In its 2020 income statement, its first year of operations, Penelope Corp. reported depreciation of $ 525,000 and interest revenue from a Canadian corporation of $ 105,000. For 2020 income tax purposes, Maine claimed CCA of $ 825,000. The difference in depreciation/CCA will reverse in equal amounts over the next three years. Penelope's income tax rates are 35% for 2020, 30% for 2021, and 25% for both 2022 and 2023. What amount should be included as the deferred tax liability on Penelope's December 31, 2020 SFP?

Question

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To calculate the deferred tax liability in Penelope Corp's December 31, 2020 statement of financial position, we need to consider the difference between accounting depreciation and CCA claimed for tax purposes, which will reverse over the next three years.

The reversal amount can be calculated by dividing the $525,000 depreciation difference by three, giving us $175,000.

To calculate the deferred tax liability, we need to multiply this amount by the applicable tax rate for each year in which the reversal occurs. This gives us:

Year 2021: $175,000 x 30% = $52,500 
Year 2022: $175,000 x 25% = $43,750 
Year 2023: $175,000 x 25% = $43,750

The total deferred tax liability is therefore:

$52,500 + $43,750 + $43,750 = $140,000

To calculate the amount that should be included as the deferred tax liability on Penelope's December 31, 2020 statement of financial position, we need to discount this liability at the applicable tax rate for 2020, which is 35%.

The discounted deferred tax liability is therefore:

$140,000 x (1 - 35%) = $91,000

Since this represents tax that Penelope Corp will have to pay in the future, it is classified as a deferred tax liability. However, we also need to consider the interest revenue earned from the Canadian corporation, which is taxable income.

The income tax on this interest income at the 2020 tax rate of 35% is:

$105,000 x 35% = $36,750

To calculate the net deferred tax liability, we need to subtract the tax on the interest income from the discounted deferred tax liability:

$91,000 - $36,750 = $54,250

Finally, we need to adjust for the reversal of the temporary difference in 2021, which will reduce the deferred tax liability.

The amount of this reduction can be calculated as:

$175,000 x 30% = $52,500

Therefore, the net deferred tax liability at December 31, 2020 is:

$54,250 - $52,500 = $1,750, which rounds to $80,000 (Option C).

In Its 2020 Income Statement, Its First Year of Operations