On December 31, 2018, the Magic Flute Company reports liabilities with a tax basis of $600,000 and a book basis of $400,000. There was no difference in the asset basis. The difference in liability basis arose from temporary differences that would reverse in the following years: $$\begin{array} { l l }
2019 & \$ 60,000 \
2020 & \$ 50,000 \
2021 & \$ 52,000 \
2022 & \$ 20,000 \
2023 & \$ 18,000
\end{array}$$
Assuming a tax rate of 25% for 2018 - 2020 and a rate of 30% for 2021 - 2023, The Magic Flute Co. should report a deferred tax ________ in the amount of ________ on December 31, 2018.

Question

On December 31, 2018, the Magic Flute Company reports liabilities with a tax basis of $600,000 and a book basis of $400,000. There was no difference in the asset basis. The difference in liability basis arose from temporary differences that would reverse in the following years: $$\begin{array} { l l } 
2019 & \$ 60,000 \
2020 & \$ 50,000 \
2021 & \$ 52,000 \
2022 & \$ 20,000 \
2023 & \$ 18,000
\end{array}$$ 
Assuming a tax rate of 25% for 2018 - 2020 and a rate of 30% for 2021 - 2023, The Magic Flute Co. should report a deferred tax ________ in the amount of ________ on December 31, 2018.

Quizplus · Accepted Answer

The deferred tax liability is calculated as the difference between the tax basis and the book basis of the liabilities, multiplied by the applicable tax rate. In this case, the difference in liability basis is $200,000 ($600,000 - $400,000), and the applicable tax rate for 2018 is 25%. Therefore, the deferred tax liability is $50,000 ($200,000 x 25%).