Question

Stephens Company has a deductible temporary difference of \(2,000,000 at the end of its first year of operations. Its tax rate is 40 percent. Stephens has \)1,800,000 of income taxes payable. After a careful review of all available evidence, Stephens determines that it is probable that it will not realize \(200,000 of this deferred tax asset. On Stephens Company’s statement of financial position at the end of its first year of operations, what is the amount of deferred tax asset?

(a) \)2,000,000. (c) \(800,000.

(b) \)1,800,000. (d) $600,000.

Short answer

The business entity will report deferred tax assets of$600,000.

Step-by-step solution

Definition of Deferred Tax Asset

The line item reported on the balance sheet of the business entity that contributes towards the reduction of the tax liability is known as deferred tax asset. Such asset is reported because of the difference between the accounting rules and the tax rules.

Explanation for the correct option

The correct option is (d) $600,000.

Working note:

Particular$(\mathrm{\$}2,000,000\times 40\mathrm{\%})$	Amount $
Gross deferred tax asset	$800,000
Less: Unrealized deferred tax asset	(200,000)
Deferred tax asset	$600,000