Part 1S & C Company reported $ 220,000$220,000 depreciation on its 2022 tax return However, they reported $ 50,000$50,000 depreciation expense on their 2022 income statement. The difference in depreciation is a temporary difference that will reverse over time. Assuming S & C's tax rate is constant at 3030%, what amount should be added to the deferred income tax liability in S & C's December 31, 2022, balance sheet? Part 1
A.$ 51,000 $ 51,000$51,000 B.$ 66,000 $ 66,000$66,000 C.$ 81,000 $ 81,000$81,000 D.$ 15,000 $ 15,000$15,000

Question

Part 1S​ & C Company reported $ 220,000$220,000 depreciation on its 2022 tax return​ However, they reported $ 50,000$50,000 depreciation expense on their 2022 income statement. The difference in depreciation is a temporary difference that will reverse over time. Assuming S​ & C's tax rate is constant at 3030​%, what amount should be added to the deferred income tax liability in S​ & C's December​ 31, 2022, balance​ sheet? Part 1
A.$ 51,000 $ 51,000$51,000 B.$ 66,000 $ 66,000$66,000 C.$ 81,000 $ 81,000$81,000 D.$ 15,000 $ 15,000$15,000

BlackTom AI · Accepted Answer

We start by restating the given information to anchor the problem: a temporary difference exists because depreciation on the tax return (220,000) differs from depreciation on the income statement (50,000). The difference between these two amounts is 220,000 − 50,000 = 170,000.

Now, consider how deferred tax liabilities (DTLs) are formed. A DTL arises when taxable income is reduced more by tax deductions today than is reported for financial accounting purposes, meaning that in the future the company will owe more taxes when those temporary differences reverse. In this case, the tax depreciation is higher than the book depreciation, which temporarily lowers current taxable income relative to book income and creates a future tax cash outflow; hence a DTL.

Compute the deferred tax amount by applying the enacted tax rate to the temporary difference: 170,000 × 0.30 = 51,000.

Option-by-option analysis:
- Option A: 51,000. This matches the calculation 170,000 × 30% = 51,000, which is the amount to recognize as a deferred tax liability.
- Option B: 66,000. This would correspond to applying 39% (or applying 170,000 × 0.39), which is not the given rate, so it misuses the tax rate.
- Option C: 81,000. This would imply a 47.65% rate or some misapplication of the difference, but it does not align with the 30% rate provided.
- Option D: 15,000. This would be 170,000 × 0.0882, an incorrect rate and calculation, vastly underestimating the liability.

In this problem, the key steps are identifying the temporary difference (170,000) and applying the correct tax rate (30%) to determine the deferred tax liability to recognize. The logic hinges on the fact that higher tax depreciation today creates a liability that will reverse in the future, increasing taxes then.

Test:Midterm 2 Problems

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