South, Inc., earns book net income before tax of $400,000 in year 1.South acquires a depreciable asset in year 1, and first year tax depreciation exceeds book depreciation by $50,000.At the end of year 1, South's deferred tax liability account balance is $10,500.In year 2, 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 21% in both years, what is South's balance in its deferred tax liability account at the end of year 2?

Question

Quizplus · Accepted Answer

In year 1, the temporary book-tax difference is a favorable one, meaning that tax is less than book income. This results in a deferred tax liability. The balance of this account at the end of year 1 is given as $10,500. The deferred tax liability balance would have increased by the tax on this temporary difference, which is $50,000 × 21% = $10,500.
In year 2, the temporary book-tax difference is an unfavorable one, meaning that tax is greater than book income. This results in a deferred tax asset. The balance of this account at the end of year 2 would have decreased by the tax on this temporary difference, which is $20,000 × 21% = $4,200. 
Thus, the balance in the deferred tax liability account at the end of year 2 would be $10,500 - $4,200 = $6,300. Therefore, the answer is (C).