On December 31,2015,The Magic Flute Company reports liabilities with a tax basis of $800,000 and a book basis of $600,000.There was no difference in the asset basis.The difference in liability basis arose from temporary differences that would reverse in the following years: Assuming a tax rate of 35% for 2015 - 2017 and a rate of 40% for 2018 - 2020,The Magic Flute Co.should report a deferred tax ________ in the amount of ________ on December 31,2015.

Question

On December 31,2015,The Magic Flute Company reports liabilities with a tax basis of $800,000 and a book basis of $600,000.There was no difference in the asset basis.The difference in liability basis arose from temporary differences that would reverse in the following years:  Assuming a tax rate of 35% for 2015 - 2017 and a rate of 40% for 2018 - 2020,The Magic Flute Co.should report a deferred tax ________ in the amount of ________ on December 31,2015.

Quizplus · Accepted Answer

The temporary differences will result in a future taxable amount when the liabilities with a tax basis of $800,000 are recorded on the tax return. Therefore, the company will have to pay taxes based on the tax basis of $800,000 in the future when these liabilities are settled. Using the tax rates provided, the deferred tax liability can be calculated as follows:

2015: ($800,000 - $600,000) x 35% = $70,000
2016-2017: $800,000 x 35% = $280,000
2018-2020: $800,000 x 40% = $320,000
Total deferred tax liability = $670,000
Less: Deferred tax liability already recognized in 2015 = $595,500
Deferred tax liability on Dec 31, 2015 = $74,500

Therefore, the correct answer is C) liability; $74,500.

On December 31,2015,The Magic Flute Company Reports Liabilities with a Tax