Jogg, Inc., earns book net income before tax of $600,000. It puts into service a depreciable asset this year, and its first-year tax depreciation exceeds book depreciation by $120,000. Jogg has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21%, and that this is Jogg's first year of operations, what is Jogg's balance in its deferred tax asset and deferred tax liability accounts at year-end?
A) $25,200 and $0.
B) $0 and $0.
C) $0 and $25,200.
D) $25,200 and $25,200.

Question

Quizplus · Accepted Answer

The difference between tax depreciation and book depreciation is a temporary difference that will reverse over time. Since tax depreciation exceeds book depreciation, this creates a future taxable amount, leading to a deferred tax liability. The deferred tax liability is calculated as the temporary difference ($120,000) multiplied by the tax rate (21%), which equals $25,200. There is no deferred tax asset in this scenario because there are no temporary differences that would result in deductible amounts in the future.

Jogg, Inc, Earns Book Net Income Before Tax of $600,000