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Jay Inc owns 80% of Tesla Inc and uses the cost method to account for its investment.The 2010 income statements of both companies are shown below.
Jay Tesla
Gross Profit $100,000 $50,000
Miscellaneous Expenses $30,000 $20,000
Depreciation Expense $20,000 $15,000
Income Tax Expense $20,000 $ 6,000
Net Income $30,000 $9,000
On January 1,2010,Tesla sold equipment to Jay at a profit of $3,000 Jay had been depreciating this equipment over a 20 year period.Both companies are subject to an effective tax rate of 40%.
-The amount of deferred taxes appearing on Jay's 2010 Consolidated Statement of Financial Position would be:

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The following information pertains to question 
Jay Inc owns 80% of Tesla Inc and uses the cost method to account for its investment.The 2010 income statements of both companies are shown below.
Jay Tesla
Gross Profit $100,000 $50,000
Miscellaneous Expenses $30,000 $20,000
Depreciation Expense $20,000 $15,000
Income Tax Expense $20,000 $ 6,000
Net Income $30,000 $9,000
On January 1,2010,Tesla sold equipment to Jay at a profit of $3,000 Jay had been depreciating this equipment over a 20 year period.Both companies are subject to an effective tax rate of 40%.
-The amount of deferred taxes appearing on Jay's 2010 Consolidated Statement of Financial Position would be:

Quizplus · Accepted Answer

The deferred tax is calculated on the profit from the intercompany sale of equipment. The profit is $3,000, and the tax rate is 40%, so the deferred tax is $3,000 x 40% = $1,200. However, since the equipment is depreciated over 20 years, only 1/20th of the profit is recognized each year, so the deferred tax for 2010 is $1,200 / 20 = $60. The deferred tax liability is $60 x 19 years = $1,140.

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