In its 2017 income statement, Tow Inc. reported proceeds from an officer’s life
ID: 2562083 • Letter: I
Question
In its 2017 income statement, Tow Inc. reported proceeds from an officer’s life insurance
policy of $90,000 and depreciation of $250,000. Tow was the owner and beneficiary of the
life insurance on its officer. Tow deducted depreciation of $370,000 in its 2017 income tax
return. The tax rate is 35%. Data related to the reversal of the excess tax deduction for depreciation
follow:
Year Reversal of Excess
Tax Deduction for Depreciation
2018 $50,000
2019 40,000
2020 20,000
2021 10,000
Tow has no other temporary differences and it had no deferred tax assets or liabilities at
December 31, 2016.
Required:
In its December 31, 2017, balance sheet, what amount should Tow report as a deferred tax
liability?
Answer: defered tax liability -Is it $42,000
Explanation / Answer
ans) $42,000 deferred tax liability
The life-insurance proceeds represent a permanent difference and therefore do not contribute to the deferred tax liability. Only temporary differences affect deferred tax accounts. The future temporary differences for depreciation are multiplied by the enacted tax rates in effect in the reversing period.
The $42,000 ending deferred tax liability for 2017 is the sum of the tax effects of these differences: (120,000 X 35%) The future enacted rates are used because those are the rates in effect when the differences reverse.