At December 31, DePaul Corporation had a $12 million balance in its deferred tax

Question

At December 31, DePaul Corporation had a $12 million balance in its deferred tax asset account and a $60 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:

Estimated warranty expense, $30 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).

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.

Rent revenue collected in advance, $10 million; taxable in the year collected; recorded as income when earned the following year.

Determine the deferred tax amounts to be reported in the December 31 balance sheet. The tax rate is 30%. (Enter your answers in millions.)

At December 31, DePaul Corporation had a $12 million balance in its deferred tax asset account and a $60 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:

Explanation / Answer

Estimated warrnty:

Warranty is already recognized as the expense in the year of sale in the accouting records, however, it is allowed as a deductible expense in the year, it is paid as per the income tax rules. Hence, it is a future deductible amount, So, this results in a deferred tax asset to the extent of $30 million * 30% = 9 million of deferred tax asset...

Depreciation expense:

As per the accouting system, straight line depreciation method is used, but as per tax purposes MACRS system is used. As per accouting system, less depreciation is calculated, as per MACRS, more depreciation is recognized as expense, as this is a future taxable amount, hence it results in a deferred tax liability = 150*30% =45 million.

Income from instalment sale of property:

Income is recognized in the year of sale, however, it is recognized as income in the year in which it is received. As, it is a future taxable amount as per income tax provisions, hence, it is recognized as deferred tax liability.

50 million * 30% =15 million of deferred tax liability

Rent revenue collected in advance:

Rents collected in advance, but rents are taxable in the year in which they are received. As per accouting principles, rent is to be recognized as income in the period to which it belongs. As tax is already paid, it is a future deductible amount, hence it is a deferred tax asset to the extent of 10 million *30% = 3 million.

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