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. Assuming no other temporary or permanent differences, Woodmount will report a deferred tax liability of:A. $21 million.B. $24 million.C. $18 million.D. $19 million.

Answer 1

Answer:

The correct answer is D. $ 19 million dollars.

Explanation:

As per accounting standards deffered tax provision is recorded on accounting difference keeping the tax rate applicable, in the year of reversal or accounting year in which difference ceased to exist, in consideration.

So based on above said rule deffered tax liability will be calculated in following way.  

Next year: $20 x 35% = $ 7

Subsequent years: $40x 30% = $ 12

Deferred tax liability  = $ 19