Financial Statement Effects of Deferred Taxes
Gottlieb Enterprises is concerned about its balance sheet disclosures of deferred tax liabilities. Gottlieb’s preliminary balance sheet at the end of 2000 is summarized as:
|
Current assets |
$ 400,000 |
Current liabilities |
$ 250,000 |
|
Fixed assets, net |
1,400,000 |
Long term debt |
500,000 |
|
Total assets |
$1,800,000 |
Shareholders’ equity |
1,050,000 |
|
Total liabilities and |
|||
|
shareholders’ equity |
$1,800,000 |
Gottlieb’s tax return shows that the net book value of its fixed assets for tax purposes is only $900,000.
Required
a. Based on the above information, compute Gottlieb’s deferred tax liability at the end of 2000, assuming a 38% average tax rate.
b. Assume that Gottlieb has already calculated a deferred tax liability of $250,000 at the beginning of 2000 and has included it erroneously in shareholders’ equity. Calculate the change in Gottlieb’s deferred tax liability.
c. Based on your answer in part b, indicate how Gottlieb’s income tax expense must have been affected by these tax deferrals.
d. Prepare Gottlieb’s corrected balance sheet at the end of 2000.
e. Discuss why it is important for a firm to disclose its deferred tax liabilities. To illustrate this importance, compare Gottlieb’s balance sheet shown earlier with the corrected balance sheet from part d.