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Reporting deferred income tax
Matthew Company reported $350,000 in income before income tax for financial reporting (book) purposes in Year 3, its first year of operation. The tax depreciation exceeded its book depreciation by 30,000. The tax rate for Year 3 and all future years is 40%. What amount of deferred income tax should Matthew report in its December 31, Year 3, balance sheet?
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This is a common situation since companies often use a declining balance deprecation method for taxes and straight line for financial reporting purposes. Per the problem, the depreciation for taxes was $30,000 greater than on the books, so the company is deferring the payment of taxes on $30,000 at a tax rate of 40%, or $12,000. |
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