[calicpa]

Wouldn’t 2005-2007 be a DTL and 208-2009 be a DTA?

Tell Corp.’s 2005 income statement had pre-tax financial income of $38,000 in its first year of operations. Tell uses an accelerated cost-recovery method on its tax return and straight-line depreciation for financial reporting.

The differences between the book and tax deductions for depreciation over the five-year life of the assets acquired in 2005, and the enacted tax rates for 2005 to 2009 are as follows:

Book over (under) tax Tax rates

2005 $(8,000) 35%

2006 $(13,000) 30%

2007 $(3,000) 30%

2008 $10,000 25%

2009 $14,000 25%

There are no other temporary differences. Tell elected early application of FASB Statement No. 109, Accounting for Income Taxes. In Tell’s December 31, 2005 balance sheet, the gross non-current deferred income tax liability and the income taxes currently payable should be

Gross non-current deferred income tax liability Income taxes currently payable

$6,000 $7,500

$6,000 $10,500

$4,800 $9,000

$4,800 $10,500

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[calicpa]

this is the solution. answer is b

Correct!

The gross non-current deferred income tax liability at the end of 2005 refers to the sum of each future taxable difference (taxable income above pre-tax financial income), multiplied by the FUTURE ENACTED tax rate for that year.

Only 2008 and 2009 generate taxable differences, because in those years tax depreciation is less than book depreciation (taxable income above pre-tax financial income): ($10,000 + $14,000)(.25) = $6,000.

The term “gross” in the question means before considering the netting effect of the other two years that would, by themselves, produce deferred tax assets (2006 and 2007), and therefore reduce the gross deferred tax liability for reporting purposes.

Income tax payable at the end of 2005 equals 35% of taxable income. Taxable income is the $38,000 pre-tax financial income, less the $8,000 excess of tax depreciation over book depreciation, or $30,000. Therefore, income tax payable is .35($30,000) = $10,500. The computation of taxable income uses the CURRENT tax rate.

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[jeff]

You missed the shifft key again…

🙂

[calicpa]

bump

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[Whopper Warrior]

I believe the problem is the wording in the question. IT is aksing for the total of the DTL before it starts reversing and the Current income tax payable.

1st year:

Dr. Income Tax Expense = 11,500

Cr. NC DTL 8,000 * .25 = (1,000)

Cr. Income Tax payable 30,000*.35 = (10,500)

Each year you would record a a similar entry until you have a DTL of 24,000 * .25 = 6,000

I have never heard of the gross method but I assume it means the point at which your DTA or DTL is maxed out. It would not make sense, imo, to record a 6,000 DTL in YR 1. Maybe FASB has a special rule?

To answer your other question, no. A DTA does not become a DTL or vice versa. Once created it will stay that way until the account = 0. 08 or 09 would be a reversal of the accrual in 05-07.

YR 4: Assume Income of 38k

Dr. Income Tax Expense = 9,500

Dr. Deferred Tax Liability (10k * .25) = 2,500

Cr: Income Tax payable (38k + 10k) * .25 = 12,000

We Credit the DTL in YR 1 – YR 3, and then we Debit the DTL in YR 4 and 5. A reclassification would not be in order; it is a reversal.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Author]

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