Windsor Company has net temporary differences between tax and book accounting of $80 million, resulting in a deferred tax liability of $28 million. An increase in the tax rate would have the following impact on deferred taxes and net income: $$\begin{array} { | l | c | c | }
\hline & \text { Deferred Taxes } & \text { Net Income } \
\hline \text { A) } & \text { Increase } & \text { No effect } \
\hline \text { B) } & \text { Increase } & \text { Decrease } \
\hline \text { C) } & \text { No effect } & \text { No effect } \
\hline \text { D) } & \text { Decrease } & \text { No effect } \
\hline
\end{array}$$
A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question

Windsor Company has net temporary differences between tax and book accounting of $80 million, resulting in a deferred tax liability of $28 million. An increase in the tax rate would have the following impact on deferred taxes and net income: $$\begin{array} { | l | c | c | } 
\hline & \text { Deferred Taxes } & \text { Net Income } \
\hline \text { A) } & \text { Increase } & \text { No effect } \
\hline \text { B) } & \text { Increase } & \text { Decrease } \
\hline \text { C) } & \text { No effect } & \text { No effect } \
\hline \text { D) } & \text { Decrease } & \text { No effect } \
\hline
\end{array}$$
A) Choice A
B) Choice B
C) Choice C
D) Choice D

Quizplus · Accepted Answer

An increase in the tax rate would require a larger tax payment in the future, increasing the value of the deferred tax liability on the balance sheet. This would decrease net income due to a higher tax expense. Therefore, the correct answer is choice B.

Windsor Company Has Net Temporary Differences Between Tax and Book