On January 1, Year 2, GHI Inc.had spent $100,000 in capital development costs to date, 50% of which had been capitalized.During Year 2, the company had incurred additional capital development costs of $200,000, 60% of which was capitalized.The income tax rate for Years 2 and prior was 20%.The tax rate for future years was expected to be 25%.This rate was enacted during Year 2.For Year 2, the temporary differences arising from the above would result in:

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The temporary difference arises from the difference between the amount of capital development costs capitalized for financial reporting purposes and the amount of capital development costs deducted for tax purposes. In this case, the company capitalized 50% of the $100,000 incurred in Year 1 and 60% of the $200,000 incurred in Year 2, for a total of $170,000. However, for tax purposes, the company deducted all of the capital development costs incurred in both years, for a total of $300,000. The temporary difference is therefore $130,000 ($300,000 - $170,000).The effect of the temporary difference is to decrease income tax expense in the current year and increase income tax expense in future years. This is because the company will eventually have to pay taxes on the $130,000 of capital development costs that it deducted for tax purposes but did not capitalize for financial reporting purposes. The amount of the decrease in income tax expense in the current year is $40,000 ($130,000 x 20%). The corresponding deferred tax asset (DTA) that is recorded at the end of the year is $60,000 ($130,000 x 25%).