Kent, Inc.’s reconciliation between financial statement and taxable income for 2010 follows:
150,000 Pretax financial Income
(12,000) Permanent Difference
$138,000
(9,000) Temporary difference – Depreciation
$129,000 Taxable income
Additional information
Cumulative temporary difference (future taxable amounts
@12/31/08 = $11,000
@12/31/09 = $20,000
The enacted tax rate was 34% for 2009, and 40% for 2010 and years thereafter. In its 12/31/10 balance, what amount should Kent report as deferred income tax liability?
A. 6,800
B. 8,000
C. 3,600
D. 7,340
The answer is B. $8,000
This answer is correct. The deferred tax liability to be reported at 12/31/10 is equal to the future taxable amounts which exist as a result of past transactions multiplied by the appropriate tax rate. The deferred tax liability is computed using the current tax rate unless there is a different enacted future tax rate which will be in effect when the temporary differences become taxable. In this case, the current tax rate at 12/31/10 is 40%, and there is no other future tax rate enacted, so the 12/31/10 deferred tax liability is $8,000 (40% x future taxable amounts of $20,000).
What happened to the $9,000 temporary difference for 2010? Shouldn’t it have been included and the deferred tax liability been $11,600? What am I missing here? I’ve read this 4 times and all I can hear in my head is the school teacher from Charlie Brown!