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. $91,350 C. $94,500 D. $3,150

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. ​$91,350 C. ​$94,500 D. ​$3,150

BlackTom AI · Accepted Answer

First, let's restate the core facts: Greene Co. has pretax book income of 315,000 for 2022, a 30% tax rate, and depreciation for tax purposes exceeds book depreciation by 10,500. A temporary difference arises because the tax depreciation is larger than the book depreciation by 10,500.

Option A: $0. This would imply there is no deferred tax impact from the difference between tax and book depreciation. However, because tax depreciation exceeds book depreciation, there is a taxable temporary difference that will reverse in the future, creating a deferred tax liability. Therefore, $0 is not correct.

Option B: $91,350. This amount resembles 315,000 × 29% or could be a misapplication of the rate to some other figure, but it does not align with the standard approach to measuring a deferred tax liability from a temporary depreciation difference. It is not the product of the relevant difference and the tax rate, so this choice is inaccurate.

Option C: $94,500. This equals 315,000 × 30%, i.e., the current income tax payable if the entire pretax book income were taxed at the rate with no differences. However, deferred tax liabilities arise from temporary differences between book and tax, not from current tax payable alone. Since there is a 10,500 temporary difference, this answer ignores the reversal pattern over time and thus is incorrect as a measurement of the deferred tax liability.

Option D: $3,150. A deferred tax liability from a taxable temporary difference is computed as the difference (10,500) times the enacted tax rate (30%). This yields 10,500 × 0.30 = 3,150. The logic is that depreciation timing differences will reverse in future periods, causing higher taxable income later and thus higher taxes; the 3,150 represents the amount of tax that is deferred to future periods due to this timing difference.

In summary, the correct concept is that a taxable temporary difference of 10,500 at a 30% rate creates a deferred tax liability of 3,150. The other options misstate either the presence of a deferred tax effect, misapply the rate to the wrong base, or ignore the timing difference altogether.

Homework:practice exam 2

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