Relix, Inc., is a domestic corporation with the following balance sheet for book
ID: 2456267 • Letter: R
Question
Relix, 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 Relix’s net deferred tax asset or net deferred tax liability at year-end. Assume a 34% corporate tax rate and no valuation allowance.
Tax Debit/ (Credit) Book Debit/ (Credit)
Assets
Cash $ 500 $ 500
Accounts receivable 8,000 8,000
Buildings 750,000 750,000
Accumulated depreciation (450,000) (380,000)
Furniture & fixtures 70,000 70,000
Accumulated depreciation (46,000) (38,000)
Total assets $ 332,500 $ 410,500
Liabilities
Accrued litigation expense $ 0 ($ 50,000)
Note payable (78,000) (78,000)
Total liabilities ($ 78,000) ($ 128,000)
Stockholders’ Equity
Paid-in capital ($ 10,000) ($ 10,000)
Retained earnings (244,500) (272,500)
Total liabilities and stockholders’ equity ($ 332,500) ($ 410,500)
Explanation / Answer
Deferred Tax Liability is the tax effect of timing difference which is created when tax on accounting income is more whereas tax payable is less as per Income-tax law for the period. Here is the same thing because of the timing difference due to Depreciation.
Gross Deferred Tax Liability at the end of year is calculated below:-
Gross Deferred Tax Liability at the end of year = 78000 * 34% = $ 26520
Difference in Depreciation of Building ( 450000 - 380000) 70000 Difference in Depreciation of Furniture & Fixtures ( 46000 - 38000) 8000 Total Difference due to Depreciation 78000