Superior Developers sells lots for residential development. When lots are sold,

Question

Superior Developers sells lots for residential development. When lots are sold, Superior recognizes income for financial reporting purposes in the year of the sale. For some lots, Superior recognizes income for tax purposes when collected. In the prior year, income recognized for financial reporting purposes for lots sold this way was $20 million, which would be collected equally over the next two years. The enacted tax rate was 40%. This year, a new tax law was enacted, revising the tax rate from 40% to 35% beginning next year. Calculate the amount by which Superior should reduce its deferred tax liability this year.

Explanation / Answer

First the deferred tax is $8 million. The first year half is recognized and paid. Also the amount to be paid for next year (the remaining deferral) is reduced from $4 million to $3.5 million.

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