Question

JJJ Corp. reported the following results for calendar 2020, its first year of operations:

         Pre-tax accounting income                                        $250,000

         Taxable income                                                                400,000

The difference between accounting income and taxable income is due to a temporary difference, which will reverse in 2021. Assuming that the enacted tax rates in effect are 30% in 2020 and 25% in 2021, what amount should Delaware record as the deferred tax asset or liability for calendar 2020?

Answer 1

The difference between the accounting income and taxable income that is caused due to temporary differences that reverse in the subsequent year/s, gives rise to either a deferred tax asset or a deferred tax liability. A deferred tax asset is created when the accounting income is less than the taxable income while, a deferred tax liability arises when the accounting income is more than the taxable income.

In the given scenario, since the accounting income of $250,000 is less than the taxable income of $400,000, a deferred tax asset will be recorded.

Deferred tax asset = 25% x ($400,000 - $250,000) = 25% x $150,000 = $37,500