South,Inc.,earns book net income before tax of $400,000 in 2013.South acquires a depreciable asset in 2013,and first year tax depreciation exceeds book depreciation by $50,000.At the end of 2013,South's deferred tax liability account balance is $17,500.In 2014,South earns $500,000 book net income before tax,and its book depreciation exceeds tax depreciation by $20,000.South records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 35%,what is South's balance in its deferred tax liability account at the end of 2014?

Question

Quizplus · Accepted Answer

In 2013, the excess of tax depreciation over book depreciation creates a deferred tax liability because South will pay more taxes in the future due to the timing difference. The current year tax effect of this timing difference is $50,000 x 35% = $17,500, which is recorded as a deferred tax liability on the balance sheet. Since South has no other temporary or permanent book-tax differences in 2014, the only change in the deferred tax liability account is the reversal of the $17,500 liability from 2013. The tax effect of reversing this liability is -$17,500, which reduces South's tax liability and increases its book income. Therefore, the balance in the deferred tax liability account at the end of 2014 is $17,500 - $17,500 = $0.

South,Inc,Earns Book Net Income Before Tax of $400,000 in 2013