Question

In its first year of operations, Woodmount Corporation reported pretax accounting income of $500 million for the current year. Depreciation reported in the tax return in excess of depreciation in the income statement was $60 million. The excess tax will reverse itself evenly over the next three years. The current year's tax rate of 40% will be reduced under the current law to 35% next year and 30% for all subsequent years. At the end of the current year, the deferred tax liability related to the excess depreciation will be:
A. $21 million.
B. $24 million.
C. $18 million.
D. $19 million

Answer 1

Answer:

D. $19 million

Explanation:

The computation of the deferred tax liability for three years is shown below:

Total depreciation would be $60 million

For each year it would be = $60 million ÷ 3 years = $20 million

For the first year, it would be

= $20 million × 35%

= $7 million

For  the second year, it would be

= $20 million × 30%

= $6 million

the first year, it would be

= $20 million × 30%

= $6 million

So, the total would be

= $7 million + $6 million + $6 million

= $19 million