At December 31, DePaul Corporation had a $16 million balance in its deferred tax

Question

At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:

1.              Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).

2.              Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.

3.              Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.

4.              Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.

Required:

Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%.

Explanation / Answer

Deferred Tax Accounts Classification Amount Tax rate Current NonCurrent Warranty Expenses C            (15) 40%               (6) Depreciation NC            120 40%                    48 Receivable Installment Sale C               10 40%                 4 Receivable Installment Sale NC               40 40%                    16 Allowance-Uncollectable C            (25) 40%            (10)            (12)                    64 Net Current liability                     (12) Net noncurrent liability               64 Current Assets: Deferred taxes                       12 Long term liabilities: Deferred tax liability                       64

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