Question

10. Assume an enacted tax rate of 30% for all years. The rates are known on 1/1/2013. The dollar amount reported as deferred taxes on the 12/31/2013 balance sheet is a $1,350 b. $4,050 c. $5,400 d. $ 150 e. $5,550

Use the information below to answer the question above.

Can someone help me with this question, please? it shows the answer as b) $4050 but I dont know how it got that? is it a deferred tax asset or deferred tax liability? show your work and thanks in advance!

here PTFI is just abbreviation for pretax financial income and TI is an abbreviation for taxable income.

Answer 1

Solution:
When the taxable income is more then pre-tax financial income, it will result into deferred tax assets because the entity will pay more tax in current year due to timing difference. Those timing difference will result into lower taxable income and higher pre-tax financial income in later years when the deferred tax assets are balanced out.
Here it the calculation below to arrive at deferred tax assets in the given question
Reported taxable income (A)	20500
Reported pre-tax financial income (B)	12000
Excess of taxable income over pre-tax financial income (A-B)	8500
Adjustment of warranty expense	0
Expense incurred is 18,000 while allowable is only 4500 which is already considered in above figures and differences
Adjustment of bond interest income as this is non taxable- Add	5000
Total adjustment to taxable income	13500
Tax Rate	30%
Deferred tax assets @ tax rate	4050