Superior Developers sells lots for residential development. When lots are sold, Superior recognizes income for financial reporting purposes in the year of the sale. For some lots, Superior recognizes income for tax purposes when collected. In the prior year, income recognized for financial reporting purposes for lots sold this way was $20 million, which would be collected equally over the next two years. The enacted tax rate was 40%. This year, a new tax law was enacted, revising the tax rate from 40% to 35% beginning next year. Calculate the amount by which Superior should reduce its deferred tax liability this year.

Question
Asked Jan 21, 2020
10 views

Superior Developers sells lots for residential development. When lots are sold, Superior recognizes income for financial reporting purposes in the year of the sale. For some lots, Superior recognizes income for tax purposes when collected. In the prior year, income recognized for financial reporting purposes for lots sold this way was $20 million, which would be collected equally over the next two years. The enacted tax rate was 40%. This year, a new tax law was enacted, revising the tax rate from 40% to 35% beginning next year. Calculate the amount by which Superior should reduce its deferred tax liability this year.

check_circle

Expert Answer

Step 1

Temporary Difference

Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records is known as temporary difference.

Deferred Tax

Deferred tax account shows the amount of reconciliation, which occurs due to the difference between the income tax expense account and the income tax payable account.

Deferred tax liability:

When the Income Tax Expense account i.e. the estimated income tax amount is less than the outstanding amount of income tax i.e. the Income Tax Payable account, the difference is to be credited to Deferred Tax Liability account.

 

Step 2

Determine the amount by which Superior Developers redu...

Accounting homework question answer, step 2, image 1
fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Accounting

Other

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Potlatch Corporation has issued various types of bondssuch as term bonds, income bonds, and debentur...

A: Click to see the answer

question_answer

Q: Product mix, special order. (N. Melumad, adapted) Gormley Precision Tools makes cutting tools for me...

A: Click to see the answer

question_answer

Q: Does GAAP distinguish between fair values that are readily determinable from a securities exchange v...

A: GAAP refers to the accounting principles & rules which are followed by the companies for financi...

question_answer

Q: A bond issue on June 1, 2016, has interest payment dates of April 1 and October 1. Bond interest exp...

A: Click to see the answer

question_answer

Q: What criteria might managers use to guide cost-allocation decisions? Which are the dominant criteria...

A: Cost Allocation:The process of assigning the cost to the cost object is cost allocation. The cost al...

question_answer

Q: Define relevant costs. Why are historical costs irrelevant?

A: Relevant cost: A cost that is specific in the managerial decision making are called relevant cost. R...

question_answer

Q: Access the FASB Accounting Standards Codification at the FASB website ( www.fasb.org ). Determine th...

A: 1. The accounting disclosure requirements for maturities of long – term debt citation is FASB ASC 47...

question_answer

Q: Describe three key components in doing a strategic analysis of operating income.

A: Operating Income: The outcome of deduction of operating expenses and depreciation from the gross inc...

question_answer

Q: Assume bonds payable are amortized using the straight-line amortization method unless stated otherwi...

A:  Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money...