Suppose that, in 2010, legislation revised the income tax rates, so that Isaac would be taxed in 2011 and beyond at 40%, rather than 30%. Assume that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses and additional sales in 2010, what deferred tax liability would Isaac report in its year-end 2010 balance sheet?

Question

Quizplus · Accepted Answer

The deferred tax liability would be calculated as the difference between the tax basis and the financial statement basis of Isaac's assets, liabilities, and equity. Assuming no other differences except for the income tax rate, the deferred tax liability can be calculated as follows:

Future taxable income = $420 million (same as book income)
Tax rate = 40%

Total deferred tax liability = ($420 million x 0.4) - ($420 million x 0.3) = $168 million

Therefore, the best choice is A.

Suppose That, in 2010, Legislation Revised the Income Tax Rates