Question

Question: At December 31, 2017, Higley Corporation has one temporary difference which will reverse and cause taxable amounts in 2018. In 2017, a new tax act set taxes equal to 45% for 2017, 40% for 2018, and 34% for 2019 and years thereafter.

Instructions

Explain what circumstances would call for Higley to compute its deferred tax liability at the end of 2017 by multiplying the cumulative temporary difference by:

(a) 45%.

(b) 40%.

(c) 34%.

Short answer

1. The cumulative temporary difference is multiplied by 45% when the temporary difference gets reversed in 2017
2. The deferred tax liability is computed by multiplying the temporary difference by 40% when the temporary difference is reversed in 2018
3. In case, the temporary difference is reversed in 2019, the deferred tax liability is calculated by multiplying the temporary difference by the 34%

Step-by-step solution

Meaning of Income Tax Rates

The income tax rate means the percentage at which the company’s income shall be taxable. It is a rate specified by the government. It is the percentage of income which is paid to the government

The circumstances in which the temporary difference s multiplied by 45% to calculate the deferred tax liability

When the reversal of temporary difference arises in 2017, the deferred tax liability is calculated by multiplying the cumulative difference by 45%

The circumstances in which the temporary difference s multiplied by 40% to calculate the deferred tax liability

When the temporary difference is expected to be reversed in 2018, then the deferred tax liability is calculated by multiplying the cumulative difference by 40%.

The circumstances in which the temporary difference s multiplied by 34% to calculate the deferred tax liability

When the company expects that the temporary difference arises is reversed and cause taxable in 2019, the deferred tax liability is computed by multiplying the temporary difference by the 34%.