In the previous year, a firm failed to record premium amortization of $40,000 an

Question

In the previous year, a firm failed to record premium amortization of $40,000 and $30,000, respectively, on its bonds payable and held to maturity bond investments. These errors affect both income before tax and taxable income. The firm's tax rate is 30%. As a result of this error, net income was:

Understated by $7,000.

Overstated by $7,000.

Understated by $33,000.

Overstated by $33,000.

Answer given below. Please show how they find Deferred tax liability.

Premium on bonds payable 40,000      Premium on bond investments 30,000      Deferred tax liability 3,000      Retained earnings 7,000

Explanation / Answer

Solution :-

The Answer is "A".

Particulars Amount ($) Amortization of Premium on bonds payable 40000 Amortization of Premium on Investments (30000) Understated Gain 10000 Less : Tax @ 30% ($10000*30%)(Deferred tax liability) (3000) Understated Net Income 7000

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