[goods4188]

So a question on becker constantly fools me… It is related to the book depreciation exceeding the tax depreciation and I always think it is an asset. My logic behind deferred tax assets and liabilities is terrible. Can someone make sense as to why a difference of $250,000 exceeding the tax basis becomes a deferred tax liability?

My logic is that if the books depreciation exceeds the tax depreciation then we have a current liability which reverses int he future (aka a deferred tax asset). I just dont get it… my logic behind these deferred tax asset/liability questions makes my headspin.

[goods4188]

Decided to add the actual question:

As result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Noor Co's Sole depciable asset, acquired in year 1, exceeded its tax basis by $250,00 at end of year. This difference will reverse in future years. Enacted rate for future periods is 40% and there were no other differences. In the year end balance sheet how should Noor report the deferred tax effect of this difference?

Anwser is Deferred Liability of $100,000

I know that its $100,000 dollars but in my head it is a deferred asset and i dont know why its a deferred liability.

[goods4188]

Decided to add the actual question:

As result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Noor Co's Sole depciable asset, acquired in year 1, exceeded its tax basis by $250,00 at end of year. This difference will reverse in future years. Enacted rate for future periods is 40% and there were no other differences. In the year end balance sheet how should Noor report the deferred tax effect of this difference?

Anwser is Deferred Liability of $100,000

I know that its $100,000 dollars but in my head it is a deferred asset and i dont know why its a deferred liability.

[Anonymous]

@goods4188…for complicating questions like this, it's a good idea to take it slow and analyze step by step. First, be careful on the wording in these questions. You need to notice the difference between THE BASIS and THE ACTUAL DEPRECIATION. The basis = orginal cost – accu. depreciation. In this question, THE BASIS of the book on the asset is $250,000 exceeds its tax basis. Translation: The depecition on book is $250,000 LESS than the depeciation use for tax. Also means: Depreciation used for tax is $250,000 is larger than the book —> Less tax paid this year —-> tax liability. (For clearer explaination: Let say the cost of the asset is $1,000,000. The depreciation expense on yr 1 is $400,000 on book, and $650,000 on tax. Hence, your book will show a basis of $600,000 whereas your tax will show a tax basis of $350,000. the $250,000 difference. Since the $650,000 tax depreciation is greater than the book depreciation ($400,000), you pay less this year but will pay more in future, hence a deferred liability = $250,000 * 40%)

[M.O.D.]

Book Asset= 250000

IRS asset =0

This implies that the book asset will be written off in the future as an expense. The IRS (basis) asset already has.

Therefore there will be a future expense of 250000, which will generate a (x 40%) 100000 tax savings.

Credit to tax exp(benefit) 100000

The Debit offset cannot be taxes payable, because they cannot take any deduction for this. It was already taken.

The only possible debit is to a Def. tax liability.

Work the IRS side: Debit to taxes payable, credit to Def tax liab. This is what is reversed in later years.

For def taxation I set up two books (T accounts): one for the books using GAAP and one for the IRS (using the tax code).

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Anonymous]

This was my explanation to a student I was tutoring for tax:

DTL = Good thing…. I don't have to pay the tax today (awesome!), but I have to pay it later. So I have a liability to owe later.

DTA = Bad thing…. Sh*t, I paid a huge chunk of tax today, but in the future, I don't have to pay as much.

And then at some point, it will even out.

To use your example, I took out $250,000 worth of depreciation today which results in tax savings of $100,000. Throughout time, this will even out, but hey, I didn't pay the tax today. Hooray.

Edit: I re-read your initial post, 2nd paragraph. If Book Depreciation exceeds Tax Depreciation like you said, then yes, you're correct. It's a DTA. But the question says Book Basis exceeds Tax Basis and CPA-Convertible did a great job explaining that portion.

[titine]

Here is my simple thought:

Book depreciation > tax depreciation leads to book taxable income < tax taxable income.

Since it will reverse in future, next year tax taxable income > book taxable income. You will pay more tax later on so it's liability.

Hope it makes sense.

[goods4188]

Hmm, Thanks everyone. I was really screwing up how expenses affected the income. They bring the Income doesn which means that the book income is lower thus creating an asset now and a liability later. The wording was really messing with me. Thank You all.

[jonnyp]

Has anyone ever seen a question where the book depr. actually exceeds tax depr. thereby creating a DTA?

(All of the questions I've seen so far only involve Tax>Book creating a DTL, but I wouldn't put it past the CPA demons to ask a question that results in a DTA.)

EDIT: Never mind, I found one! Becker F6 MCQ#46 (CPA #04683)

Becker Self Study
FAR 5/21/15-- 83
AUD 8/20/15-- 72, 10/8/15-- 68, 2/29/16-- 83
BEC 11/30/15-- 77
REG 1/20/16--81

[Author]

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