Question

Mill Company began operations on January 1,2017, and recognized income from construction-type contracts under different methods for tax purposes and financial reporting purposes. Information concerning income recognition under each method is as follows:
Year Tax Purposes Book Purposes
2017 $400,000 $ 0
2018 625,000 375,000
2019 750,000 850,000
Required Assume the income tax rate is 35% in all years and that Mill has no other temporary differences. In its December 31, 2019, balance sheet, what amount of deferred income taxes should Mill report? Indicate whether the amount is an asset or a liability.

Answer 1

Answer:

i. Deferred income taxes balance on  December 2019 is $192,500

ii. Deferred tax asset.

Explanation:

Year   Tax purpose   Book purpose   Difference   Deferred tax book

2017      $400,000          $0                $400,000        $140,000

2018      $625,000     $375,000         $250,000        $87,500

2019      $750,000     $850,000        ($100,000)        ($35,000)

Deferred tax asset balance on  December 2019 =   $192,500

Working

Deferred tax book

2017 = 400,000 * 35% =  $140,000

2018 = 250,000 * 35% = $87,500

2019 = (100,000) * 35% = ($35,000)

ii. Book income is less than tax income in 2017 and 2018. Deferred tax asset would be accounted. Book income is higher than tax income in 2019. Deferred tax asset would be reverse (i.e. deferred tax liability). Balance at the end of December 31, 2019 would be Deferred tax asset.