Question

Seal Ltd's balance sheet shows an item of equipment that cost $210,000 and accumulated depreciation of $80,000. The tax base of the equipment is $100,000. Seal Ltd also has accrued expenses of $10,000 that had not been paid, and doubtful debts of $6,000 which will only be allowed as a deduction when the debts are written off as bad. The tax rate is 30%.

What is the balance in the deferred tax account(s) to account for the above transactions?

a) deferred tax liability of $4,800 and deferred tax asset of $9,000
b) deferred tax liability of $9,000 and deferred tax asset of $4,800
c) deferred tax liability of $10,800 and deferred tax asset of $3,000
d) deferred tax liability of $13,800
e) deferred tax asset of $13,800

and why?

Answer 1

Deferred tax liability - If income as per books is more than taxable income then it means that we have paid less tax as per book’s income and we have to pay more tax in future and thus recorded as Deferred Tax Liability (DTL). Similarly if income as per books is less than taxable income then it means we have to paid more tax and has to pay less tax in future. So it will be a Deferred Tax Asset (DTA).

1) Equipment at cost - Accumulated depreciation = Value as per book

210,000 - 80,000 = 130,000

Value of equipment as per tax - 100,000

That means we have claim more depreciation in Tax by 30,000 and that means more tax is payable is paid future

Deferred tax liability is created at tax rate - 30000(30%) = 9,000

2) Accrued expense of 10000 not paid

Carrying value of asset is 10000

Tax base of asset is - 0

Temporary Difference - 10000

Deferred tax asset - 10000* 30% = 3000

3) Doubtful debts expense. This expense is an accounting estimate of what bad debts are likely to be. This amount is not allowable as a tax deduction as it is only an estimate of doubtful debts; amounts actually written off as bad debts are allowed. Hence $6000 is added back to accounting profit.

Since in above case 6000 will be claimed as deduction in future in Income tax is it deferred tax asset at tax rate

6000*30% =1800

So total of 3 is 9000 Deferred tax liability and 4800 Deferred tax asset

So B is correct answer