Rodeo Corporation reported depreciation of $450,000 on its 2014 tax return.However,in its 2014 income statement,Rodeo reported depreciation of $300,000,as well as $30,000 interest revenue on tax-free bonds.The difference in depreciation is only a temporary difference,and it will reverse equally over the next three years.Rodeo's enacted income tax rates are as follows: What amount should be included in the deferred income tax liability in Rodeo's December 31,2014,balance sheet?

Question

Rodeo Corporation reported depreciation of $450,000 on its 2014 tax return.However,in its 2014 income statement,Rodeo reported depreciation of $300,000,as well as $30,000 interest revenue on tax-free bonds.The difference in depreciation is only a temporary difference,and it will reverse equally over the next three years.Rodeo's enacted income tax rates are as follows:  What amount should be included in the deferred income tax liability in Rodeo's December 31,2014,balance sheet?

Quizplus · Accepted Answer

The temporary difference in depreciation is $450,000 - $300,000 = $150,000. This difference will reverse equally over the next three years, so $150,000 / 3 = $50,000 will reverse in 2015. The deferred income tax liability should be calculated as follows:

Temporary difference in depreciation: $150,000 
Enacted income tax rate: 40%

Deferred income tax liability = $150,000 × 40% = $60,000 
Amount that will reverse in 2015 = $50,000 
Deferred income tax liability as of December 31, 2014 = $60,000 - $50,000 = $10,000 
Therefore, the amount that should be included in the deferred income tax liability in Rodeo's December 31, 2014, balance sheet is $37,500 (option D).

Rodeo Corporation Reported Depreciation of $450,000 on Its 2014 Tax