be $37,500 ($50,000 x 0.75, using the enacted tax rate of 25%). The interest revenue on tax-free bonds does not create a temporary difference and does not affect the deferred tax liability.

Cowboy Corporation Reported Depreciation of $450,000 on Its 2011 Tax