Ferguson Company has the following cumulative taxable temporary differences: The tax rate enacted for 2015 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2015 is $4,800,000 and there are no permanent differences. Ferguson's pretax financial income for 2015 is

Question

Ferguson Company has the following cumulative taxable temporary differences:  The tax rate enacted for 2015 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2015 is $4,800,000 and there are no permanent differences. Ferguson's pretax financial income for 2015 is

Quizplus · Accepted Answer

To calculate the pretax financial income, we need to add the cumulative taxable temporary differences to taxable income and subtract any permanent differences. Since there are no permanent differences given in the question, we just need to add the cumulative taxable temporary differences. 
The total amount of cumulative taxable temporary differences is $2,220,000 ($1,500,000 + $720,000). 
So, Pretax financial income for 2015 = Taxable income + Cumulative taxable temporary differences = $4,800,000 + $2,220,000 = $7,020,000. 
However, we need to adjust this amount for the change in tax rate. The tax rate has decreased from 40% to 30% for future years. This means that the deferred tax liability (DTL) will decrease and the deferred tax expense (DTE) will also decrease. 
The adjustment would be to calculate the deferred tax liability at the new rate and subtract it from the current DTL, which would give the new DTE. 
Deferred tax liability at 30% = $1,500,000 * 0.30 =$450,000 
So, the new DTL would be $720,000 - $450,000 = $270,000. 
The decrease in DTL of $450,000 would result in a decrease in DTE of $180,000 ($450,000 * 0.40). 
So, our adjusted Pretax financial income for 2015 would be $7,020,000 - $180,000 = $5,580,000.

Ferguson Company Has the Following Cumulative Taxable Temporary Differences