Case 4 – Taxing Situations
1) The difference between the tax expense and the taxes actually paid should be reported as a deferred tax liability of $40,000. The reason for this is tax law allows $200,000 to be deducted for depreciation but GAAP only allows $100,000 of depreciation to be recorded for the year so this means that there will be $100,000 of depreciation in the future that will be deducted on the income statement but not for tax purposes, resulting in a future liability. 2) The balance in the deferred tax liability account for each year is shown in the following table:
DTL Balance @ end of 1991:$148,000
DTL Balance @ end of 1995:$180,000
DTL Balance @ end of 2000:$0
Bug Off, Inc.
1) The following tables represent the pro forma income statement and taxable income for 1990-1992:
The difference in the warranty expense recorded for tax purposes and for book purposes is reported using a deferred tax account where in 1990 the company records a deferred tax asset of $2,400 because they are recording and extra $6,000 of warranty expenses for book purposes that will later be recorded for tax purposes, resulting in a future asset. 2) The deferred assets are actually pretty easy to record because they reverse in 1991 and there is no deferred tax in 1992.
As you can see, there is a deferred tax asset at the end of 1990 due to an extra $6,000 being reported for book purposes than tax purposes, but that deferred tax reverses the very next year. An asset will be reported on the 1990 balance sheet but will be taken off in 1991.