If the software refinement had been capitalized and amortized over a three year period beginning in the year the cost was incurred, but was expensed for tax purposes, the deferred tax position at the end of fiscal 2005 would have been:
A) A deferred tax credit of $2.8M
B) A deferred tax credit of $3.5M
C) A deferred tax credit of $5.2M
D) A deferred tax debit of $4M

Question

Quizplus · Accepted Answer

The deferred tax credit is calculated as the difference between the book value and the tax basis of the software refinement, multiplied by the tax rate. In this case, the book value of the software refinement is $10.5M, the tax basis is $0, and the tax rate is 40%. Therefore, the deferred tax credit is $10.5M x 40% = $4.2M. However, the question states that the software refinement was expensed for tax purposes, which means that the tax basis is equal to the book value. Therefore, the deferred tax credit is $0.

If the Software Refinement Had Been Capitalized and Amortized Over