At December 31, 2014, Rockfellow Corp. had a net deferred tax asset of $50,000.

Question

At December 31, 2014, Rockfellow Corp. had a net deferred tax asset of $50,000. An explanation of the items that compose this balance is as follows.

Temporary Differences Resulting Balances in Deferred Taxes

1. Accrual, for book purposes, of estimated warranty costs.

Warranty costs will be deducted on the tax return when paid. $ 125,000

2. Excess of tax depreciation over book depreciation (110,000)

3. Accrual, for book purposes, of an estimated litigation settlement expected to be paid in 2016.

The loss will be deducted for tax purposes when paid. 35,000

$ 50,000

In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference will reverse in 2015, and $100,000 of the temporary difference due to the warranty costs will reverse in 2015. The tax rate for all years is 40%.

Instructions Indicate the manner in which deferred taxes should be presented on Rockfellow’s December 31, 2014, balance sheet.

PLEASE SHOW ALL WORK AND CALCULATIONS. PLEASE SHOW THE CORRECT BALANCE SHEET.

Explanation / Answer

In the balance sheet of Rockfellow as on 31st December, 2014 the deferred tax asset will be shown as $64,000 under current assets and $44,000 will be shown as deferred tax liabilities under current liabilities.

Balance sheet cannot be prepared as the figures and data related to the balance sheet is not given here.

Estimated warranty cost $           125,000 Deferred Tax Asset Excess of depreciation over book depreciation $        (110,000) Deferred Tax Liability Estimated litigation to be deductible when paid $             35,000 Deferred Tax Asset The Deferred Tax Asset calculated as under: Estimated warranty cost $           125,000 Estimated litigation to be deductible when paid $             35,000 Total $           160,000 Deferred Tax Asset @ 40% $             64,000 The Deferred Tax Liability calculated as under: Excess of depreciation over book depreciation $        (110,000) Deferred Tax Liability @ 40% $ (44,000)

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