[kimconan]

Hi guys. I am confused by the deferred tax of periodic pension cost. Here is a example extracted from F6, page 17, third entry.

Journal entry to record the Year 2 service cost, interest cost, and return on plan assets ($400,000 + $115,000 – $20,000 = $495,000) and the related deferred tax asset of $198,400 ($495,000 x 40%):

Net periodic pension cost $495,000

Pension benefit liability-current $495,000

Deferred tax asset $198,400

Deferred tax benefit-income statement $198,400

_______________________

Second entry is weird for me. What I thought was tax benefit can only be deferred when the recognition of expense is deferred to OCI. In this example, net periodic pension cost is recognized in I/S, but the related tax is deferred, and recognized in I/S immediately.

Could you guys explain the entry please? I got stuck in this example.

[Anonymous]

any one can answer people

really can't get it too

[mangos]

Maybe this will make sense…

But when you're recording service cost, you're “expensing” it on the income statement but you're actually not “paying” out the expense. These costs can only be deducted for tax purposes when paid (at least that's my understanding). So until you pay it out, you record a deferred tax asset that you will use when you pay it out.

“Pension expense” is an accrual entry in Fin Books and for taxes they are not expense until they get paid sometime in future, creating a temporary difference.

FAR (5/07/13): 96

[Anonymous]

You are exactly right. The reason you book your SIR entries on the I/S as a Deferred Tax Asset- I/S is because your charging that expense the income statement as you said, but on your 1065 you cannot take any deduction for pension costs until you actually pay the expenses. I didn't understand this either until I asked my Corporate Tax Professor at my school.

[Author]

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