Part 1Greene Co. has pretax book income for the year ended December 31, 2022 in the amount of $315,000 and has a tax rate of 30%. Depreciation for tax purposes exceeded book depreciation by $10,500.What should Greene Co. record as its deferred tax liability for 2022? Part 1
A. $0 B. $3,150 C. $91,350 D. $94,500

Question

Part 1Greene Co. has pretax book income for the year ended December​ 31, 2022 in the amount of​ $315,000 and has a tax rate of​ 30%. Depreciation for tax purposes exceeded book depreciation by​ $10,500.What should Greene Co. record as its deferred tax liability for​ 2022? Part 1
A. ​$0 B. ​$3,150 C. ​$91,350 D. ​$94,500

BlackTom AI · Accepted Answer

First, restate the given data to anchor the problem: Greene Co. reports a pretax book income of 315,000 for 2022, with a tax rate of 30%. The depreciation for tax purposes exceeds book depreciation by 10,500. This creates a temporary difference between book income and taxable income.

Option A: $0
This would imply there is no deferred tax liability or asset. However, since tax depreciation exceeds book depreciation by 10,500, there is a definite temporary difference that will reverse in the future. Therefore, a deferred tax item must exist, so this option is incorrect.

Option B: $3,150
To find the deferred tax liability, focus on the temporary difference: 10,500 of tax depreciation exceeds book depreciation. The temporary difference multiplied by the tax rate gives the deferred tax amount: 10,500 × 0.30 = 3,150. A positive DTL arises because taxable income is initially lower due to higher depreciation for tax purposes, creating future tax obligations when the difference reverses. This aligns with standard accounting for deferred taxes under the liability approach.

Option C: $91,350
This value represents 30% of the taxable income if you incorrectly apply the tax rate to the adjusted taxable income (315,000 − 10,500 = 304,500; 304,500 × 0.30 = 91,350). While this figure corresponds to current tax payable on taxable income, it does not measure the deferred tax liability caused by the temporary difference. It conflates current tax with deferred tax, so it is not the correct deferred tax liability.

Option D: $94,500
This amount equals 30% of the book income (315,000 × 0.30). Using the book income to compute tax expense ignores the fact that tax depreciation exceeded book depreciation, creating a temporary difference. Therefore, this is not the correct deferred tax liability.

In summary, only the 10,500 temporary difference, when multiplied by the tax rate of 30%, yields the correct deferred tax liability amount of 3,150. The other figures either reflect current tax payable or ignore the existence of the temporary difference altogether.

Homework:practice exam 2

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