[OnToTheNextOne]

Becker Review in regards to this question : https://imgur.com/a/IbBO6

The answer is $95 , with Year 2 Warranty Costs multiplied by the Year 2 enacted rate, and the same with Year 3 Warranty costs.

The deferred depreciation however, is multiplied using the Year 3 enacted rate, by only Year 1 amount. https://imgur.com/a/H0xR1

Why is Depreciation calculated differently than Warranty costs? Is it because Warranty costs are deferred assets and depreciation is considered a deferred liability?

[Anonymous]

The years for the temporary differences (which were expected to reverse) were not provided in the problem. So how did they come up with the year of the enacted rates to be used?

To answer your questions:
Why is Depreciation calculated differently than Warranty costs? Is it because Warranty costs are deferred assets and depreciation is considered a deferred liability?

Depreciation expense and warranty costs are of different categories that cause temporary differences (deductible expenses) which reverse in future periods.

Becker presents an outstanding lay-out of the 4 basic transactions that cause temporary differences. (See Pages Becker Book FAR F6-61 to 62)

Warranty cost is a Future Tax Benefit, also called a Deferred Tax Asset. Along with warranty costs are Estimated Liability, Bad Debt Expense, and Start-up Costs that are “Booked Now” (recorded in FS now) and “Taxed Later” (taxable in the future years).

Depreciation expense is a Future Tax Liability. This category (tax deduct now) includes prepaid expenses (cash basis for tax), amortization, and depreciation expense. These expenses are booked later but taxed now.

[SchruteBeet]

Someone had posted the same question on a different thread. Hope this helps:

https://www.another71.com/cpa-exam-forum/topic/far-income-tax-accounting-question/

[Author]

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