Cross Company reported the following results for the year ended December 31, 2014, its first year of operations: The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2015. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2014, assuming that the enacted tax rates in effect are 40% in 2014 and 35% in 2015?

Question

Cross Company reported the following results for the year ended December 31, 2014, its first year of operations:  The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2015. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2014, assuming that the enacted tax rates in effect are 40% in 2014 and 35% in 2015?

Quizplus · Accepted Answer

To determine the deferred tax asset/liability, we need to calculate the temporary difference first.

Inventory:
Book depreciation = $1,200,000/5 = $240,000
Tax depreciation = $1,200,000/3 = $400,000
Temporary difference = $160,000 (Taxable Income < Book Income)
Deferred tax liability = $160,000 x 40% = $64,000

Warranty:
Book warranty expense = $500,000
Tax deductible amount = $0
Temporary difference = $500,000 (Taxable Income < Book Income)
Deferred tax liability = $500,000 x 40% = $200,000

Net Operating Loss:
Book NOL carryforward = $2,000,000
Tax NOL carryforward = $1,500,000
Temporary difference = $500,000 (Taxable Income > Book Income)
Deferred tax asset = $500,000 x 35% = $175,000

Total deferred tax asset/liability = $64,000 (liability) + $200,000 (liability) + $175,000 (asset) = $315,000 (asset). Therefore, the correct answer is B.

Cross Company Reported the Following Results for the Year Ended