The Waterloo Company uses straight-line depreciation accounting in its corporate financial reports but MACRS depreciation accounting for income tax purposes.

At the end of the year, Waterloo reported taxable income to the IRS totaling \($100,000\) and pretax net income to its shareholders of \($150,000\). MACRS depreciation expense for the year totaled \($70,000\), while straightline depreciation was only \($40,000\). Assume an effective tax rate of 35 percent; calculate Waterloo’s deferred income taxes for the year. Is the company’s deferred income tax effect an asset or a liability? If the income tax rate was lowered to 30 percent, how much will the company’s deferred income taxes change? Explain the change in deferred income taxes.