Palmer Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2014 related to $900,000 of excess depreciation. In December of 2014, a new income tax act is signed into law that lowers the corporate rate from 40% to 35%, effective January 1, 2016. If taxable amounts related to the temporary difference are scheduled to be reversed by $450,000 for both 2015 and 2016, Palmer should increase or decrease deferred tax liability by what amount?

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Quizplus · Accepted Answer

The decrease in the corporate tax rate will result in a decrease in the deferred tax liability. In this case, the excess depreciation is scheduled to be reversed evenly over two years, so each year it will decrease by $450,000 / 2 = $225,000. The change in the deferred tax liability is calculated by multiplying the change in the tax rate (0.05) by the total amount being reversed ($450,000). Therefore, the change in deferred tax liability is $22,500 (0.05 x $450,000). Therefore, Palmer should decrease its deferred tax liability by $22,500.

Palmer Co Had a Deferred Tax Liability Balance Due to a a Temporary