Information for questions 10. and 11. Watson Corporation prepared the following
ID: 2527665 • Letter: I
Question
Information for questions 10. and 11. Watson Corporation prepared the following reconciliation for
its first year of operations:
Pretax financial income for 2017 $1,400,000
Tax exempt interest (permanent difference) (100,000)
Originating temporary difference (300,000)
Taxable income $1,000,000
The temporary difference will reverse evenly over the next two years at an enacted tax rate of
21%. The enacted tax rate for 2017 is 35%.
10. What amount should be reported in its 2017 income statement as the current portion of its
provision for income taxes?
a. $350,000
b. $490,000
c. $455,000
d. $385,000
11. What amount should be shown on the balance sheet for Watson’s deferred taxes?
a. $63,000 deferred tax liability – current
b. $63,000 deferred tax liability – long-term
c. $31,500 deferred tax asset – current
d. $31,500 deferred tax liability – long term
Explanation / Answer
10.
Current portion of provison for income taxes = Taxable income * Current tax rate
= 1,000,000 * 35%
= 350,000
The answer is A.
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11.
Negative temporary difference * Future tax rate = Deferred tax liablilty
Deferred tax liability = 300,000 * 21%
= 63,000
Deferred tax assets and liabilities are always non current as per GAAP
The answer is - B.