West Corp. leased a building and received the $36,000 annual rental payment on June 15 of the current year. The beginning of the lease was July 1. Rental income is taxable when received. West's tax rates are 30% for the current year and 40% thereafter. West had no other permanent or temporary differences. West determined that no valuation allowance was needed. What amount of deferred tax asset should West report in its balance sheet for the current year ended December 31?
A. $14,400
B. $7,200
C. $10,800
D. $5,400
Answer:B
Choice "B" is correct. Taxable income includes $36,000 and book income should be 1/2 of $36,000 for the current year. The $18,000 difference results in a deferred tax asset at the tax rate in the year of reversal. $18,000 x 40% = $7,200.
Choice "D" is incorrect. The $18,000 temporary difference results in a deferred tax asset at the tax rate in the year of reversal.
Choice "C" is incorrect. The $18,000 temporary difference results in a deferred tax asset. The amount of the deferred tax asset is the difference times the tax rate in the year of reversal.
Choice "A" is incorrect. The $18,000 temporary difference results in a deferred tax asset. The amount of the deferred tax asset is the difference times the tax rate in the year of reversal.