Under the temporary difference approach, the tax rates used for deferred tax calculations are those enacted at the balance sheet date, based on how the reversal will be treated for tax purposes.
Instructions
For each of the following situations, discuss the impact on deferred tax balances.
(a) At December 31, 2014, Golden Corporation has one temporary difference that will reverse and cause taxable amounts in 2015. In 2014, new tax legislation sets tax rates equal to 35% for 2014, 30% for 2015, and 24% for 2016 and the years thereafter.
Explain what circumstances would require Golden to calculate its deferred tax liability at the end of 2014 by multiplying the temporary difference by:
1. 35%
2. 30%
3. 24%
(b) Record Inc. uses the fair value method for reporting its investment properties. The company has an investment property with an original cost of $5 million and a tax carrying amount of $3.5 million due to cumulative capital cost allowance claimed to date of $1.5 million. This asset is increased to its fair value of $8 million for accounting purposes. No equivalent adjustment is made for tax purposes. The tax rate is 30% for normal business purposes. If the asset is sold for more than cost, the cumulative capital cost allowance of $1.5 million will be included in taxable income as recaptured depreciation, but sale proceeds in excess of cost will be taxable at 15%. Calculate the related deferred balance assuming:
1. The value of the asset will be recovered through its use.
2. The value of the asset will be recovered by selling the asset.
(c) Assume the same above for parts (a) and (b), but the company is now revaluing a tract of land and a building that are included in property, plant, and equipment. The change in revaluation has been reported in other comprehensive income. All numbers remain the same as discussed in parts (a) and (b) above. What differences in the tax impact, if any, would be required?