South, Inc., earns book net income before tax of $400,000 in 2014. South acquires a depreciable asset in 2014, and first year tax depreciation exceeds book depreciation by $50,000. At the end of 2014, South's deferred tax liability account balance is $17,500. In 2015, 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 35%, what is South's balance in its deferred tax liability account at the end of 2015?

Question

Quizplus · Accepted Answer

In 2014, the temporary difference arising from the difference in tax and book depreciation is $50,000. Since South's tax rate is 35%, the tax savings from the temporary difference is $17,500 ($50,000 x 35%). This amount is credited to deferred tax liability account, which results in an ending balance of $17,500 at the end of 2014.

In 2015, the opposite occurs, with book depreciation exceeding tax depreciation by $20,000. This results in a deferred tax liability of $7,000 ($20,000 x 35%), which is added to the existing balance in the deferred tax liability account of $17,500 from the previous year.

Therefore, the balance in South's deferred tax liability account at the end of 2015 is $24,500 ($17,500 + $7,000), which corresponds to option C.