Question

At the end of 2015, Harrybean Inc learned that, although current statutory tax rate is 30%, Congress enacted a 35% rate for 2016 and beyond, and they are expected to enact a 40 percent rate for 2017, although it has not yet occurred.

2015 2016 2017

FS Pre-Tax income $400,000 $340,000 $370,000

Differences due to

Depreciation (30,000) 10,000 25,000

Warranties $5,000 (7,000) -------

IRS Taxable Income 375,000 343,000 395,000

Calculate the ending balances in the deferred tax liability and asset accounts assuming the new information on taxes. Make sure you clearly show your calculations.

Depreciation Difference 2015 2016 2017

Amount 10,000 25,000

Tax Rate ??? ???

Tax Effect ??? ???

Ending Balance ???

It should be liability.

Warranty Difference

Amount (7,000) ---

Tax Rate ???

Tax Effect ???

Ending Balance ???

This should be an asset.

Answer 1

	2015	2016	2017
Depreciation Difference	(30,000.00)	10,000.00	25,000.00
Tax Rate		35%	40%
Deferred Tax Liability		3,500.00	10,000.00

Warranty Difference	7000
Tax Rate	35%
Deferred Tax Assets	2450

The Deferred Tax assets are created based on the expected future enacted tax rate.

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