B is corrent. The deferred tax component of income tax expense reported in the income statement is computed by determining the change in the balance sheet account(s) for deferred income taxes. Since no beginning balance due to temporary differences originating in prior years is given, the deferred portion of income tax expense will be the amount of the ending balance sheet account(s). Depreciation expense and royalty income are temporary differences and cause pretax book income to exceed taxable income, while the officers life insurance premium is a permanent difference and has no effect on deferred taxes. Because book income exceeds taxable income, taxes on this difference will be due in future years when reversal occurs. The two future taxable amounts that represent the temporary differences are tax affected using future rate of 30%. This gives the desired ending balance in the deferred income tax liability account and the deferred portion of income tax expense for year 3 . | | Temporary difference | × | Tax rate | = | Deferred tax | | Royalties: | ($ 40,000 – $ 20,000) | × | 30% | = | $6,000 | | Depreciation: | ($125,000 – $100,000) | × | 30% | = | $7,500 |
Thus, deferred tax expense for year 3 would be $13,500.A is incorrect. The deferred tax component of income tax expense reported in the income statement is computed by determining the change in the balance sheet account(s) for deferred income taxes. Since no beginning balance due to temporary differences originating in prior years is given, the deferred portion of income tax expense will be the amount of the ending balance sheet account(s). Depreciation expense and royalty income are temporary differences and cause pretax book income to exceed taxable income, while the officers life insurance premium is a permanent difference and has no effect on deferred taxes. Because book income exceeds taxable income, taxes on this difference will be due in future years when reversal occurs. The two future taxable amounts that represent the temporary differences are tax affected using future rate of 30%. This gives the desired ending balance in the deferred income tax liability account and the deferred portion of income tax expense for year 3 . | | Temporary difference | × | Tax rate | = | Deferred tax | | Royalties: | ($ 40,000 – $ 20,000) | × | 30% | = | $6,000 | | Depreciation: | ($125,000 – $100,000) | × | 30% | = | $7,500 |
Thus, deferred tax expense for year 3 would be $13,500. C is incorrect. The deferred tax component of income tax expense reported in the income statement is computed by determining the change in the balance sheet account(s) for deferred income taxes. Since no beginning balance due to temporary differences originating in prior years is given, the deferred portion of income tax expense will be the amount of the ending balance sheet account(s). Depreciation expense and royalty income are temporary differences and cause pretax book income to exceed taxable income, while the officers life insurance premium is a permanent difference and has no effect on deferred taxes. Because book income exceeds taxable income, taxes on this difference will be due in future years when reversal occurs. The two future taxable amounts that represent the temporary differences are tax affected using future rate of 30%. This gives the desired ending balance in the deferred income tax liability account and the deferred portion of income tax expense for year 3 . | | Temporary difference | × | Tax rate | = | Deferred tax | | Royalties: | ($ 40,000 – $ 20,000) | × | 30% | = | $6,000 | | Depreciation: | ($125,000 – $100,000) | × | 30% | = | $7,500 |
Thus, deferred tax expense for year 3 would be $13,500. D is incorrect. The deferred tax component of income tax expense reported in the income statement is computed by determining the change in the balance sheet account(s) for deferred income taxes. Since no beginning balance due to temporary differences originating in prior years is given, the deferred portion of income tax expense will be the amount of the ending balance sheet account(s). Depreciation expense and royalty income are temporary differences and cause pretax book income to exceed taxable income, while the officers life insurance premium is a permanent difference and has no effect on deferred taxes. Because book income exceeds taxable income, taxes on this difference will be due in future years when reversal occurs. The two future taxable amounts that represent the temporary differences are tax affected using future rate of 30%. This gives the desired ending balance in the deferred income tax liability account and the deferred portion of income tax expense for year 3 .
| | Temporary difference | × | Tax rate | = | Deferred tax | | Royalties: | ($ 40,000 – $ 20,000) | × | 30% | = | $6,000 | | Depreciation: | ($125,000 – $100,000) | × | 30% | = | $7,500 |
Thus, deferred tax expense for year 3 would be $13,500. |
