[Hammer]

Can someone please explain this question. Becker doesn’t do the greatest job. Just gives me the answer. I somehow got an 85% on accounting for income tax homework, but feel like I really don’t know what the hell I’m doing….I guess my confusion lies on classifying deferred tax assets/liabilities as current/non-current

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 for tax purposes 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 Warranty

expense

Year 2 $ 80,000 $ 10,000

Year 3 70,000 15,000

Year 4 50,000 25,000

$ 200,000 $ 50,000

These were Clark’s only temporary differences. In Clark’s Year 1 income statement, the deferred portion of its provision for income taxes should be:

a.

$45,000

b.

$41,000

c.

$67,000

d.

$37,500

FAR - 70, 81
AUD - 83
BEC - 77
REG - 70, 78

Licensed in Ohio.

Now what the hell do I do?

[sep7uakron]

My key to remembering how the deferral is handled is:

F/S income first – Tax Liability

Tax Return Expense First – Tax Liability

Tax Return Income First – Tax Asset

F/S Expense first – Tax Asset

Depr Warranty Enacted Rate liability(depr) asset(warranty)

80,000.00 10,000.00 0.30 24,000.00 3,000.00

70,000.00 15,000.00 0.25 17,500.00 3,750.00

50,000.00 25,000.00 0.25 12,500.00 6,250.00

Total 54,000.00 13,000.00 41,000.00

It's not asking you if they are current of non-current, they are only asking you for the I/S provision.

Depr would be non-current and I believe warranty would be current, if looking at it from the B/S perspective.

Hope this helps

AUD: April 2014 - 85
REG: May 2014 - 83
BEC: July 2014 - 82
FAR: August 2014 - 83

I'M DONE!!

[jm962011]

Go back and review the lecture about how to classify the deferred tax assets/liabilities as current or non current. Remember, the classification of the deferred tax follows it's momma.. what gave birth to it. So depreciation arises because of fixed assets. Fixed assets are long term, or non current so your deferred tax asset/liability (asset in this case) that arose from a difference in depreciation expense will be non current.

If the deferred tax asset/liability doesn't have a momma, you classify it as current or non current based on when it'll reverse. This question isn't really asking for the classification but other questions will.

For this question:

Book depreciation expense = 300,000

Tax depreciation expense = 500,000

when book expense < tax expense, leads to book income > tax income which is a deferred tax ASSET

use the ENACTED rate as it reverses

year 2: 30,000 * 30% = 24,000

year 3: 70,000 * 25% = 17,500

year 4: 50,000 * 25% = 12,500

24,000 + 17,500 + 12,500 = 54,000 deferred tax ASSET

Book warranty expense = 50,000

Tax warranty expense = 0

when book expense > tax expense, leads to book income < tax income which is a deferred tax LIABILITY

use the ENACTED rate as it reverses

year 2: 10,000 * 30% = 3,000

year 3: 15,000 * 25% = 3,750

year 4: 25,000 * 25% = 6,250

3,000 + 3,750 + 6,250 = 13,000 deferred tax LIABILITY

NET your deferred tax asset (54,000) with your deferred tax liability (13,000) and you get $41,000

[krokofilen]

Key to remember that I use:

If accounting results are higher than taxable results in the current year – liability

If taxable results are higher than accounting results in the current year – asset

Big 4 Audit Manager from Europe here to pass the CPA in the U.S. of A in 2014! Niiice!

AUD - 95 / Jul 15 / 130h over 4 weeks
FAR - 86 / Aug 14 / 240h over 4 weeks
(11 week break)

REG - 81 / Nov 14 / 200h over 4 weeks
BEC - 87 / Nov 17 / 30 h over 2.5 days

[Author]

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