[ayc311]

Hey, I keep having difficult time with these DTA and DTLA questions. I am including a question as an example. If anyone could kindly explain to me DTA n DTL in the most simplistic way possible, that would be great. I tried many times to understand these but having very difficult time in doing so. Many years ago when I did these in college, I understood them very easily but for some reason, this time around I just cant. Basically just explaining DTA n DTL, as they would be asked in similar questions. Sorry if I sound to lost or too vague, but yah..!!

Orleans Co., a cash-basis taxpayer, prepares accrual-basis financial statements. In its current-year bal­ance sheet, Orleans’ deferred income tax liabilities increased compared to the previous year. Which of the following changes would cause this increase in deferred income tax liabilities?

An increase in prepaid insurance
An increase in rent receivable
An increase in warranty obligations

(I n II are the right answers)

[AGI]

Don't try to study at 1am.

To keep it simple, our lovely tax system basically run on a cash basis most of the time (except during depreciation). When you get (or pay out) real $$$$$, that's when you record it.

And when do you getdeferred tax liability? You know you owe taxes you just haven't pay it. Or you pay up something in advance, overstating your expenses, (resulting in an understatement of net income), but that you technically won't use some of it untill next year.

So an increase in rent receivable = failed to collect actual $$$ = future income = waiting to be taxed = got to pay taxes next year = increase in deferred tax liability

And an increase in prepaid insurance? Because it's a prepaid = money already went out of my pocket = overstating my caah expense = understating my current year net income = so next year when I used up the prepaid, next year's net income will be higher = deferred tax liability

New York - NYC
Passed CPA Exam (11/2014)
In search for a position in NYC that will fulfills the license requirement.

[AGI]

If you want to skip the logic, then just remember the no brainer math:

Assuming your company value is 100, and so your tax base is 100.

A – L = Equity

Increase in A = Increase in Equity = company value goes up = exceeded 100 (tax basis) = more taxes

Increase in L = Decrease in Equity = company value goes down = under 100 (tax basis) = less taxes

——
This is not how accounting should work, but that's one way to pass the exam.

New York - NYC
Passed CPA Exam (11/2014)
In search for a position in NYC that will fulfills the license requirement.

[ayc311]

@JFKGY, this looks awesome, just trying to pass so if a shortcut works, then def!!
so would it be ok to assume if Equity goes up; Value would go up- more taxes so it would be DTA or DTL?

Dec in Liability so Dec in Equity -> less taxes so DTA or DTL such as warranty exp?

As Far as Dep goes, it would go lower Asset thru Accu dep goig up so Equity going down (or NI going down n RE down so Equity is Down) thus less taxes meaning DTA or DTL?

Honestly I am very overwhelmed w this FAR but have 40 days to figure it out.
.
BTW congrats on your recent NY License, I am also from NY n can not wait until I add that line to my life!! thank you

[AGI]

Er… I've just created a bad example. Although it will almost always work.

What you are really trying to do when you calculate DTL and DTA is to compare the +/- impact against your tax basis (which is almost identical to cash basis). The term “deferred tax” really just mean nothing more than “I got to dig exact pot of gold here to make sure I have enough money to pay for taxes in N months”.

The correct what to do this is to compare every accounts‘ impact to net income. (See below)

——
For depreciation, you should not confuse it with asset or liability, as it is actually and expense account.

Net income can goes either up and down.The impact on depreciation on DTL and DTA will depends on which method you write in on the book vs. allow by IRS. A company may choose to write it in any method allow by accounting standard, but IRS might only allow straight line.

So if on the book it's double decline but on IRS it's straight line, the book will have a much more “-” than tax. Resulting in more expense on the book than allow by IRS. That difference on net income, will than rollover to reflect the “tax basis”, creating extra tax liability.

This is like a two step process.
—
NOW, the reason why I wrote the above formular is because A – L = SE moves the same direction as income – expense = net income. As most asset and liability accounts are straight forward, it will most likely work.

It's really a bad example.! You should always use the two step verification method when you do questions. (But when you do ran out of time or being clueless, one of those basic formula might help you).

New York - NYC
Passed CPA Exam (11/2014)
In search for a position in NYC that will fulfills the license requirement.

[AGI]

In case you want to know

Increase in prepay insurance >>> excess CASH pay out on tax basis on insurance >>>> tax basis insurance expense overstates (greater than actual YTD spending) >>>>> net income understated >>>> didn't pay enough taxes >>>> DTL

Increase in rent receivable >>> not enough CASH received on actual rent >>> tax basis rent income is less than actual rent on book >>>> cash basis net income understated >>>> didn't pay enough cash >>>> DTL

An increase in warranty obligations >>>> I did not provide as much warranty as I'm supposed to (but I collected the money already that's why it's a liability ) >>> cash basis expense is less than what it's supposed to be >>>> tax basis net income overstated >>>> pay too much tax >>> DTA

New York - NYC
Passed CPA Exam (11/2014)
In search for a position in NYC that will fulfills the license requirement.

[Author]

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