South, Inc., earns book net income before tax of $400,000 in year 1. It acquires a depreciable asset in year 1, and its 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?
A) $0
B) $4,200
C) $6,300
D) $10,500

Question

Quizplus · Accepted Answer

In year 1, the deferred tax liability increases by $10,500 due to the $50,000 excess of tax depreciation over book depreciation, taxed at 21% ($50,000 * 21% = $10,500). In year 2, the book depreciation exceeds tax depreciation by $20,000, creating a deferred tax asset of $4,200 ($20,000 * 21%). To find the balance at the end of year 2, subtract the deferred tax asset from the beginning deferred tax liability: $10,500 (beginning balance) - $4,200 (deferred tax asset) = $6,300.