[rvcpa]

For its first year of operations, cable corp recorded a 100,000 expense in its tax return that will not be recorded in its accounting records in it until next year. There were no other differences between its taxable and financial statement income. Cable’s effect tax rate for the current year is 45% but a 40% rate has already been passed into the law for next year. In it’s year-end balance sheet, what amount should cable report as deferred tax asset (liability)

A) 45,000 asset

B) 40,000 asset

C) 40,000 liability

D) 45,000 liability

Correct answer is C. Can someone explain why?

[mjp44]

An expense on a tax return that has not yet been recorded on the books is the result of a temporary difference that results in a deferred tax liability. Because the give the tax rate for next year (40%) use that to calculate the $ amount of the liability. 40% x 100k = $40k

FAR- PASSED (11/13)
REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)

If it's important to you, you will find a way. If it isn't, you will find an excuse.

[mjp44]

An expense on a tax return that has not yet been recorded on the books is the result of a temporary difference that results in a deferred tax liability. Because the give the tax rate for next year (40%) use that to calculate the $ amount of the liability. 40% x 100k = $40k

FAR- PASSED (11/13)
REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)

If it's important to you, you will find a way. If it isn't, you will find an excuse.

[ssiegri]

You're recognizing the expense (deduction) in year 1 on the tax return. You aren't going to take that same deduction in the subsequent year, however, you're recognizing the expense on the financial statements in year 2. This is going to cause a DTL, because your taxable income is now higher than your book income for year 2. The DTA is the opposite situation. You then take that temporary difference ( which will reverse to 0 after time, 12/31/YR2 in this example) and multiply it by the future tax rate because that's what period is being affected.

[ssiegri]

You're recognizing the expense (deduction) in year 1 on the tax return. You aren't going to take that same deduction in the subsequent year, however, you're recognizing the expense on the financial statements in year 2. This is going to cause a DTL, because your taxable income is now higher than your book income for year 2. The DTA is the opposite situation. You then take that temporary difference ( which will reverse to 0 after time, 12/31/YR2 in this example) and multiply it by the future tax rate because that's what period is being affected.

[Author]

Replies