Discuss the situations that will result in a deferred tax liability and a deferred tax asset....

Discuss the situations that will result in a deferred tax liability and a deferred tax asset. Provide an example of each. Prepare a journal entry for your examples. Discuss how deferred liabilities affect the income statement.

Expert Solution

If taxable income is greater than accounting income, then it will result in deferred tax asset. And if accounting income is greater than taxable income, then it will result in deferred tax liability

Common Situations

One common situation that gives rise to deferred tax liability is depreciation of fixed assets. Tax laws allow for the modified accelerated cost recovery system (MACRS) depreciation method, while most companies use the straight-line depreciation method for financial reporting.

Consider a company with a 30% tax rate that depreciates an asset worth $10,000 placed in service in 2015 over 10 years. In the second year of the asset's service, the company records $1,000 of straight-line depreciation in its financial books and $1,800 MACRS depreciation in its tax books. The difference of $800 represents a temporary difference, which the company expects to eliminate by year 10 and pay higher taxes after that. The company records $240 ($800 × 30%) as a deferred tax liability on its financial statements.

Journal entry

[1] Profit & Loss A/c Dr

To Deferred Tax Liability A/c

[2] Deferred Tax Asset A/c

To Profit & Loss A/c

While deffered tax liability is creadted the. The income statement is credited with the difference of accounting profit and income tax profit

ekkarill92 answered 2 years ago

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