Question

What are the steps to calculate deferred income tax liability? Thanks

The Sample Corporation prepared the following income statements and income tax returns for Year 1 through Year 4.

Income Statement	Year 1	Year 2	Year 3	Year 4
Sales	$1,000	$1,000	$1,000	$1,000
Operating expenses	650	650	650	650
Pretax net income	$350	$350	$350	$350
Provisions for income taxes	140	140	140	140
Net income	$210	$210	$210	$210

Income Tax Return	Year 1	Year 2	Year 3	Year 4
Sales	$1,000	$1,000	$1,000	$1,000
Operating expenses	900	900	400	400
Taxable income	$100	$100	$600	$600
Income tax payable	40	40	240	240
After-tax net income	$60	$60	$360	$360

Calculate the balance in the company’s deferred income tax liability account at the end of each year.

Assume that the time value of money is 10% per year; calculate the implicit value of the company’s tax deferral strategy.
Round your answer to the nearest whole number.

Answer 1

	Deferred Tax Liability arises when the Accounting Income is more than the Taxable Income. The difference between pre-tax Accounting income and pre tax taxable income as per tax laws is multiplied by tax rate to obtain Deferred Tax Liability. It is reversed or deferred tax asset is created when the Accounting Income is less than Taxable Income.
		Year 1	Year 2	Year 3	Year 4
	Pre Tax Net Income(A)	$ 350	$ 350	$ 350	$ 350
	Taxable Income(B)	$ 100	$ 100	$ 600	$ 600
	Difference(C = A-B)	$ 250	$ 250	$ -250	$ -250
	Tax Rate(D)	40%	40%	40%	40%
	Deferred Tax Liability/ (Asset)(C*D)	$ 100	$ 100	$ -100	$ -100
	Opening Deferred Tax Liability	$ -	$ 100	$ 200	$ 100
	Addition	$ 100	$ 100	$ -	$ -
	Reversal	$ -	$ -	$ -100	$ -100
	Closing Deferred Tax Liability	$ 100	$ 200	$ 100	$ -
	Calculation of Implicit Value of Tax Deferral Strategy
		Year	Tax Benefit	PVF @ 10%	Present value
		1	$ 100	0.9091	$ 91
		2	$ 100	0.8264	$ 83
		3	$ -100	0.7513	$ -75
		4	$ -100	0.6830	$ -68
				TOTAL	$ 30
	Implicit Value of Tax Deferral Strategy		$ 30