Palmer Co.had a deferred tax liability balance due to a temporary difference at the beginning of 2010 related to $600,000 of excess depreciation.In December of 2010, a new income tax act is signed into law that lowers the corporate rate from 40% to 35%, effective January 1, 2012.If taxable amounts related to the temporary difference are scheduled to be reversed by $300,000 for both 2011 and 2012, Palmer should increase or decrease deferred tax liability by what amount?

Question

Quizplus · Accepted Answer

The decrease in the corporate tax rate from 40% to 35% will result in a decrease in the amount of the deferred tax liability. The excess depreciation of $600,000 will result in a deferred tax liability of $240,000 ($600,000 x 40%).

With the new tax rate, the deferred tax liability will be calculated using a rate of 35%, resulting in a lower liability of $210,000 ($600,000 x 35%).

The taxable amounts related to the temporary difference are scheduled to be reversed by $300,000 each for 2011 and 2012, resulting in a total reversal of $600,000.

Therefore, the deferred tax liability should be decreased by $15,000 ($600,000 x (40% - 35%)) to reflect the new tax rate for the remaining taxable amounts to be reversed.

Palmer CoHad a Deferred Tax Liability Balance Due to a Temporary