Question

AFS company reported the following information: Financial Statement Tax return

income before Depreciation and income tax 200,000   200,000
Depreciation Expense 45,000   72,000

The tax rate is 35%

1. Income tax for the financial statement is:

2. Income tax on the tax return is:

3. Which does this situation create, a deferred tax asset, or a deferred tax liability?

4. What is the amount of the deferred item?

Please follow the answer and calculation processes. Thank you.

Answer 1

1. Income tax for the financial statement

	Financial Statement
Income Before Depreciation and Income Tax	200,000
Depreciation	45,000
Income after Depreciation before Income Tax	155,000
Tax rate	35%
Income Tax	54,250

2. Income tax on the tax return

	Tax Return
Income Before Depreciation and Income Tax	200,000
Depreciation	72,000
Income after Depreciation before Income Tax	128,000
Tax rate	35%
Income Tax	44,800

3. When Income as per tax return is more than Income as per Financial Statements,Deferred tax asset is to be created, And the situation when Income as per Financial Statement is more than Income as per Tax Return, it resuts in creation of Deferred tax Liability .

In the given information since the Income in Financial statements is higher than the income in Tax return, Deferred Tax liability will be created, meaning that company will be required to pay more taxes in future.

4. Deferred Tax Liability Calculation

	Financial Statement
Depreciation as per Financial Statement	45,000
Depreciation as per Tax Return	72,000
Excess profits as per Financial Statements due to lower depreciation	27,000
Tax Rate	35%
Deferred Tax Liability	9,450