On December 31, 2018, Big Bear Corporation reports liabilities with a tax basis of $1,200,000 and a book basis of $1,700,000. There was no difference in the asset basis. The difference in liability basis arose from temporary differences that would reverse in the following years: $$\begin{array} { r r }
2019 & \$ 120,000 \
2020 & \$ 110,000 \
2021 & \$ 112,000 \
2022 & \$ 80,000 \
2023 & \$ 78,000
\end{array}$$
Assuming a tax rate of 40% for 2018 - 2021 and a rate of 45% for 2022 - 2023, what should Big Bear report on its balance sheet on December 31, 2018?

Question

On December 31, 2018, Big Bear Corporation reports liabilities with a tax basis of $1,200,000 and a book basis of $1,700,000. There was no difference in the asset basis. The difference in liability basis arose from temporary differences that would reverse in the following years: $$\begin{array} { r r } 
2019 & \$ 120,000 \
2020 & \$ 110,000 \
2021 & \$ 112,000 \
2022 & \$ 80,000 \
2023 & \$ 78,000
\end{array}$$ 
Assuming a tax rate of 40% for 2018 - 2021 and a rate of 45% for 2022 - 2023, what should Big Bear report on its balance sheet on December 31, 2018?

Quizplus · Accepted Answer

The deferred tax asset is calculated by multiplying the temporary differences by the applicable tax rates for each year they reverse. The total temporary difference is $500,000 ($1,700,000 - $1,200,000). The deferred tax asset is calculated as follows:  2019: $120,000 * 40% = $48,000  2020: $110,000 * 40% = $44,000  2021: $112,000 * 40% = $44,800  2022: $80,000 * 45% = $36,000  2023: $78,000 * 45% = $35,100  Total deferred tax asset = $48,000 + $44,000 + $44,800 + $36,000 + $35,100 = $207,900.

On December 31, 2018, Big Bear Corporation Reports Liabilities with a Tax