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