Question

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): $299 Pretax accounting income: Pretax accounting income included: Overweight fines (not deductible for tax purposes) Depreciation expense Depreciation in the tax return 5 80 160 The applicable tax rate is 25%. There are no other temporary or permanent differences. Franklin's balance sheet at the end of its first year would report: Multiple Choice A deferred tax liability of $20 million among noncurrent liabilities. O A deferred tax liability of $20 million among current liabilities. A deferred tax asset of $20 million among noncurrent assets. o o A deferred tax asset of $20 million among current assets.

Answer 1

Answer

• Depreciation allowed as per tax return = $ 160
• Depreciation in books = $ 80
• This means that more depreciation expense is allowed than present in books.
  This would result in LOWER taxable income in CURRENT PERIOD.
  Hence, it will lead to creation of Deferred Tax Liability to be paid in coming future.
• Deferred Tax Liability = Excess depreciation allowed x Tax rate
  = ($160 – 80) x 25%
  = 80 x 25%
  = $ 20
• Correct Answer = Option #1: A Deferred Tax Liability of $ 20 million among non current liabilities.