Jogg,Inc. ,earns book net income before tax of $600,000.Jogg puts into service a depreciable asset this year,and first year tax depreciation exceeds book depreciation by $120,000.Jogg has recorded no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 35%,and that this is Jogg's first year of operations,what is Jogg's balance in its deferred tax asset and deferred tax liability accounts at year end?

Question

Quizplus · Accepted Answer

To calculate the balance in Jogg's deferred tax asset (DTA) and deferred tax liability (DTL) accounts at year end, we need to first determine the amount of temporary book-tax differences.

In this case, the only temporary difference is the excess tax depreciation of $120,000. This creates a DTL because Jogg has already recognized lower book depreciation expense in their income statement, which results in higher taxable income (and therefore higher taxes payable) than if they had used the same depreciation method for both book and tax purposes.

The balance in Jogg's DTA and DTL accounts will be equal to the tax rate (35%) multiplied by the temporary difference of $120,000, which gives us a DTL of $42,000. However, since this is Jogg's first year of operations, they would not have any pre-existing DTA or DTL balances, so the answer is B) $0 and $42,000.

Jogg,Inc ,Earns Book Net Income Before Tax of $600,000