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 35%, 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?
A)$42,000 and $0.
B)$0 and $0.
C)$0 and $42,000.
D)$42,000 and $42,000.

Question

Quizplus · Accepted Answer

Since Jogg records no other temporary or permanent book-tax differences, the only deferred tax item is the difference between tax and book depreciation, which creates a deferred tax asset. The deferred tax asset is calculated as follows:

Deferred tax asset = Temporary difference × Tax rate
Deferred tax asset = $120,000 × 35% = $42,000

Jogg has no deferred tax liability since there are no temporary differences that will result in taxable amounts in the future. Therefore, the balance in the deferred tax asset account is $42,000, and the balance in the deferred tax liability account is $0. Choice C is the correct answer.

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