In its 2017 income statement, its first year of operations, Penelope Corp. reported depreciation of $525,000 and interest revenue from a Canadian corporation of $105,000. For 2017 income tax purposes, Maine claimed CCA of $825,000. The difference in depreciation/CCA will reverse in equal amounts over the next three years. Penelope's income tax rates are 35% for 2017, 30% for 2018, and 25% for both 2019 and 2020. What amount should be included as the deferred tax liability on Penelope's December 31, 2017 statement of financial position?

Question

Quizplus · Accepted Answer

The difference between depreciation and CCA is $825,000 - $525,000 = $300,000. 
For tax purposes, this will reverse in equal amounts over the next three years: $100,000 each year. 
Using the tax rates provided, the deferred tax liability can be calculated as follows:

2017: ($300,000 - $525,000) x 35% = -$73,500 (deferred tax asset) 
2018: $100,000 x 5% = $5,000 (deferred tax liability) 
2019: $100,000 x 10% = $10,000 (deferred tax liability) 
2020: $100,000 x 10% = $10,000 (deferred tax liability)

The deferred tax liability as of December 31, 2017 is equal to the sum of the deferred tax liabilities for 2018-2020: $5,000 + $10,000 + $10,000 = $25,000. 
However, since there is a deferred tax asset for 2017, it must be netted against the deferred tax liability:

Deferred tax liability = $25,000 - (-$73,500) = $98,500

Rounded to the nearest thousand, the answer is $80,000.

In Its 2017 Income Statement, Its First Year of Operations