On January 1, 2020, Lake Corp., a publicly accountable enterprise, purchased 40% of the common shares of Michigan Inc. and accounts for this investment by the equity method. During 2020, Michigan reported earnings of $ 900,000 and paid dividends of $ 300,000. Lake assumes that all of Michigan's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 20%. Lake's current income tax rate is 25%. The increase in Lake's deferred tax liability for this temporary difference is

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Lake Corp.'s share of Michigan Inc.'s undistributed earnings is 40% of ($900,000 - $300,000) = $240,000. The temporary difference arises because these earnings will be taxed at a future rate of 20% when distributed as dividends, whereas Lake's current tax rate is 25%. The increase in deferred tax liability is calculated as $240,000 * (25% - 20%) = $12,000. However, the correct calculation should consider the entire temporary difference, which is $240,000 * 20% = $48,000, reflecting the future tax liability on Lake's share of Michigan's undistributed earnings at the future tax rate.