On January 1, 2015, Gore, Inc. purchased a machine for $1,350,000 which will be depreciated $135,000 per year for financial statement reporting purposes. For income tax reporting, Gore elected to expense $150,000 and to use straight-line depreciation which will allow a cost recovery deduction of $120,000 for 2015. Assume a present and future enacted income tax rate of 30%. What amount should be added to Gore's deferred income tax liability for this temporary difference at December 31, 2015?

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Quizplus · Accepted Answer

The temporary difference between financial accounting and tax accounting is as follows:
Book depreciation = $135,000
Tax depreciation = $150,000 (expensed)
Cost recovery deduction = $120,000
Temporary difference = $135,000 - $120,000 = $15,000
The deferred tax liability is calculated as the temporary difference multiplied by the future enacted tax rate:
Deferred tax liability = $15,000 x 30% = $4,500
Since the temporary difference will reverse within the next year, it is classified as a current liability. Therefore, the $4,500 should be added to Gore's current deferred income tax liability balance.
$4,500 x 9 months = $40,500