Cullumber Company reported the following results for the year ended December 31, 2018, its first year of operations:

2018

Income (per books before income taxes) $2,049,000

Taxable income 3,250,000

The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2019. What should Cullumber record as a net deferred tax asset or liability for the year ended December 31, 2018, assuming that the enacted tax rates in effect are 40% in 2018 and 35% in 2019?

A. $480400 deferred tax liability

B. $420350 deferred tax asset

C. $480400 deferred tax asset

D. $420350 deferred tax liability

Question

Annie Schaefer

Business

5 August, 18:00

Cullumber Company reported the following results for the year ended December 31, 2018, its first year of operations:

2018

Income (per books before income taxes) $2,049,000

Taxable income 3,250,000

The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2019. What should Cullumber record as a net deferred tax asset or liability for the year ended December 31, 2018, assuming that the enacted tax rates in effect are 40% in 2018 and 35% in 2019?

A. $480400 deferred tax liability

B. $420350 deferred tax asset

C. $480400 deferred tax asset

D. $420350 deferred tax liability

+3

Answers (1)

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Vazquez · Answer 1

Option B is correct, a deferred tax asset of $420,350

Explanation:

The amount of taxable income is now than the income per books, which means that a higher amount than usual is assessed to tax now leading to higher tax paid in the current year but would result in lower tax amount next year, without mincing words we have a deferred tax asset now which is computed as follows:

(taxable income-income per books) * 2019 tax rate

($3,250,000-$2,049,000) * 35%=$420,350

Ultimately the correct option is B, a deferred tax asset of $$420,350

Option D is wrong because it is the opposite of the correct classification