The European Specialty Company which prepares its financial

The European Specialty Company, which prepares its financial statements under IFRS, has reported income before taxes of $1,300 on its financial statements and taxable income of $900. The $400 difference is due exclusively to a gain recognized for financial statement purposes in the current year that will be taxed 3 years later. The company is subject to a tax rate of 25% in the current year and, based on enacted tax law, will be subject to tax at the rate of 35% in the year in which the $400 will be taxable. After the date of the financial statements, but prior to their issuance, the future tax rate was reduced from 35% to 30%. What amount of deferred tax liability will European Specialty recognize in its current financial statements?

Multiple Choice

$0

$100

$120

$140

Solution

When the accounting income differs from permanent income due to temporary difference ,deffered tax asset /deffered tax liability should be recognised using the tax rate that might be prevailing in the year in which deferred tax asset/liability will be applied /reversed.

When accounting income is more than taxable income ,it will create deffered tax liability.

However if expected future rate changes before the financial statement is issued ,the new revised rate should be used for calculating deffered tax asset/liability .

Temporary difference =1300-900=400

Deferred tax liability = 400*.30

                   = $ 120

correct option is \"C\"-120