Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year, representing a net taxable deductible difference of $200,000 (taxed at 34 percent). During the year, Lynch reported pretax book income of $800,000. Included in the computation were favorable temporary differences of $20,000 and unfavorable temporary differences of $50,000. At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Lynch's deferred income tax expense or benefit for the current year would be:

Question

Quizplus · Accepted Answer

Step 1: 
Calculate the net taxable deductible difference at the end of the year:
$200,000 – $20,000 + $50,000 = $230,000

Step 2: 
Calculate the deferred tax asset at the end of the year using the reduced tax rate of 21%:
$230,000 * 21% = $48,300

Step 3: 
Calculate the change in deferred tax asset:
$48,300 – $68,000 = ($19,700)

Since there is a decrease in deferred tax asset, there is a net deferred tax expense of $19,700. Therefore, the answer is D.

Lynch Company Had a Net Deferred Tax Asset of $68,000