Jump to content

* * * * * 1 votes

FAR CH6 Question please help!!!

deferred tax liability

  • Please log in to reply
1 reply to this topic

#1 cpacpa2013



  • CPAnet Member
  • Pip
  • 3 posts

Posted 22 October 2013 - 01:45 AM

On December 2 of the current year, Huff Corp. received a condemnation award of $450,000 as compensation for the forced sale of land purchased five years earlier for $300,000. The gain was not reported as taxable income on its income tax return for the year ended December 31 because Huff elected to replace the land within the allowed replacement period for at least $450,000. Huff has an income tax rate of 25% for the current year, and there is an enacted rate of 30% for future years. There were no other temporary differences. In its December 31 balance sheet, Huff should report a deferred income tax liability of:
Choice "b" is correct, $45,000. Rule: Establish deferred tax using enacted annual tax rate (current tax rate for the related years) when temporary differences (will) reverse.
Deferred tax liability on temporary difference:
 Sales price of asset $ 450,000
 Cost 300,000
 Gain on sale 150,000
 Enacted future tax rate × 30%
  Deferred tax liability $  45,000
In this case, gain on sale is taxable in a future year when the enacted tax rate is 30%.


I don't get this - why is this a temporary difference? Can someone please explain the whole situation here? I think I'm completely lost in this question...........

#2 bella.dreamer


    Advanced Member

  • CPAnet Member
  • PipPipPip
  • 40 posts

Posted 26 November 2013 - 02:28 AM

The rule is that when a property is taken by the government and if the govt pays an amount of money in this case $450,000 which is higher than the book value of the property which is $300,000, the difference/gain of $150,000 = 450000-300,000 is a temporary difference.  Because the owner of the property invests that full $450,000 right away, they don't need to pay tax NOW on $150,000 . Lets say this person bought another property with this money for $450,000 and two years later they sell it, then they have to pay tax on that 150,000 gain that was deferred. Because we have to use enacted rate for deferred taxes, we have to use .30 * 150,000 = $45,000. 

Hope this helps!!!