Jogg, Inc., earns book net income before tax of $600,000.Jogg puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000.Jogg has recorded no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21%, and that this is Jogg's first year of operations, what is Jogg's balance in its deferred tax asset and deferred tax liability accounts at year end?

Question

Quizplus · Accepted Answer

Since Jogg's first year tax depreciation exceeds book depreciation, this creates a temporary difference that will reverse in the future. As a result, Jogg will have a deferred tax asset. The deferred tax asset can be calculated as follows:

Deferred Tax Asset = (Temporary Book-Tax Difference) x (Tax Rate)
Deferred Tax Asset = $120,000 x 21%
Deferred Tax Asset = $25,200

Since Jogg has no other temporary or permanent book-tax differences, it will not have a deferred tax liability. Therefore, the balance in Jogg's deferred tax liability account is $0. The answer is (C).

Jogg, Inc, Earns Book Net Income Before Tax of $600,000