Question

1. Kantner, Inc. is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Based on this information, determine Kantner’s net deferred tax asset or net deferred tax liability at year end. Assume a 34% corporate income tax rate and no valuation allowance.

	Tax Dr (Cr)	Book Dr (Cr)
Assets
Cash	$1,000	$1,000
Accounts Receivable	$9,000	$9,000
Buildings	$850,000	$850,000
Accumulated depreciation	($700,000)	($620,000)
Equipment	$40,000	$40,000
Accumulated depreciation	($10,000)	($8,000)
Total Assets	$190,000	$272,000
Liabilities
Accrued Warranty Expense	-0-	($40,000)
Note Payable	($16,000)	($16,000)
Total Liabilities	($16,000)	($56,000)
Shareholder’s Equity
Paid in Capital	($50,000)	($50,000)
Retained Earnings	($124,000)	($166,000)
Total Liabilities and Shareholder’s Equity	($190,000)	($272,000)

Answer 1

Excess expense observed at tax while calculating tax : Depreciation on Assets : 80000 + 2000 = $82000

Less: Warranty expense not recognised at tax, they are taken as exp. on actual: $40000

Net Excess expense observed at tax than book while calculating tax = $42000

Tax rate = 34%

Being excess expense at tax, so Deferred Tax Liability has risen to the extent of tax on $42000 = $42000 *34% = $14280