The financial reporting carrying value of Boze Music's only depreciable asset exceeded its tax basis by $150,000 at December 31, 2009. This was a result of differences between straight line depreciation for financial reporting purposes and MACRS for tax purposes. The asset was acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is 30% for 2009 and 40% thereafter. Boze should report the deferred tax effect of this difference in its December 31, 2009, balance sheet as:

Question

Quizplus · Accepted Answer

The excess of financial reporting carrying value over tax basis creates a future taxable amount of $150,000. Applying the enacted tax rate of 30% for 2009, the deferred tax liability at December 31, 2009, is $45,000 ($150,000 × 30%). Since the tax rate increases to 40% in future years, the deferred tax liability will increase to $60,000 ($150,000 × 40%). Therefore, Boze should report a liability of $60,000 in its December 31, 2009, balance sheet.

The Financial Reporting Carrying Value of Boze Music's Only Depreciable