B&B Inc.'s taxable income is computed as follows. $$\begin{array} { l r }
\text { Book income before tax } & \mathbf { \$ 9 , 8 8 2 , 5 9 0 } \
\text { Net permarnent differences } & 447,600 \
\text { Net temporary differences } & ( 802,100) \
\text { Taxable income } & \$ 9,528,090
\end{array}$$ B&B's tax rate is 34%. Which of the following statements is true?

Question

B&B Inc.'s taxable income is computed as follows. $$\begin{array} { l r } 
\text { Book income before tax } & \mathbf { \$ 9 , 8 8 2 , 5 9 0 } \
\text { Net permarnent differences } & 447,600 \
\text { Net temporary differences } & ( 802,100) \
\text { Taxable income } & \$ 9,528,090
\end{array}$$ B&B's tax rate is 34%. Which of the following statements is true?

Quizplus · Accepted Answer

The formula for calculating taxable income is as follows:

Taxable Income = Book Income Before Tax + Permanent Differences + Temporary Differences

Given the values we can say:

Temporary Differences = Book Income Before Tax - Taxable Income - Permanent Differences

Temporary Differences = $9,882,590 - $9,528,090 - $447,600

Temporary Differences = -$802,100 (negative value indicates a future tax deduction)

Deferred Tax Liabilities arise when taxable income is less than the book income (as in this case), therefore DT liability here can be calculated as follows:

Deferred Tax Liability = Temporary Differences x Tax Rate

Deferred Tax Liability = -$802,100 x 34%

Deferred Tax Liability = -$272,714

The negative sign indicates that deferred tax liability has decreased by $272,714. So option D is correct.

B&B Inc'S Taxable Income Is Computed as Follows B&B's Tax Rate Is 34