In 2017, Squirrel Corp. recorded book income of $165,000. It has one temporary difference which relates to a $30,000 warranty expense that it recorded for book purposes, and no permanent differences. Squirrel anticipates satisfying this liability equally over the following two years. The current enacted tax rate is 36%. The enacted tax rates for the following years are 2017: 26%, 2018: 31%, 2019: 26% and 2020: 36%, respectively. Under U.S. GAAP, what deferred tax amount should Squirrel Corp. record for this temporary difference?

Question

Quizplus · Accepted Answer

The deferred tax amount is calculated as the temporary difference multiplied by the enacted tax rate for the year in which the temporary difference will reverse. In this case, the temporary difference is $30,000 and the enacted tax rate for 2018 is 31%. Therefore, the deferred tax amount is $30,000 * 31% = $9,300.