Question

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars):

Pretax accounting income:	$	923
Pretax accounting income included:
Overweight fines (not deductible for tax purposes)		5
Depreciation expense		140
Depreciation in the tax return		460

The applicable tax rate is 25%. There are no other temporary or permanent differences.

Franklin's balance sheet at the end of its first year would report:

Multiple Choice

• A deferred tax liability of $80 million among noncurrent liabilities.

• A deferred tax liability of $80 million among current liabilities.

• A deferred tax asset of $80 million among noncurrent assets.

• A deferred tax asset of $80 million among current assets.

Answer 1

The correct answer is

A Deffered tax liability $ 80 million among non current liabilities

Explanation

Since the tax depreciation is more than book depreciation, this means less income tax will be payable, so it means in future more tax will be required to be paid, so liability will be created., Since we dont know when this liability will be payable in future, so it will be categorized as non current

Non current deferred tax liability = difference in depreciation * tax rate

= (460-140)*25%

= 320*25 %

= $ 80 Deffered tax liability non current liabilities