Supreme Corporation reports pretax accounting income of 6000

Supreme Corporation reports pretax accounting income of $600,000, but due to a single temporary difference, taxable income is only $500,000. At beginning of the year, no temporary differences existed. Assuming a tax rate of 40%, the amount of deferred tax liability or deferred tax asset to be reported this year would be:

a. Deferred tax asset of $40,000
b. Deferred tax liability of $40,000
c. Deferred tax asset of $60,000
d. Deferred tax liability of $60,000

Solution

Income Tax Rate Tax Amount Income as per Accounting Income = $            6,00,000 40% $       2,40,000 Income as per Taxable Income = $            5,00,000 40% $       2,00,000 Difference $            1,00,000 40% $           40,000 As per accounting income we have to pay the tax of Rs. $ 240,000 But in actual we have to pay the only $ 240,000 So, There is saving of tax of $ 40,000 , So in future we have to pay the tax difference we can create aliability against pending tax difference. So these difference is called defferred Tax Liability So, Answer = Option B = Deferred tax Liability of $40,000