Okay, so I'm having a difficult time understanding the concept behind one of the Becker MCQs. I was hoping one of you guys could help! I'll write out the question below:
For Year 1, Clark Corp. reported depreciation of $300,000 in its income statement. On its Year 1 income tax return, Clark reported depreciation of $500,000. Clark's income statement also included $50,000 accrued warranty expense that will be deducted on the tax return when paid. Clark's enacted tax rates are 30% for Year 1 and Year 2, and 25% for Year 3 and Year 4. The depreciation difference and warranty expense will reverse over the next three years as follows:
Depreciation Difference: Years 2/3/4: $80,000/$70,000/$50,000
Warranty expense: Year 2/3/3: $10,000/$15,000/$25,000
These are the only temporary differences. In its Year 1 income statement, the deferred portion of its provision for income taxes should be:
The answer is $41,000.
Now, here is where I am confused. Becker says to arrive at the answer by netting the depreciation difference and warranty expense reversal for each respective year (i.e. 80,000-10,000, etc.) and multiply by the respective enacted rate. But, isn't depreciation related to a non-current asset while warranty expense is related to current operations? There was a similar question in the Becker MCQs that was computed differently. I'm just having a hard time understanding why these are netted against each other.
FAR - 85
AUD - 99
REG - 85
BEC - 10/4/13 (Waiting)
Using Becker Self-Study
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