Question

Palmer Co. had a deferred tax liability balance due to a temporary difference at the beginning...

Palmer Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2014 related to $600,000 of excess depreciation. In December of 2014, a new income tax act is signed into law that lowers the corporate rate from 40% to 35%, effective January 1, 2016. If taxable amounts related to the temporary difference are scheduled to be reversed by $300,000 for both 2015 and 2016, Palmer should increase or decrease deferred tax liability by what amount?

a.   Decrease by $30,000

b.   Decrease by $15,000

c.   Increase by $15,000

d.   Increase by $30,000

why b ??

Business   Accounting   
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Answer #1

Solution:

Total taxable temporary differences = $600,000

Temporary differences reversible in 2015 = $300,000

Temporary differences reversible in 2016 = $300,000

As new income tax act lowers the coroporate rate from 40% to 35% from 2016, therefore at the end of 2014, deferred tax liability related to temporary differences reversible in 2016 will be reduced by 5% (40% - 35%) of reversible differences.

Therefore decrease in deferred tax liability = $300,000 * 5% = $15,000

Hence option b is correct.

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